Alphatec Spine, Inc.
Alphatec Holdings, Inc. (Form: 10-Q, Received: 05/10/2010 17:15:45)
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, 2010

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.)

5818 El Camino Real

Carlsbad, CA 92008

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 May 7, 2010, there were 87,283,597 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2010

Table of Contents

 

          Page
PART I – FINANCIAL INFORMATION   

Item 1.

   Financial Statements (Unaudited)    3
   Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009    3
   Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009    4
   Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009    5
   Notes to Condensed Consolidated Financial Statements    7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    24

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    35

Item 4.

   Controls and Procedures    35
PART II – OTHER INFORMATION   

Item 1.

   Legal Proceedings    37

Item 1A.

   Risk Factors    37

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    38

Item 6.

   Exhibits    38

SIGNATURES

   40

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except for par value data)

 

     March 31,
2010
    December 31,
2009
 
Assets     

Current assets:

    

Cash and cash equivalents

   $ 12,662      $ 10,085   

Accounts receivable, net

     39,268        24,766   

Inventories, net

     46,702        29,515   

Prepaid expenses and other current assets

     5,057        3,128   

Deferred income tax assets

     1,427        128   
                

Total current assets

     105,116        67,622   

Property and equipment, net

     36,116        30,356   

Goodwill

     172,631        60,113   

Intangibles, net

     40,822        2,296   

Other assets

     2,520        1,501   
                

Total assets

   $ 357,205      $ 161,888   
                
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 23,073      $ 12,781   

Accrued expenses

     23,423        16,439   

Deferred revenue

     1,618        2,135   

Other current liabilities

     2,864        —     

Current portion of long-term debt

     10,055        6,724   
                

Total current liabilities

     61,033        38,079   

Long-term debt, less current portion

     26,752        23,631   

Other long-term liabilities

     3,013        1,008   

Deferred income tax liabilities

     12,255        738   

Redeemable preferred stock, $0.0001 par value; 20,000 authorized at March 31, 2010 and December 31, 2009; 3,319 shares issued and outstanding at both March 31, 2010 and December 31, 2009

     23,603        23,603   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.0001 par value; 200,000 authorized at March 31, 2010 and December 31, 2009; 78,062 and 52,558 shares issued and outstanding at Mach 31, 2010 and December 31, 2009, respectively

     8        5   

Treasury stock, 19 shares

     (97     —     

Additional paid-in capital

     335,178        175,021   

Accumulated other comprehensive income

     1,092        1,263   

Accumulated deficit

     (106,170     (101,460
                

Total Alphatec stockholders’ equity

     230,011        74,829   

Non-controlling interest

     538        —     
                

Total stockholders’ equity

     230,549        74,829   
                

Total liabilities and stockholders’ equity

   $ 357,205      $ 161,888   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three Months Ended March 31,  
     2010     2009  

Revenues

   $ 38,431      $ 30,610   

Cost of revenues

     14,465        10,830   
                

Gross profit

     23,966        19,780   

Operating expenses:

    

Research and development

     3,687        2,867   

In-process research and development

     450        1,290   

Sales and marketing

     13,780        12,784   

General and administrative

     5,646        5,963   

Transaction related expenses

     3,152        —     

Restructuring expenses

     882        —     
                

Total operating expenses

     27,597        22,904   
                

Operating loss

     (3,631     (3,124

Other income (expense):

    

Interest income

     5        34   

Interest expense

     (862     (916

Other income (expense), net

     (110     (261
                

Total other income (expense)

     (967     (1,143
                

Loss before taxes

     (4,598     (4,267

Income tax provision

     112        116   
                

Net loss

   $ (4,710   $ (4,383
                

Net loss per common share:

    

Basic and diluted

   $ (0.09   $ (0.09
                

Weighted-average shares used in computing net loss per share:

    

Basic and diluted

     54,153        46,503   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

     Three Months Ended March 31,  
     2010     2009  

Operating activities:

    

Net loss

   $ (4,710   $ (4,383

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

    

Depreciation and amortization

     3,562        2,601   

Stock-based compensation

     981        634   

Interest expense related to amortization of debt discount and debt issuance costs

     147        150   

In-process research and development paid in stock

     —          350   

Provision for (recoveries from) doubtful accounts

     14        (25

Provision for excess and obsolete inventory

     393        210   

Deferred income taxes

     35        35   

Changes in operating assets and liabilities:

    

Accounts receivable

     (780     (5,381

Inventories

     (3,427     (3,189

Prepaid expenses and other current assets

     (432     (629

Other assets

     (186     229   

Accounts payable

     (407     504   

Accrued expenses and other

     2,826        1,892   

Deferred revenues

     (517     643   
                

Net cash used in operating activities

     (2,501     (6,359

Investing activities:

    

Cash received in acquisition of Scient’x

     1,589        —     

Proceeds from sale of Noas investment

     —          383   

Purchases of property and equipment

     (1,145     (2,892
                

Net cash provided by (used in) investing activities

     444        (2,509

Financing activities:

    

Exercise of stock options

     92        —     

Net proceeds from issuance of common stock

     6,546        —     

Borrowings under lines of credit

     410        1,940   

Repayments under lines of credit

     (296     (500

Principal payments on capital lease obligations

     (18     (98

Principal payments on notes payable

     (1,972     (498
                

Net cash provided by financing activities

     4,762        844   
                

Effect of exchange rate changes on cash and cash equivalents

     (128     (204
                

Net increase (decrease) in cash and cash equivalents

     2,577        (8,228

Cash and cash equivalents at beginning of period

     10,085        18,315   
                

Cash and cash equivalents at end of period

   $ 12,662      $ 10,087   
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)

(UNAUDITED)

(in thousands)

 

     Three Months Ended March 31,
     2010    2009

Supplemental cash flow information:

     

Cash paid for interest

   $ 634    $ 527

Cash paid for income taxes

   $ 15    $ 152

Purchases of property and equipment in accounts payable

   $ 4,379    $ 3,144

Financing of software and support by software provider

   $ 872    $ —  

Issuance of common stock in acquisition of Scient’x

   $ 151,639    $ —  

Non-cash exercise of warrants

   $ 540    $ —  

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ALPHATEC HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. The Company and Basis of Presentation

The Company

Alphatec Holdings, Inc. (“Alphatec,” “Alphatec Holdings” or the “Company”), through its wholly-owned subsidiary, Alphatec Spine, Inc. (“Alphatec Spine”) is a medical device company that designs, develops, manufactures and markets products for the surgical treatment of spine disorders, with a focus on treating conditions related to the aging spine. Alphatec Holdings’ principal operating activities are conducted through Alphatec Spine and its wholly owned and consolidated subsidiaries, Alphatec Pacific, Inc. (“Alphatec Pacific”), a Japanese corporation and Milverton Limited, a Hong Kong corporation.

On March 26, 2010, the Company completed its acquisition of Scient’x S.A. (“Scient’x”), a global medical device company based in France that designs, develops and manufacturers surgical implants to treat disorders of the spine (See Note 3).

Basis of Presentation

The consolidated financial statements include the accounts of Alphatec and Alphatec Spine and its wholly owned subsidiaries. The results of operations for the three months ended March 31, 2010 do not include the results of Scient’x as the Company has determined that Scient’x’s results of operations for the five days from the acquisition date, March 26, 2010, to the fiscal quarter end are immaterial to the Company’s consolidated results. All intercompany balances and transactions have been eliminated in the condensed consolidated financial statements.

The accompanying condensed balance sheet as of December 31, 2009, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The interim financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. 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 and No. 2 thereto for the fiscal year ended December 31, 2009, as filed with the SEC on March 2, 2010, April 2, 2010 and April 8, 2010, respectively.

Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010, or any other future periods. The results of operations for the remainder of 2010 will include the results of operations of Scient’x commencing with the second quarter of 2010.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. A going concern basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Based on the Company’s annual operating plan, management believes that its existing cash and cash equivalents of $12.7 million and available credit of $0.2 million at March 31, 2010 and cash of $42.5 million raised in an April 2010 equity offering (See Note 14) will be sufficient to fund its cash requirements through at least March 31, 2011.

On March 26, 2010, the Company completed its acquisition of Scient’x (See Note 3). Subsequent to the closing of the acquisition, the Company became responsible for managing the operations of the combined entities.

In conjunction with the closing of its acquisition with Scient’x, the Company amended its Loan and Security Agreement (the “Credit Facility”) with Silicon Valley Bank and Oxford Finance Corporation (the “Lenders”) that it had entered into in December 2008 (see Note 7). In addition, Scient’x’s existing term loan facility with Oxford Finance Corporation was combined with the Company’s term loan facility. The covenant requirements have been revised under the amended Credit Facility and consist of a combined cash-flow covenant to maintain a minimum fixed charge coverage ratio on a consolidated basis. The minimum fixed charge coverage ratio increases from the second quarter 2010 to the third quarter 2010 and is consistent thereafter. There is also a requirement for the Company to maintain a cash balance with Silicon Valley Bank equal to at least $10 million. The Company expects that it will be in compliance with its covenants throughout 2010. In addition to the minimum fixed charge covenant described above, there are other clauses including subjective clauses that would allow the Lenders to declare the loan immediately due and payable (See Note 7). Upon the occurrence of an event of default under the Amended Credit Facility, the Lenders could elect to declare all amounts outstanding under the Amended Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. If the Lenders were to accelerate the repayment of borrowings under the Amended Credit Facility for any reason, the Company may not have sufficient cash on hand to repay the amounts borrowed under the Amended Credit Facility.

 

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Based on the Company’s plan for combining the operating activities of these two companies, which includes a combined operating plan and cash forecast, management believes that on a combined basis, the Company will have sufficient working capital to fund its cash requirements through March 31, 2011.

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to its audited Consolidated Financial Statements for the fiscal year ended December 31, 2009, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2010, as amended. These accounting policies have not significantly changed during the three months ended March 31, 2010.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that requires entities to allocate revenue in an arrangement of the delivered goods and services based on a selling price hierarchy. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other prescribed means to determine the fair value of that undelivered item. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not expect adoption to have a material impact on the Company’s financial position or results of operations.

3. Acquisition of Scient’x

On December 17, 2009, the Company entered into an acquisition agreement to acquire all of the shares of Scient’x, with Scient’x continuing after the acquisition as a wholly-owned subsidiary of Alphatec. The acquisition, which closed on March 26, 2010, is accounted for under the acquisition method of accounting. The effective acquisition date for accounting purposes was the close of business on March 31, 2010, the end of Scient’x’s fiscal first quarter. The Company purchased Scient’x to acquire its product portfolio and technology, its international distribution network and existing customer base and because of the increased scale of the combined entities.

The transaction was structured as an all stock transaction such that 100% of outstanding Scient’x stock was exchanged pursuant to a fixed ratio for 24,000,000 shares of the Company’s common stock. The consideration paid was reduced by a certain number of shares calculated at the closing in exchange for the payment of certain fees and expenses incurred by HealthPointCapital Partners, L.P. and HealthPointCapital Partners II, L.P. (collectively, “HealthPointCapital”), the Company’s and Scient’x’s principal stockholders, in connection with the acquisition. The aggregate number of shares exchanged was 23,730,644 shares of the Company’s common stock.

As required by the acquisition agreement, the holders of both vested and unvested options to purchase shares of Scient’x common stock who were employed by either Scient’x or Alphatec on the closing date were entitled to receive replacement options to purchase shares of Alphatec common stock upon closing of the acquisition (“Replacement Options”), and such optionees were given credit for the vesting of their Scient’x options up to the closing date. $1.0 million has been included in the purchase price to represent the fair value of the Scient’x options attributable to pre-combination service and was estimated using the Black-Scholes option pricing model with market assumptions. Option pricing models require the use of highly subjective market assumptions, including expected stock price volatility, which if changed can materially affect fair value estimates. The assumptions used in estimating the fair value of the Replacement Options include expected volatility of 56.0%, expected term of 6.0 years, and a risk-free interest rate of 2.5%. The difference between the fair value of the replacement options and the amount included in consideration transferred will be recognized as compensation cost in the Company’s post-combination financial statements over the requisite service period.

Based on the closing price of Alphatec’s common stock of $6.39 on March 26, 2010, the fair value of the Replacement Options, and the payable in exchange for reduction in shares, the preliminary estimated total purchase price is as follows (in thousands):

 

Fair value of Alphatec common stock issued upon closing

   $ 151,639

Fair value of Scient’x options replaced

     1,040

Payable in exchange for reduction in shares to be paid in cash

     1,618
      

Total estimated purchase price

   $ 154,297
      

Under the acquisition method of accounting, the total estimated purchase price is allocated to Scient’x’s net tangible and intangible assets based on their preliminary estimated fair values at the date of the completion of the acquisition and such estimates are subject to revision based on the Company’s final determination of valuations associated with net tangible assets, intangible assets, deferred taxes, contingent liabilities, and the non-controlling interest. Consequently, the amounts recorded at March 31, 2010 are subject to change, and the final amounts may differ.

 

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The following table summarizes the preliminary allocation of the purchase price (in thousands) for Scient’x and the estimated useful lives for the acquired intangible assets:

 

     Useful lives
(in years)
   Estimated
Fair  Value

Net tangible assets assumed

      $ 2,329

Acquired intangibles:

     

Core technology

   10      3,632

Developed technology

   8      9,552

In-process technology

   Indefinite      1,749

Corporate trademarks

   5      1,614

Key product trademarks

   9      2,179

Customer-related intangible

   15      16,009

Distribution network

   10      1,614

Physician education programs

   10      3,095

Goodwill

        112,524
         

Total preliminary estimate purchase price allocation

      $ 154,297
         

A preliminary estimate of $2.3 million has been allocated to Scient’x net tangible assets assumed and $39.4 million has been allocated to identifiable intangible assets acquired. A value of $112.5 million, representing the difference between the total purchase price and the aggregate fair values assigned to the net tangible and intangible assets acquired, less liabilities assumed, was assigned to goodwill. Alphatec is acquiring Scient’x to expand its product offerings, increase its addressable market, increase the size of its international business, and increase its revenues primarily outside of the U.S. Alphatec also believes that significant cost reduction synergies may be realized when the acquired business is integrated. These are among the factors that contributed to a purchase price for the Scient’x acquisition that resulted in the recognition of goodwill. The amount recorded as acquired intangibles and goodwill is not expected to be deductible for tax purposes.

Inventories were increased by Alphatec to their estimated fair value (“step up”), which represented an amount equivalent to estimated selling prices less distribution related costs and a normative selling profit. Consistent with stock rotation, the inventory step up reverses in the next 14 months and will be included in the Company’s post-combination financial statements. The increase to inventory was offset by a decrease in estimated fair value of redundant inventory based on the highest and best use of a similar market participant.

For the technology related assets, the acquired product families were separated into the following categories: core, developed, and in-process technology. The core, developed, and in-process technology values were determined by estimating the present values of the net cash flows expected to be generated by each category of technology.

Trademarks were segregated into the categories of corporate trademarks and key product trademarks. Trademark values were calculated by estimating the present value of future royalty costs that would be avoided by a market participant due to ownership of the trademarks acquired.

The customer-related intangible includes hospitals and distributors that take title to Scient’x’s products. The customer-related intangible value was determined by estimating the present value of expected future net cash flows derived from such customers.

The distribution network includes U.S.-based distributors that sell Scient’x products to customers on a consignment basis. Intangibles related to the distribution network values were determined by estimating the difference between the present values of expected future net cash flows generated with and without the distribution network in place.

The physician education programs value was determined by estimating the costs to rebuild such a program.

The fair value of the non-controlling interest as of the acquisition date is $0.5 million. The fair value of the non-controlling interest was determined by reviewing the fair value of Scient’x’s Italian subsidiary’s net equity and multiplying such amount by 30%, which represents the ownership interest of the non-controlling party.

Scient’x is subject to legal and regulatory requirements, including but not limited to those related to taxation in each of the jurisdictions in the countries in which it operates. The Company has conducted a preliminary assessment of liabilities arising from these tax matters in each of these jurisdictions, and has recognized provisional amounts in its initial accounting for the acquisition of Scient’x for the identified liabilities. However, the Company is continuing its review of these matters during the measurement period, and if new information obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized, as well as any additional liabilities that existed as the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional tax amounts initially recognized.

 

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The following unaudited pro forma information presents the condensed consolidated results of operations of the Company and Scient’x as if the acquisition had occurred on January 1, 2009 (in thousands, except share data):

 

     Three Months Ended
March 31,
 
     2010     2009  

Revenues

   $ 49,766      $ 41,702   

Loss from operations

     (755     (6,615

Net loss

     (1,159     (6,782

Net loss per share, basic and diluted

   $ (0.01   $ (0.10

The pro forma information is not necessarily indicative of what the results of operations actually would have been had the acquisition been completed on the dates indicated. In addition, it does not purport to project the future operating results of the combined entity. The pro forma condensed combined financial information is presented for illustrative purposes only and does not reflect the realization of potential cost savings, revenue synergies or any restructuring costs.

For the three months ended March 31, 2010, the Company incurred transaction costs related to the acquisition of Scient’x of $3.2 million. These costs were expensed as incurred.

For the three months ended March 31, 2010, the Company incurred restructuring charges related to the acquisition of $0.9 million. These costs consist of severance payments and severance-related benefits associated with the termination of certain Scient’x employees based in the United States. The restructuring expenses are due to the consolidation of Scient’x’s U.S. business into our operations in Carlsbad, California.

In future periods, the combined business may incur charges to operations to reflect costs associated with integrating the two businesses that Alphatec cannot reasonably estimate at this time. In addition, the combined business may incur additional charges relating to the transaction in subsequent periods, which could have a material impact on the Company’s financial position or results of operations.

4. Balance Sheet Details

Accounts Receivable

Accounts receivable consist of the following (in thousands):

 

     March 31,
2010
    December 31,
2009
 

Accounts receivable

   $ 39,590      $ 25,084   

Allowance for doubtful accounts

     (322     (318
                

Accounts receivables, net

   $ 39,268      $ 24,766   
                

Inventories

Inventories consist of the following (in thousands):

 

     March 31, 2010    December 31, 2009
     Gross    Reserve for
excess and
obsolete
    Net    Gross    Reserve for
excess and
obsolete
    Net

Raw materials

   $ 3,527    $ —        $ 3,527    $ 2,866    $ —        $ 2,866

Work-in-process

     3,016      —          3,016      1,644      —          1,644

Finished goods

     49,185      (9,026     40,159      33,650      (8,645     25,005
                                           

Inventories, net

   $ 55,728    $ (9,026   $ 46,702    $ 38,160    $ (8,645   $ 29,515
                                           

 

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Property and Equipment

Property and equipment consist of the following (in thousands except as indicated):

 

     Useful lives
(in years)
   March 31,
2010
    December 31,
2009
 

Surgical instruments

   4    $ 42,030      $ 35,286   

Machinery and equipment

   7      10,325        9,684   

Computer equipment

   5      2,608        2,575   

Office furniture and equipment

   5      3,538        3,128   

Leasehold improvements

   various      3,352        3,355   

Building

   39      200        201   

Land

   n/a      15        15   

Construction in progress

   n/a      929        368   
                   
        62,997        54,612   

Less accumulated depreciation and amortization

        (26,881     (24,256
                   

Property and equipment, net

      $ 36,116      $ 30,356   
                   

Total depreciation expense was $2.6 million and $1.8 million for the three months ended March 31, 2010 and 2009, respectively.

The Company has assets under capital leases of $3.4 million and $3.1 million at March 31, 2010 and December 31, 2009, respectively. Accumulated depreciation on these assets totaled $2.6 million and $2.5 million at March 31, 2010 and December 31, 2009, respectively. Depreciation expense for these capital leases included in total depreciation expense above was $0.1 million for both the three months ended March 31, 2010 and 2009.

Intangible Assets

Intangible assets consist of the following (in thousands except as indicated):

 

     Useful lives
(in years)
   March 31,
2010
    December 31,
2009
 

Developed product technology

   5-8    $ 23,252      $ 13,700   

Distribution rights

   3      3,708        3,737   

Intellectual property

   5      1,003        1,004   

License agreement

   1      350        350   

Core technology

   15      3,632        —     

In-process technology

   Indefinite      1,749        —     

Trademarks and trade names

   5-9      3,793        —     

Customer-related

   15      16,009        —     

Distribution network

   10      1,614        —     

Physician education programs

   10      3,095        —     

Supply agreement

   10      225        225   
                   
        58,430        19,016   

Less accumulated amortization

        (17,608     (16,720
                   

Intangible assets, net

      $ 40,822      $ 2,296   
                   

Total amortization expense was $0.9 million and $0.8 million for the three months ended March 31, 2010 and 2009, respectively.

 

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The future expected amortization expense related to intangible assets as of March 31, 2010 is as follows (in thousands):

 

Year Ending December 31,

    

Remainder of 2010

   $ 3,111

2011

     3,961

2012

     3,961

2013

     3,916

2014

     3,813

Thereafter

     20,311
      

Total future expected amortization expense

     39,073

Add: In-process technology

     1,749
      

Total

   $ 40,822
      

Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

     March 31,
2010
   December  31,
2009

Legal

   $ 621    $ 273

Restructuring

     882      —  

Payable in exchange for reduction in shares in connection with Scient’x acquisition, to be paid in cash

     1,618      —  

Deferred rent

     2,220      2,277

Royalties

     2,990      2,615

Commissions

     4,088      3,072

Payroll and related

     4,419      4,185

Other

     6,585      4,017
             

Total accrued expenses

   $ 23,423    $ 16,439
             

Deferred Revenues

During the three months ended March 31, 2010 and 2009, the Company shipped $1.9 million and $0.9 million, respectively, of product to European distributors in which the terms of such sales included extended payment terms. As a result of offering payment terms greater than the Company’s customary U.S. business terms, and operating in a new market in which the Company has limited prior experience, revenues for purchases by distributors in Europe have been deferred until the earlier of either the date upon which payments are due or until cash is received for such purchases. The balance in deferred revenue relating to European distributors as of March 31, 2010 and December 31, 2009 was $1.1 million and $1.3 million, respectively.

During the three months ended March 31, 2010 and 2009, the Company shipped $0.2 million and $1.0 million, respectively, of product to a U.S. distributor that did not have an extensive credit history. As a result of a lack of extensive credit history, revenues for purchases by this distributor have been deferred until cash is received. The balance in deferred revenue relating to this distributor as of March 31, 2010 and December 31, 2009 was $0.5 million and $0.8 million, respectively.

5. Comprehensive Loss

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events, including foreign currency translation adjustments. The following table sets forth the computation of comprehensive loss for the three months ended March 31, 2010 and 2009 (in thousands):

 

     Three Months Ended March 31,  
     2010     2009  

Net loss, as reported

   $ (4,710   $ (4,383

Foreign currency translation adjustment

     (171     (439
                

Comprehensive loss

   $ (4,881   $ (4,822
                

 

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6. License and Developmental Consulting Agreements

OsseoFix Fracture Reduction System License Agreement

On April 16, 2009, the Company and Stout Medical Group LP (“Stout”) amended the license agreement that the parties had entered into in September 2007 (the “License Amendment”) that provides the Company with a worldwide license to develop and commercialize Stout’s proprietary intellectual property related to a treatment for vertebral compression fractures. The effective date of the License Amendment is March 31, 2009. Under the License Amendment, the timing of the minimum royalty payments has been adjusted and Stout’s ability to terminate the License Amendment was revised. Under the original license agreement, the Company’s minimum royalty obligation began in the year ending December 31, 2009. Pursuant to the License Amendment, the minimum royalty obligation is suspended until a licensed product obtains regulatory approval from the United States Food and Drug Administration (the “FDA”). In addition, under the terms of the License Amendment, Stout has the ability to terminate the License Amendment if the Company is not using commercially reasonably efforts to obtain regulatory approval to market and sell a licensed product; provided that the Company has the right to delay such termination in exchange for making certain payments to Stout. If, during the time period when such payments are made, the Company were to make a regulatory filing for the marketing and sale of a licensed product, such termination will be null and void. Pursuant to the License Amendment, Stout is entitled to retain all up-front payments that had been previously paid to it. The other material terms to the license agreement were not changed in the License Amendment.

Expandable VBR License and Consulting Agreement

On April 15, 2009, the Company and Stout amended and restated the license agreement that the parties had entered into in March 2008 (the “Amended and Restated License Agreement”) that provides the Company with a worldwide license to develop and commercialize Stout’s proprietary intellectual property related to an expandable interbody/vertebral body replacement device. The effective date of the Amended and Restated License Agreement is March 31, 2009. Under the Amended and Restated License Agreement, the timing of the minimum royalty payments has been adjusted and Stout’s ability to terminate the Amended and Restated License Agreement was revised. Under the original license agreement, the Company’s minimum royalty obligation began in the year ending December 31, 2010. Pursuant to the Amended and Restated License Agreement, if the Company is required to initiate a clinical trial to obtain clearance from the FDA for a licensed product, the minimum royalty obligation is suspended until such licensed product obtains regulatory approval. In addition, under the terms of the Amended and Restated License Agreement, Stout has the ability to terminate the Amended and Restated License Agreement if the Company has not filed for regulatory approval to market and sell a licensed product within an allotted time period; provided that the Company has the right to delay such termination in exchange for making certain payments to Stout. If, during the time period when such payments are made, the Company were to make a regulatory filing for the marketing and sale of a licensed product, such termination would be null and void. Pursuant to the Amended and Restated License Agreement, Stout is entitled to retain all up-front payments that had been previously paid to it. The other material terms to the original license agreement were not changed in the Amended and Restated License Agreement.

Additionally, effective March 31, 2009 the Company and Stout amended and restated the developmental consulting agreement that the parties had entered into in March 2008 (the “Amended and Restated Consulting Agreement”) pursuant to which Stout agreed to provide consulting services related to the development of an expandable interbody/vertebral body replacement device. Under the Amended and Restated Consulting Agreement, the timing and amount of consulting fees has been adjusted. Under the original consulting agreement, the Company was obligated to make ten monthly payments of $50,000 to compensate Stout for providing development services. As of the effective date of the Amended and Restated Consulting Agreement, the Company had paid Stout $0.4 million of such consulting fees, and had expensed $0.2 million of such fees. Pursuant to the Amended and Restated Consulting Agreement, Stout returned such $0.4 million to the Company in April 2009. The terms of the Amended and Restated Consulting Agreement call for the Company to pay consulting fees of $20,000 per month for 12 months beginning in July 2009, provided that the agreement is in full force and effect. Pursuant to the Amended and Restated Consulting Agreement, Stout is entitled to retain the 101,944 shares of restricted stock of the Company that the Company had previously issued to Stout. Such restricted stock would become vested upon the attainment of a development milestone. The other material terms to the original consulting agreement were not changed. As the total cash consideration has been reduced to $0.2 million, the Company is recording the remaining amount that had not yet been expensed over the expected development period.

OsseoScrew License Agreement

In December 2007, the Company entered into an exclusive license agreement, (the “OsseoScrew License Agreement”), with Progressive Spinal Technologies LLC (“PST”), which provides the Company with an exclusive worldwide license to develop and commercialize PST’s proprietary intellectual property related to an expanding pedicle screw with increased pull-out strength. 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 began 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 a charge for in process research and development expense (“IPR&D”) of $2.0 million in the fourth quarter of 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. The agreement includes milestone payments of $3.6 million consisting of cash and its

 

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common stock upon the completion of the biomechanical testing. Furthermore, the agreement includes milestone payments of $2.5 million consisting of cash and the Company’s common stock upon market launch. During the second quarter of 2009, the Company successfully completed one of its development milestones and recorded an IPR&D charge totaling $3.6 million, which consisted of a cash payment of $1.8 million and the issuance of $1.8 million of shares of the Company’s common stock. The amounts were expensed 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. The total number of shares of common stock, which were issued on July 15, 2009, was 567,821.

In December 2009, the Company and PST amended the OsseoScrew License Agreement (the “OsseoScrew License Amendment”). Under the OsseoScrew License Amendment, the terms relating to the payment of a $0.5 million development milestone payment were modified. The Company recorded a charge for IPR&D of $0.5 million in the fourth quarter of 2009 upon completion of a development milestone, 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. The timing of the royalty payments based on net sales of licensed products has been amended and minimum annual royalties begin in 2010 instead of 2009.

Assignment Agreement with Spine Vision, S.A.

In January 2009, the Company entered into an assignment agreement (the “Patent and Technology Assignment Agreement”) with Spine Vision, S.A (“Spine Vision”) that assigns to the Company all rights, title and interests to certain patents and technology of Spine Vision that relate to a stand-alone locking interbody device. The financial terms of the Patent and Technology Assignment Agreement include: (i) an initial payment of $0.5 million; and (ii) a royalty payment based on the net sales of any product that contains the assigned intellectual property. During the first quarter of 2009, the Company recorded an IPR&D charge of $0.5 million 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.

License Agreement with Helix Point, LLC

In February 2009, the Company entered into a License Agreement (the “Helifuse/Helifix License Agreement”) with Helix Point, LLC (“Helix Point”) that provides the Company with a worldwide exclusive license (excluding the People’s Republic of China) to develop and commercialize Helix Point’s proprietary intellectual property related to a device for the treatment of spinal stenosis. The financial terms of the Helifuse/Helifix License Agreement include: (i) a cash payment of $0.2 million payable following the execution of the Helifuse/Helifix License Agreement; (ii) the issuance of $0.4 million of shares of the Company’s common stock following the execution of the Helifuse/Helifix 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 2010; and (iv) a royalty payment based on net sales of licensed products, with minimum annual royalties beginning in the year after the first commercial sale of a licensed product. During the first quarter of 2009, the Company recorded an IPR&D charge of $0.6 million for the initial cash and stock 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.

License Agreement with International Spinal Innovations, LLC

In June 2009, the Company entered into a Cross License Agreement (the “ISI License Agreement”) with International Spinal Innovations, LLC (“ISI”) that provides the Company with a worldwide license to develop and commercialize ISI’s proprietary intellectual property related to a stand-alone anterior lumbar interbody fusion device. The financial terms of the ISI License Agreement include: (i) the issuance of 260,000 shares of the Company’s common stock following the execution of the ISI License Agreement; (ii) sales milestone payments in cash that could begin to be achieved and paid in 2011; and (iii) a royalty payment based on net sales of licensed products with minimum annual royalties beginning in the year after the first commercial sale of a licensed product. During the second quarter of 2009, the Company recorded an IPR&D charge of $0.9 million for the stock issuance on June 30, 2009, 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.

Supply Agreement with ETEX Corporation

In October 2009, Alphatec Spine entered into a supply and distribution agreement (the “ETEX Agreement”) with ETEX Corporation, (“ETEX”), that provides Alphatec Spine with the rights to market and sell ETEX’s EquivaBone and CarriGen products in the U.S and Europe, excluding Spain. The financial terms of the ETEX Agreement include: (i) minimum purchase commitments during the first, second and third year following execution of the agreement of $2.3 million, $3.4 million and $4.5 million, respectively.

 

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Distribution Agreement with Parcell Spine, LLC

In January 2010, the Company entered into an exclusive distribution agreement (the “Parcell Agreement”) with Parcell Spine, LLC, (“Parcell Spine”), that provides Alphatec with an exclusive right to distribute Parcell Spine’s proprietary adult stem cells for the treatment of spinal disorders. The financial terms of the Parcell Agreement include: (i) a cash payment of $0.5 million payable following the execution of the Parcell Agreement; (ii) a milestone payment consisting of $1.0 million in cash and the issuance of $1.0 million of shares of the Company’s common stock following the successful completion of the pre-clinical study; and (iii) sales milestone payments in cash and the Company’s common stock. During the three months ended March 31, 2010, the Company recorded an IPR&D charge of $0.5 million for the initial cash payment.

7. Debt and Other Financing Activities

Subscription Agreements for Sale of Common Stock

On February 9, 2010, the Company entered into subscription agreements with a group of purchasers for the sale of an aggregate of 1,592,011 shares of the Company’s common stock at a purchase price of $4.1457 per share, for gross proceeds of approximately $6.6 million (the “Offering”). The net proceeds to the Company from the Offering, after deducting expenses, were approximately $6.5 million. The Offering was made pursuant to a registration statement on Form S-3 and closed on February 12, 2010.

Filing of Registration Statement

On February 12, 2010, the Company filed a registration statement on Form S-3 with the SEC pursuant to which the Company may offer and sell shares of its common stock and preferred stock, various series of debt securities, and warrants, either individually or in units, with a total value of up to $100,000,000 at prices and on terms to be determined by market conditions at the time of offering. In addition, under such registration statement, HealthpointCapital has registered for resale up to an aggregate of 20,031,646 shares of the Company’s common stock. The registration statement was declared effective by the SEC on April 9, 2010.

Loan and Security Agreement

In December 2008, the Company entered into the Credit Facility with the Lenders consisting of a $15.0 million term loan and a $15.0 million working capital line of credit. The term loan carries a fixed interest rate of 11.25% with interest payments due monthly, and principal repayments commencing in October 2009. Thereafter, the Company is required to repay the principal plus interest in 30 equal monthly installments, ending in April 2012. A finance charge of $0.8 million is due in April 2012. The working capital line of credit carries a variable interest rate equal to the prime rate plus either 2.5% or 2.0%, depending on our financial performance. Interest only payments are due monthly and the principal is due at maturity in April 2012.

On March 26, 2010, the Company amended its Credit Facility (the “Amended Credit Facility”) with the Lenders. The working capital line of credit has been increased by $10 million, to $25 million. In addition, the Company combined the previously existing term loan facility provided by Oxford Finance Corporation to Scient’x with the Company’s existing term loan facility. Commencing in the second quarter 2010, the amended term loan will collectively not exceed $19.5 million.

Alphatec’s term loan interest rate was amended to a fixed rate of 12.0%. Alphatec is required to repay the principal plus interest in 25 equal monthly installments, ending in April 2012. In connection with the amendment, the existing finance charge of $0.8 million has been increased by $0.2 million to $1.0 million. The finance charge is being accrued to interest expense through April 2012, when it is due and payable. The Company will pay a prepayment penalty if the loan is repaid prior to maturity. The balance of Alphatec’s term loan as of March 31, 2010 was $12.4 million, net of the debt discount.

In May 2009, Scient’x had entered into a term loan facility with Oxford Finance Corporation for $7.5 million. This term loan has been included under the Amended Credit Facility. Scient’x’s term loan carries a fixed interest rate of 12.42%. Scient’x is required to repay the principal plus interest in 36 equal monthly installments, ending in June 2012. In connection with the Amended Credit Facility, the Scient’x term loan finance charge has been increased to $0.5 million. The finance charge will be accrued to interest expense through June 2012, when it is due and payable. The collateral granted to Oxford under the original term loan facility will remain in full effect, amended as necessary to accommodate the acquisition of Scient’x and to conform to the terms of the Amended Credit Facility. Scient’x’s previously existing financial covenant to maintain a minimum level of revenues has been eliminated under the Amended Credit Facility. The balance of Scient’x’s term loan as of March 31, 2010 was $6.8 million.

The working capital line of credit interest rate was amended to equal the prime rate plus 4.50%, with a floor rate of 8.50%. The repayment terms under the working capital line of credit were not amended. Interest-only payments are due monthly and the principal is due at maturity in April 2012. As of March 31, 2010, the Company has $0.2 million remaining available to be drawn under the working capital line of credit based on its eligible borrowing base.

        The funds from the credit facility are intended to serve as a source of working capital for ongoing operations and working capital needs. In connection with the amendment, the Company paid debt issuance costs and other transaction fees totaling $0.8 million. Included in debt issuance costs was a facility fee of $0.4 million and a line of credit commitment fee of $0.1 million. The debt issuance costs were capitalized and are being amortized over the remaining term of the loan using the effective interest method.

 

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To secure the repayment of any amounts borrowed under the Amended Credit Facility, the Company granted to the Lenders a first priority security interest in all of its assets, other than its owned and licensed intellectual property assets. The Company also agreed not to pledge or otherwise encumber its intellectual property assets without the consent of the Lenders. Additionally, the Lenders received a pledge on a portion of the Scient’x shares owned by the Company.

Commencing in the second quarter of 2010, the Company (including Scient’x) is also required to maintain compliance with a minimum fixed charge coverage ratio defined as Adjusted EBITDA (a non-GAAP term defined as net income (loss) excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation costs and other non-recurring income or expense items, such as IPR&D expense, acquisition-related restructuring expense and transaction related expenses) divided by total debt service. The Company is also required to maintain a cash balance with Silicon Valley Bank equal to at least $10 million.

The Lenders have the right to declare the loan immediately due and payable in an event of default under the Amended Credit Facility, which includes, among other things, the failure to make payments when due, breaches of representations, warranties or covenants, the occurrence of certain insolvency events, the occurrence of a non-appealable legal judgment against the Company that is not satisfied within ten days, or the occurrence of an event which, in the opinion of the Lenders, could have a material adverse effect on the Company.

In connection with the original Credit Facility, the Company had issued warrants to the Lenders to purchase an aggregate of 476,190 shares of the Company’s common stock. The warrants were immediately exercisable, can be exercised through a cashless exercise, have an exercise price of $1.89 per share and have a ten year term. The Company recorded the value of the warrants of $0.9 million as a debt discount. The value of the warrants was determined on the date of grant using the Black-Scholes valuation method with the following assumptions: risk free interest rate of 2.67%, volatility of 60.9%, a ten year term and no dividend yield. In March 2010, one of the Lenders exercised all of its warrants pursuant to the cashless exercise provision of its agreement (See Note 10). The other Lender had previously exercised all of its warrants in September 2009.

During the three months ended March 31, 2010 and 2009, the Company repaid $0.3 million and $0.5 million, respectively, and drew an additional $0.4 million and $1.9 million, respectively, on the working capital line of credit. The balance of the line of credit as of March 31, 2010 was $14.8 million. The balance of the combined term loans was $19.2 million, net of the debt discount. The Company’s amortization of the debt discount and debt issuance costs and accretion of the finance charge, which is recorded as a non-cash interest expense, totaled $0.2 million and $0.3 million for the three months ended March 31, 2010 and 2009, respectively. Interest expense for Alphatec’s term loan and working capital line of credit, excluding debt discount and debt issuance cost amortization and accretion of the additional finance charge, totaled $0.6 million for both the three months ended March 31, 2010 and 2009.

Other Debt Agreements

In September 2008, Alphatec Pacific paid $0.8 million on its Resona Bank line of credit and replaced the line of credit with $0.6 million of term debt with Resona Bank, which is payable over 30 months with a 3.75% interest rate. Alphatec Pacific has additional notes payable to Japanese banks and a bond payable, bearing interest at rates ranging from 1.5% to 6.5% and maturity dates through January 2014 that are collateralized by substantially all of the assets of Alphatec Pacific and Japan Ortho Medical, a subsidiary of Alphatec Pacific. As of March 31, 2010, the balance of the notes and the bond totaled $0.9 million.

The Company and Scient’x have various capital lease arrangements. The leases bear interest at rates ranging from 4.5% to 7.4%, are generally due in monthly principal and interest installments, are collateralized by the related equipment, and have various maturity dates through January 2014. As of March 31, 2010, the balance of these capital leases totaled $0.5 million.

The Company has a note payable with Microsoft, Inc. for the purchase of software licenses, bearing interest at a rate of 2.7% and a maturity date of February 2011. The balance of this note as of March 31, 2010 was $0.1 million.

The Company has three financing agreements totaling $1.0 million for the payment of premiums on various insurance policies. These financing arrangements bear interest ranging from 0.0% to 5.2% and are payable through June 2010. The balance of all such financing agreements as of March 31, 2010 totaled $0.3 million.

In February 2010, the Company executed a note payable with Oracle for the purchase of software and the related support totaling $0.9 million. The loan bears interest at 5.3% and has maturity date of February 2013. An initial payment of $0.1 million was made in February 2012. Payments of principal and interest are due every three months. The balance of this note as of March 31, 2010 was $0.8 million.

 

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Scient’x has a conditional interest free loan with OSEO Anvar, a French government agency that provides research and development financing to French companies. At the loan’s inception, an imputed interest rate of 4% was used to calculate the present value of the loan. Scient’x complied with the loan conditions and was therefore granted the contractual repayment terms which consisted of annual repayments in March of each year. Scient’x repaid $0.1 million in March 2010. The balance of this loan as of March 31, 2010 was $0.1 million.

Principal payments on debt are as follows as of March 31, 2010 (in thousands):

 

Year Ending December 31,

      

Remainder of 2010

   $ 7,398   

2011

     10,102   

2012

     20,644   

2013

     49   

2014

     4   

Thereafter

     —     
        

Total

     38,197   

Less: finance charge being accrued to interest expense through April 2012, and debt discount

     (1,898

Add: capital lease principal payments

     508   
        

Total

     36,807   

Less: current portion of long-term debt

     (10,055
        

Long-term debt, net of current portion

   $ 26,752   
        

8. Commitments and Contingencies

Leases

The Company and Scient’x lease certain equipment under capital leases which expire on various dates through 2013. The Company and Scient’x also lease their buildings and certain equipment and vehicles under operating leases which expire on various dates through 2017. Future minimum annual lease payments under such leases are as follows (in thousands):

 

Year Ending December 31,

   Operating    Capital  

Remainder of 2010

   $ 2,699    $ 140   

2011

     3,252      176   

2012

     2,746      175   

2013

     2,637      48   

2014

     2,163      —     

Thereafter

     3,492      —     
               
   $ 16,989      539   
         

Less: amount representing interest

        (31
           

Present value of minimum lease payments

        508   

Current portion of capital leases

        (160
           

Capital leases, less current portion

      $ 348   
           

Rent expense under operating leases for the three months ended March 31, 2010 and 2009 was $0.6 million and $0.8 million, respectively.

Litigation

In February 2010, a complaint was filed in the U.S. District Court for the Central District of California, by Cross Medical Products, LLC (“Cross”) alleging that the Company breached a patent license agreement with Cross by failing to make certain royalty payments allegedly due under the agreement. Cross is seeking payment of prior royalties allegedly due from the Company’s sales of polyaxial pedicle screws and an order from the court regarding payment of future royalties by the Company. While the Company denied the allegations in its answer to the complaint and believes that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of Cross could have a significant adverse effect on the Company’s financial condition and results of operations.

In 2002, Eurosurgical, a French company in the business of sales and marketing of spinal implants, entered into a distribution agreement for the United States, Mexico, Canada, India and Australia with Orthotec, LLC, a California company (“Orthotec”). In 2004, Orthotec sued Eurosurgical in connection with an intellectual property dispute and a $9 million judgment was entered against

 

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Eurosurgical by a California court. At the same time, a federal court declared Eurosurgical liable to Orthotec for $30 million. In 2006, Eurosurgical’s European assets were ultimately acquired by Surgiview, SAS (“Surgiview”) in a sale approved by a French court. Pursuant to this sale, Surgiview became a subsidiary of Scient’x in 2006. Orthotec attempted to recover on Eurosurgical’s obligations in California and federal courts by filing a motion in a California court to add Surgiview to the judgment against Eurosurgical on theories including successor liability and fraudulent conveyance. In February 2007, the California court dismissed Orthotec’s motion, indicating that Orthotec had not carried its burden of proof to establish successor liability. Orthotec chose to not proceed with a further hearing in June 2007. After the acquisition of Scient’x by HealthpointCapital in 2007, Orthotec sued Scient’x, Surgiview, HealthpointCapital and certain Scient’x directors in the California and New York state and federal courts. In April 2009, the California court dismissed this matter on jurisdictional grounds, and Orthotec has appealed such dismissal. In November 2009, the New York state court dismissed Orthotec’s claims with respect to the other defendants based on collateral estoppel. Orthotec has commenced an appeal of the New York ruling. While the Company believes that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of Orthotec could have a significant adverse effect on the Company’s financial condition and results of operations.

In 2004, Scient’x’s U.S. subsidiary entered into a distribution agreement with DAK Surgical, Inc., an independent distributor (“DAK Surgical”), for the distribution of Scient’x’s products in certain defined sales areas. In September 2007, shortly after the termination of its distribution contract, DAK Surgical filed a lawsuit against Scient’x in which it alleges, among other things, that it is entitled to a change of control payment pursuant to the terminated distribution contract. While the Company believes that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of DAK Surgical could have a significant adverse effect on the Company’s financial condition and results of operations.

In August 2009, a complaint filed under the qui tam provisions of the United States Federal False Claims Act (“the FCA”) that had been filed by private parties against Scient’x’s U.S. subsidiary was unsealed by the United States District Court for the Middle District of Florida (Hudak v. Scient’x USA, Inc., et al. (Civil Action No. 6:08-cv-1556-Orl-22DAB, U.S. District Court, W.D. Florida). The complaint alleged violations of the FCA arising from allegations that Scient’x engaged in improper activities related to consulting payments to surgeon customers. Under the FCA, the United States Department of Justice, Civil Division (“the DOJ”) had a certain period of time in which to decide whether to intervene and conduct the action against Scient’x, or to decline to intervene and allow the private plaintiffs to proceed with the case. In August 2009, the DOJ filed a notice informing the court that it was declining to intervene in the case. In December 2009, the private plaintiffs who filed the action moved the court to dismiss the matter without prejudice, the Attorney General consented to such dismissal and the matter was dismissed without prejudice. Despite the dismissal of this matter, the DOJ is continuing its review of the facts alleged by the original plaintiffs in this matter. To date, neither Scient’x nor the Company has been subpoenaed by any governmental agency in connection with this review. The Company believes that Scient’x’s business practices were in compliance with the FCA and intends to vigorously defend itself with respect to the allegations contained in the qui tam complaint, however, the outcome of the matter cannot be predicted at this time and any adverse outcome could have a significant adverse effect on the Company’s financial condition and results of operations.

The Company is and may become involved in various other legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters to have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position; litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.

Royalties

The Company has entered into various intellectual property agreements requiring the payment of royalties based on the sale of products that utilize such intellectual property. These royalties primarily relate to products sold by Alphatec Spine and are calculated either as a percentage of net sales or in one instance on a per-unit sold basis. Royalties are included on the accompanying consolidated statement of operations as a component of cost of revenues.

9. Net Loss Per Share

Basic earnings per share (“EPS”) is calculated by dividing the net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period and 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. (In thousands, except per share data):

 

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     Three Months Ended March 31,  
     2010     2009  

Numerator:

    

Net loss

   $ (4,710   $ (4,383
                

Denominator:

    

Weighted average common shares outstanding

     54,734        47,436   

Weighted average unvested common shares subject to repurchase

     (581     (933
                

Weighted average common shares outstanding - basic

     54,153        46,503   

Effect of dilutive securities:

    

Options, warrants and restricted share awards

     —          —     
                

Weighted average common shares outstanding - diluted

     54,153        46,503   
                

Net loss per common share:

    

Basic and diluted

   $ (0.09   $ (0.09
                

The weighted-average anti-dilutive securities not included in diluted net loss per share were as follows (in thousands):

 

     Three Months Ended March 31,
     2010    2009

Options to purchase common stock

   1,793    2,539

Warrants to purchase common stock

   222    476

Unvested restricted share awards

   581    933
         

Total

   2,596    3,948
         

10. Stock-Based Compensation and Other Equity Transactions

The Company accounts for stock-based compensation under provisions that require 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. The amount of expense recognized during the period is affected by subjective assumptions, including: estimates of the Company’s future volatility, the expected term for its stock options, the number of options expected to ultimately vest, and the timing of vesting for the Company’s share-based awards.

The Company accounts for stock option grants to non-employees in accordance with provisions that require that the fair value of these instruments be recognized as an expense over the period in which the related services are rendered.

Share-based compensation expense of awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met. Determining the likelihood and timing of achieving performance conditions is a subjective judgment made by management which may affect the amount and timing of expense related to these share-based awards. Share-based compensation is adjusted to reflect the value of options which ultimately vest as such amounts become known in future periods.

Valuation of Stock Option Awards

The assumptions used to compute the share-based compensation costs for the stock options granted during the three months ended March 31, 2010 and 2009 are as follows:

 

     Three Months Ended March 31,  
     2010     2009  
Employee Stock Options     

Risk-free interest rate

   2.80   2.00

Expected dividend yield

   —     —  

Weighted average expected life (years)

   6.2      6.2   

Volatility

   56   58

 

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The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future.

Compensation Costs

The compensation cost that has been included in the Company’s condensed 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,  
     2010     2009  

Cost of revenues

   $ 57      $ 52   

Research and development

     349        64   

Sales and marketing

     199        171   

General and administrative

     376        347   
                

Total

   $ 981      $ 634   
                

Effect on basic and diluted net loss per share

   $ (0.02   $ (0.01
                

Stock Options

A summary of the Company’s stock option activity under its Amended and Restated 2005 Employee, Director and Consultant Stock Plan (the “2005 Plan”) and related information is as follows (in thousands, except as indicated and per share data):

 

     Shares     Weighted
average
exercise
price
   Weighted
average
remaining
contractual
term
(in years)
   Aggregate
intrinsic
value

Outstanding at December 31, 2009

   2,957      $ 3.94    8.28    $ 4,120

Granted year to date

   842      $ 6.31    —        —  

Exercised year to date

   (22   $ 4.18    —        —  

Forfeited year to date

   (27   $ 4.31    —        —  
              

Outstanding at March 31, 2010

   3,750      $ 4.47    8.59    $ 7,157
                        

Options vested and expected to vest at March 31, 2010

   3,124      $ 4.51    8.59    $ 5,835
                        

Options vested and exercisable at March 31, 2010

   1,036      $ 4.23    7.92    $ 2,227
                        

In connection with the acquisition of Scient’x, the holders of both vested and unvested options to purchase shares of Scient’x common stock who were employed by either Scient’x or Alphatec on the closing date were entitled to receive replacement options to purchase shares of Alphatec common stock upon closing of the acquisition, and such optionees were given credit for the vesting of their Scient’x options up to the closing date. The Company calculated the fair value of the Scient’x options attributable to pre-combination service using the Black-Scholes option pricing model with market assumptions. The fair value of the replacement options that was associated with pre-combination service was included in consideration transferred in the acquisition. The difference between the fair value of the replacement options and the amount included in consideration transferred will be recognized as compensation cost in the Company’s post-combination financial statements over the requisite service period. The Company granted 754,838 options, with an exercise price of $6.39, to purchase shares of Alphatec common stock to Scient’x optionees.

The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2010 and 2009 was $6.31 and $1.62, respectively. The aggregate intrinsic value of options at March 31, 2010 is based on the Company’s closing stock price on that date of $6.37 per share.

As of March 31, 2010, there was $5.1 million of unrecognized compensation expense for stock options and awards which is expected to be recognized on a straight-line basis over a weighted average period of approximately 2.5 years. The total intrinsic value of options exercised was $0.1 million for the three months ended March 31, 2010. There were no option exercises during the three months ended March 31, 2009.

In January 2010, the Company’s Board of Directors agreed to increase the number of shares reserved for issuance under the 2005 Plan by 1,000,000 shares. At March 31, 2010, approximately 1,689,000 shares of common stock remained available for issuance under the 2005 Plan.

 

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Restricted Stock Awards

The following table summarizes information about the restricted stock awards activity (in thousands, except as indicated and per share data):

 

     Shares     Weighted
average
grant
date fair
value
   Weighted
average
remaining
recognition
period
(in  years)
   Aggregate
intrinsic
value

Outstanding at December 31, 2009

   520      $ 5.90    1.29    $ 3,068

Awarded year to date

   —        $ —        

Released year to date

   (43   $ 3.72      

Forfeited year to date

   (1   $ 9.19      
              

Outstanding at March 31, 2010

   476      $ 6.09    1.15    $ 2,901
                        

The table above does not include the 101,944 shares of restricted stock granted to Stout in March 2008. There were no restricted awards granted during the three months ended March 31, 2010 and 2009.

Warrants

In December 2008, the Company issued warrants to the Lenders in the Credit Facility to purchase an aggregate of 476,190 shares of the Company’s common stock with an exercise price of $1.89 per share. The warrants were immediately exercisable, could be exercised through a cashless exercise and had a ten-year term. The Company recorded the value of the warrants of $0.9 million as a debt discount. The value of the warrants was determined on the grant date using the Black-Scholes valuation method with the following assumptions: risk free interest rates of 2.67%, volatility of 60.9%, a ten year term and no dividends yield.

In March 2010, one of the Lenders to the Credit Facility exercised all of its warrants pursuant to the cashless exercise provision of its warrant agreement resulting in the Company issuing 196,161 shares of its common stock to the Lender. The net value of the shares issued was $1.2 million. Following this exercise, there were no outstanding warrants to purchase shares of the Company’s common stock.

Treasury Stock

On August 31, 2009, pursuant to the settlement documents with the claimant surgeons in the Brodke litigation, the Company issued 114,766 shares of its common stock, valued at a price per share of $4.35, to the claimant surgeons. The resale of such shares was not covered by a registration statement. As required by the settlement agreement, six months after the issuance, the value of such stock ($0.5 million) was measured against the then-current value of the Company’s common stock on such date. The Company performed the measurement calculation on February 28, 2010 using a per share price of the Company’s common stock of $5.20, which resulted in the forfeiture of 18,612 shares by the claimant surgeons. The Company recorded the fair value of the forfeited shares of $0.1 million as treasury stock. The Company also reviews the fair value of the $0.5 million equity issuance on a quarterly basis to determine if additional accounting is warranted based on a fluctuation in the Company’s stock price. As of March 31, 2010, the Company recorded a fair value adjustment of $0.1 million to increase litigation expense.

11. Income Taxes

To calculate its interim tax provision, at the end of each interim period the Company estimates the annual effective tax rate and applies that to its ordinary quarterly earnings. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.

The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. The Company’s unrecognized tax benefits increased $1.1 million during the three months ended March 31, 2010. The increase in unrecognized tax benefits during the three months ended March 31, 2010 was primarily related to uncertain tax positions of the acquired Scient’x operations. The unrecognized tax benefits at March 31, 2010 were $3.3 million. It is reasonably possible that $0.3 million of the Company’s unrecognized tax benefits could be recognized within the next 12 months.

 

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The U.S. income tax expense consists primarily of state income taxes and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill. The foreign income tax expense consists primarily of Japanese provincial and city income taxes.

12. Segment and Geographical Information

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company operates in one reportable business segment.

During the three months ended March 31, 2010 and 2009, the Company operated in three geographic locations, the U.S., Asia and Europe. Revenues, attributed to the geographic location of the customer, were as follows (in thousands):

 

     Three Months Ended March 31,
     2010    2009

United States

   $ 28,436    $ 23,813

Asia

     6,096      5,830

Europe

     3,899      967
             

Total consolidated revenues

   $ 38,431    $ 30,610
             

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

 

     March 31,
2009
   December  31,
2009

United States

   $ 186,816    $ 148,735

Asia

     11,993      13,082

Europe

     158,396      71
             

Total consolidated assets

   $ 357,205    $ 161,888
             

13. Related Party Transactions

In connection with the acquisition of Scient’x and pursuant to the terms of the share purchase agreement, the consideration paid for 100% of the shares of Scient’x was fixed at 24,000,000 shares of the Company’s common stock, reduced by a certain number of shares calculated at the closing in exchange for the payment of certain fees and expenses incurred by HealthpointCapital. The aggregate purchase price paid to acquire 100% of the shares of Scient’x was 23,730,644 shares of the Company’s common stock. The Company will pay fees and expenses incurred by HealthpointCapital of $1.6 million. HealthpointCapital and its affiliates held approximately 94.8% of the issued and outstanding shares of Scient’x prior to the acquisition. HealthpointCapital received shares of the Company’s common stock in connection with the acquisition proportional to its ownership interest in Scient’x.

For the three months ended March 31, 2010 and 2009, the Company incurred costs of $0 and $0.1 million, respectively, to Foster Management Company and HealthpointCapital, LLC for travel expenses, including the use of Foster Management Company’s airplane. Foster Management Company is an entity owned by John H. Foster, a member of the Company’s board of directors. John H. Foster is a significant equity holder of HealthpointCapital, LLC, an affiliate of HealthpointCapital Partners, L.P. and Healthpoint Capital Partners II, L.P., which are the Company’s principal stockholders.

Dr. Stephen H. Hochschuler serves as a director of the Company’s and Alphatec Spine’s board of directors and Chairman of Alphatec Spine’s Scientific Advisory Board. The Company, Alphatec Spine and Dr. Hochschuler entered a written consulting agreement on October 13, 2006 (the “Consulting Agreement”). Pursuant to the Consulting Agreement, Dr. Hochschuler is required to provide advisory services related to the spinal implant industry and the Company’s research and development strategies. For the three months ended March 31, 2010 and 2009, the Company incurred costs of $0.1 million in each period, for advisory services provided by Dr. Hochschuler.

 

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14. Subsequent Events

Public Offering of Common Stock

In April 2010, the Company completed a public offering of an aggregate of 18,400,000 shares (16,000,000 primary shares and 2,400,000 shares sold pursuant to the exercise of an over allotment option granted to the underwriters) of its common stock, par value $0.0001 per share (the “Offering”). The shares were sold at an offering price of $5.00 per share, less underwriting commissions and discounts. Of the shares of common stock sold in the Offering, 9,200,000 shares were sold by the Company and 9,200,000 were sold by HealthpointCapital Partners, L.P (the “Selling Stockholder”). The Offering closed on April 21, 2010. The net proceeds to the Company were approximately $42.5 million after deducting underwriting discounts and commissions and estimated expenses payable by the Company. The Company did not receive any proceeds from the sale of shares of common stock by the Selling Stockholder.

The Offering was made pursuant to a prospective supplement dated April 16, 2010 and the Company’s existing shelf registration statement on Form S-3, which was initially filed with the SEC on February 12, 2010 and declared effective by the SEC on April 9, 2010.

Consolidation of Scient’x’s U.S. Operations

As a result of the acquisition of Scient’x, the Company elected to consolidate Scient’x’s U.S. operations, close the U.S. facility and move its U.S. operations to the Company’s corporate location in Carlsbad, California. This consolidation was completed by April 30, 2010. All of the Scient’x U.S. employees were notified of the closure of the Scient’x U.S. operations and provided documentation related to their employment, resulting in a reduction in workforce. The Company accrued $0.9 million in restructuring costs relating to a reduction in workforce in March 2010. The Company expects to incur approximately $0.4 million of expenses related to the consolidation of Scient’x’s U.S. operations in the second quarter of 2010.

Sale of IMC Co.

In connection with the Company’s strategy to focus on the sale of spinal implants in Japan, Alphatec Pacific entered into an agreement to sell its wholly owned subsidiary, IMC Co., to a third party in April 2010. The Company determined that IMC Co. was a non-strategic asset given that it is a distribution company that primarily sells general orthopedic trauma products in a limited geographic market. In exchange for all of the shares of IMC Co., the purchaser agreed to pay $0.6 million. The purchaser will pay the Company in installments, of which $0.3 million will be paid in the second quarter of 2010 and the remaining amount paid thereafter in three annual installments. During the three months ended March 31, 2010, IMC Co. contributed revenues of $3.1 million, gross margin of 12.5% and net loss ($0.1 million) to the Company’s results of operations. The impact of this transaction on the Company’s consolidated results of operations was previously contemplated in the Company’s 2010 performance objectives and financial guidance.

 

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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 this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ending December 31, 2009, as amended, as well as any updates to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.

Overview

We are a medical technology company focused on the design, development, manufacturing and marketing of products for the surgical treatment of spine disorders, with a focus on products that treat conditions that affect the aging spine. We have a comprehensive product portfolio and pipeline that address the cervical, thoracolumbar and intervertebral regions of the spine and covers a variety of major spinal disorders and procedures such as vertebral compression fracture, disorders related to poor bone quality, spinal stenosis and minimally invasive access techniques. On March 26, 2010, we completed the acquisition of Scient’x S.A., or Scient’x, a global medical device company based in France that designs, develops and manufacturers surgical implants to treat disorders of the spine. Scient’x distributes products through its direct sales force in France, Italy and the U.K. and distributes products through independent distributors in more than 45 additional countries. Our principal product offerings are focused on the global market for orthopedic spinal disorder solution products, which is estimated to be more than $8.5 billion in revenue in 2009 and is expected to grow between 10%-12% over the next year. 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, cobalt chrome, ceramic and a strong, heat resistant, radiolucent, biocompatible plastic called polyetheretherketone, or PEEK. We also sell products made of allograft, 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. To further differentiate our solutions, we have incorporated minimally invasive access techniques, and biologic solutions into our portfolio to improve patient outcomes. 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. Our goal is to be the leading independent full-line spine company, with a focus on solutions for the aging spine. The aging spine has unique characteristics and our aging spine solutions are targeted at providing superior efficacy in dealing with patients who suffer from poor bone density, vertebral compression fractures, adult deformity or scoliosis, degenerative disc disease, and spinal stenosis. We believe that we have developed a strong product platform for consistent and measured growth and intend to leverage this platform by, among other things, providing unmatched service to, and taking scientific direction from, surgeons. In addition to bringing innovative products to market, we understand that surgeons make the ultimate decision as to whether our products are used in a surgical procedure. Accordingly, we view our relationship with the surgeon community as an integral component of our strategy.

In connection with our acquisition of Scient’x, the consideration paid was fixed at 24,000,000 shares of our common stock, reduced by a certain number of shares calculated at the closing in exchange for the payment of certain fees and expenses incurred by HealthPointCapital Partners, L.P. and HealthPointCapital Partners II, L.P., collectively referred to herein as HealthPointCapital, our and Scient’x’s principal stockholders. The aggregate purchase price paid to acquire 100% of the shares of Scient’x was 23,730,644 shares of our common stock. We will pay fees and expenses incurred by HealthpointCapital of $1.6 million. HealthpointCapital and its affiliates held approximately 94.8% of the issued and outstanding shares of Scient’x prior to the acquisition. HealthpointCapital received shares of our common stock in connection with the acquisition proportional to its ownership interest in Scient’x.

In April 2010, we completed a public offering of an aggregate of 18,400,000 shares (16,000,000 primary shares and 2,400,000 shares sold pursuant to the exercise of an over allotment option granted to the underwriters) of our common stock, par value $0.0001 per share, or, the Offering. Of the shares of common stock sold in the Offering, 9,200,000 shares were sold by us and 9,200,000 were sold by HealthpointCapital Partners, L.P. See “Subsequent Events that Impact Liquidity” below.

In 2007, as part of our strategy to focus on disorders affecting the aging spine, 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 that disproportionately affect the aging population. Through March 31, 2010, we have licensed or acquired approximately 53 patent and patent applications from third parties. A discussion of our material license agreements may be found in “Item 1—Business-Intellectual Property” included in our Annual Report on Form 10-K for the year ending December 31, 2009, as amended, as well as in our subsequent Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.

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 and nine months ended March 31, 2010 and 2009, 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 or spine disorder.

 

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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 and our Scientific Advisory Board 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.

Revenue 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 and complementary products, vertebral body replacement devices, plates, products to treat vertebral compression fractures and bone grafting materials. Our revenues are generated by our direct sales force and independent distributors. Our products are requested 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 expect to continue to sell orthopedic trauma products in order to introduce our spine products to Japanese surgeons. In Europe and Latin America, where we began sales in the second half of 2008, we use independent distributors that purchase our products and market them to their surgeon customers. As a result of offering payment terms greater than our customary U.S. business terms and operating in a new market in which we have limited prior experience, revenues for sales to our European and Latin American distributors have been deferred until the sooner of when payments become due or cash is received.

Cost of revenues.  Cost of revenues consists of direct product costs, royalties, depreciation of our surgical instruments, and the amortization of purchased intangibles. We manufacture substantially all of the non-allograft implants that we sell. Our product costs consist primarily of direct labor, manufacturing overhead, and raw materials and components. 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. Amortization of purchased intangibles consists of amortization of developed product technology.

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 and Executive Surgeon Panels.

In-process research and development. IPR&D consists of acquired research and development assets that were not technologically feasible on the date we acquired such technology, provided that such technology did not have any 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 commercial viability of a product will 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 delays or failures due to intellectual property rights of third parties.

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

General and administrative. General and administrative expense consists primarily of salaries and related employee benefits, professional service fees and legal expenses.

Transaction related expenses . Transaction related expenses consists of legal, accounting and financial advisory fees associated with the acquisition of Scient’x.

Restructuring expenses . Restructuring expenses consists of costs associated with exit or disposal activities related to the acquisition of Scient’x.

Total other income (expense). Total other income (expense) includes interest income, interest expense, gains and losses from foreign currency exchanges and other non-operating gains and losses.

Income tax expense. Income tax expense consists primarily of state and foreign income taxes and the tax effect of changes in deferred tax liabilities associated with tax goodwill.

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 U.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowances for accounts receivable, inventories, goodwill and intangible assets, stock-based compensation and income taxes. 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 assumption conditions.

 

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Critical accounting policies are those that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Management believes there have been no material changes during the three months ended March 31, 2010 to the critical accounting policies discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2009, as amended.

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,  
     2010     2009  

Revenues

   100.0   100.0

Cost of revenues

   37.6      35.4   
            

Gross profit

   62.4      64.6   

Operating expenses:

    

Research and development

   9.6      9.4   

In-process research and development

   1.2      4.2   

Sales and marketing

   35.9      41.7   

General and administrative

   14.7      19.5   

Transaction related expenses

   8.2      —     

Restructuring expenses

   2.3      —     
            

Total operating expenses

   71.9      74.8   
            

Operating loss

   (9.5   (10.2
            

Other income (expense):

    

Interest income

   0.0      0.1   

Interest expense

   (2.2   (3.0

Other income (expense), net

   (0.3   (0.8
            

Total other income (expense)

   (2.5   (3.7
            

Loss before taxes

   (12.0   (13.9

Income tax provision

   0.3      0.4   
            

Net loss

   (12.3 )%    (14.3 )% 
            

Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009

Revenues. Revenues were $38.4 million for the three months ended March 31, 2010 compared to $30.6 million for the three months ended March 31, 2009, representing an increase of $7.8 million, or 25.6%. U.S. revenues increased $4.6 million, or 19.4%, primarily due to increased sales of our Zodiac, Illico, Novel and Trestle product lines. In addition, Asia revenues increased $0.3 million, or 4.6%, due to both sales volume, ($0.1 million), and the favorable affect of foreign currency exchange rates. We recognized revenue of $3.9 million for European revenue during the three months ended March 31, 2010 compared to $1.0 million for the three months ended March 31, 2009. The increase in European revenues is primarily due to our expanded distribution network and increased sales in our Zodiac, Illico and OsseoFix product lines.

Cost of revenues . Cost of revenues was $14.5 million for the three months ended March 31, 2010 compared to $10.8 million for the three months ended March 31, 2009, representing an increase of $3.7 million, or 33.6%. The increase was primarily due to $2.7 million in product costs associated with the increased sales volume, increased depreciation costs of $0.7 million based on a larger installed surgical instruments asset base, higher amortization expenses of $0.1 million related to new intangible assets and increased royalty payments of $0.2 million associated with the increased sales volume.

Gross profit. Gross profit was $24.0 million for the three months ended March 31, 2010 compared to $19.8 million for the three months ended March 31, 2009, representing an increase of $4.2 million, or 21.2%. Gross margin of 62.4% of revenues for the three months ended March 31, 2010 decreased 2.2 percentage points from the three months ended March 31, 2009 of 64.6%.

Gross profit in the U.S. was 69.9% for the three months ended March 31, 2010 compared to 70.8% for the three months ended March 31, 2009. The decrease of 0.9 percentage points was primarily due to increased depreciation expense (1.2 percentage points), increased excess and obsolete reserves as our inventory balances grow to support increased sales volume (0.7 percentage points) and modest U.S. hospital price erosion which was offset by improving manufacturing efficiencies (0.1 percentage points). These decreases were partially offset by reduced royalty expenses (1.1 percentage points).

 

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Gross profit in Asia was 35.3% for the three months ended March 31, 2010 compared to 43.3% for the three months ended March 31, 2009. The decrease of 8.0 percentage points was primarily due to unfavorable mix of lower margin non-spine product revenues.

Gross profit in Europe was 50.0% for the three months ended March 31, 2010 compared to 40.5% for the three months ended March 31, 2009. The increase of 9.5 percentage points was primarily due to favorable product mix with broader product offerings to our expanding distribution network.

Research and development.  Research and development expense was $3.7 million for the three months ended March 31, 2010 compared to $2.9 million for the three months ended March 31, 2009, representing an increase of $0.8 million, or 28.6%. The increase was primarily related to increased compensation related expenses.

In-process research and development . In-process research and development expense was $0.5 million for the three months ended March 31, 2010 compared to $1.3 million for the three months ended March 31, 2009. In the three months ended March 31, 2010, we incurred expenses of $0.5 million related to our acquisition of technology related to stem cells. In the three months ended March 31, 2009, we incurred costs related to our acquisition of technology related to a stand-alone interbody device of $0.5 million, $0.6 million related to our acquisition of technology related to a device for the treatment of spinal stenosis ($0.25 million in cash and $0.35 million in stock (174,129 shares)), and $0.2 million combined for three smaller in-process research and development collaborations with third parties.

Sales and marketing . Sales and marketing expense was $13.8 million for the three months ended March 31, 2010 compared to $12.8 million for the three months ended March 31, 2009, representing an increase of $1.0 million, or 7.8%. The increase was primarily due to higher commission expense of $0.2 million due to the higher U.S. sales volume and an increase of $0.8 million in various sales and marketing expenses.

General and administrative . General and administrative expense was $5.6 million for the three months ended March 31, 2010 compared to $6.0 million for the three months ended March 31, 2009, representing a decrease of $0.4 million, or 5.3%. The decrease was primarily related to a reduction of outside patent fees and legal fees.

Transaction-related expenses. Transaction-related expense was $3.2 million for the three months ended March 31, 2010 compared to $0 for the three months ended March 31, 2009, representing an increase of $3.2 million, or 100%. The transaction-related expenses were for legal, accounting and financial advisory fees associated with the acquisition of Scient’x, which closed on March 26, 2010.

Restructuring expenses. Restructuring expense was $0.9 million for the three months ended March 31, 2010 compared to $0 for the three months ended March 31, 2009, representing an increase of $0.9 million, or 100%. The restructuring expenses were due to severance expenses incurred in connection with the consolidation of Scient’x’s U.S. operations.

Interest Expense. Interest expense was $0.9 million for the three months ended March 31, 2010 compared to $0.9 million for the three months ended March 31, 2009, representing no change. Interest expense in both periods consisted primarily of interest expense for our loan agreement and line of credit with Silicon Valley Bank and Oxford Finance Corporation.

Other income (expense), net.  Other income (expense), net was ($0.1) million for the three months ended March 31, 2010 compared to ($0.3) million for the three months ended March 31, 2009, representing an increase in income of $0.2 million. The increase was due to greater foreign currency exchange gains realized in the three months ended March 31, 2010 as compared to the three months ended March 31, 2009.

Income tax. Income tax expense was $0.1 million for the three months ended March 31, 2010 compared to $0.1 million for the three months ended March 31, 2009, representing no change. The U.S. income tax expense consists primarily of state income taxes and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill. The foreign income tax expense consists primarily of Japanese provincial and city income taxes.

Non-GAAP Financial Measures

We utilize certain financial measures that are not calculated based on Generally Accepted Accounting Principles, or GAAP. Certain of these financial measures are considered “non-GAAP” financial measures within the meaning of Item 10 of Regulation S-K promulgated by the SEC. We believe that non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with the GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business. These non-GAAP financial measures are also used by our management to evaluate financial results and to plan and forecast future periods. However, non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Non-GAAP financial measures used by us may differ from the non-GAAP measures used by other companies, including our competitors.

 

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Adjusted EBITDA represents net income (loss) excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation and other non-recurring income or expense items, such as in-process research and development expense and acquisition related transaction and restructuring expenses. We believe that the most directly comparable GAAP financial measure to adjusted EBITDA is net income (loss). Adjusted EBITDA has limitations. Therefore, adjusted EBITDA should not be considered either in isolation or as a substitute for analysis of our results as reported under GAAP. Furthermore, adjusted EBITDA should not be considered as an alternative to operating income (loss) or net income (loss) as a measure of operating performance or to net cash provided by operating, investing or financing activities, or as a measure of our ability to meet cash needs.

The following is a reconciliation of adjusted EBITDA to the most comparable GAAP measure, net loss, for the three months ended March 31, 2010 and 2009 (in thousands):

 

     Three Months Ended March 31,  
     2010     2009  

Net loss

   $ (4,710   $ (4,383

Stock-based compensation

     981        634   

Depreciation

     2,642        1,822   

Amortization of intangible assets

     920        779   

In-process research and development

     450        1,290   

Interest expense, net

     857        882   

Income tax expense

     112        116   

Other (income) expense, net

     110        261   

Transaction related expenses

     3,152        —     

Restructuring expenses

     882        —     
                

Adjusted EBITDA

   $ 5,396      $ 1,401   
                

Non-GAAP earnings (loss) represents net income (loss) excluding the effects of in-process research and development expenses and acquisition related transaction and restructuring expenses. Management does not consider these expenses when it makes certain evaluations of the operations of the Company. We believe that the most directly comparable GAAP financial measure to non-GAAP earnings (loss) is net income (loss).

The following is a reconciliation of non-GAAP net loss to the most comparable GAAP measure, net loss, for the three months ended March 31, 2010 and 2009 (in thousands):

 

     Three Months Ended March 31,  
     2010     2009  

Net loss

   $ (4,710   $ (4,383

In-process research and development

     450        1,290   

Transaction related expenses

     3,152        —     

Restructuring expenses

     882        —     
                

Non-GAAP net loss

   $ (226   $ (3,093
                

The following is a reconciliation of non-GAAP net loss per share to the most comparable GAAP measure, net loss per common share, for the three months ended March 31, 2010 and 2009 (in thousands):

 

     Three Months Ended March 31,  
     2010     2009  

Net loss per common share-basic and diluted

   $ (0.09   $ (0.09

In-process research and development

     0.01        0.03   

Transaction related expenses

     0.06        —     

Restructuring expenses

     0.02        —     
                

Non-GAAP net loss per common share-basic and diluted

   $ 0.00      $ (0.06
                

 

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Pro Forma Information

The following unaudited pro forma information presents the condensed consolidated results of operations of us and Scient’x as if the acquisition had occurred on January 1, 2009 (in thousands, except gross margin and share data):

 

     Three Months Ended March 31,  
     2010     2009  

Pro Forma Combined:

    

Revenues

   $ 49,766      $ 41,702   

Loss from operations

     (755     (6,615

Net loss

     (1,159     (6,782

Net loss per share, basic and diluted

   $ (0.01   $ (0.10

Gross margin

     59.8     57.5

Pro Forma Adjusted EBITDA

   $ 5,987      $ (465

The following is a reconciliation of pro forma adjusted EBITDA to pro forma net loss, for the three months ended March 31, 2010 and 2009 (in thousands):

 

     Three Months Ended March 31,  
     2010     2009  

Pro Forma net loss

   $ (1,159   $ (6,782

Pro Forma Combined:

    

Stock-based compensation

     1,084        737   

Depreciation

     3,012        2,117   

Amortization of intangible assets

     1,760        1,570   

In-process research and development

     450        1,290   

Interest expense, net

     1,040        935   

Income tax expense (benefit)

     40        (584

Other (income) expense, net

     (702     (206

Inventory step-up

     436        436  

Non-controlling interest

     26        22  
                

Pro Forma Adjusted EBITDA

   $ 5,987      $ (465
                

The pro forma information is not necessarily indicative of what the results of operations actually would have been had the acquisition been completed on the dates indicated. In addition, it does not purport to project the future operating results of the combined entity. The pro forma condensed combined financial information is presented for illustrative purposes only and does not reflect the realization of potential cost savings, revenue synergies or any restructuring costs.

Liquidity and Capital Resources

At March 31, 2010, our principal sources of liquidity consisted of cash and cash equivalents of $12.7 million, accounts receivable, net of $39.3 million, and remaining amounts available under our credit facility of $0.2 million. We believe such amounts and cash raised in an April 2010 equity offering (see “Subsequent Events that Impact Liquidity” below) will be sufficient to fund our projected operating requirements through at least March 31, 2011, including the acquisition of Scient’x as discussed below.

In March 2010, we amended our Loan and Security Agreement with Silicon Valley Bank and Oxford Finance Corporation, or, the Lenders, that we had entered in December 2008 (See “Credit Facility and Other Debt” below). In conjunction with the Credit Facility, we were required to maintain compliance with quarterly financial covenants, which included a minimum level of revenues and a minimum level of adjusted EBITDA. The covenant requirements have been revised and under the amended Credit Facility consist of a cash-flow covenant to maintain a minimum fixed charge coverage ratio. The minimum fixed charge coverage ratio increases from the second quarter 2010 to the third quarter 2010 and is consistent thereafter. There is also a requirement for us to maintain a cash balance with Silicon Valley Bank equal to at least $10 million. We expect that we will be in compliance with our covenants throughout 2010. In addition to the minimum fixed charge covenant described above, there are other clauses including subjective clauses that would allow the Lenders to declare the loan immediately due and payable. Upon the occurrence of an event of default under the Amended Credit Facility, the Lenders could elect to declare all amounts outstanding under the Amended Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. If the Lenders were to accelerate the repayment of borrowings under the Amended Credit Facility for any reason, we may not have sufficient cash on hand to repay the amounts borrowed under the Amended Credit Facility.

 

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On March 26, 2010, we completed our acquisition of Scient’x. Subsequent to the closing of the acquisition, we became responsible for managing the operations of the combined entities. Based on the Company’s plan for combining the operating activities of these two companies, which includes a combined operating plan and cash forecast, management believes that on a combined basis, we will have sufficient working capital to fund our cash requirements through March 31, 2011.

We will need to invest in working capital and capitalized surgical instruments in order to support our revenue projections through 2011. Should we not be able to achieve our revenue forecast and cash consumption starts to exceed forecasted consumption, management will need to adjust our investment in surgical instruments and manage our inventory to the decreased sales volumes. If we do not make these adjustments in a timely manner, there could be an adverse impact on our financial resources.

Historically, our principal sources of cash have included customer payments from the sale of our products, proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt. Our principal uses of cash have included cash used in operations, acquisitions of businesses and intellectual property rights, payments relating to purchases of property and equipment and repayments of borrowings. 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.

On February 9, 2010, we entered into subscription agreements with a group of purchasers for the sale of an aggregate of 1,592,011 shares of our common stock at a purchase price of $4.1457 per share, for gross proceeds of approximately $6.6 million. The net proceeds to us from the offering, after deducting expenses, were approximately $6.5 million. The offering closed on February 12, 2010.

On February 12, 2010, we filed a registration statement on Form S-3 with the SEC pursuant to which we may offer and sell shares of our common stock and preferred stock, various series of debt securities, and warrants, either individually or in units, with a total value of up to $100,000,000 at prices and on terms to be determined by market conditions at the time of offering. In addition, under such registration statement, HealthpointCapital has registered for resale up to an aggregate of 20,031,646 shares of our common stock. The registration statement was declared effective by the SEC on April 9, 2010. (See “Subsequent Events that Impact Liquidity” below).

A substantial portion of our available cash funds is in business accounts with reputable financial institutions. However, our deposits, at times, may exceed federally insured limits. The capital markets have recently been highly volatile and there has been a lack of liquidity for certain financial instruments, especially those with exposure to mortgage-backed securities and auction rate securities. This lack of liquidity has made it difficult for the fair value of these types of instruments to be determined. We did not hold any marketable securities as of March 31, 2010.

As a result of recent volatility in the capital markets, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. Continued turbulence in the U.S. and international markets and economies may adversely affect our ability to obtain additional financing on terms acceptable to us, or at all. If these market conditions continue, they may limit our ability to timely replace maturing liabilities and to access the capital markets to meet liquidity needs.

Subsequent Events that Impact Liquidity

In April 2010, we completed a public offering of an aggregate of 18,400,000 shares (16,000,000 primary shares and 2,400,000 shares sold pursuant to the exercise of an over allotment option granted to the underwriters) of our common stock, also referred to as the Offering. The shares were sold at an offering price of $5.00 per share, less underwriting commissions and discounts. Of the shares of common stock sold in the Offering, 9,200,000 shares were sold by us and 9,200,000 were sold by HealthpointCapital Partners, L.P. The Offering closed on April 21, 2010. The net proceeds to us were approximately $42.5 million after deducting underwriting discounts and commissions and estimated expenses payable by us. We did not receive any proceeds from the sale of shares of common stock by HealthpointCapital Partners, L.P.

 

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Operating Activities

We used net cash of $2.5 million in operating activities for the three months ended March 31, 2010. During this period, net cash used in operating activities primarily consisted of a net loss of $4.7 million and a decrease in working capital and other assets of $2.9 million, which were partially offset by $5.1 million of non-cash costs including amortization, depreciation, deferred income taxes, stock-based compensation, provision for excess and obsolete inventory, and interest expense related to amortization of debt discount and issue costs. The decrease in working capital and other assets of $2.9 million consisted of increases in accounts receivable of $0.8 million, increases in inventory of $3.4 million in support of the higher sales volume, increases in prepaid expenses and other assets of $0.6 million and decreases in accounts payable and deferred revenues of $0.9 million, partially offset by increases in accrued expenses and other liabilities of $2.8 million.

Investing activities

We generated net cash of $0.4 million from investing activities for the three months ended March 31, 2010 primarily from the cash received of $1.6 million from our acquisition of Scient’x which was partially offset by the purchase of $1.2 million in surgical instruments, computer equipment, leasehold improvements and manufacturing equipment.

Financing activities

We generated net cash of $4.8 million from financing activities for the three months ended March 31, 2010. In February 2010 we entered into subscription agreements to sell shares of our common stock. Net proceeds from such sale totaled $6.5 million. Net proceeds from borrowings under our line of credit totaled $0.4 million and we generated cash of $0.1 million from the exercise of stock options. We made payments on our line of credit and made other principal payments on notes payable and capital lease obligations totaling $2.2 million.

Credit Facility and Other Debt

In December 2008, we entered into a Loan and Security Agreement, or the Credit Facility, with Silicon Valley Bank and Oxford Finance Corporation, or the Lenders, consisting of a $15.0 million term loan and a $15.0 million working capital line of credit. The term loan carries a fixed interest rate of 11.25% with interest payments due monthly, and principal repayments commencing in October 2009. Thereafter, the Company is required to repay the principal plus interest in 30 equal monthly installments, ending in April 2012. A finance charge of $0.8 million is due in April 2012. The working capital line of credit carries a variable interest rate equal to the prime rate plus either 2.5% or 2.0%, depending on our financial performance. Interest only payments are due monthly and the principal is due at maturity in April 2012.

On March 26, 2010, we amended our Credit Facility, or the Amended Credit Facility, with the Lenders. The working capital line of credit has been increased by $10 million, to $25 million. In addition, we combined the previously existing term loan facility provided by Oxford Finance Corporation to Scient’x with our existing term loan facility. Commencing in the second quarter 2010, the amended term loan will collectively not exceed $19.5 million.

Our term loan interest rate was amended to a fixed rate of 12.0%. We are required to repay the principal plus interest in 25 equal monthly installments, ending in April 2012. In connection with the amendment, the existing finance charge of $0.8 million has been increased by $0.2 million to $1.0 million. The finance charge is being accrued to interest expense through April 2012, when it is due and payable. We will pay a prepayment penalty if the loan is repaid prior to maturity. The balance of our term loan as of March 31, 2010 was $12.4 million, net of the debt discount.

In May 2009, Scient’x had entered into a term loan facility with Oxford Finance Corporation for $7.5 million. This term loan has been included under the Amended Credit Facility. Scient’x’s term loan carries a fixed interest rate of 12.42%. Scient’x is required to repay the principal plus interest in 36 equal monthly installments, ending in June 2012. In connection with the Amended Credit Facility, the Scient’x term loan finance charge has been increased to $0.5 million. The finance charge will be accrued to interest expense through June 2012, when it is due and payable. The collateral granted to Oxford under the original term loan facility will remain in full effect, amended as necessary to accommodate the acquisition of Scient’x and to conform to the terms of the Amended Credit Facility. Scient’x’s previously existing financial covenant to maintain a minimum level of revenues has been eliminated under the Amended Credit Facility. The balance of Scient’x’s term loan as of March 31, 2010 was $6.8 million.

The working capital line of credit interest rate was amended to equal the prime rate plus 4.50%, with a floor rate of 8.50%. The repayment terms under the working capital line of credit were not amended. Interest-only payments are due monthly and the principal is due at maturity in April 2012. As of March 31, 2010, we had $0.2 million remaining available to be drawn under the working capital line of credit based on our eligible borrowing base.

The funds from the credit facility are intended to serve as a source of working capital for ongoing operations and working capital needs. In connection with the amendment, we paid debt issuance costs and other transaction fees totaling $0.8 million. Included in debt issuance costs was a facility fee of $0.4 million and a line of credit commitment fee of $0.1 million. The debt issuance costs were capitalized and are being amortized over the remaining term of the loan using the effective interest method.

 

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To secure the repayment of any amounts borrowed under the Amended Credit Facility, we granted to the Lenders a first priority security interest in all of its assets, other than its owned and licensed intellectual property assets. We also agreed not to pledge or otherwise encumber our intellectual property assets without the consent of the Lenders. Additionally, the Lenders received a pledge on a portion of the Scient’x shares owned by us.

Commencing in the second quarter of 2010, we (including Scient’x) are also required to maintain compliance with a minimum fixed charge coverage ratio defined as Adjusted EBITDA (a non-GAAP term defined as net income (loss) excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation costs and other non-recurring income or expense items, such as IPR&D expense, acquisition-related restructuring expense and transaction related expenses) divided by total debt service. We are also required to maintain a cash balance with Silicon Valley Bank equal to at least $10 million.

The Lenders have the right to declare the loan immediately due and payable in an event of default under the Amended Credit Facility, which includes, among other things, the failure to make payments when due, breaches of representations, warranties or covenants, the occurrence of certain insolvency events, the occurrence of a non-appealable legal judgment against the Company that is not satisfied within ten days, or the occurrence of an event which, in the opinion of the Lenders, could have a material adverse effect on us.

In connection with the original Credit Facility, we had issued warrants to the Lenders to purchase an aggregate of 476,190 shares of our common stock. The warrants were immediately exercisable, can be exercised through a cashless exercise, have an exercise price of $1.89 per share and have a ten year term. We recorded the value of the warrants of $0.9 million as a debt discount. In March 2010, one of the Lenders exercised all of its warrants pursuant to the cashless exercise provision of its agreement. The other Lender had previously exercised all of its warrants in September 2009 (See Note 10).

During the three months ended March 31, 2010 and 2009, we repaid $0.3 million and $0.5 million, respectively, and drew an additional $0.4 million and $1.9 million, respectively, on the working capital line of credit. The balance of the line of credit as of March 31, 2010 was $14.8 million. The balance on the combined term loans was $19.2 million, net of the debt discount. Amortization of the debt discount and debt issuance costs and accretion of the finance charge, which is recorded as a non-cash interest expense, totaled $0.2 million and $0.3 million for the three months ended March 31, 2010 and 2009, respectively. Interest expense for our term loan and our working capital line of credit, excluding debt discount and debt issuance cost amortization and accretion of the additional finance charge, totaled $0.6 million for both the three months ended March 31, 2010 and 2009.

In September 2008, Alphatec Pacific paid $0.8 million on its Resona Bank line of credit and replaced the line of credit with $0.6 million term debt with Resona Bank, which is payable over 30 months with a 3.75% interest rate. Alphatec Pacific has additional notes payable to Japanese banks and a bond payable, bearing interest at rates ranging from 1.5% to 6.5% and maturity dates through January 2014 which are collateralized by substantially all of the assets of Alphatec Pacific and Japan Ortho Medical. As of March 31, 2010, the balance of the notes and the bond totaled $0.9 million.

We and Scient’x have various capital lease arrangements. The leases bear interest at rates ranging from 4.5% to 7.4%, are generally due in monthly principal and interest installments, are collateralized by the related equipment, and have various maturity dates through January 2014. As of March 31, 2010, the balance of these capital leases totaled $0.5 million.

We have a note payable with Microsoft, Inc. for the purchase of software licenses, bearing interest at a rate of 2.7% and a maturity date of February 2011. The balance of this note as of March 31, 2010 was $0.1 million.

We have three financing agreements totaling $1.0 million for the payment of premiums on various insurance policies. These financing arrangements bear interest ranging from 0.0% to 5.2% and are payable through June 2010. The balance of all such financing agreements as of March 31, 2010 totaled $0.3 million.

In February 2010, we executed a note payable with Oracle for the purchase of software and the related support totaling $0.9 million. The loan bears interest at 5.3% and has maturity date of February 2013. An initial payment of $0.1 million was made in February 2012. Payments of principal and interest are due every three months. The balance of this note as of March 31, 2010 was $0.8 million.

Scient’x has a conditional interest free loan with OSEO Anvar, a French government agency that provides research and development financing to French companies. At the loan’s inception, an imputed interest rate of 4% was used to calculate the present value of the loan. Scient’x complied with the loan conditions and was therefore granted the contractual repayment terms which consisted of annual repayments in March of each year. Scient’x repaid $0.1 million in March 2010. The balance of this loan as of March 31, 2010 was $0.1 million.

 

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Contractual Obligations and Commercial Commitments

Total contractual obligations and commercial commitments as of March 31, 2010 are summarized in the following table (in thousands):

 

     Payment Due by Year
     Total    2010
(9 months)
   2011    2012    2013    2014    Thereafter

Line of credit with SVB/Oxford

   $ 14,849    $ —      $ —      $ 14,849    $ —      $ —      $ —  

Alphatec term loan with SVB/Oxford

     12,782      4,244      6,274      2,264      —        —        —  

Scient’x term loan with SVB/Oxford

     6,838      2,076      3,084      1,678      —        —        —  

Term loan finance charges

     1,518      —        —        1,518      —        —        —  

Notes payable to Microsoft

     148      133      15      —        —        —        —  

Notes payable to Oracle

     785      241      338      206      —        —        —  

Notes payable for insurance premiums

     255      255      —        —        —        —        —  

Notes and bond payable to Japanese banks

     921      462      289      117      49      4      —  

Scient’x notes payable with French government agency

     101      —        101      —        —        —        —  

Capital lease obligations

     508      133      165      165      45      —        —  

Operating lease obligations

     16,989      2,699      3,252      2,746      2,637      2,163      3,492

Guaranteed minimum royalty obligations

     1,488      638      600      250      —        —        —  

New product development milestones (1)

     4,300      1,800      —        2,500      —        —        —  
                                                

Total

   $ 61,482    $ 12,681    $ 14,118    $ 26,293    $ 2,731    $ 2,167    $ 3,492
                                                

 

(1) This commitment represents payments in cash, and is subject to attaining certain development milestones such as FDA approval, product design and functionality testing requirements, which we believe are reasonably likely to be achieved in 2010 through 2012.

Real Property Leases

During the first quarter of fiscal year 2008, we entered into a lease agreement and sublease agreement in order to consolidate the use and occupation of our five existing premises into two adjacent facilities.

In February 2008, we entered into a sublease agreement, or the Sublease, for 76,693 square feet of office, engineering, and research and development space, or Building 1. The Sublease term commenced May 2008 and ends on January 31, 2016. We are obligated under the Sublease to pay base rent and certain operating costs and taxes for Building 1. Monthly base rent payable by us was 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 was abated for months one through seven of the Sublease. Under the Sublease, we were required to provide the sublessor with a security deposit in the amount of approximately $93,500. Building 1 consolidated all corporate, marketing, finance, administrative, and research and development activities into one building.

In March 2008, we entered into a 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 commenced 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 was 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 was abated for the months two through eight of the term of the Lease in the amount of $38,480. Under the Lease, we were 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. The lessor provided a tenant improvement allowance of $1.1 million to assist with the configuration of the facility to meet our business needs. We consolidated all manufacturing, distribution and warehousing activities into Building 2 in April 2009.

Scient’x has two leased office locations and a manufacturing and distribution warehouse in France and one leased office location which includes warehouse space, in the U.S. The leased facilities range in size from 2,500 to 21,900 square feet. The leases expire on various dates through December 2013. Scient’x also maintains sales offices in Singapore, Dubai, Milan, Argentina and the United Kingdom.

 

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Stock-based Compensation

Stock-based compensation has been classified as follows in the accompanying condensed consolidated statements of operations (in thousands, except per share data):

 

     Three Months Ended
March 31,
 
     2010     2009  

Cost of revenues

   $ 57      $ 52   

Research and development

     349        64   

Sales and marketing

     199        171   

General and administrative

     376        347   
                

Total

   $ 981      $ 634   
                

Effect on basic and diluted net loss per share

   $ (0.02   $ (0.01
                

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board issued new accounting guidance that requires entities to allocate revenue in an arrangement of the delivered goods and services based on a selling price hierarchy. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other prescribed means to determine the fair value of that undelivered item. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We do not expect adoption to have a material impact on our financial position or results of operations.

Forward Looking Statements

This Quarterly Report on Form 10-Q 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 estimates regarding anticipated operating losses, future revenue, expenses, capital requirements, and liquidity, including our anticipated revenue growth and cost savings following our acquisition of Scient’x;

 

   

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 ability to realize benefits from our acquisition of Scient’x;

 

   

our ability to successfully integrate Scient’x’s business;

 

   

our ability to successfully achieve and maintain regulatory clearance or approval for our products in applicable jurisdictions;

 

   

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 relating to customer collections;

 

   

trends related to the treatment of spine disorders, including without limitation the aging spine market;

 

   

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

 

   

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

 

   

our ability to enhance our U.S. and international sales networks and product penetration;

 

   

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 meet the financial covenants under our credit facilities;

 

   

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

 

   

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

 

   

the effects of the loss of key personnel;

 

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potential liability resulting from litigation;

 

   

potential liability resulting from a governmental review of our or Scient’x’s business practices; and

 

   

other factors discussed elsewhere in this Form 10-Q or any document incorporated by reference herein or therein.

Any or all of our forward-looking statements in this Quarterly Report may turn out to be inaccurate. 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 this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, as well as any updates to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K. 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 referenced in or set forth under “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

Our borrowings under our line of credit expose us to market risk related to changes in interest rates. As of March 31, 2010, our outstanding floating rate indebtedness totaled $14.8 million. The primary base interest rate is the U.S. federal prime rate. Assuming the outstanding balance on our floating rate indebtedness remains constant over a year, a 100 basis point increase in the interest rate would decrease pre-tax income and cash flow by approximately $0.1 million. Other outstanding debt consists of fixed rate instruments, including the term loan and capital leases.

Foreign Currency Risk

While a majority of our business is denominated in U.S. dollars, we maintain operations in foreign countries, primarily Japan and Europe, that require payments in the local currency. 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, then our reported revenues would decrease when we convert the Japanese Yen into U.S. dollars. We do not currently engage in hedging or similar transactions to reduce these risks. However, the currency exposure in our foreign currency revenues is mitigated because expenses of our foreign subsidiaries are payable in foreign currencies. 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 not have a material impact on our results of operations for the three months ended March 31, 2010.

 

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.

 

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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, to ensure 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 effective to ensure that information required to be disclosed by us in the 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, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. 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.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

In February 2010, a complaint was filed in the U.S. District Court for the Central District of California, by Cross Medical Products, LLC, or Cross, alleging that we breached a patent license agreement with Cross by failing to make certain royalty payments allegedly due under the agreement. Cross is seeking payment of prior royalties allegedly due from our sales of polyaxial pedicle screws and an order from the court regarding payment of future royalties by the Company. While we denied the allegations in our answer to the complaint and believe that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of Cross could have a significant adverse effect on our financial condition and results of operations.

In 2002, Eurosurgical, a French company in the business of sales and marketing of spinal implants, entered into a distribution agreement for the United States, Mexico, Canada, India and Australia with Orthotec, LLC, a California company, or Orthotec. In 2004, Orthotec sued Eurosurgical in connection with an intellectual property dispute and a $9 million judgment was entered against Eurosurgical by a California court. At the same time, a federal court declared Eurosurgical liable to Orthotec for $30 million. In 2006, Eurosurgical’s European assets were ultimately acquired by Surgiview, SAS, or Surgiview, in a sale approved by a French court. Pursuant to this sale, Surgiview became a subsidiary of Scient’x in 2006. Orthotec attempted to recover on Eurosurgical’s obligations in California and federal courts by filing a motion in a California court to add Surgiview to the judgment against Eurosurgical on theories including successor liability and fraudulent conveyance. In February 2007, the California court dismissed Orthotec’s motion, indicating that Orthotec had not carried its burden of proof to establish successor liability. Orthotec chose to not proceed with a further hearing in June 2007. After the acquisition of Scient’x by HealthpointCapital in 2007, Orthotec sued Scient’x, Surgiview, HealthpointCapital and certain Scient’x directors in the California and New York state and federal courts. In April 2009, the California court dismissed this matter on jurisdictional grounds, and Orthotec has appealed such dismissal. In November 2009, the New York state court dismissed Orthotec’s claims with respect to the other defendants based on collateral estoppel. Orthotec has commenced an appeal of the New York ruling. While we believe that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of Orthotec could have a significant adverse effect on our financial condition and results of operations.

In 2004, Scient’x’s U.S. subsidiary entered into a distribution agreement with DAK Surgical, Inc., an independent distributor, or, DAK Surgical, for the distribution of Scient’x’s products in certain defined sales areas. In September 2007, shortly after the termination of its distribution contract, DAK Surgical filed a lawsuit against Scient’x in which it alleges, among other things, that it is entitled to a change of control payment pursuant to the terminated distribution contract. While the Company believes that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of DAK Surgical could have a significant adverse effect on our financial condition and results of operations.

In August 2009, a complaint filed under the qui tam provisions of the United States Federal False Claims Act, or the FCA, that had been filed by private parties against Scient’x’s U.S. subsidiary was unsealed by the United States District Court for the Middle District of Florida (Hudak v. Scient’x USA, Inc., et al. (Civil Action No. 6:08-cv-1556-Orl-22DAB, U.S. District Court, W.D. Florida). The complaint alleged violations of the FCA arising from allegations that Scient’x engaged in improper activities related to consulting payments to surgeon customers. Under the FCA, the United States Department of Justice, Civil Division, or DOJ, had a certain period of time in which to decide whether to intervene and conduct the action against Scient’x, or to decline to intervene and allow the private plaintiffs to proceed with the case. In August 2009, the DOJ filed a notice informing the court that it was declining to intervene in the case. In December 2009, the private plaintiffs who filed the action moved the court to dismiss the matter without prejudice, the Attorney General consented to such dismissal and the matter was dismissed without prejudice. Despite the dismissal of this matter, the DOJ is continuing its review of the facts alleged by the original plaintiffs in this matter. To date, neither we nor Scient’x have been subpoenaed by any governmental agency in connection with this review. We believe that Scient’x’s business practices were in compliance with the FCA and intend to vigorously defend ourself with respect to the allegations contained in the qui tam complaint, however, the outcome of the matter cannot be predicted at this time and any adverse outcome could have a significant adverse effect on our financial condition and results of operations.

The Company is and may become involved in various other legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters to have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position; litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.

 

Item 1A. Risk Factors

There have been no material changes to the risk factors described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as amended, other than the risk factor set forth below. If any of the risks set forth herein or 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.

 

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The adoption of healthcare reform legislation in the United States could have an adverse effect on our business, financial condition or results of operations.

In March 2010, healthcare reform legislation was enacted in the United States. This legislation includes provisions that will impose a 2.3% excise tax on the sale of most medical devices in the United States, including our spinal implant products and systems, starting in 2013. The medical devices excise tax will increase our cost of doing business, and could have a significant impact on our results of operations. If the cost of this tax is not offset by increased demand for our products, other cost reductions or price increases, we could experience lower margins and profitability and our business, financial condition and results of operations could be materially and adversely affected.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

Pursuant to the Credit Facility with SVB and Oxford entered into in December 2008, SVB received a warrant to purchase 190,476 shares of our common stock at $1.89 per share, exercisable for a term of 10 years and Oxford received a warrant to purchase 285,714 shares of our common stock at $1.89 per share, exercisable for a term of 10 years. In March 2010, Oxford exercised all of its warrants pursuant to the cashless exercise provision of its warrant agreement resulting in the issuance of 196,161 shares of our common stock to Oxford. The net value of the shares issued was $1.2 million. Following this exercise, there were no outstanding warrants to purchase shares of the Company’s common stock.

These issuances of securities were made in reliance on an exemption from the registration provisions of the Securities Act set forth in Rule 506 of Regulation D promulgated thereunder and/or Section 4(2) of the Securities Act. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. The sales of these securities were made without general solicitation or advertising.

Issuer Purchases of Equity Securities

Under the terms of our Amended and Restated 2005 Employee, Director and Consultant Stock Plan, or the 2005 Plan, we may award shares of restricted stock to our employees, directors and consultants. These shares of restricted stock are subject to a lapsing right of repurchase by us. We may exercise this right of repurchase in the event that a restricted stock recipient’s employment, directorship or consulting relationship with us terminates prior to the end of the vesting period. If we exercise this right, we are required to repay the purchase price paid by or on behalf of the recipient for the repurchased restricted shares. Repurchased shares are returned to the 2005 Plan and are available for future awards under the terms of the 2005 Plan. Shares repurchased during the three months ended March 31, 2010 were as follows:

 

Month/Year

   Total Number
of Shares
Purchased (1)
   Average Price
Paid per
Share
   Total Number of
Shares Purchased
as part of Publicly
Announced  Plans
or Programs
   Maximum Number
of Shares that may
Yet be Purchased
Under Plans  or
Programs

January 2010

   725    $ 0.0005    —      —  

February 2010

   —      $ —      —      —  

March 2010

   —      $ —      —      —  

 

(1) Not included in the table above are 17,266 forfeited and retired shares in connection with the payment of minimum statutory withholding taxes due upon the vesting of certain stock awards or the exercise of certain stock options. In lieu of making a cash payment with respect to such withholding taxes, the holders of such stock forfeited a number of shares at the then current fair market value to pay such taxes.

 

Item 6. Exhibits

 

10.1    Amended and Restated Loan and Security Agreement, dated as of March 26, 2010 by and among Silicon Valley Bank, Oxford Finance Corporation, Alphatec Holdings, Inc. and Alphatec Spine, Inc.
10.2    Loan and Security Agreement, dated as of May 29, 2009, between Oxford Finance Corporation and Scient’x USA, Inc.
10.3    Second Amendment to Loan and Security Agreement, dated as of March 26, 2010, between Oxford Finance Corporation and Scient’x USA, Inc.
10.4*    Employment Agreement, effective March 26, 2010, by and among Alphatec Holdings, Inc., Alphatec Spine, Inc, and Oliver Burckhardt
10.5    Unconditional Guaranty, dated as of March 26, 2010 by Alphatec Spine, Inc. in favor of Oxford Finance Corporation
10.6    Unconditional Guaranty, dated as of March 26, 2010 by Alphatec Holdings, Inc. in favor of Oxford Finance Corporation

 

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31.1    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Principal 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.

 

* Management contract or compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ALPHATEC HOLDINGS, INC.
By:  

/s/ Dirk Kuyper

 

Dirk Kuyper

President and Chief Executive Officer

(principal executive officer)

By:  

/s/ Peter C. Wulff

 

Peter C. Wulff

Chief Financial Officer, Vice President and Treasurer

(principal financial and accounting officer)

Date: May 10, 2010

 

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Exhibit Index

 

10.1    Amended and Restated Loan and Security Agreement, dated as of March 26, 2010 by and among Silicon Valley Bank, Oxford Finance Corporation, Alphatec Holdings, Inc. and Alphatec Spine, Inc.
10.2    Loan and Security Agreement, dated as of May 29, 2009, between Oxford Finance Corporation and Scient’x USA, Inc.
10.3    Second Amendment to Loan and Security Agreement, dated as of March 26, 2010, between Oxford Finance Corporation and Scient’x USA, Inc.
10.4*    Employment Agreement, effective March 26, 2010, by and among Alphatec Holdings, Inc., Alphatec Spine, Inc, and Oliver Burckhardt
10.5    Unconditional Guaranty, dated as of March 26, 2010 by Alphatec Spine, Inc. in favor of Oxford Finance Corporation
10.6    Unconditional Guaranty, dated as of March 26, 2010 by Alphatec Holdings, Inc. in favor of Oxford Finance Corporation
31.1    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Principal 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.

 

* Management contract or compensatory plan or arrangement.

 

41

Exhibit 10.1

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this “ Agreement ”) dated as of March 26, 2010 (the “Effective Date” ) between SILICON VALLEY BANK ( “Bank” ), as collateral agent (the “Collateral Agent” ), Bank, as a lender, and OXFORD FINANCE CORPORATION (“ Oxford ”; each, of Bank and Oxford are sometimes individually referred to as a “Lender” and collectively, as the “Lenders” ), and ALPHATEC SPINE, INC. , a California corporation (“ Alphatec ”) and ALPHATEC HOLDINGS, INC. , a Delaware corporation (“ Parent ” and together with Alphatec, each a “Borrower” and collectively, “ Borrowers ”), amends and restates the terms of that certain Loan and Security Agreement by and between Collateral Agent, Lenders and Borrower, dated as of December 5, 2008, as amended from time to time (the “Original Agreement” ), and provides the terms on which Lenders shall lend to Borrowers and Borrowers shall repay Lender. The parties agree as follows:

1 ACCOUNTING AND OTHER TERMS

Accounting terms not defined in this Agreement shall be construed following GAAP. Calculations and determinations must be made following GAAP. Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 13 . All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein.

2 LOAN AND TERMS OF PAYMENT

2.1 Promise to Pay. Borrowers hereby unconditionally promise to pay Lenders the outstanding principal amount of all Credit Extensions and accrued and unpaid interest thereon and any other amounts due hereunder as and when due in accordance with this Agreement.

2.1.1 Growth Capital Loan Facility.

(a) Intentionally Omitted .

(b) Repayment . Borrowers shall continue to make consecutive equal monthly payments of principal and interest in arrears, to fully amortize the outstanding amount of the Growth Capital Advance (as defined in and) as provided for in the Original Agreement. All unpaid principal and accrued and unpaid interest is due and payable in full on the Growth Capital Maturity Date with respect to the Growth Capital Advance. The Growth Capital Advance may only be prepaid in accordance with Sections 2.1.1(c) or 2.1.1(d) .

(c) Prepayment . Borrowers shall have the option to prepay all, but not less than all, of the Growth Capital Advance advanced by Lenders under this Agreement, provided , (a) Alphatec provides written notice to Lenders of Borrowers’ election to prepay the Growth Capital Advance at least five (5) Business Days prior to such prepayment, and (b) Borrowers pay, on the date of the prepayment (i) all outstanding principal and accrued interest on the Growth Capital Advance; (ii) the Prepayment Fee (subject to Section 2.5(e)) and the Growth Capital Final Payment; and (iii) all other sums, including Lenders’ Expenses, if any, that have become due and payable hereunder with respect to the Growth Capital Advance.

(d) Mandatory Prepayment Upon an Acceleration . If the Growth Capital Advance is accelerated following the occurrence of an Event of Default, Borrowers shall immediately pay to Lenders an amount equal to the sum of: (i) all outstanding principal plus accrued and unpaid interest on the Growth Capital Advance, (ii) the Prepayment Fee and the Growth Capital Final Payment, plus (iii) all other sums, if any, that shall have become due and payable, including interest at the Default Rate with respect to any past due amounts.

2.1.2 Revolving Advances.

(a) Availability . Subject to the terms and conditions of this Agreement and to deduction of Reserves, Lenders agree, severally and not jointly, to lend to Borrowers from time to time prior to the Revolving Line Maturity Date, according to each Lender’s pro rata share of the Revolving Line (based upon the respective


Revolving Commitment Percentage of each Lender), Revolving Advances not exceeding the Availability Amount. Amounts borrowed hereunder may be repaid and, prior to the Revolving Line Maturity Date, reborrowed, subject to the applicable terms and conditions precedent herein.

(b) Termination; Repayment . The Revolving Line terminates on the Revolving Line Maturity Date, when the principal amount of all Revolving Advances, the unpaid interest thereon, and all other Obligations relating to the Revolving Line (including but not limited to the Revolving Line Termination Fee and the Revolving Line Accommodation Fee) shall be immediately due and payable.

2.1.3 Letters of Credit Sublimit.

(a) Letters of Credit . As part of the Revolving Line, Bank shall issue or have issued Letters of Credit for Borrowers’ account. Such aggregate amounts utilized hereunder shall at all times reduce the amount otherwise available for Revolving Advances under the Revolving Line. The face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) may not exceed One Million Dollars ($1,000,000), inclusive of Credit Extensions relating to Sections 2.1.4 and 2.1.5. The aggregate amount available to be used for the issuance of Letters of Credit may not exceed (i) the lesser of (A) the Revolving Line or (B) the Borrowing Base, minus (ii) the outstanding principal amount of any Revolving Advances (including any amounts used for Cash Management Services and the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) and minus (iii) the FX Reduction Amount. If, on the Revolving Line Maturity Date, there are any outstanding Letters of Credit, then on such date Borrowers shall provide to Agent cash collateral in an amount equal to one hundred five percent (105%) of the face amount of all such Letters of Credit plus all interest, fees, and costs due or to become due in connection therewith (as estimated by Bank in its good faith business judgment), to secure all of the Obligations relating to said Letters of Credit. All Letters of Credit shall be in form and substance acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank’s standard Application and Letter of Credit Agreement (the “ Letter of Credit Application ”). Borrowers agree to execute any further documentation in connection with the Letters of Credit as Bank may reasonably request. Borrowers further agree to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Bank and opened for Borrowers’ account or by Bank’s interpretations of any Letter of Credit issued by Bank for Borrowers’ account, and Borrowers understand and agree that Bank shall not be liable for any error, negligence, or mistake, made in good faith whether of omission or commission, in following Borrowers’ instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto.

(b) Letter of Credit Participations . Bank irrevocably agrees to grant and hereby grants to each Lender, and, to induce the Bank to issue Letters of Credit, each Lender irrevocably agrees to accept and purchase and hereby accepts and purchases from Bank, on the terms and conditions set forth below, for such Lender’s own account and risk an undivided interest equal to such Lender’s Revolving Commitment Percentage in Bank’s obligations and rights under and in respect of each Letter of Credit and the amount of each draft paid by Bank thereunder. Each Lender agrees with Bank that, if a draft is paid under any Letter of Credit for which Bank is not reimbursed in full by Borrowers pursuant to Section 2.1.3(c), such Lender shall pay to Bank upon demand at Bank’s address for notices specified herein an amount equal to such Lender’s Revolving Commitment Percentage of the amount of such draft, or any part thereof, that is not so reimbursed. Each Lender’s obligation to pay such amount shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any setoff, counterclaim, recoupment, defense or other right that such Lender may have against Bank, Borrowers or any other Person for any reason whatsoever, (ii) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Sections 3.1 or 3.2, (iii) any adverse change in the condition (financial or otherwise) of Borrowers, (iv) any breach of this Agreement or any other Loan Document by Borrowers or any other Lender or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing.

(c) Reimbursement .

(i) If Bank shall make any disbursement in respect of a Letter of Credit, Borrowers shall pay or cause to be paid to Bank an amount equal to the entire amount of such disbursement not later than the immediately following Business Day. Each such payment shall be made to Bank at its address for notices referred to herein in Dollars and in immediately available funds.

 

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(ii) If Bank shall not have received from Borrowers the payment that it is required to make pursuant to Section 2.1.3(c)(i) with respect to a Letter of Credit within the time specified in such Section, Bank will promptly notify the Collateral Agent of the disbursement and the Collateral Agent will promptly notify each Lender of such disbursement and its Revolving Commitment Percentage thereof, and each Lender shall pay to Bank upon demand at Bank’s address for notices specified herein an amount equal to such Lender’s Revolving Commitment Percentage of such disbursement; upon such payment pursuant to this paragraph to reimburse Bank for any disbursement, Borrowers shall be required to reimburse the Lenders for such payments (including interest accrued thereon from the date of such payment until the date of such reimbursement at the rate applicable to Revolving Advances under the Revolving Line) on demand and the Lenders shall be deemed to have extended, and Borrowers shall be deemed to have accepted, a Revolving Advance under the Revolving Line in the aggregate principal amount of such payment without further action on the part of any party, and the Letter of Credit sublimit shall be reduced by such amount; any amount so paid pursuant to this paragraph shall, on and after the payment date thereof, be deemed to be Revolving Advances under the Revolving Line for all purposes hereunder.

(d) Letter of Credit Payments . If any draft shall be presented for payment under any Letter of Credit, Bank shall promptly notify Borrowers and the Collateral Agent of the date and amount thereof. The responsibility of Bank to Borrowers in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit. If Bank shall make any disbursement in respect of a Letter of Credit, unless either (i) Borrowers reimburse such disbursement in full within the time period specified in Section 2.1.3(c) or (ii) the Lenders shall reimburse such disbursement in full on such date as provided in Section 2.1.3(c) then, the unpaid amount thereof shall bear interest for the account of Bank, for each day from and including the date of such disbursement up to but excluding, the earlier of, the date of payment by Borrowers, at the rate per annum that would apply to such amount if such amount were a Revolving Advance under the Revolving Line; provided that the provisions of Section 2.1.3(c)(ii) shall be applicable to any such amounts not paid when due.

(e) Obligations Absolute . Borrowers’ obligations under this Section 2.1.3 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment that Borrowers may have or have had against Bank, any Lender, any beneficiary of a Letter of Credit or any other Person. Borrowers also agree with Bank that Bank, absent Bank’s gross negligence or willful misconduct, shall not be responsible for, and Borrowers’ obligations hereunder shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among Borrowers and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of Borrowers against any beneficiary of such Letter of Credit or any such transferee. Bank shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of Bank. Borrowers agree that any action taken or omitted by Bank under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct, shall be binding on Borrowers and shall not result in any liability of Bank to Borrowers.

In addition to amounts payable as elsewhere provided in the Agreement, Borrowers hereby agree to pay and to protect, indemnify, and save Bank harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys’ fees) that Bank may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit, or (B) the failure of Bank or of any Lender to honor a demand for payment under any Letter of Credit thereof as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority, in each case other than to the extent solely as a result of the gross negligence or willful misconduct of Bank or such Lender (as finally determined by a court of competent jurisdiction).

 

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(f) Borrowers may request that Bank issue a Letter of Credit payable in a Foreign Currency. If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as a Revolving Advance to Borrowers of the equivalent of the amount thereof (plus fees and charges in connection therewith such as wire, cable, SWIFT or similar charges) in Dollars at the then-prevailing rate of exchange in San Francisco, California, for sales of the Foreign Currency for transfer to the country issuing such Foreign Currency.

(g) To guard against fluctuations in currency exchange rates, upon the issuance of any Letter of Credit payable in a Foreign Currency, Bank shall create a reserve (the “ Letter of Credit Reserve ”) under the Revolving Line in an amount equal to ten percent (10%) of the face amount of such Letter of Credit. The amount of the Letter of Credit Reserve may be adjusted by Bank from time to time to account for fluctuations in the exchange rate. The availability of funds under the Revolving Line shall be reduced by the amount of such Letter of Credit Reserve for as long as such Letter of Credit remains outstanding.

2.1.4 Foreign Exchange Sublimit . As part of the Revolving Line, Borrowers may enter into foreign exchange contracts with Lenders under which Borrowers commit to purchase from or sell to Lenders (in accordance with their Revolving Commitment Percentages) a specific amount of Foreign Currency (each, a “ FX Forward Contract ”) on a specified date (the “ Settlement Date ”). FX Forward Contracts shall have a Settlement Date of at least one (1) FX Business Day after the contract date and shall be subject to a reserve of ten percent (10%) of each outstanding FX Forward Contract in a maximum aggregate amount equal to Two Hundred Fifty Thousand Dollars ($250,000) (such maximum shall be the “ FX Reserve ”). The aggregate amount of FX Forward Contracts at any one time may not exceed ten (10) times the amount of the FX Reserve. The amount otherwise available for Credit Extensions under the Revolving Line shall be reduced by an amount equal to ten percent (10%) of each outstanding FX Forward Contract (the “ FX Reduction Amount ”). Any amounts that are not paid by Borrowers for any FX Forward Contracts will be treated as Revolving Advances under the Revolving Line under the Revolving Facility and will accrue interest at the interest rate applicable to Revolving Advances.

2.1.5 Cash Management Services Sublimit . Borrowers may use up to One Hundred Thousand Dollars ($100,000), inclusive of Credit Extensions relating to Sections 2.1.3 and 2.1.4 of the Revolving Line for Bank’s cash management services which may include merchant services, direct deposit of payroll, business credit card, and check cashing services identified in Bank’s various cash management services agreements (collectively, the “ Cash Management Services ”).

2.2 Overadvances . If, at any time, the sum of (a) the outstanding principal amount of any Revolving Advances (including any amounts used for Cash Management Services), plus (b) the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve), plus (c) the FX Reduction Amount, exceeds the lesser of either the Revolving Line or the Borrowing Base (such amount being an “ Overadvance ”), Borrowers shall immediately pay to Lenders in cash the ratable amount (according to each such Lender’s Revolving Commitment Percentage) of such Overadvance. Without limiting Borrowers’ obligation to repay Lenders any amount of the Overadvance, Borrowers agree to pay Lenders interest on the outstanding amount of any Overadvance, on demand, at the Default Rate.

2.3 Lockbox; Account Collection Services.

(a) From and after the Effective Date, Borrowers shall direct each Account Debtor (and each depository institution where proceeds of Accounts are on deposit) to remit payments with respect to the Accounts to a lockbox account established with Bank or to wire transfer payments to a cash collateral account that Bank controls (collectively, the “ Lockbox ”). It will be considered an immediate Event of Default if the Lockbox is not set-up and operational as of the date set forth in the preceding sentence.

(b) Upon receipt by a Borrower of proceeds of Accounts not directed to the Lockbox, if any, such Borrower shall immediately transfer and deliver same to Bank, for the ratable benefit of the Lenders, along with a detailed cash receipts journal. Provided no Event of Default exists or an event that with notice or lapse of time will be an Event of Default, within three (3) Business Days of receipt of such amounts by Bank, Bank will turn over to Borrowers the proceeds of the Accounts, less any amounts due to Lenders, such as payments due to the Lenders, other fees and expenses, or otherwise. This Section does not impose any affirmative duty on any Lender to perform any act other than as specifically set forth herein. All Accounts and the proceeds thereof are Collateral and

 

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if an Event of Default occurs, Bank may apply the proceeds of such Accounts to the Obligations. Without limiting the foregoing, the Lockbox (and the amounts in the Lockbox) shall be subject to a “lock box control” agreement which will provide for, among other things the establishment of “control” within the meaning of Article 9 of the UCC. Unless an Event of Default has occurred and is continuing, the Borrowers shall have immediate and full access to any funds held in the Lockbox account and such funds shall not be subject to any conditions or restrictions whatsoever other than those of the Bank and as provided in this Agreement and related documents; provided, however, that nothing herein shall (i) affect or reduce Borrowers’ obligations to pay in full all amounts due to Lenders under this Agreement, or (ii) in any manner limit the recourse of Lenders to the Collateral to satisfy the Borrowers’ Obligations.

2.4 Payment of Interest on the Credit Extensions.

(a) Interest Rates .

(i) Growth Capital Advance . Subject to Section 2.4(b) , the principal amount outstanding for the Growth Capital Advance shall accrue interest, which interest shall be payable monthly in arrears, at a fixed per annum rate equal to twelve percent (12.00%).

(ii) Revolving Advances . Subject to Section 2.4(b) , the principal amount outstanding under the Revolving Line shall accrue interest at a per annum rate equal to the greater of (A) four and one half percent (4.50%) above the Prime Rate and (B) eight and one half percent (8.50%); which interest shall be payable monthly.

(b) Default Rate . Immediately upon the occurrence and during the continuance of an Event of Default, Obligations shall bear interest at a rate per annum which is five percentage points above the rate effective immediately before the Event of Default (but in no event in excess of the maximum rate permitted by then applicable law) (the “ Default Rate ”). Payment or acceptance of the increased interest rate provided in this Section 2.4(b) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Lenders.

(c) Adjustment to Interest Rate . Changes to the interest rate of any Credit Extension (accruing interest at the Prime Rate) based on changes to the Prime Rate shall be effective on the effective date of any change to the Prime Rate and to the extent of any such change.

(d) 360-Day Year . Interest shall be computed on the basis of a 360-day year of twelve 30-day months.

(e) Debit of Accounts . Collateral Agent, for the benefit of the Lenders, may debit any of Borrowers’ deposit accounts, including the Designated Deposit Account, for principal and interest payments or any other amounts Borrowers owe Lenders when due. These debits shall not constitute a set-off.

(f) Payments; Interest Computation; Float Charge . Unless otherwise provided, interest is payable monthly on the first calendar day of each month. In computing interest on the Obligations, all Payments received after 1:00 p.m. Pacific time on any day shall be deemed received on the next Business Day. In addition, Lenders shall be entitled to charge Borrowers a “float” charge in an amount equal to three (3) Business Days’ interest, at the interest rate applicable to the Revolving Advances whether or not any Revolving Advances are outstanding, on all payments received by any Lender. The float charge for each month shall be payable on the last day of the month. Lenders shall not, however, be required to credit Borrowers’ account for the amount of any item of payment which is unsatisfactory to any Lender in its good faith business judgment, and Lenders may charge Borrowers’ Designated Deposit Account for the amount of any item of payment which is returned to any Lender unpaid.

 

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2.5 Fees. Borrowers shall pay to Collateral Agent:

(a) Growth Capital Accommodation Fee . A fully earned, non-refundable accommodation fee of Four Hundred Forty Five Thousand Dollars ($445,000) (the “Growth Capital Accommodation Fee” ), on the Effective Date, to be shared among the Lenders pro rata according to the Growth Capital Commitment Percentage of each Lender;

(b) Revolving Line Accommodation Fee . The Revolving Line Accommodation Fee, when due hereunder;

(c) Revolving Commitment Fee . A fully earned, non-refundable commitment fee on account of the Revolving Line in the amount of Sixty Two Thousand Five Hundred Dollars ($62,500) (the “Revolving Commitment Fee” ) on the Effective Date and each anniversary thereof, to be shared among the Lenders pro rata according to their Revolving Commitment Percentages of the Revolving Line;

(d) Unused Revolving Line Facility Fee . A fee (the “ Unused Revolving Line Facility Fee ”), payable monthly, in arrears, on a calendar year basis, in an amount equal to one half of one percent (0.50%) per annum of the average unused portion of the Revolving Line, as determined by Collateral Agent, for the ratable benefit of the Lenders according to their Revolving Commitment Percentages. The unused portion of the Revolving Line, for the purposes of this calculation, shall include amounts reserved under the Cash Management Services Sublimit for products provided and under the Foreign Exchange Sublimit for FX Forward Contracts. Borrowers shall not be entitled to any credit, rebate or repayment of any Unused Revolving Line Facility Fee previously earned by any Lender pursuant to this Section notwithstanding any termination of the Agreement, or suspension or termination of Lenders’ obligation to make loans and advances hereunder;

(e) Revolving Line Termination Fee . The Revolving Line Termination Fee, if and when due hereunder.

(f) Prepayment Fee . The Prepayment Fee, if and when due hereunder; provided however, if as of the date the Prepayment Fee would otherwise be due and payable, a prepayment is made by Borrowers in connection with an Acquisition and the per share consideration that would be received by the Lenders upon the sale or exchange of the Shares (as defined in the Warrants) issuable to the Lenders upon exercise of the Warrants in connection with such Acquisition is at least one hundred fifty percent (150%) of the Warrant Price (as defined in the Warrants), then the Prepayment Fee shall be waived by the Lenders;

(g) Growth Capital Final Payment . The Growth Capital Final Payment, when due hereunder;

(h) Collateral Monitoring Fee . A monthly collateral monitoring fee of $750, payable in arrears on the last day of each month (prorated for any partial month at the beginning and upon termination of this Agreement); provided that such fee shall be for the sole account of Bank; and

(i) Lenders’ Expenses . All Lenders’ Expenses (including reasonable attorneys’ fees and reasonable expenses incurred in connection with the documentation and negotiation of this Agreement) incurred through and after the Effective Date, when due.

3 CONDITIONS OF LOANS

3.1 Conditions Precedent to Initial Credit Extension. Lenders’ obligation to make the initial Credit Extension is subject to the condition precedent that Lenders shall have received, in form and substance satisfactory to Lenders, such documents, and completion of such other matters, as Lenders may reasonably deem necessary or appropriate, including, without limitation:

(a) duly executed original signatures to the Loan Documents;

(b) duly executed original signatures to the Control Agreements, if any;

 

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(c) the Operating Documents and a good standing certificate of each Borrower certified by the Secretary of State of the states of organization and qualification to do business as of a date no earlier than thirty (30) days prior to the Effective Date;

(d) duly executed original signatures to the completed Borrowing Resolutions for each Borrower (one set for each Lender);

(e) to the extent not previously provided to the Collateral Agent, the certificate(s) for the Shares, together with stock powers, duly executed in blank by the applicable Borrower;

(f) certified copies, dated as of a recent date, of financing statement searches, as Lenders shall request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the initial Credit Extension, will be terminated or released;

(g) to the extent not previously provided to the Collateral Agent, landlord’s consents for each of Borrowers’ leased properties executed in favor of Collateral Agent, for the ratable benefit of the Lenders;

(h) a legal opinion of Borrowers’ and Guarantors’ counsel dated as of the Effective Date together with the duly executed original signatures thereto;

(i) two Perfection Certificate(s) executed by Parent (one for each Lender);

(j) evidence satisfactory to Lenders that the insurance policies required by Section 6.7 hereof are in full force and effect, together with appropriate evidence showing loss payable and/or additional insured clauses or endorsements in favor of each Lender;

(k) evidence satisfactory to Lenders that Parent has transferred all issued and outstanding Shares in NexMed to a third party which is not an Affiliate of any Borrower; and

(l) payment of the fees and Lenders’ Expenses then due as specified in Section 2.5 hereof.

3.2 Conditions Precedent to all Credit Extensions. Lenders’ obligations to make each Credit Extension, including the initial Credit Extension, are subject to the following:

(a) Alphatec shall have duly executed and delivered to Lenders a Payment/Advance Form, together with an executed Transaction Report;

(b) Borrowers shall have duly executed and delivered to each Lender a Note (x) in the outstanding amount of such Lender’s Growth Capital Advance; and (y) in the amount of each Lender’s Revolving Commitment Percentage of the Revolving Line;

(c) the representations and warranties in Section 5 shall be true in all material respects on the date of the Payment/Advance Form and the Transaction Report and on the Funding Date of each Credit Extension; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, and no Default or Event of Default shall have occurred and be continuing or result from the Credit Extension. Each Credit Extension is each Borrower’s representation and warranty on that date that the representations and warranties in Section 5 remain true in all material respects; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date;

 

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(d) receipt of and approval by Lenders of two updated Perfection Certificate(s) executed by Parent (one for each Lender), which shall include any additional information that shall be necessary to make such Perfection Certificates complete and correct in all material respects as of the date of such Credit Extension; provided that such approval will not be unreasonably withheld due to immaterial changes from the prior Perfection Certificate(s) provided to Lenders; and

(e) in Lenders’ reasonable discretion, there has not been a Material Adverse Change.

3.3 Covenant to Deliver.

Each Borrower agrees to deliver to Lenders each item required to be delivered to any Lender under this Agreement as a condition to any Credit Extension. Each Borrower expressly agrees that the extension of a Credit Extension prior to the receipt by Lenders of any such item shall not constitute a waiver by Lenders of such Borrower’s obligation to deliver such item, and any such extension in the absence of a required item shall be in Lenders’ sole discretion.

3.4 Procedures for Borrowing. Subject to the prior satisfaction of all other applicable conditions to the making of a Revolving Advance set forth in this Agreement, to obtain a Revolving Advance, Alphatec shall notify Collateral Agent by electronic mail, facsimile, or telephone by 12:00 p.m. Pacific time on the Funding Date of the Revolving Advance. Together with such notification, Alphatec must promptly deliver to Collateral Agent by electronic mail or facsimile a completed Transaction Report executed by a Responsible Officer or his or her designee. Collateral Agent, on behalf of Lenders, shall credit Revolving Advances to the Designated Deposit Account, and such Revolving Advances shall be deemed to be Revolving Advances by each of the Lenders in the amount of their respective Revolving Commitment Percentages. The Lenders shall reimburse Collateral Agent for Revolving Advances made by Collateral Agent. (The Lenders and Collateral Agent, as among themselves, agree that such reimbursement shall occur by the second Business Day of each week; the Borrower is not a party to or beneficiary of this agreement and it may be amended without the Borrower’s consent.) Lenders may make Revolving Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Revolving Advances are necessary to meet Obligations which have become due. Each Lender may rely on any telephone notice given by a person whom such Lender reasonably believes is a Responsible Officer or designee. Borrowers shall indemnify each Lender for any loss Lender suffers due to such reliance.

4 CREATION OF SECURITY INTEREST

4.1 Grant of Security Interest. Each Borrower hereby grants to the Collateral Agent, for the benefit of Lenders, to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to the Collateral Agent, for the benefit of Lenders, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. Each Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a first priority perfected security interest in the Collateral (subject only to Permitted Liens that may have superior priority under this Agreement). If a Borrower shall acquire a commercial tort claim (as defined in the Code), such Borrower shall promptly notify Collateral Agent in a writing signed by such Borrower of the general details thereof (and further details as may be required by Collateral Agent) and grant to Collateral Agent, for the benefit of Lenders, in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Collateral Agent.

If this Agreement is terminated, Collateral Agent’s Lien in the Collateral shall continue until the Obligations (other than inchoate indemnity obligations) are repaid in full in cash. Upon payment in full in cash of the Obligations and at such time as the Lenders’ obligation to make Credit Extensions has terminated, Collateral Agent shall, at Borrowers’ sole cost and expense, promptly release its Liens in the Collateral and all rights therein shall revert to Borrowers.

4.2 Authorization to File Financing Statements. Each Borrower hereby authorizes Collateral Agent to file financing statements, without notice to either Borrower, with all appropriate jurisdictions to perfect or protect Collateral Agents and/or Lenders’ interest or rights hereunder, including a notice that any disposition of the Collateral, by either a Borrower or any other Person, shall be deemed to violate the rights of Collateral Agent and Lenders under the Code.

 

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4.3 Pledge of Collateral . Each Borrower hereby pledges, assigns and grants to the Collateral Agent, for the ratable benefit of Lenders, a security interest in all the Shares, together with all proceeds and substitutions thereof, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash proceeds of the foregoing, as security for the performance of the Obligations. On the Effective Date, the certificate or certificates for the Shares will be delivered to the Collateral Agent, accompanied by an instrument of assignment duly executed in blank by the applicable Borrower. To the extent required by the terms and conditions governing the Shares, the applicable Borrower shall cause the books of each entity whose Shares are part of the Collateral and any transfer agent to reflect the pledge of the Shares. Upon the occurrence of an Event of Default hereunder, Collateral Agent may effect the transfer of any securities included in the Collateral (including but not limited to the Shares) into the name of the Lenders and cause new certificates representing such securities to be issued in the name of the Lenders or their transferee. Each Borrower will execute and deliver such documents, and take or cause to be taken such actions, as the Collateral Agent or Lenders may reasonably request to perfect or continue the perfection of the Collateral Agent’s security interest in the Shares. Unless an Event of Default shall have occurred and be continuing, Borrowers shall be entitled to exercise any voting rights with respect to the Shares and to give consents, waivers and ratifications in respect thereof, provided that no vote shall be cast or consent, waiver or ratification given or action taken which would be inconsistent with any of the terms of this Agreement or which would constitute or create any violation of any of such terms. All such rights to vote and give consents, waivers and ratifications shall terminate upon the occurrence and continuance of an Event of Default.

4.4 Parallel Debt.

(a) For the purpose of ensuring and preserving the validity and continuity of the security rights granted and to be granted by the Borrowers under or pursuant to the Loan Documents the Borrowers hereby irrevocably and unconditionally undertake, as an abstract obligation ( abstraktes Schuldversprechen ), to pay to the Collateral Agent amounts equal to and in the currency of the Obligations from time to time due in accordance with the terms and conditions of the Loan Documents and irrespective of any discharge of an obligor’s obligation to pay such amounts resulting from a failure by Collateral Agent or any Lender to take appropriate steps in insolvency, bankruptcy or similar proceedings affecting an obligor to preserve its respective right to be paid those amounts (such payment undertaking and the obligations and liabilities which are the result thereof the “ Parallel Debt ”).

(b) The Borrowers and the Collateral Agent acknowledge that:

(i) for this purpose the Parallel Debt constitutes undertakings, obligations and liabilities of the Borrowers to the Collateral Agent and the Lenders under the Loan Documents which are separate and independent from and without prejudice to, the corresponding Obligations which the Borrowers have to each of the Collateral Agent and the Lender; and

(ii) that the Parallel Debt represents the Collateral Agent’s and the Lenders’ own claims to receive payment of the Parallel Debt, provided that the total amount which may become due under the Parallel Debt shall never exceed the total amount which may otherwise become due as Obligations.

(c) Every payment of monies made by the Borrowers to the Collateral Agent or any Lender shall be in satisfaction pro tanto of the Parallel Debt, provided that if any such payment as is mentioned above is subsequently avoided or reduced by virtue of any provisions or enactments relating to bankruptcy, liquidation or similar laws of general application the Collateral Agent, for the ratable benefit of the Lenders, shall be entitled to receive the avoided or reduced amount of such payment from the Borrowers and the Borrowers shall remain liable to perform the relevant obligation and the relevant liability shall be deemed not to have been discharged.

 

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(d) Subject to the provision of this sub-clause (d), but notwithstanding any of the other provisions of this Section 4.4:

(i) the total amount due and payable as Parallel Debt under this Section 4.4 shall be decreased to the extent that an obligor pays any amounts to the Collateral Agent or any Lender or any of them as a payment for the Obligations or the Collateral Agent or any Lender otherwise receives any amount in payment of (a part of) the Obligations; and

(ii) to the extent that any obligor shall have paid any amounts to the Collateral Agent or any Lender under the Parallel Debt or the Collateral Agent or any Lender shall have otherwise received monies in payment of the Parallel Debt, the total amount due and payable by any obligor on account of the Obligations shall be decreased as if said amounts were received directly in payment of the Obligations.

Notwithstanding Section 11 of this Agreement with respect to choice of law, this Section 4.4 shall be governed by German law.

5 REPRESENTATIONS AND WARRANTIES

Each Borrower represents and warrants as follows:

5.1 Due Organization and Authorization. Borrower and each of its Subsidiaries, if any, are duly existing and in good standing, as Registered Organizations in their respective jurisdictions of formation and are qualified and licensed to do business and are in good standing in any jurisdiction in which the conduct of their business or their ownership of property requires that they be qualified except where the failure to do so could not reasonably be expected to have a material adverse effect on Borrower’s business. In connection with this Agreement, Parent has delivered to Collateral Agent a completed perfection certificate signed by Parent (as may be updated from time to time in accordance with Section 3.2(d), the “ Perfection Certificate ”). Borrower represents and warrants that (a) Borrower’s exact legal name is that indicated on the Perfection Certificate and on the signature page hereof; (b) Borrower is an organization of the type and is organized in the jurisdiction set forth in the Perfection Certificate; (c) the Perfection Certificate accurately sets forth Borrower’s organizational identification number or accurately states that Borrower has none; (d) the Perfection Certificate accurately sets forth Borrower’s place of business, or, if more than one, its chief executive office as well as Borrower’s mailing address (if different than its chief executive office); (e) Borrower (and each of its predecessors) has not, in the past five (5) years, changed its jurisdiction of formation, organizational structure or type, or any organizational number assigned by its jurisdiction; and (f) all other information set forth on the Perfection Certificate pertaining to Borrower and each of its Subsidiaries is accurate and complete. If Borrower is not now a Registered Organization but later becomes one, Borrower shall promptly notify Collateral Agent of such occurrence and provide Collateral Agent with Borrower’s organizational identification number.

The execution, delivery and performance by Borrower of the Loan Documents to which it is a party have been duly authorized, and do not (i) conflict with any of Borrower’s Operating Documents, (ii) contravene, conflict with, constitute a default under or violate any material Requirement of Law, (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree, determination or award of any Governmental Authority by which Borrower or any of its Subsidiaries or any of their property or assets may be bound or affected, (iv) require any action by, filing, registration, or qualification with, or Governmental Approval from, any Governmental Authority (except such Governmental Approvals which have already been obtained and are in full force and effect and except for filings with the Securities Exchange Commission or NASDAQ, which shall be made following closing) or are being obtained pursuant to Section 6.1(b), or (v) constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound in which the default could have a material adverse effect on Borrower’s business.

5.2 Collateral. Borrower has good title to, has rights in, and the power to transfer each item of the Collateral upon which it purports to grant a Lien hereunder, free and clear of any and all Liens except Permitted Liens. Borrower has no deposit accounts other than the deposit accounts with Bank, the deposit accounts, if any, described in the Perfection Certificate delivered to Collateral Agent in connection herewith, or of which Borrower has given Lenders notice and taken such actions as are necessary to give Collateral Agent a perfected security interest therein.

 

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Other than with respect to Consigned Collateral, none of the Collateral is in the possession of any third party bailee. None of the components of the Collateral (other than the Consigned Collateral) shall be maintained at locations other than as provided in the Perfection Certificate or as Borrower has given Lenders notice pursuant to Section 7.2 . In the event that Borrower, after the date hereof, intends to store or otherwise deliver any portion of the Collateral (other than the Consigned Collateral) to a bailee, then Borrower will first receive the written consent of Lenders, such consent not to be unreasonably withheld, and such bailee must execute and deliver a bailee agreement in form and substance satisfactory to Collateral Agent in its sole discretion.

For each Account with respect to which Revolving Advances are requested, on the date each Revolving Advance is requested and made, such Account shall be an Eligible Account.

All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Eligible Accounts are and shall be true and correct and all such invoices, instruments and other documents, and all of each Borrower’s Books are genuine and in all respects what they purport to be. Whether or not an Event of Default has occurred and is continuing, Bank may notify any Account Debtor owing a Borrower money of Bank’s security interest in such funds and verify the amount of such Eligible Account. All sales and other transactions underlying or giving rise to each Eligible Account shall comply in all material respects with all applicable laws and governmental rules and regulations. No Borrower has any actual knowledge of any actual or imminent Insolvency Proceeding of any Account Debtor whose accounts are Eligible Accounts in any Transaction Report. To the best of each Borrower’s knowledge, all signatures and endorsements on all documents, instruments, and agreements relating to all Eligible Accounts are genuine, and all such documents, instruments and agreements are legally enforceable in accordance with their terms.

All Inventory is in all material respects of good and marketable quality, free from material defects. For any item of Inventory consisting of Eligible Inventory in any Transaction Report, such Inventory (i) consists of finished goods, in good, new, and salable condition, which is not perishable, returned, consigned, obsolete, not sellable, damaged, or defective, and is not comprised of demonstrative or custom inventory, works in progress, packaging or shipping materials, or supplies; (ii) meets all applicable governmental standards; (iii) has been manufactured in compliance with the Fair Labor Standards Act; (iv) is not subject to any Liens, except the first priority Liens granted or in favor of Bank under this Agreement or any of the other Loan Documents; and (v) is located at the locations identified by Borrower in the Perfection Certificate where it maintains Inventory (or any location permitted under Section 7.2).

Borrower is the sole owner of its intellectual property, except for non-exclusive licenses granted to its customers in the ordinary course of business. Except as set forth in the Perfection Certificate, to the best of Borrower’s knowledge each patent is valid and enforceable, and no part of the intellectual property has been judged invalid or unenforceable, in whole or in part, and to the best of Borrower’s knowledge, no claim has been made that any part of the intellectual property violates the rights of any third party except to the extent such claim could not reasonably be expected to have a material adverse effect on Borrower’s business. Except as noted on the Perfection Certificate, Borrower is not a party to, nor is bound by, any material license or other agreement with respect to which Borrower is the licensee (a) that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property, or (b) for which a default under or termination of could interfere with Collateral Agent’s right to sell any Collateral. Borrower shall provide written notice to Collateral Agent within ten (10) days of entering or becoming bound by any such license or agreement (other than over-the-counter software that is commercially available to the public). Borrower shall take such steps as Collateral Agent reasonably requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (x) all such licenses or agreements to be deemed “Collateral” and for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement, whether now existing or entered into in the future, and (y) Collateral Agent to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Collateral Agent’s rights and remedies under this Agreement and the other Loan Documents.

5.3 Litigation. Other than as set forth in the Perfection Certificate, there are no actions or proceedings pending or, to the knowledge of the Responsible Officers, threatened in writing by or against Borrower or any of its Subsidiaries involving more than Five Hundred Thousand Dollars ($500,000).

 

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5.4 No Material Deviation in Financial Statements. All consolidated financial statements for Borrower and any of its Subsidiaries delivered to Lenders fairly present in all material respects Borrower’s consolidated financial condition and Borrower’s consolidated results of operations. There has not been any material deterioration in Borrower’s consolidated financial condition since the date of the most recent financial statements submitted to Lenders.

5.5 Solvency. The fair salable value of Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature.

5.6 Regulatory Compliance. Borrower is not an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act of 1940, as amended. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Neither Borrower nor any of its Subsidiaries is a “holding company” or an “affiliate” of a “holding company” or a “subsidiary company” of a “holding company” as each term is defined and used in the Public Utility Holding Company Act of 2005. Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to have a material adverse effect on its business. None of Borrower’s or any of its Subsidiaries’ properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each of its Subsidiaries have (i) obtained all consents, approvals and authorizations of, (ii) made all declarations or filings with, and (iii) given all notices to, all Government Authorities that, in the case of each of (i), (ii) and (iii) above, are necessary to continue their respective businesses as currently conducted.

5.7 Subsidiaries; Investments. Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments.

5.8 Tax Returns and Payments; Pension Contributions. Borrower has timely filed all required tax returns and reports, and Borrower and its Subsidiaries have timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower. Borrower may defer payment of any contested taxes, provided that Borrower (a) in good faith contests its obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Lenders in writing of the commencement of, and any material development in, the proceedings, (c) posts bonds or takes any other steps required to prevent the governmental authority levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien”. Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not withdrawn from participation in, and has not permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

5.9 Use of Proceeds. Borrower shall use the proceeds of the Credit Extensions solely as working capital, for strategic acquisitions, licenses and to fund its general business requirements and not for personal, family, household or agricultural purposes.

5.10 Full Disclosure. No written representation, warranty or other statement of Borrower in any certificate or written statement given to Collateral Agent or any Lender, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to Collateral Agent or any Lender, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).

 

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6 AFFIRMATIVE COVENANTS

Each Borrower shall do all of the following:

6.1 Government Compliance.

(a) Maintain its and all its Subsidiaries’ legal existence and good standing in their respective jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on Borrower’s business or operations. Borrower shall comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could have a material adverse effect on Borrower’s business.

(b) Obtain all of the Governmental Approvals necessary for the performance by Borrower of its obligations under the Loan Documents to which it is a party and the grant of a security interest to Collateral Agent for the ratable benefit of the Lenders, in all of its property. Borrower shall promptly provide copies of any such obtained Governmental Approvals to Collateral Agent.

6.2 Financial Statements, Reports, Certificates.

(a) Alphatec shall provide each Lender with the following:

(i) within twenty (20) days after the end of each month, (A) a Transaction Report (and any schedules related thereto) (if there are no loan balances outstanding under the Revolving Line for the preceding calendar month), (B) monthly accounts receivable agings, aged by invoice date, (C) monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, (D) monthly reconciliations of accounts receivable agings (aged by invoice date), transaction reports and general ledger, (E) monthly perpetual inventory reports for Inventory valued on a first-in, first-out basis at the lower of cost or market (in accordance with GAAP) or such other inventory reports as are requested by Lenders in their good faith business judgment; (F) a deferred revenue schedule; and (G) a report of the location, holders and value of all Consigned Collateral.

(ii) as soon as available, and in any event within thirty (30) days after the end of each month, monthly unaudited financial statements of Alphatec;

(iii) within thirty (30) days after the end of each quarter a quarterly Compliance Certificate signed by a Responsible Officer, certifying that as of the end of such quarter, Borrowers were in full compliance with all of the terms and conditions of this Agreement, and such other information as Lenders shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks, and a calculation of the financial covenants set forth in Section 6.8 below;

(iv) the more frequent of weekly, by Monday of the following week, or with each request for a Revolving Advance when there are loan balances outstanding under the Revolving Line for the preceding calendar month, a Transaction Report (and any schedules related thereto);

(v) within sixty (60) days after the beginning of each fiscal year of Borrowers, (A) annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for such fiscal year of Borrowers, and (B) annual financial projections for such fiscal year (on a quarterly basis), together with any related business forecasts used in the preparation of such annual financial projections; in each case, as approved by each Borrower’s board of directors and provided to Borrowers’ equity investors;

(vi) as soon as available, and in any event within one hundred eighty (180) days following the end of Alphatec’s fiscal year, annual financial statements certified by, and with an unqualified opinion of, independent certified public accountants acceptable to Lenders; and

 

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(vii) a prompt report of any legal actions pending or threatened in writing against a Borrower or any Subsidiary that could result in damages or costs to a Borrower or any Subsidiary of Five Hundred Thousand Dollars ($500,000) or more.

(b) Parent shall provide each Lender with, as soon as available, but no later than five (5) days after filing with the Securities Exchange Commission, Parent’s 10K, 10Q, and 8K reports;

Parent’s 10K, 10Q, and 8K reports required to be delivered pursuant hereto shall be deemed to have been delivered on the date on which Parent posts such report or provides a link thereto on Parent’s or another website (including www.sec.gov ) on the Internet.

6.3 Accounts Receivable.

(a) Schedules and Documents Relating to Accounts . Alphatec shall deliver to each Lender transaction reports and schedules of collections, as provided in Section 6.2 , on Bank’s standard forms; provided, however, that Alphatec’s failure to execute and deliver the same shall not affect or limit Lenders’ Lien and other rights in all of Borrowers’ Accounts, nor shall any Lender’s failure to advance or lend against a specific Account affect or limit such Lender’s Lien and other rights therein. If requested by a Lender, each Borrower shall furnish each Lender with copies (or, at a Lender’s request, originals) of all contracts, orders, invoices, and other similar documents, and all shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Accounts. In addition, each Borrower shall deliver to Lenders, on any Lender’s request, the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts, in the same form as received, with all necessary indorsements, and copies of all credit memos.

(b) Disputes . Each Borrower shall promptly notify Lenders of all disputes or claims exceeding Seventy Five Thousand Dollars ($75,000) relating to Accounts. Each Borrower may forgive (completely or partially), compromise, or settle any Account for less than payment in full, or agree to do any of the foregoing so long as (i) such Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, in arm’s-length transactions, and reports the same to Lenders in the regular reports provided to Lenders; (ii) no Default or Event of Default has occurred and is continuing; and (iii) after taking into account all such discounts, settlements and forgiveness, the total outstanding Advances will not exceed the lesser of the Revolving Line or the Borrowing Base.

(c) Collection of Accounts . Each Borrower shall have the right to collect all Accounts, unless and until a Default or an Event of Default has occurred and is continuing. Lenders shall require that all proceeds of Accounts be deposited by Borrowers into the Lockbox. Whether or not an Event of Default has occurred and is continuing, each Borrower shall hold all payments on, and proceeds of, Accounts in trust for Lenders, and each Borrower shall immediately deliver all such payments and proceeds to Collateral Agent, for the ratable benefit of the Lenders according to their respective Revolving Line Commitment Percentages, in their original form, duly endorsed, to be applied (i) prior to an Event of Default, pursuant to the terms of Section 2.4(f) hereof, and (ii) after the occurrence and during the continuance of an Event of Default, pursuant to the terms of Section 9.4 hereof.

(d) Returns . Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to a Borrower, such Borrower shall promptly (i) determine the reason for such return, (ii) issue a credit memorandum to the Account Debtor in the appropriate amount, and (iii) provide a copy of such credit memorandum to Bank, for the benefit of the Lenders, upon request from any Lender. In the event any attempted return occurs after the occurrence and during the continuance of any Event of Default, such Borrower shall hold the returned Inventory in trust for Lenders, and immediately notify Lenders of the return of the Inventory.

(e) Verification . Lenders may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Accounts, either in the name of a Borrower or any Lender or such other name as Lenders may choose.

 

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(f) No Liability . Lenders shall not be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Account, or for settling any Account in good faith for less than the full amount thereof, nor shall any Lender be deemed to be responsible for any of Borrowers’ obligations under any contract or agreement giving rise to an Account. Nothing herein shall, however, relieve Lenders from liability for its own gross negligence or willful misconduct.

6.4 Remittance of Proceeds . Except as otherwise provided in Section 6.3(c) , deliver, in kind, all proceeds arising from the disposition of any Collateral to Bank, for the ratable benefit of the Lenders, in the original form in which received by a Borrower not later than the following Business Day after receipt by a Borrower, to be applied to the Obligations pursuant to the terms of Section 9.4 hereof; provided that, if no Default or Event of Default has occurred and is continuing, Borrowers shall not be obligated to remit to Bank the proceeds of the sale of worn out or obsolete Equipment disposed of by a Borrower in good faith in an arm’s length transaction for an aggregate purchase price of One Hundred Thousand Dollars ($100,000) or less (for all such transactions in any fiscal year). Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.

6.5 Taxes; Pensions. Timely file, and require each of its Subsidiaries to timely file, all required tax returns and reports and timely pay, and require each of its Subsidiaries to timely file, all foreign, federal, state and local taxes, assessments, deposits and contributions owed by a Borrower and each of its Subsidiaries, except for deferred payment of any taxes contested pursuant to the terms of Section 5.8 hereof, and shall deliver to Lenders, on demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms.

6.6 Access to Collateral; Books and Records . At reasonable times, but not more than two (2) times per year (unless a Default or Event of Default has occurred and is continuing) on one (1) Business Day’s notice (provided no notice is required if an Event of Default has occurred and is continuing), each Lender, or its agents, shall have the right to inspect the Collateral and the right to audit and copy each Borrower’s Books. The foregoing inspections and audits shall be at Borrowers’ expense, and the charge therefor shall be Seven Hundred Fifty Dollars ($750) per person per day (or such higher amount as shall represent such Lender’s then-current standard charge for the same), plus reasonable out-of-pocket expenses. In the event a Borrower and any Lender schedule an audit more than ten (10) days in advance, and such Borrower cancels or seeks to reschedule the audit with less than ten (10) days written notice to Lenders, then (without limiting any of each Lender’s rights or remedies), such Borrower shall pay such Lender a fee of One Thousand Dollars ($1,000) plus any out-of-pocket expenses incurred by such Lender to compensate such Lender for the anticipated costs and expenses of the cancellation or rescheduling.

6.7 Insurance. Keep its business and the Collateral insured for risks and in amounts standard for companies in Borrowers’ industry and location and as Lenders may reasonably request. Insurance policies shall be in a form, with companies, and in amounts that are reasonably satisfactory to Lenders. All property policies shall have a lender’s loss payable endorsement showing Collateral Agent as an additional lender loss payee and waive subrogation against Lenders, and all liability policies shall show, or have endorsements showing, Collateral Agent as an additional insured. Alphatec will make commercially reasonable efforts to ensure that all policies (or the loss payable and additional insured endorsements) shall provide that the insurer must give Collateral Agent at least thirty (30) days notice before canceling, amending, or declining to renew its policy. At Collateral Agent’s and any Lenders’ request, Borrowers shall deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy shall, at Lenders’ option, be payable to Lenders on account of the Obligations. Notwithstanding the foregoing, (a) so long as no Event of Default has occurred and is continuing, Borrowers shall have the option of applying the proceeds of any casualty policy up to Five Hundred Thousand Dollars ($500,000) with respect to any loss toward the replacement or repair of destroyed or damaged property; provided that any such replaced or repaired property (i) shall be of equal or like value as the replaced or repaired Collateral and (ii) shall be deemed Collateral in which Collateral Agent has been granted a first priority security interest, and (b) after the occurrence and during the continuance of an Event of Default, all proceeds payable under such casualty policy shall, at the option of Lenders, be payable to Lenders on account of the Obligations. If a Borrower fails to obtain insurance as required under this Section 6.7 or to pay any amount or furnish any required proof of payment to third persons and Collateral Agent, Collateral Agent may make all or part of such payment or obtain such insurance policies required in this Section 6.7 , and take any action under the policies Collateral Agent reasonably deems prudent.

 

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6.8 Operating Accounts.

(a) Maintain its primary depository, operating and securities accounts with Bank or Bank’s Affiliates, which accounts shall represent at least eighty five percent (85%) of the dollar value of each Borrower’s and each Borrower’s Subsidiaries’ accounts at all financial institutions; provided that Borrowers shall at all times maintain cash and cash equivalents with Bank and/or Bank’s Affiliates of at least Ten Million Dollars ($10,000,000). Notwithstanding the foregoing, from the Effective Date through 5:00 p.m. California time, April 2, 2010, Borrowers may comply with the preceding proviso by including accounts of Scient’x USA, Inc., Scient’x Groupe, S.A.S. and Scient’x, S.A., provided the same are maintained with Bank and/or Bank’s Affiliates, and/or subject to Control Agreements in favor of (and in form and content reasonably acceptable to) Bank and/or Oxford.

(b) Provide Collateral Agent five (5) days prior written notice before establishing any Collateral Account at or with any bank or financial institution other than Bank or Bank’s Affiliates. In addition, for each Collateral Account that a Borrower or any Domestic Subsidiary at any time maintains, such Borrower shall cause the applicable bank or financial institution (other than Bank) at or with which any Collateral Account is maintained to execute and deliver a Control Agreement or other appropriate instrument with respect to such Collateral Account to perfect Collateral Agent’s Lien in such Collateral Account in accordance with the terms hereunder, which Control Agreement may not be terminated without prior written consent of the Lenders. The provisions of the previous sentence shall not apply to deposit accounts exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of a Borrower’s employees and identified to Collateral Agent by Borrowers as such.

6.9 Fixed Charge Coverage Ratio . Borrowers shall maintain, at all times, to be tested , as of the last day of each quarter, on a consolidated basis with respect to Borrowers and their Subsidiaries, a Fixed Charge Coverage Ratio of at least (i) 1.25 to 1.00 for the quarter ending June 30, 2010; and (ii) 1.50 to 1.00 for each quarter thereafter.

6.10 Protection of Intellectual Property Rights. Each Borrower shall: (a) protect, defend and maintain the validity and enforceability of its intellectual property; (b) promptly advise Lenders in writing of material infringements of its material intellectual property; and (c) not allow any intellectual property material to such Borrower’s business to be abandoned, forfeited or dedicated to the public without Lenders’ written consent. Notwithstanding the foregoing, in no event shall any Borrower be obligated to bring any action against any Person for infringement of such Borrower’s intellectual property if, such intellectual property is not material to Borrower’s business, or in the good faith business judgment of such Borrower’s board of directors, such an action would be impractical or imprudent.

6.11 Litigation Cooperation. From the date hereof and continuing through the termination of this Agreement, make available to Collateral Agent upon reasonable terms, without expense to Collateral Agent, each Borrower and its officers, employees and agents and each Borrower’s books and records, to the extent that Collateral Agent may deem them reasonably necessary to prosecute or defend any third-party suit or proceeding instituted by or against Collateral Agent with respect to any Collateral or relating to a Borrower.

6.12 Notices of Litigation and Default. Each Borrower will give prompt written notice to Collateral Agent of any litigation or governmental proceedings pending or threatened (in writing) against such Borrower which would reasonably be expected to have a material adverse effect with respect to such Borrower. Without limiting or contradicting any other more specific provision of this Agreement, promptly (and in any event within three (3) Business Days) upon a Borrower becoming aware of the existence of any Event of Default or event which, with the giving of notice or passage of time, or both, would constitute an Event of Default, such Borrower shall give written notice to Collateral Agent of such occurrence, which such notice shall include a reasonably detailed description of such Event of Default or event which, with the giving of notice or passage of time, or both, would constitute an Event of Default.

 

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6.13 Creation/Acquisition of Subsidiaries. In the event a Borrower or a Subsidiary creates or acquires any Subsidiary, such Borrower or Subsidiary shall promptly notify Lenders of the creation or acquisition of such new Subsidiary and take all such action as may be reasonably required by Lenders to cause each such domestic Subsidiary to guarantee the Obligations of Borrowers under the Loan Documents and grant a continuing pledge and security interest in and to the assets of such Subsidiary (substantially as described on Exhibit A hereto); and the applicable Borrower and/or Subsidiary shall grant and pledge to Lenders a perfected security interest in the Shares of each Subsidiary.

6.14 Further Assurances. Execute any further instruments and take further action as Collateral Agent reasonably requests to perfect or continue Lenders’ Lien in the Collateral or to effect the purposes of this Agreement. Deliver to Collateral Agent, within ten (10) days after the same are sent or received, copies of all correspondence, reports, documents and other filings with any Governmental Authority regarding compliance with or maintenance of Governmental Approvals or Requirements of Law or that could reasonably be expected to have a material effect on any of the Governmental Approvals or otherwise on the operations of a Borrower or any of its Subsidiaries.

7 NEGATIVE COVENANTS

Neither Borrower shall do any of the following without Collateral Agent’s prior written consent:

7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for Transfers (a) of Inventory in the ordinary course of business; (b) of worn-out or obsolete Equipment; (c) in connection with Permitted Liens and Permitted Investments; (d) of non-exclusive licenses for the use of the property of Borrowers or their Subsidiaries in the ordinary course of business, and (e) non-exclusive licenses of Borrowers’ intellectual property in the ordinary course of business to include licenses of product to partnerships in bona fide collaborations.

7.2 Changes in Business, Management, Ownership, or Business Locations. (a) Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by a Borrower and such Subsidiary, as applicable, or reasonably related thereto; (b) liquidate or dissolve; or (c) enter into any transaction or series of related transactions in which the stockholders of a Borrower immediately prior to the first such transaction own less than sixty five percent (65%) of the voting stock of such Borrower immediately after giving effect to such transaction or related series of such transactions (other than by the sale of a Borrower’s equity securities in a public offering or to venture capital investors so long as such Borrower identifies to Lenders the venture capital investors prior to the closing of the transaction). Neither Borrower shall, without at least thirty (30) days prior written notice to Lenders: (1) add any new offices or business locations, including warehouses (unless (x) such new offices, business locations or warehouses contain less than One Hundred Thousand Dollars ($100,000) in such Borrower’s assets or property, or (y) Borrower has delivered to Collateral Agent a bailee agreement in form and substance satisfactory to Collateral Agent in its sole discretion with respect to such offices, business locations or warehouses), or (z) such warehouse consists of a drop-ship location that Borrower is using in the ordinary course of its business to store only Consigned Collateral, (2) change its jurisdiction of organization, (3) change its organizational structure or type, (4) change its legal name, or (5) change any organizational number (if any) assigned by its jurisdiction of organization.

7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. A Subsidiary may merge or consolidate into another Subsidiary or into a Borrower.

7.4 Indebtedness. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness.

7.5 Encumbrance. Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted herein. Neither Borrower shall sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber, or

 

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enter into any agreement, document, instrument or other arrangement (except with or in favor of Collateral Agent) with any Person which directly or indirectly prohibits or has the effect of prohibiting a Borrower or any Subsidiary from selling, transferring, assigning, mortgaging, pledging, leasing, granting a security interest in or upon, or encumbering any of a Borrower’s or any Subsidiary’s intellectual property, except as is otherwise permitted in Section 7.1 hereof and the definition of “Permitted Liens” herein.

7.6 Maintenance of Collateral Accounts. Maintain any Collateral Account except pursuant to the terms of Section 6.8(b) hereof.

7.7 Distributions; Investments. (a) Directly or indirectly make any Investment other than Permitted Investments, or permit any of its Subsidiaries to do so; or (b) pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock provided that (i) each Borrower may pay dividends solely in common stock; and (ii) each Borrower may repurchase the stock of former employees or consultants pursuant to stock repurchase agreements so long as an Event of Default does not exist at the time of such repurchase and would not exist after giving effect to such repurchase, provided such repurchase does not exceed in the aggregate of Two Hundred Fifty Thousand Dollars ($250,000) per fiscal year.

7.8 Transactions with Affiliates. Except as disclosed in any filings under applicable securities laws, directly or indirectly enter into or permit to exist any material transaction with any Affiliate of a Borrower, except for transactions that are in the ordinary course of a Borrower’s business, upon fair and reasonable terms that are no less favorable to such Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person.

7.9 Subordinated Debt. (a) Make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof or adversely affect the subordination thereof to Obligations owed to the Lenders.

7.10 Compliance. Become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on a Borrower’s business, or permit any of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any present pension, profit sharing and deferred compensation plan which could reasonably be expected to result in any liability of a Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

7.11 Indebtedness Payments. (i) Prepay, redeem, purchase, defease or otherwise satisfy in any manner prior to the scheduled repayment thereof any Indebtedness for borrowed money (other than amounts due under this Agreement or due any Lender) or lease obligations, (ii) amend, modify or otherwise change the terms of any Indebtedness for borrowed money or lease obligations so as to accelerate the scheduled repayment thereof or (iii) repay any notes to officers, directors or shareholders.

8 EVENTS OF DEFAULT

Any one of the following shall constitute an event of default (an “ Event of Default ”) under this Agreement:

8.1 Payment Default. A Borrower fails to (a) make any payment of principal or interest on any Credit Extension on its due date, or (b) pay any other Obligations within three (3) Business Days after such Obligations are due and payable (which three (3) day grace period shall not apply to payments due on the Growth Capital Maturity Date or the Revolving Line Maturity Date, as applicable). During the grace period, the failure to cure the payment default is not an Event of Default (but no Credit Extension will be made during the grace period);

 

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8.2 Covenant Default.

(a) A Borrower fails or neglects to perform any obligation in Sections, 6.2, 6.5, 6.7, 6.8 or 6.9 or violates any covenant in Section 7 ; or

(b) A Borrower fails or neglects to perform, keep, or observe any other term, provision, condition, covenant or agreement contained in this Agreement or any Loan Documents, and as to any default (other than those specified in this Section 8 ) under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within ten (10) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by such Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then such Borrower shall have an additional period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of Default (but no Credit Extensions shall be made during such cure period). Grace periods provided under this Section shall not apply, among other things, to financial covenants or any other covenants set forth in subsection (a) above;

8.3 Material Adverse Change. A Material Adverse Change occurs;

8.4 Attachment.

(a) (i) The service of process seeking to attach, by trustee or similar process, any funds of a Borrower or of any entity under control of a Borrower (including a Subsidiary) on deposit with Bank or any Bank Affiliate, or (ii) a notice of lien, levy, or assessment is filed against any of a Borrower’s assets by any government agency, and the same under subclauses (i) and (ii) hereof are not, within ten (10) days after the occurrence thereof, discharged or stayed (whether through the posting of a bond or otherwise); provided, however, no Credit Extensions shall be made during any ten (10) day cure period; and

(b) (i) any material portion of a Borrower’s assets is attached, seized, levied on, or comes into possession of a trustee or receiver, or (ii) any court order enjoins, restrains, or prevents a Borrower from conducting any part of its business;

8.5 Insolvency. (a) a Borrower is unable to pay its debts (including trade debts) as they become due or otherwise becomes insolvent; (b) a Borrower begins an Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against a Borrower and not dismissed or stayed within forty-five (45) days (but no Credit Extensions shall be made while of any of the conditions described in clause (a) exist and/or until any Insolvency Proceeding is dismissed);

8.6 Other Agreements. There is a default in any agreement to which a Borrower or any Guarantor is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could reasonably be expected to have a material adverse effect on a Borrower’s business; or, if there is an Event of Default under and as defined in the Scient’x Loan Agreement.

8.7 Judgments. A final, nonappealable judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Thousand Dollars ($100,000) (not covered by independent third-party insurance) shall be rendered against a Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days after the entry thereof (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment);

8.8 Misrepresentations. A Borrower or any Person acting for a Borrower makes any material representation, warranty, or other statement now or later in this Agreement, any Loan Document or in any writing delivered to Collateral Agent and/or any Lender or to induce Collateral Agent and/or Lenders to enter this Agreement or any Loan Document, and such representation, warranty, or other statement is incorrect in any material respect when made;

 

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8.9 Subordinated Debt. A default or breach occurs under any agreement between a Borrower and any creditor of a Borrower that signed a subordination, intercreditor, or other similar agreement with Lenders, or any creditor that has signed such an agreement with Lenders breaches any terms of such agreement;

8.10 Guaranty . (a) Any guaranty of any Obligations terminates or ceases for any reason to be in full force and effect; (b) any Guarantor does not perform any obligation or covenant under any guaranty of the Obligations; (c) any circumstance described in Sections 8.3, 8.4, 8.5, 8.7, or 8.8 occurs with respect to any Guarantor, or (d) the liquidation, winding up, or termination of existence of any Guarantor ;

8.11 Governmental Approvals. Any Governmental Approval shall have been (a) revoked, rescinded, suspended, modified in an adverse manner or not renewed in the ordinary course for a full term or (b) subject to any decision by a Governmental Authority that designates a hearing with respect to any applications for renewal of any of such Governmental Approval or that could result in the Governmental Authority taking any of the actions described in clause (a) above, and such decision or such revocation, rescission, suspension, modification or non-renewal (i) has, or could reasonably be expected to have, a Material Adverse Change, or (ii) adversely affects the legal qualifications of a Borrower or any of its Subsidiaries to hold such Governmental Approval in any applicable jurisdiction and such revocation, rescission, suspension, modification or non-renewal could reasonably be expected to affect the status of or legal qualifications of a Borrower or any of its Subsidiaries to hold any Governmental Approval in any other jurisdiction.

9 RIGHTS AND REMEDIES

9.1 Rights and Remedies. While an Event of Default occurs and continues Collateral Agent may, without notice or demand, do any or all of the following:

(a) declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Collateral Agent or Lenders);

(b) stop advancing money or extending credit for either Borrower’s benefit under this Agreement or under any other agreement between either Borrower and Collateral Agent and/or Lenders;

(c) demand that Borrowers (i) deposit cash with Bank in an amount equal to the aggregate amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrowers shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letter of Credit fees scheduled to be paid or payable over the remaining term of any Letters of Credit;

(d) terminate any FX Forward Contracts;

(e) settle or adjust disputes and claims directly with Account Debtors for amounts on terms and in any order that Collateral Agent considers advisable, notify any Person owing a Borrower money of Lenders’ security interest in such funds, and verify the amount of such account;

(f) make any payments and do any acts it considers necessary or reasonable to protect the Collateral and/or its security interest in the Collateral. Each Borrower shall assemble the Collateral if Collateral Agent requests and make it available as Collateral Agent designates. Collateral Agent may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Each Borrower grants Collateral Agent a license to enter and occupy any of its premises, without charge, to exercise any of Collateral Agent’s rights or remedies;

(g) apply to the Obligations any (i) balances and deposits of Borrowers it holds, or (ii) any amount held by Collateral Agent or Lenders owing to or for the credit or the account of a Borrower;

 

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(h) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Collateral Agent is hereby granted a non-exclusive, royalty-free license or other right to use, without charge, each Borrower’s labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Collateral Agent’s exercise of its rights under this Section, each Borrower’s rights under all licenses and all franchise agreements inure to Collateral Agent for the benefit of the Lenders;

(i) place a “hold” on any account maintained with Collateral Agent or Lenders and/or deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any Control Agreement or similar agreements providing control of any Collateral;

(j) demand and receive possession of each Borrower’s Books; and

(k) exercise all rights and remedies available to Collateral Agent under the Loan Documents or at law or equity, including all remedies provided under the Code (including disposal of the Collateral pursuant to the terms thereof).

9.2 Power of Attorney. Each Borrower hereby irrevocably appoints Collateral Agent as its lawful attorney-in-fact, exercisable only upon the occurrence and during the continuance of an Event of Default, to: (a) endorse Borrower’s name on any checks or other forms of payment or security; (b) sign such Borrower’s name on any invoice or bill of lading for any Account or drafts against Account Debtors; (c) settle and adjust disputes and claims about the Accounts directly with Account Debtors, for amounts and on terms Collateral Agent determines reasonable; (d) make, settle, and adjust all claims under such Borrower’s insurance policies; (e) pay, contest or settle any Lien, charge, encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; and (f) transfer the Collateral into the name of Collateral Agent or a third party as the Code permits. Each Borrower hereby appoints Collateral Agent as its lawful attorney-in-fact to sign such Borrower’s name on any documents necessary to perfect or continue the perfection of Lenders’ security interest in the Collateral regardless of whether an Event of Default has occurred until all Obligations (other than inchoate indemnity obligations) have been satisfied in full and Collateral Agent and Lenders are under no further obligation to make Credit Extensions hereunder. Collateral Agent’s foregoing appointment as each Borrower’s attorney in fact, and all of Collateral Agent’s rights and powers, coupled with an interest, are irrevocable until all Obligations (other than inchoate indemnity obligations) have been fully repaid and performed and Collateral Agent’s and Lenders’ obligation to provide Credit Extensions terminates.

9.3 Protective Payments. If a Borrower fails to obtain the insurance called for by Section 6.7 or fails to pay any premium thereon or fails to pay any other amount which a Borrower is obligated to pay under this Agreement or any other Loan Document, Collateral Agent may obtain such insurance or make such payment, and all amounts so paid by Collateral Agent are Lenders’ Expenses and immediately due and payable, bearing interest at the then highest applicable rate, and secured by the Collateral. Collateral Agent will make reasonable efforts to provide Borrowers with notice of Collateral Agent obtaining such insurance at the time it is obtained or within a reasonable time thereafter. No payments by Collateral Agent are deemed an agreement to make similar payments in the future or Collateral Agent’s waiver of any Event of Default.

9.4 Application of Payments and Proceeds. Borrowers shall have no right to specify the order or the accounts to which Lenders shall allocate or apply any payments required to be made by a Borrower to any Lender or otherwise received by any Lender under this Agreement when any such allocation or application is not specified elsewhere in this Agreement. If an Event of Default has occurred and is continuing, Lenders may apply any funds in their possession, whether from either Borrower’s account balances, payments, proceeds realized as the result of any collection of Accounts or other disposition of the Collateral, or otherwise, to the Obligations in such order as Lenders shall determine in their sole discretion. Any surplus shall be paid to Borrowers by credit to the Designated Deposit Account or to other Persons legally entitled thereto; Borrowers shall remain liable to Lenders for any deficiency. If any Lender, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Lenders shall have the option, exercisable at any time, of either reducing the Obligations by the principal amount of the purchase price or deferring the reduction of the Obligations until the actual receipt by Lenders of cash therefor.

 

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9.5 Liability for Collateral. So long as the Collateral Agent and Lenders comply with reasonable banking practices regarding the safekeeping of the Collateral in the possession or under the control of the Collateral Agent and Lenders, the Collateral Agent and Lenders shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person. Borrowers bear all risk of loss, damage or destruction of the Collateral.

9.6 No Waiver; Remedies Cumulative. Collateral Agent’s failure, at any time or times, to require strict performance by a Borrower of any provision of this Agreement or any other Loan Document shall not waive, affect, or diminish any right of Collateral Agent thereafter to demand strict performance and compliance herewith or therewith. No waiver hereunder shall be effective unless signed by Collateral Agent and then is only effective for the specific instance and purpose for which it is given. Collateral Agent’s rights and remedies under this Agreement and the other Loan Documents are cumulative. Collateral Agent has all rights and remedies provided under the Code, by law, or in equity. Collateral Agent’s exercise of one right or remedy is not an election, and Collateral Agent’s waiver of any Event of Default is not a continuing waiver. Collateral Agent’s delay in exercising any remedy is not a waiver, election, or acquiescence.

9.7 Demand Waiver. Each Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Collateral Agent on which a Borrower is liable.

10 NOTICES

All notices, consents, requests, approvals, demands, or other communication by any party to this Agreement or any other Loan Document must be in writing and shall be deemed to have been validly served, given, or delivered: (a) upon the earlier of actual receipt and three (3) Business Days after deposit in the U.S. mail, first class, registered or certified mail return receipt requested, with proper postage prepaid; (b) upon transmission, when sent by facsimile transmission; (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address, facsimile number indicated below. Each party may change its address or facsimile number by giving the other parties written notice thereof in accordance with the terms of this Section 10 .

 

  If to Borrowers:    ALPHATEC SPINE, INC.
     ALPHATEC HOLDINGS, INC.
     5818 El Camino Real
     Carlsbad, CA 92008
     Attn: Peter C. Wulff - Chief Financial Officer
     Tel: 760-494-6749
     Fax: 760-930-2513
  If to Collateral Agent:    Silicon Valley Bank
     4370 La Jolla Village Drive, Suite 860
     San Diego, CA 92121
     Attn: Mike White
     Tel.: (858) 784-3310
     Fax: (858) 622-1424
  If to Oxford:    Oxford Finance Corporation
     133 N. Fairfax Street
     Alexandria, VA 22314
     Attn: Tim A. Lex, Chief Operating Officer
     Tel.: (703) 519-4900
     Fax: (703) 519-5225

 

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11 CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE

California law governs the Loan Documents without regard to principles of conflicts of law. Each Borrower, Collateral Agent and Lenders each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California; provided, however, that nothing in this Agreement shall be deemed to operate to preclude Collateral Agent from bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment or other court order in favor of Collateral Agent and Lenders. Each Borrower expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such court, and each Borrower hereby waives any objection that it may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court. Each Borrower hereby waives personal service of the summons, complaints, and other process issued in such action or suit and agrees that service of such summons, complaints, and other process may be made by registered or certified mail addressed to either Borrower at the address set forth in Section 10 of this Agreement and that service so made shall be deemed completed upon the earlier to occur of a Borrower’s actual receipt thereof or three (3) days after deposit in the U.S. mails, proper postage prepaid.

TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH BORROWER, COLLATERAL AGENT AND LENDERS EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR THE PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court) appointed in accordance with California Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of California Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential and all records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then such party may apply to the Santa Clara County, California Superior Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and order applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to the California Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right of any party at any time to exercise self-help remedies, foreclose against collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.

12 GENERAL PROVISIONS

12.1 Termination of Revolving Line Prior to Revolving Line Maturity Date . The Revolving Line may be terminated prior to the Revolving Line Maturity Date by Borrowers (or any of them), effective two (2) Business Days after written notice of termination is given to Lenders. Notwithstanding any such termination, Lenders’ liens and security interests in the Collateral shall continue until each Borrower fully satisfies its

 

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Obligations under the Loan Documents. If such termination is at a Borrower’s election, or at either Lender’s election due to the occurrence and continuance of an Event of Default, Borrowers shall pay to Lenders, in addition to the payment of any other expenses or fees then-owing, (x) a termination fee (the “Revolving Line Termination Fee” ) in an amount equal to (i) Five Hundred Thousand Dollars ($500,000), if such termination occurs on or prior to the first anniversary of the Effective Date; and (ii) Two Hundred Fifty Thousand Dollars ($250,000), if such termination occurs after the first anniversary of the Effective Date; in each case, to be shared among the Lenders pro rata according to their Revolving Commitment Percentages of the Revolving Line; and (y) the Revolving Line Accommodation Fee.

12.2 Successors and Assigns. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrowers may not assign this Agreement or any rights or obligations under it without Collateral Agent’s prior written consent (which may be granted or withheld in Collateral Agent’s reasonable discretion). Lenders have the right, without the consent of or notice to either Borrower, to sell, transfer, assign, negotiate, or grant participation in all or any part of, or any interest in, Lenders’ obligations, rights, and benefits under this Agreement and the other Loan Documents.

12.3 Indemnification; Expenses. Each Borrower agrees to indemnify, defend and hold Collateral Agent and the Lenders and their respective directors, officers, employees, agents, attorneys, or any other Person affiliated with or representing Collateral Agent or the Lenders (each, an “ Indemnified Person ”) harmless against: (a) all obligations, demands, claims, and liabilities (collectively, “ Claims ”) asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Lenders’ Expenses incurred, or paid by such Indemnified Person from, following, or arising from transactions between Collateral Agent, and/or Lenders and either Borrower (including reasonable attorneys’ fees and expenses), except to the extent that such are Claims and/or losses directly caused by such Indemnified Person’s gross negligence or willful misconduct.

12.4 Time of Essence. Time is of the essence for the performance of all Obligations in this Agreement.

12.5 Severability of Provisions. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.

12.6 Correction of Loan Documents . Lenders may, after reasonable consultation with Borrowers, correct immaterial patent errors and fill in any blanks in this Agreement and the other Loan Documents consistent with the agreement of the parties.

12.7 Amendments in Writing; Integration. All amendments to this Agreement must be in writing signed by Collateral Agent, Lenders and Borrowers. This Agreement and the other Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement and the Loan Documents merge into this Agreement and the other Loan Documents.

12.8 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement.

12.9 Borrowers’ Liability . Either Borrower may, acting singly, request Credit Extensions hereunder. Each Borrower hereby appoints the other as agent for the other for all purposes hereunder, including with respect to requesting Credit Extensions hereunder. Each Borrower hereunder shall be obligated to repay all Credit Extensions made hereunder, regardless of which Borrower actually receives said Credit Extension, as if each Borrower hereunder directly received all Credit Extensions. Notwithstanding any other provision of this Agreement or other related document, each Borrower irrevocably waives all rights that it may have at law or in equity (including, without limitation, any law subrogating such Borrower to the rights of Lenders under this Agreement) to seek contribution, indemnification or any other form of reimbursement from any other Borrower, or any other Person now or hereafter primarily or secondarily liable for any of the Obligations, for any payment made by a Borrower with respect to the Obligations in connection with this Agreement or otherwise and all rights that it might have to benefit from, or to participate in, any security for the Obligations as a result of any payment made by a Borrower

 

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with respect to the Obligations in connection with this Agreement or otherwise. Any agreement providing for indemnification, reimbursement or any other arrangement prohibited under this Section shall be null and void. If any payment is made to a Borrower in contravention of this Section, such Borrower shall hold such payment in trust for Lenders and such payment shall be promptly delivered to Lenders for application to the Obligations, whether matured or unmatured.

12.10 Survival. All covenants, representations and warranties made in this Agreement continue in full force until this Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) have been satisfied. The obligation of each Borrower in Section 12.3 to indemnify Collateral Agent and each Lender shall survive until the statute of limitations with respect to such claim or cause of action shall have run.

12.11 Confidentiality. In handling any confidential information, Collateral Agent and each Lender shall exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made: (a) to Lenders’ and Collateral Agent’s Subsidiaries or Affiliates; (b) to prospective transferees or purchasers of any interest in the Credit Extensions (provided, however, Lenders and Collateral Agent shall use commercially reasonable efforts to obtain such prospective transferee’s or purchaser’s agreement to the terms of this provision); (c) as required by law, regulation, subpoena, or other order; (d) to regulators or as otherwise required in connection with an examination or audit; and (e) as Collateral Agent considers appropriate in exercising remedies under the Loan Documents. Confidential information does not include information that either: (i) is in the public domain or in Lenders’ and/or Collateral Agent’s possession when disclosed to Lenders and/or Collateral Agent, or becomes part of the public domain after disclosure to Lenders and/or Collateral Agent; or (ii) is disclosed to Lenders and/or Collateral Agent by a third party, if Lenders and/or Collateral Agent does not know that the third party is prohibited from disclosing the information.

Lenders and Collateral Agent may use confidential information for any purpose, including, without limitation, for the development of client databases, reporting purposes, and market analysis, so long as Lenders and the Collateral Agent do not disclose either Borrower’s identity or the identity of any person associated with either Borrower unless otherwise expressly permitted by this Agreement. The provisions of the immediately preceding sentence shall survive the termination of this Agreement.

12.12 Attorneys’ Fees, Costs and Expenses. In any action or proceeding between Borrowers, Collateral Agent and/or Lenders arising out of or relating to the Loan Documents, the prevailing party shall be entitled to recover its reasonable attorneys’ fees and other costs and expenses incurred, in addition to any other relief to which it may be entitled.

12.13 Right of Set Off . Each Borrower hereby grants to Collateral Agent and to each Lender, a lien, security interest and right of set off as security for all Obligations to Collateral Agent and each Lender hereunder, whether now existing or hereafter arising upon and against all deposits, credits, Collateral and property, now or hereafter in the possession, custody, safekeeping or control of Collateral Agent or Lenders or any entity under the control of Collateral Agent or Lenders (including a Collateral Agent affiliate) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Collateral Agent or Lenders may set off the same or any part thereof and apply the same to any liability or obligation of Borrowers even though unmatured and regardless of the adequacy of any other Collateral securing the Obligations. ANY AND ALL RIGHTS TO REQUIRE COLLATERAL AGENT TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWERS ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

12.14 Effect of Amendment and Restatement. Except as otherwise set forth herein, this Agreement is intended to and does completely amend and restate, without novation, the Original Agreement. All security interests granted under the Original Agreement are hereby confirmed and ratified and shall continue to secure all Obligations under this Agreement.

 

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13 DEFINITIONS

13.1 Definitions. As used in this Agreement, the following terms have the following meanings:

Account ” is any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to a Borrower.

Account Debtor ” is any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.

Acquisition ” is any sale, license, or other disposition of all or substantially all of the assets of Parent, or any reorganization, consolidation, or merger of Parent where the holders of Parent’s securities before the transaction beneficially own less than fifty percent (50%) of the outstanding voting securities of the surviving entity after the transaction.

Affiliate ” of any Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.

Agreement ” is defined in the preamble hereof.

API ” means Alphatec Pacific, Inc., a wholly owned Subsidiary of Parent organized under the laws of Japan.

API Share Pledge Documents” means (i) the API Share Pledge Agreement and any related documents and (ii) resolutions of API authorizing such share pledge documents.

Availability Amount ” is (a) the lesser of (i) the Revolving Line or (ii) the amount available under the Borrowing Base minus (b) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit) plus an amount equal to the Letter of Credit Reserve, minus (c) the FX Reduction Amount, minus (d) any amounts used for Cash Management Services, and minus (e) the outstanding principal balance of any Revolving Advances.

Bank ” is defined in the preamble hereof.

Borrower ” and “ Borrowers ” are defined in the preamble hereof.

Borrower’s Books ” are all of a Borrower’s books and records including ledgers, federal and state tax returns, records regarding a Borrower’s assets or liabilities, the Collateral, business operations or financial condition, and all computer programs or storage or any equipment containing such information.

Borrowing Base ” is (a) eighty percent (80%) of Eligible Accounts plus (b) the lesser of thirty percent (30%) of the value of Alphatec’s Eligible Inventory (valued at the lower of cost or wholesale fair market value) or Three Million Dollars ($3,000,000), as determined by Lenders from Borrowers’ most recent Transaction Report; provided, however, that (i) Lenders may decrease the foregoing percentages in their good faith business judgment based on events, conditions, contingencies, or risks which, as determined by Lenders, may adversely affect Collateral; and (ii) Revolving Advances made against Eligible Inventory shall not exceed thirty percent (30%) of aggregate outstanding Revolving Advances.

Borrowing Resolutions ” are, with respect to any Person, those resolutions adopted by such Person’s Board of Directors and delivered by such Person to Lenders approving the Loan Documents to which such Person is a party and the transactions contemplated thereby, together with a certificate executed by its secretary on behalf of such Person certifying that (a) such Person has the authority to execute, deliver, and perform its obligations under each of the Loan Documents to which it is a party, (b) that attached as an exhibit to such certificate is a true, correct,

 

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and complete copy of the resolutions then in full force and effect authorizing and ratifying the execution, delivery, and performance by such Person of the Loan Documents to which it is a party, (c) the name(s) of the Person(s) authorized to execute the Loan Documents on behalf of such Person, together with a sample of the true signature(s) of such Person(s), and (d) that Lenders may conclusively rely on such certificate unless and until such Person shall have delivered to Lenders a further certificate canceling or amending such prior certificate.

Business Day ” is any day that is not a Saturday, Sunday or a day on which Bank is closed.

“Cash Management Services” is defined in Section 2.1.5.

Code ” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of California; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Collateral Agent’s and Lenders’ Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of California, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes on the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.

Collateral ” is any and all properties, rights and assets of each Borrower described on Exhibit A .

Collateral Account ” is any Deposit Account, Securities Account, or Commodity Account.

Collateral Agent ” means Silicon Valley Bank, not in its individual capacity, but solely in its capacity as agent on behalf of and for the benefit of the Lenders.

Commodity Account ” is any “commodity account” as defined in the Code with such additions to such term as may hereafter be made.

Compliance Certificate ” is that certain certificate in the form attached hereto as Exhibit D .

Consigned Collateral ” means raw materials, Equipment and Inventory that has been (i) consigned to Borrowers’ third party distribution agents and/or direct sales agents in the ordinary course of Borrowers’ business, or (ii) transferred to a drop-ship location in the ordinary course of Borrowers’ business.

Contingent Obligation ” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

Control Agreement ” is any control agreement entered into among the depository institution at which a Borrower maintains a Deposit Account or the securities intermediary or commodity intermediary at which a Borrower maintains a Securities Account or a Commodity Account, such Borrower, and Collateral Agent pursuant to which Collateral Agent obtains control (within the meaning of the Code) for the benefit of the Lenders over such Deposit Account, Securities Account, or Commodity Account.

 

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Credit Extension ” is the Growth Capital Advance, any Revolving Advance, Letter of Credit, FX Forward Contract, amount utilized for Cash Management Services, or any other extension of credit by Lenders for a Borrower’s benefit.

Debt Service ” means, as of the last day of each fiscal quarter, principal and interest of Indebtedness of Borrowers and their Subsidiaries determined on a consolidated basis due within twelve (12) months after such day.

Default ” means any event which with notice or passage of time or both, would constitute an Event of Default.

Default Rate ” is defined in Section 2.4(b).

Deposit Account ” is any “deposit account” as defined in the Code with such additions to such term as may hereafter be made.

Designated Deposit Account ” is Alphatec’s deposit account, account number 3300650019, maintained with Bank.

Dollars ,” “ dollars ” and “ $ ” each mean lawful money of the United States.

EBITDA ” means earnings before interest, taxes, depreciation, amortization, realized and unrealized foreign exchange gain and loss and non-cash charges related to equity-based compensation and cash and non-cash in-process research and development expenses, plus transaction related deal costs and restructuring costs in accordance with FAS 141R (as defined by the Financial Accounting Standards Board and specifically related to non-operational and non-recurring expenses). The cash-based in-process research and development add-back, for purposes of this calculation, shall be limited to $1,000,000 in any given quarter; plus up to (i) $450,000 upon the execution of the Parcell Spine LLC License and Supply Agreement; and (ii) $2,000,000 ($1,000,000 in cash and $1,000,000 in common stock) upon successful completion of the preclinical animal study for posterolateral fusion. Transaction related deal costs and restructuring costs, for purposes of this calculation, shall be limited to (x) the aggregate amount of $8,000,000 for fiscal years 2010 and 2011; and (y) $0 thereafter. Cash-based in-process R&D payments, and transaction related deal costs and restructuring costs, in excess of the amounts set forth in the respective preceding sentences, shall not be included in the calculation of EBITDA.

Effective Date ” is defined in the preamble of this Agreement.

Eligible Accounts ” means Accounts which arise in the ordinary course of a Borrower’s business that meet all Borrowers’ representations and warranties in Section 5.2 . Lenders reserve the right at any time after the Effective Date to adjust any of the criteria set forth below and to establish new criteria in its good faith business judgment. Eligible Accounts shall not include:

(a) Accounts that the Account Debtor has not paid within ninety (90) days of invoice date regardless of invoice payment period terms;

(b) Accounts owing from an Account Debtor, fifty percent (50%) or more of whose Accounts have not been paid within ninety (90) days of invoice date;

(c) Accounts billed in the United States and owing from an Account Debtor which does not have its principal place of business in the United States or Canada unless such Accounts are otherwise Eligible Accounts and (i) covered in full by credit insurance satisfactory to Lenders, less any deductible, (ii) supported by letter(s) of credit acceptable to Lenders, (iii) supported by a guaranty from the Export-Import Bank of the United States, or (iv) that Lenders otherwise approve of in writing.;

(d) Accounts billed and payable outside of the United States unless the Lenders have a first priority, perfected security interest or other enforceable Lien in such Accounts;

 

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(e) Accounts owing from an Account Debtor to the extent that either Borrower is indebted or obligated in any manner to the Account Debtor (as creditor, lessor, supplier or otherwise - sometimes called “contra” accounts, accounts payable, customer deposits or credit accounts), with the exception of customary credits, adjustments and/or discounts given to an Account Debtor by a Borrower in the ordinary course of its business;

(f) Accounts for which the Account Debtor is a Borrower’s Affiliate, officer, employee, or agent;

(g) Accounts with credit balances over ninety (90) days from invoice date;

(h) Accounts owing from an Account Debtor, including Affiliates, whose total obligations to a Borrower exceed twenty-five (25%) of all Accounts, for the amounts that exceed that percentage, unless Lenders approve in writing;

(i) Accounts owing from an Account Debtor which is a United States government entity or any department, agency, or instrumentality thereof unless the applicable Borrower has assigned its payment rights to Lenders and the assignment has been acknowledged under the Federal Assignment of Claims Act of 1940, as amended;

(j) Accounts for demonstration or promotional equipment, or in which goods are consigned, or sold on a “sale guaranteed”, “sale or return”, “sale on approval”, or other terms if Account Debtor’s payment may be conditional;

(k) Accounts owing from an Account Debtor that has not been invoiced or where goods or services have not yet been rendered to the Account Debtor (sometimes called memo billings or pre-billings);

(l) Accounts subject to contractual arrangements between a Borrower and an Account Debtor where payments shall be scheduled or due according to completion or fulfillment requirements where the Account Debtor has a right of offset for damages suffered as a result of a Borrower’s failure to perform in accordance with the contract (sometimes called contracts accounts receivable, progress billings, milestone billings, or fulfillment contracts);

(m) Accounts owing from an Account Debtor the amount of which may be subject to withholding based on the Account Debtor’s satisfaction of a Borrower’s complete performance (but only to the extent of the amount withheld; sometimes called retainage billings);

(n) Accounts subject to trust provisions, subrogation rights of a bonding company, or a statutory trust;

(o) Accounts owing from an Account Debtor that has been invoiced for goods that have not been shipped to the Account Debtor unless Lenders, the applicable Borrower, and the Account Debtor have entered into an agreement acceptable to Lenders in their sole discretion wherein the Account Debtor acknowledges that (i) it has title to and has ownership of the goods wherever located, (ii) a bona fide sale of the goods has occurred, and (iii) it owes payment for such goods in accordance with invoices from the applicable Borrower (sometimes called “bill and hold” accounts);

(p) Accounts owing from an Account Debtor with respect to which a Borrower has received Deferred Revenue (but only to the extent of such Deferred Revenue);

(q) Accounts for which the Account Debtor has not been invoiced;

(r) Accounts that represent non-trade receivables or that are derived by means other than in the ordinary course of a Borrower’s business;

 

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(s) Accounts for which a Borrower has permitted Account Debtor’s payment to extend beyond 90 days;

(t) Accounts subject to chargebacks or others payment deductions taken by an Account Debtor (but only to the extent the chargeback is determined invalid and subsequently collected by a Borrower);

(u) Accounts in which the Account Debtor disputes liability or makes any claim (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business; and

(v) Accounts for which Lenders in their good faith business judgment determines collection to be doubtful.

Eligible Inventory ” means Inventory that meets in all material respects all of Borrowers’ representations and warranties in Section 5.2 and is finished goods Inventory located at Borrower’s leased facilities located at 5818 El Camino Real, Carlsbad, CA 92008 and 5830 El Camino Real, Carlsbad, CA 92008.

Equipment ” is all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), personal computers, laptops, workstations, routers and other computer equipment, and any interest in any of the foregoing

ERISA ” is the Employee Retirement Income Security Act of 1974, and its regulations.

Event of Default ” is defined in Section 8 .

“Fixed Charge Coverage Ratio” means, as of any date of determination, the ratio of EBITDA to Debt Service.

Foreign Currency ” means lawful money of a country other than the United States.

“Funding Date” is any date on which a Credit Extension is made to or on account of a Borrower which shall be a Business Day.

“FX Business Day” is any day when (a) Bank’s Foreign Exchange Department is conducting its normal business and (b) the Foreign Currency being purchased or sold by a Borrower is available to Bank from the entity from which Bank shall buy or sell such Foreign Currency.

FX Forward Contract ” is defined in Section 2.1.4.

FX Reduction Amount ” is defined in Section 2.1.4.

FX Reserve ” is defined in Section 2.1.4.

GAAP ” is generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination.

General Intangibles ” is all “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation, all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, any patents, trademarks, service marks and, to the extent permitted under applicable law, any applications therefor, whether registered or not, any trade secret rights, including any rights to

 

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unpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income and other tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

Governmental Approval ” is any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.

Governmental Authority ” is any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.

“Growth Capital Accommodation Fee” is defined in Section 2.5(a) hereof.

Growth Capital Advance ” is an advance made by the Lenders, severally and not jointly, under the Original Agreement, in the original principal amount of Fifteen Million Dollars ($15,000,000).

Growth Capital Commitment Percentage ” means 55.56% with respect to SVB and 44.44% with respect to Oxford.

“Growth Capital Final Payment” is a payment (in addition to and not a substitution for the regular monthly payments of principal plus accrued interest) due on the earlier to occur of (a) the Growth Capital Maturity Date, (b) the acceleration of the Growth Capital Advance, or (c) the prepayment of the Growth Capital Advance, in the amount of One Million Five Thousand Six Hundred Forty-Five Dollars and 73/100 ($1,005,645.73) [ provided the Effective Date is on or prior to March 31, 2010; otherwise the foregoing sum will be recalculated by Lenders ]; to be shared among the Lenders as determined by the Lenders in their sole discretion.

Growth Capital Maturity Date ” is the earliest of (a) April 1, 2012, or (b) the occurrence of an Event of Default.

Guarantor ” means any guarantor of the Obligations.

Indebtedness ” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations, and (d) Contingent Obligations.

Insolvency Proceeding ” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

Inventory ” is all “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of a Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

Investment ” is any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any loan, advance or capital contribution to any Person.

Lender ” is any one of the Lenders.

 

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Lenders ” shall mean the Persons identified in the preamble of this Agreement and each assignee that becomes a party to this Agreement pursuant to Section 12.2.

Lenders’ Expenses ” are all audit fees and expenses, costs, and expenses (including reasonable attorneys’ fees and expenses) for preparing, amending, negotiating, administering, defending and enforcing the Loan Documents and the Warrants (including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred with respect to a Borrower.

Letter of Credit” means a standby letter of credit issued by Bank or another institution based upon an application, guarantee, indemnity or similar agreement on the part of Bank as set forth in Section 2.1.3.

Letter of Credit Application ” is defined in Section 2.1.3(a).

Letter of Credit Reserve ” has the meaning set forth in Section 2.1.3(g).

Lien ” is a claim, mortgage, lien, deed of trust, levy, charge, pledge, security interest or other encumbrance.

Loan Documents ” are, collectively, this Agreement, the Perfection Certificate, the Milverton Share Pledge Documents, the API Share Pledge Documents any Note, or Notes or guaranties and/or security agreements executed by a Borrower or any guarantor, and any other present or future agreement, other than the Warrants, between a Borrower, any guarantor and/or for the benefit of Collateral Agent and/or any Lender in connection with this Agreement, all as amended, restated, or otherwise modified.

Material Adverse Change ” is (a) a material impairment in the perfection or priority of Collateral Agent’s Lien in the Collateral or in the value of such Collateral; (b) a material adverse change in the business, operations, or condition (financial or otherwise) of a Borrower; (c) a material impairment of the prospect of repayment of any portion of the Obligations. or (d) Lenders determine, based upon information available to them and in their reasonable judgment, that there is a reasonable likelihood that Borrowers shall fail to comply with one or more of the financial covenants in Section 6 during the next succeeding financial reporting period.

Milverton ” means Milverton Ltd., a wholly owned subsidiary of Parent organized under the laws of Hong Kong.

Milverton Pledge Documents ” means (i) that certain Equitable Mortgage Over Shares executed by Parent and Milverton and (ii) resolutions of Milverton authorizing the Equitable Mortgage Over Shares.

“NexMed” means NexMed, Inc., a California corporation.

Note ” means for the Growth Capital Advance and the Revolving Advances, secured promissory notes in form and content acceptable to Lenders.

Obligations ” are each Borrower’s obligation to pay when due any debts, principal, interest, Lenders’ Expenses, Prepayment Fee, Growth Capital Final Payment, Growth Capital Accommodation Fee, Revolving Commitment Fee, Unused Revolving Line Facility Fee, Revolving Line Termination Fee, Revolving Line Accommodation Fee, and other amounts a Borrower owes Lenders now or later, whether under this Agreement, the Loan Documents, or otherwise, including, without limitation, all obligations relating to letters of credit (including reimbursement obligations for drawn and undrawn letters of credit), Cash Management Services, and foreign exchange contracts, if any, and including interest accruing after Insolvency Proceedings begin (whether or not allowed) and debts, liabilities, or obligations of a Borrower assigned to Lenders and/or Collateral Agent, and the performance of each Borrower’s duties under the Loan Documents.

Operating Documents ” are, for any Person, such Person’s formation documents, as certified with the Secretary of State of such Person’s state of formation on a date that is no earlier than 30 days prior to the Effective Date, and, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability

 

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company, its limited liability company agreement (or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all current amendments or modifications thereto.

Overadvance ” is defined in Section 2.2 .

“Payment” means all checks, wire transfers and other items of payment received by any Lender (including proceeds of Accounts and payment of the Obligations in full) for credit to Borrowers’ outstanding Credit Extensions or, if the balance of the Credit Extensions has been reduced to zero, for credit to its Deposit Accounts.

Payment/Advance Form ” is that certain form attached hereto as Exhibit B .

Perfection Certificate ” is defined in Section 5.1 .

Permitted Indebtedness ” is:

(a) Each Borrower’s Indebtedness to Lenders and Collateral Agent under this Agreement and the other Loan Documents;

(b) Indebtedness existing on the Effective Date and shown on the Perfection Certificate;

(c) Subordinated Debt;

(d) unsecured Indebtedness to trade creditors and with respect to insurance premiums, surety bonds and similar obligations incurred in the ordinary course of business;

(e) Indebtedness not to exceed Seven Hundred Fifty Thousand Dollars ($750,000) in the aggregate during the term of this Agreement secured by a lien described in clause ( j ) of the defined term “Permitted Liens;” provided such Indebtedness does not exceed the lesser of the cost or fair market value of the software (and any related maintenance agreements) financed with such Indebtedness;

(f) Indebtedness secured by Permitted Liens;

(g) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (e) above, provided that the then-outstanding principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon a Borrower or its Subsidiary, as the case may be.

Permitted Investments ” are:

(a) Investments shown on the Perfection Certificate and existing on the Effective Date;

(b) any Investments permitted by a Borrower’s investment policy, as amended from time to time, provided that such investment policy (and any such amendment thereto) has been approved by Lenders;

(c) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of a Borrower;

(d) Investments accepted in connection with Transfers permitted by Section 7.1 ;

(e) Investments by a Borrower in a Guarantor or another Borrower and investments by a Guarantor in a Borrower;

 

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(f) (i) Investments of Subsidiaries which are not Guarantors in or to other Subsidiaries which are not Guarantor or a Borrower; and (ii) Investments by a Borrower in Subsidiaries which are not Guarantors not to exceed One Hundred Thousand Dollars ($100,000) in the aggregate in any fiscal year;

(g) Investments consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of a Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by a Borrower’s Board of Directors which do not exceed Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate in any year, provided that no cash loans under this clause (ii) may be made if an Event of Default is then occurring or would otherwise upon the making thereof;

(h) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; and

(i) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (i) shall not apply to Investments of a Borrower in any Subsidiary.

Notwithstanding the foregoing, Permitted Investments shall not include, and each Borrower and each Subsidiary is prohibited from purchasing, purchasing participations in, entering into any type of swap or other equivalent derivative transaction, or otherwise holding or engaging in any ownership interest in any type of debt instrument, including, without limitation, any corporate or municipal bonds with a long-term nominal maturity for which the interest rate is reset through a dutch auction and more commonly referred to as an “auction rate security.”

Permitted Liens ” are:

(a) Liens existing on the Effective Date and shown on the Perfection Certificate or arising under this Agreement and the other Loan Documents;

(b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which a Borrower maintains adequate reserves on its Books, if they have no priority over any of Collateral Agent’s and/or Lenders’ Liens;

(c) statutory Liens securing claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other Persons imposed without action of such parties, provided, they have no priority over any of Collateral Agent’s and/or Lenders’ Liens and the aggregate amount of such Liens does not at any time exceed Two Hundred Fifty Thousand Dollars ($250,000);

(d) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business, provided, they have no priority over any of Collateral Agent’s and/or Lenders’ Liens and the aggregate amount of the Indebtedness secured by such Liens does not at any time exceed One Hundred Thousand Dollars ($100,000);

(e) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (e), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase;

(f) Easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and similar charges or encumbrances affecting real property not constituting or reasonable likely to have a Material Adverse Change;

(g) Leases or subleases of real property granted in the ordinary course of business, and leases, subleases, non-exclusive licenses or sublicenses of property (other than real property or intellectual property) granted in the ordinary course of a Borrower’s business, if the leases, subleases, licenses and sublicenses do not prohibit granting Collateral Agent and/or Lenders a security interest;

 

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(h) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 8.4 or 8.7 ;

(i) Liens in favor of other financial institutions arising in connection with a Borrower’s deposit and/or securities accounts held at such institutions, provided that such Borrower has complied with Section 6.8 hereof;

(j) Liens not to exceed Seven Hundred Fifty Thousand Dollars ($750,000) in the aggregate upon or in any software acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such software or indebtedness incurred solely for the purpose of financing the acquisition of such software, provided that the Lien is confined solely to the software so acquired or financed; and

(k) Purchase money Liens (i) on Equipment acquired or held by a Borrower incurred in connection with financing the acquisition of the Equipment or (ii) existing on Equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the Equipment, in both cases, collectively, securing no more than One Million Dollars ($1,000,000) in the aggregate amount outstanding.

Person ” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

Prepayment Fee ” shall be an additional fee payable to the Collateral Agent, for the ratable benefit of the Lenders according to their respective Growth Capital Commitment Percentages, in amount equal to (i) Three Hundred Thousand Dollars ($300,000) if such prepayment occurs on or prior to the first anniversary of the Effective Date, and (ii) One Hundred Fifty Thousand Dollars ($150,000) if such prepayment occurs thereafter.

Prime Rate ” is Bank’s most recently announced “prime rate,” even if it is not Bank’s lowest rate.

Registered Organization ” is any “registered organization” as defined in the Code with such additions to such term as may hereafter be made

“Requirement of Law ” is as to any Person, the organizational or governing documents of such Person, and any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

Reserves ” means, as of any date of determination, such amounts as Lenders may from time to time establish and revise in their good faith business judgment, reducing the amount of Advances and other financial accommodations which would otherwise be available to a Borrower (a) to reflect events, conditions, contingencies or risks which, as determined by Lenders in their good faith business judgment, do or may adversely affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Accounts), (ii) the assets, business or prospects of a Borrower or any Guarantor, or (iii) the security interests and other rights of any Lender in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Lenders’ good faith belief that any collateral report or financial information furnished by or on behalf of a Borrower or any Guarantor to Lenders is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which any Lender determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.

Responsible Officer ” is any of the Chief Executive Officer, President, Chief Financial Officer and Secretary of each Borrower.

 

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Revenue ” means the consolidated revenue of Borrowers and their Subsidiaries, determined in accordance with GAAP.

Revolving Advance ” or “ Revolving Advances ” means an advance (or advances) under the Revolving Line.

“Revolving Commitment Fee” is defined in Section 2.5(b) hereof.

“Revolving Commitment Percentage” means 55.56% with respect to SVB and 44.44% with respect to Oxford.

“Revolving Line” is a Revolving Advance or Revolving Advances in an amount equal to Twenty Five Million Dollars ($25,000,000).

“Revolving Line Accommodation Fee” is a payment (in addition to and not a substitution for the regular monthly payments of principal plus accrued interest) due on the earlier to occur of (a) the Revolving Line Maturity Date, (b) the acceleration of the Revolving Line, or (c) the prepayment of the Revolving Line, in the amount of (x) Two Hundred Fifty Thousand Dollars ($250,000), or (y) provided Parent receives, after the Effective Date and on or prior to June 30, 2010, net proceeds from the sale and issuance of Parent’s equity securities in the minimum amount of Twenty Five Million Dollars ($25,000,000), One Hundred Twenty Five Thousand Dollars ($125,000); in any case of (x) or (y), to be shared among the Lenders pro rata according to their Revolving Commitment Percentages of the Revolving Line.

“Revolving Line Maturity Date” is April 1, 2012.

Revolving Line Termination Fee ” is defined in Section 12.1.

“Scient’x Loan Agreement” means that certain Loan and Security Agreement, dated as of May 29, 2009 (as amended from time to time), by and between Oxford and Scient’x USA, Inc., a Florida corporation.

Securities Account ” is any “securities account” as defined in the Code with such additions to such term as may hereafter be made.

Shares ” means (i) sixty-five percent (65%) of the issued and outstanding capital stock, membership units or other securities owned or held of record by a Borrower in any Subsidiary of such Borrower which is not an entity organized under the laws of the United States or any territory thereof, and (ii) one hundred percent (100%) of the issued and outstanding capital stock, membership units or other securities owned or held of record by a Borrower in any Subsidiary of such Borrower which is an entity organized under the laws of the United States or any territory thereof.

Subordinated Debt ” is indebtedness incurred by a Borrower subordinated to all of such Borrower’s now or hereafter indebtedness to Lenders (pursuant to a subordination, intercreditor, or other similar agreement in form and substance satisfactory to Collateral Agent and Lenders entered into between Collateral Agent, the applicable Borrower or Borrowers and the other creditor), on terms acceptable to and negotiated in good faith by Collateral Agent and Lenders.

Subsidiary ” means, with respect to any Person, any Person of which more than fifty percent (50%) of the voting stock or other equity interests is owned or controlled, directly or indirectly, by such Person or one or more Affiliates of such Person.

Transaction Report ” is that certain report of transactions and schedule of collections in the form attached hereto as Exhibit C .

Transfer ” is defined in Section 7.1 .

 

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Unused Revolving Line Facility Fee” is defined in Section 2.5(c).

Warrants ” are those certain Warrants to Purchase Stock, dated on or about the date of the Original Agreement, executed by Parent in favor of Bank and Oxford.

[ Balance of Page Intentionally Left Blank ]

 

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IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed as of the Effective Date.

 

BORROWERS:

 

ALPHATEC SPINE, INC.

By    /s/ Peter C. Wulff
Name:   Peter C. Wulff
Title:   CFO and VP
ALPHATEC HOLDINGS, INC.
By    /s/ Peter C. Wulff
Name:   Peter C. Wulff
Title:   CFO and VP

COLLATERAL AGENT:

 

SILICON VALLEY BANK

By    /s/ Sarah Larson
Name:   Sarah Larson
Title:   Relationship Manager

LENDERS:

 

SILICON VALLEY BANK

By    /s/ Sarah Larson
Name:   Sarah Larson
Title:   Relationship Manager
OXFORD FINANCE CORPORATION
By    /s/ Tim Lex
Name:   Tim Lex
Title:   COO

 

[ Signature Page to Amended and Restated Loan and Security Agreement]

Exhibit 10.2

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this “ Agreement ”) dated as of May 29, 2009 (the “Closing Date”) between OXFORD FINANCE CORPORATION , a Delaware corporation (“ Lender ”), and SCIENT’X USA, INC. , a Florida corporation (“ Borrower ”), provides the terms on which Lender shall lend to Borrower and Borrower shall repay Lender. The parties agree as follows:

1 ACCOUNTING AND OTHER TERMS

Accounting terms not defined in this Agreement shall be construed following IFRS. Calculations and determinations must be made following IFRS. Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 13. All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein.

2 LOAN AND TERMS OF PAYMENT

2.1 Promise to Pay . Borrower unconditionally promises to pay Lender the outstanding principal amount of all Credit Extensions and accrued and unpaid interest thereon and any other amounts due hereunder as and when due in accordance with this Agreement.

2.1.1 Growth Capital Loan Facility .

(a) Availability . Subject to the terms and conditions of this Agreement, on the Closing Date, Lender shall make one (1) Growth Capital Advance to Borrower in the amount of Seven Million Five Hundred Thousand Dollars ($7,500,000). Borrower may transfer the proceeds of the Growth Capital Advance to any of the other Credit Parties as long as the transfer is evidenced by instruments substantially in the form attached on Schedule 2.1.1.

(b) Repayment . Borrower shall make monthly payments of interest only, in arrears, commencing on the first day of the second month following the month in which the Funding Date occurs and continuing thereafter on the first day of each successive calendar month during the Interest Only Period. Commencing on the Amortization Date, Borrower shall make thirty (30) equal monthly payments of principal and interest, in arrears, which would fully amortize the outstanding amount of the Growth Capital Advance. All unpaid principal and accrued and unpaid interest and all other amounts due on account of the Growth Capital Advance are due and payable in full on the Maturity Date. The Growth Capital Advance may only be prepaid in accordance with Sections 2.1.1(d) or 2.1.1(e). Borrower shall pay any initial partial month’s interest from the Closing Date through the first day of the following month.

(c) Final Payment . On the Maturity Date, Borrower shall pay, in addition to the unpaid principal and accrued interest and all other amounts due on such date with respect to the Growth Capital Advance, an amount equal to the Final Payment.

(d) Permitted Prepayment . Borrower shall have the option to prepay all, but not less than all, of the Growth Capital Advance made by Lender under this Agreement, provided Borrower, (i) provides written notice to Lender of its election to prepay the Growth Capital Advance at least seven (7) days prior to such prepayment, and (ii) pays, on the date of such prepayment (A) all outstanding principal plus accrued interest on the Growth Capital Advance, (B) the Prepayment Fee, (C) the Final Payment, plus (D) all other sums, if any, that have become due and payable, including Lender Expenses, if any, and interest at the Default Rate with respect to any past due amounts.

(e) Mandatory Prepayment Upon an Acceleration . If the Growth Capital Advance is accelerated, following the occurrence of an Event of Default, Borrower shall immediately pay to Lender an amount equal to the sum of: (i) all outstanding principal plus accrued and unpaid interest on the Growth Capital Advance, (ii) the Prepayment Fee, (iii) the Final Payment, plus (iv) all other sums, if any, that shall have become due and payable, including Lender Expenses, if any, and interest at the Default Rate with respect to any past due amounts.


2.2 Payment of Interest on the Credit Extensions .

(a) Interest Rate . Subject to Section 2.2(b), the principal amount outstanding under the Growth Capital Advance shall accrue interest, which interest shall be payable in arrears, at a fixed per annum rate equal to 12.42%, which interest shall be payable monthly, in arrears, in accordance with Section 2.2(e) below.

(b) Default Rate . Immediately upon the occurrence and during the continuance of an Event of Default, Obligations shall bear interest at a rate per annum which is five percentage points above the rate that is otherwise applicable thereto (the “ Default Rate ”). Payment or acceptance of the increased interest rate provided in this Section 2.2(b) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Lender. For the avoidance of doubt, as soon as an Event of Default triggering the Default Rate is cured subject to confirmation by Lender (such confirmation not to be unreasonably withheld), the outstanding Obligations shall cease bearing interest at the Default Rate and shall continue to bear interest at the ordinary rate set forth in Section 2.2(a).

(c) 360-Day Year . Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed.

(d) Debit of Accounts . Lender may debit any of Borrower’s deposit accounts, including the Designated Deposit Account, through automatic debit of such accounts, Automated Clearinghouse (“ACH”) or other transfers, for principal and interest payments or any other amounts Borrower owes Lender when due. These debits shall not constitute a set-off.

(e) Payments . Unless otherwise provided, interest is payable monthly, in arrears, in accordance with Section 2.1.1, on the first calendar day of each month. Payments of principal and/or interest received after 12:00 p.m. Eastern time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest, as applicable, shall continue to accrue.

2.3 Fees . Borrower shall pay to Lender:

(a) Facility Fee . A fully earned, non-refundable loan fee of Seventy Five Thousand Dollars ($75,000) (the “Facility Fee”), receipt of which is acknowledged by Lender;

(b) Final Payment . The Final Payment when due on the Growth Capital Maturity Date or pursuant to the terms of Sections 2.1.1(d) or 2.1.1(e);

(c) Prepayment Fee . The Prepayment Fee, when due hereunder; and

(d) Lender Expenses . On the Closing Date, all Lender Expenses incurred through the Closing Date, and after the Closing Date, all Lender Expenses within ten (10) Business Days of Lender’s delivery to Borrower of reasonable documentation and invoices related to such Lender Expenses.

3 CONDITIONS OF LOAN

3.1 Conditions Precedent to Growth Capital Advance . Lender’s obligation to make the Growth Capital Advance is subject to the condition precedent that Borrower shall consent to or have delivered, in form and substance satisfactory to Lender, such documents, and completion of such other matters, as Lender may reasonably deem necessary or appropriate, including, without limitation:

(a) duly executed original signatures to the Loan Documents;

 

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(b) duly executed original signatures to the Control Agreement(s);

(c) each Credit Party’s Operating Documents;

(d) certificates of good standing issued by the Secretary of State of the States of Florida and Pennsylvania as of a date no earlier than forty five (45) days prior to the Closing Date;

(e) duly executed original signatures to the completed Borrowing Resolutions for Borrower;

(f) a guaranty executed by each of the Guarantors (other than Scient’x Italia S.r.l.);

(g) security instruments, including pledges of the stock or share charges of Scient’x, S.A. owned by Scient’x Groupe, S.A. and of the stock owned by Scient’x, S.A. of each of its direct Subsidiaries (other than Scient’x Italia S.r.l. and Scient’x Australia Pty Ltd.) and pledges of the other personal property of the Guarantors, duly executed by each Guarantor (other than Scient’x Italia S.r.l.);

(h) a Success Fee Agreement;

(i) an Intellectual Property Security Agreement for Scient’x, S.A. and Borrower;

(j) evidence of repayment of certain loans by Scient’x, S.A of loans listed on Exhibit E attached hereto;

(k) a landlord waiver;

(l)(i) a signed copy of the “Convention d’avance en compte courant” entered into between Healthpoint (Luxembourg) II, S.à.r.l, Scient’x Groupe S.A. and Scient’x, S.A.; (ii) evidence that Scient’x, S.A. has transferred an amount of at least €1,787,099.35 to the Borrower; (iii) a duly executed letter of Healthpoint (Luxembourg) II S.à.r.l to the Lender by which Healthpoint (Luxembourg) II S.à.r.l undertakes to vote in favour of the capitalization of its advance of €3.85 million to Scient’x Groupe S.A.; (iv) a duly executed letter of Scient’x Groupe S.A. to the Lender by which Scient’x Groupe S.A. undertakes to vote in favour of the capitalization of its advance of €3.85 million to Scient’x, S.A.; and (v) a duly executed letter of Healthpoint (Luxembourg) I, S.à.r.l. to the Lender by which Healthpoint (Luxembourg) I, S.à.r.l. undertakes to vote in favour of the capitalization of Scient’x Groupe S.A.’s advance of €3.85 million to Scient’x, S.A.;

(m) forms of loan and security instruments reasonably acceptable to Lender evidencing any advances or Investments after the Closing Date by a Credit Party in or to Surgiview, S.A.S.;

(n) duly executed original signatures to the completed Borrowing Resolutions for each Credit Party (other than Scient’x Italia S.r.l. and Scient’x Australia Pty Ltd.);

(o) certified copies, dated as of a recent date, of financing statement searches, as Lender shall request, accompanied by written evidence (including any termination statements under the Code) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the Growth Capital Advance, will be terminated or released;

(p) Perfection Certificates executed by or on behalf of each Credit Party other than Scient’x Australia Pty Ltd.;

(q) opinions of Covington & Burling LLP, Darrois Villey Maillot Brochier, and other counsel to Borrower and each Guarantor (other than Scient’x Italia S.r.l.) dated as of the Closing Date;

(r) evidence satisfactory to Lender that the insurance policies required by Section 6.5 hereof are in full force and effect, together with appropriate evidence showing lender loss payable and/or additional insured clauses or endorsements in favor of Lender; and

 

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(s) payment of the fees and Lender Expenses then due as specified in Section 2.3 hereof.

3.2 Conditions Precedent to all Credit Extensions . Lender’s obligation to make each Credit Extension, including the initial Credit Extension, is subject to the following:

(a) Borrower shall have duly executed and delivered to Lender a note in the amount of the Credit Extension;

(b) the representations and warranties in Section 5 shall be true in all material respects on the date of the Payment/Advance Form and on the Funding Date of each Credit Extension; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, and no Default or Event of Default shall have occurred and be continuing or result from the Credit Extension; and

(c) in Lender’s sole discretion, there has not been a Material Adverse Change.

3.3 Covenant to Deliver . Borrower shall deliver to Lender each item required to be delivered to Lender under this Agreement as a condition to any Credit Extension. A Credit Extension made prior to the receipt by Lender of any such item shall not constitute a waiver by Lender of Borrower’s obligation to deliver such item, and any such Credit Extension in the absence of a required item shall be made in Lender’s sole discretion.

3.4 Procedures for Borrowing . Subject to the prior satisfaction of all other applicable conditions to the making of the Growth Capital Advance set forth in this Agreement, the Growth Capital Advance shall be made upon Borrower’s irrevocable written notice delivered to Lender in the form of a Payment/Advance Form, executed by a Responsible Officer of Borrower or his or her designee. Lender may rely on any telephone notice given by a person whom Lender believes is a Responsible Officer or designee. Borrower will indemnify Lender for any loss Lender suffers due to such reliance. Such Notice of Borrowing must be received by Lender prior to 12:00 p.m. Eastern time, at least one (1) day prior to the requested Funding Date.

4 CREATION OF SECURITY INTEREST

4.1 Grant of Security Interest . Borrower grants Lender, to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to Lender, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a first priority perfected security interest in the Collateral (subject only to Permitted Liens that may have priority by operation of law under this Agreement). If Borrower shall acquire a commercial tort claim (as defined in the Code), Borrower shall promptly notify Lender in a writing signed by Borrower of the general details thereof (and further details as may be required by Lender) and grant to Lender in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Lender.

If this Agreement is terminated, Lender’s Lien in the Collateral shall continue until the Obligations (other than inchoate indemnity obligations) are repaid in full in cash. Upon payment in full in cash of the Obligations and at such time as Lender’s obligation to make Credit Extensions has terminated, Lender shall, at Borrower’s sole cost and expense, release its Liens in the Collateral and all rights therein shall revert to Borrower.

4.2 Authorization to File Financing Statements . Borrower authorizes Lender to file financing statements, without notice to Borrower, with all appropriate jurisdictions to perfect or protect Lender’s interest or rights hereunder, including a notice that any disposition of the Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of Lender under the Code. Such financing statements may indicate the Collateral as “all assets of the Debtor” or words of similar effect, or as being of an equal or lesser scope, or with greater detail, all in Lender’s discretion.

 

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5 REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants as follows:

5.1 Due Organization, Authorization; Power and Authority . Each Credit Party is duly existing and in good standing in its jurisdiction of formation and is qualified and licensed to do business and is in good standing in any jurisdiction in which the conduct of its business or its ownership of property requires that it be qualified except where the failure to do so could not reasonably be expected to result in a Material Adverse Change. In connection with this Agreement Borrower, Scient’x, S.A., Scient’x Groupe, S.A., Surgiview, S.A.S. and Scient’x (UK) Limited have delivered to Lender Perfection Certificates. Borrower represents and warrants to Lender that (a) each Credit Party’s exact legal name is that indicated on the Perfection Certificates and on the signature page hereof with respect to those Credit Parties signing or acknowledging the Agreement; (b) each Credit Party is an organization of the type and is organized in the jurisdiction set forth on the Perfection Certificates; (c) the Perfection Certificates accurately set forth each Credit Party’s organizational identification number or accurately states that such Credit Party has none; (d) the Perfection Certificates accurately set forth each Credit Party’s place of business, or, if more than one, such Credit Party’s chief executive office as well as each Credit Party’s mailing address (if different than its chief executive office); (e) except as set forth in the Perfection Certificates, no Credit Party (and none of its predecessors) has, in the past five (5) years, changed its jurisdiction of formation, organizational structure or type, or any organizational number assigned by its jurisdiction; and (f) all other information set forth on the Perfection Certificates pertaining to each Credit Party and their Subsidiaries is accurate and complete (it being understood and agreed that Borrower may from time to time update certain information in the Perfection Certificates after the Closing Date to the extent permitted by one or more specific provisions in this Agreement). If a Credit Party is not now a Registered Organization but later becomes one, Borrower shall promptly notify Lender of such occurrence and provide Lender with such Credit Party’s organizational identification number.

The execution, delivery and performance by each Credit Party of the Loan Documents to which it is a party have been duly authorized, and do not, except as set forth on the Perfection Certificates, (i) conflict with any of such Credit Party’s organizational documents, (ii) contravene, conflict with, constitute a default in any material respect, under or violate any material Requirement of Law, (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree, determination or award of any Governmental Authority by which any Credit Party or any its Subsidiaries or any of their property or assets may be bound or affected, (iv) require any action by, filing, registration, or qualification with, or Governmental Approval from, any Governmental Authority (except such Governmental Approvals which have already been obtained and are in full force and effect) or (v) constitute an event of default under any material agreement by which any Credit Party is bound. No Credit Party is in default under any agreement to which it is a party or by which it is bound in which the default could reasonably be expected to result in a Material Adverse Change.

5.2 Collateral . Each Credit Party has good title to, has rights in, and the power to grant a security interest in, each item of the Collateral upon which it purports to grant a Lien, free and clear of any and all Liens except Permitted Liens. No Credit Party has any deposit accounts other than the deposit accounts described in the Perfection Certificates, or of which Borrower has given Lender notice and taken such actions as are necessary to give Lender a perfected security interest therein.

The Collateral is not in the possession of any third party bailee (such as a warehouse) except as otherwise provided in the Perfection Certificates. None of the components of the Collateral shall be maintained at locations other than (i) for Inventory maintained with distributors or customers in the ordinary course of Borrower’s business, (ii) as provided in the Perfection Certificates, or (iii) as permitted pursuant to Section 7.2.

Except as set forth on the Perfection Certificates, each Credit Party is the sole owner of, or otherwise has the right to use, such intellectual property, as each Credit Party, as applicable, uses as of the Closing Date in the conduct of its business in the ordinary course. Except as set forth on the Perfection Certificates, (i) to the knowledge of the Responsible Officers, each patent owned by the Credit Parties is valid and enforceable, (ii) no part thereof has been judged invalid or unenforceable, and (iii) no claim has been made in writing to any Credit Party that the practice thereof by any such Credit Party violates the rights of any third party, which claim could reasonably be expected to result in a Material Adverse Change.

 

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Except as set forth on the Perfection Certificates, no Credit Party is a licensee under any material license agreement that prohibits or otherwise restricts a Credit Party from granting a security interest in its interest in such license agreement or any other property. Each Credit Party shall provide written notice to Lender within ten (10) Business Days prior to entering or becoming bound by any such material license (other than over-the-counter software that is commercially available to the public), and shall take such steps as Lender reasonably requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (x) the Credit Party’s interest in such license agreement to be deemed “Collateral” and for Lender to have a security interest in such property that might otherwise be restricted or prohibited by law or by the terms of such license agreement, and (y) Lender to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Lender’s rights and remedies under this Agreement and the other Loan Documents.

5.3 Litigation . Except as set forth in the Perfection Certificates, there are no actions or proceedings pending or, to the knowledge of the Responsible Officers, threatened in writing by or against any Credit Party involving more than One Hundred Thousand Dollars ($100,000).

5.4 No Material Deviation in Financial Statements . All consolidated financial statements delivered to Lender fairly present in all material respects the Credit Parties’ consolidated financial condition and consolidated results of operations for the time period covered by such financial statements. There has not been any material deterioration in the Credit Parties’ consolidated financial condition since the date of the most recent financial statements submitted to Lender.

5.5 Solvency . Excluding the effect of liabilities owed to Scient’x S.A, Scient’x Groupe S.A. or Borrower pursuant to shareholder loans, the fair salable value of each Credit Party’s assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; no Credit Party is left with unreasonably small capital after the transactions in this Agreement; and each Credit Party (without taking into account such Credit Party’s obligations under any guarantee to Lender) is able to pay its debts (including trade debts) as they mature.

5.6 Regulatory Compliance . No Credit Party is (a) an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act of 1940, as amended, (b) engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors), or (c) a “holding company” or an “affiliate” of a “holding company” or a “subsidiary company” of a “holding company” as each term is defined and used in the Public Utility Holding Company Act of 2005. Each Credit Party has complied in all material respects with all material laws, ordinances or rules applicable to it. No Credit Party’s properties or assets has been used by any Credit Party or, to the knowledge of the Responsible Officers, by previous Persons, in disposing, producing, storing, treating or transporting any hazardous substance other than legally. Each Credit Party has (i) obtained all consents, approvals and authorizations of, (ii) made all declarations or filings with, and (iii) given all notices to, all Governmental Authorities that, in the case of each (i), (ii) and (iii) above, are necessary to continue their respective businesses, in all material respects, as currently conducted.

5.7 Investments . Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments.

5.8 Tax Returns and Payments; Pension Contributions . For any periods as to which the applicable statutes of limitations have not run, and except for deferred payment of any taxes contested in good faith by such Credit Party by appropriate proceedings promptly and diligently instituted and conducted, each Credit Party has timely filed all required tax returns and reports, and has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by such Credit Party. Each Credit Party may defer payment of any contested taxes, provided that each Credit Party (a) in good faith contests its obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Lender in writing of the commencement of, and any material development in, the proceedings, (c) posts bonds or takes any other steps required to prevent the governmental authority levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien”. There are no claims or adjustments proposed for any of any Credit Party’s prior tax years that could result in additional taxes becoming due and payable by such Credit Party. Each Credit Party has paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, as applicable, and no Credit Party has withdrawn from participation in, and has not permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any material liability of a Credit Party, including any material liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency, as applicable.

 

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5.9 Use of Proceeds . Borrower and each other Credit Party shall use the proceeds of the Credit Extensions solely as working capital and to fund its general business requirements and not for personal, family, household or agricultural purposes.

5.10 Affiliate Agreements . Any material agreements between or among any Credit Parties are listed on Schedule 5.10.

5.11 Full Disclosure . No written representation, warranty or other statement of any Credit Party in any certificate or written statement given to Lender, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to Lender, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized by Lender that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).

6 AFFIRMATIVE COVENANTS

6.1 Government Compliance . Each Credit Party shall maintain its legal existence and good standing in its jurisdiction of formation and each jurisdiction in which the nature of its business requires it to be so qualified, except where the failure to take such action would not reasonably be expected to result in a Material Adverse Change; provided , that no Credit Party may permit its qualification to do business in the jurisdiction of its chief executive office to terminate or lapse. Each Credit Party shall comply, in all material respects, with all laws, ordinances and regulations to which it is subject, noncompliance with which could reasonably be expected to result in a Material Adverse Change.

6.2 Financial Statements, Reports, Certificates .

(a) Borrower shall deliver to Lender: (i) as soon as available, but no later than forty-five (45) days after the last day of each fiscal month of the Borrower, company prepared consolidated and consolidating balance sheets and income statements covering the Credit Parties’ operations for such month certified by a Responsible Officer and in a form reasonably acceptable to Lender; (ii) as soon as available, but no later than one hundred eighty (180) days after the last day of Borrower’s fiscal year, audited consolidated financial statements prepared under IFRS, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm acceptable to Lender in its reasonable discretion; (iii) within five (5) days of delivery, copies of all statements, reports and notices made available to Borrower’s or any Credit Party’s security holders or to any holders of Subordinated Debt; (iv) in the event that Borrower becomes subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, within five (5) days of filing, all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission or a link thereto on Borrower’s or another website on the Internet; (v) a prompt report of any legal actions pending or threatened in writing against any Credit Party, and of which such Credit Party has knowledge, that could result in damages or costs to any Credit Party or any of its Subsidiaries of One Hundred Thousand Dollars ($100,000) or more; and (vi)  such budgets, sales projections, operating plans and other financial information reasonably requested in writing by Lender.

(b) Within forty-five (45) days after the last day of each month, Borrower shall deliver to Lender with the monthly financial statements, a duly completed Compliance Certificate signed by a Responsible Officer setting forth calculations showing compliance with the financial covenants set forth in this Agreement for the period covered by such financial statements.

 

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(c) Upon five (5) Business Days written notice to Borrower, Borrower shall allow Lender, during normal business hours, to audit Borrower’s Collateral at Borrower’s expense. Such audits shall be conducted no more often than once every six (6) months unless an Event of Default has occurred and is continuing.

(d) Deliver to Lender, within five (5) days after the same are sent or received, copies of all correspondence, reports, documents and other filings with any Governmental Authority regarding compliance with or maintenance of Governmental Approvals or Requirements of Law and that could reasonably be expected to have a material effect on any of the Governmental Approvals or otherwise result in a Material Adverse Change.

(e) Promptly notify Lender of any circumstance that results in the Chief Executive Officer or the Chief Financial Officer and Chief Operating Officer of Scient’x, S.A. not being actively engaged in the management of Scient’x, S.A., and the hiring and approval by the Board of Directors of Scient’x, S.A. of such person’s replacement.

6.3 Inventory; Returns . Each Credit Party shall (a) use reasonable commercial efforts to keep all Inventory in good and marketable condition, free from material defects, (b) follow customary practices as they exist at the Closing Date as to returns and allowances between each Credit Party and its Account Debtors, and (c) promptly notify Lender of all returns, recoveries and disputes and claims with respect to the foregoing that involve more than One Hundred Thousand Dollars ($100,000).

6.4 Taxes; Pensions . Each Credit Party shall timely file all required tax returns and reports and timely pay all foreign, federal, state and local taxes, assessments, deposits and contributions except for deferred payment of any taxes contested pursuant to the terms of Section 5.8 hereof, and shall deliver to Lender, promptly following written demand by Lender, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms.

6.5 Insurance . Each Credit Party shall maintain its respective business and property insured for risks and in amounts standard for companies in their respective industries, and as Lender may reasonably request. Insurance policies shall be in a form, with companies, and in amounts that are reasonably satisfactory to Lender. All of Borrower’s property policies shall have a lender’s loss payable endorsement showing Lender as lender loss payee and waive subrogation against Lender, and all of Borrower’s liability policies shall show, or have endorsements showing, Lender as an additional insured. All of Borrower’s policies (or the loss payable and additional insured endorsements) shall provide that the insurer shall give Lender at least twenty (20) days notice before canceling, amending, or declining to renew its policy. Promptly following Lender’s written request, Borrower shall deliver certified copies of policies and evidence of all premium payments to Lender. If any Credit Party fails to obtain insurance as required under this Section 6.5 or to pay any amount or furnish any required proof of payment to third persons and Lender, Lender may make all or part of such payment or obtain such insurance policies required in this Section 6.5, and take any action under the policies Lender deems prudent.

6.6 Operating Accounts .

(a) The Credit Parties shall maintain all Collateral Accounts with the banks or financial institutions set forth in Schedule 6.6. Borrower, Scient’x, S.A. and Scient’x Groupe, S.A. shall cause their respective Collateral Accounts to be subject to Control Agreements (or their equivalents) in favor of and in form and substance reasonably acceptable to Lender. Within one hundred and eighty (180) days of the Closing Date and in accordance with Section 6.13, Scient’x Italia S.r.l. shall cause its Collateral Accounts to be subject to Control Agreements (or their equivalents) in favor of and in form and substance reasonably acceptable to Lender.

(b) Each Credit Party shall provide Lender five (5) days prior written notice before establishing any Collateral Account at or with any bank or financial institution other than the banks or financial institutions set forth in Schedule 6.6. Borrower, Scient’x, S.A., Scient’x Groupe, S.A., and Scient’x Italia S.r.l. shall cause the applicable bank or financial institution at or with which any Collateral Account is maintained to execute and deliver a Control Agreement or other appropriate instrument in form and substance reasonably acceptable to Lender.

 

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6.7 Performance to Plan . The consolidated revenue of Scient’x, S.A. and its Subsidiaries, tested quarterly on a trailing six-month basis, shall not be less than eighty percent (80%) of the projected revenue for such period set forth on Annex I attached hereto (the “ Quarterly Revenue Covenant ”). As provided in Section 8.2(a) of this Agreement, failure to achieve the Quarterly Revenue Covenant shall constitute an Event of Default (as defined in Section 8), providing Lender with all the rights and remedies set forth in this Agreement, including Section 9 and Section 2.2(b). To the extent that following an Event of Default caused by a failure to achieve the Quarterly Revenue Covenant, (a) the Lender decides (in its sole discretion) to impose the Default Rate on the Obligations as provided by Section 2.2(b) and (b) the Borrower achieves the Quarterly Revenue Covenant in the immediately following quarter subject to confirmation by Lender (such confirmation not to be unreasonably withheld), the outstanding Obligations shall cease bearing interest at the Default Rate and shall continue to bear interest at the ordinary rate set forth in Section 2.2(a). Nothing in this Section 6.7 shall be construed to grant Borrower a cure period in respect of this Section 6.7 that would prevent Lender from immediately exercising all rights and remedies available to it under this Agreement following an Event of Default caused by a failure to achieve the Quarterly Revenue Covenant.

6.8 Protection and Registration of Intellectual Property Rights . Each Credit Party shall (a) exercise commercially reasonable efforts to protect, defend and maintain the validity and enforceability of its intellectual property; (b) promptly advise Lender in writing of any known material infringements of its intellectual property that is owned by such Credit Party and material to its business and (c) exercise commercially reasonable efforts to not permit any such intellectual property to be abandoned, forfeited or dedicated to the public without Lender’s prior written consent, which consent shall not be unreasonably withheld or delayed. If a Credit Party (i) becomes the owner of any patent, registered trademark or servicemark, registered copyright, registered mask work, or any pending application for any of the foregoing, whether as owner, licensee or otherwise, or (ii) applies for any patent or the registration of any trademark or servicemark, then such Credit Party shall promptly provide written notice thereof to Lender and shall execute such intellectual property security agreements and other documents and take such other actions as Lender shall request in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Lender in such property. If any Credit Party decides to register any copyrights or mask works in the United States Copyright Office, Borrower shall: (x) provide Lender with at least ten (10) days prior written notice of such Credit Party’s intent to register such copyrights or mask works together with a copy of the application it intends to file with the United States Copyright Office (excluding exhibits thereto); (y) execute an intellectual property security agreement and such other documents and take such other actions as Lender may request in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Lender in the copyrights or mask works intended to be registered with the United States Copyright Office; and (z) record such intellectual property security agreement with the United States Copyright Office contemporaneously with filing the copyright or mask work application(s) with the United States Copyright Office. Borrower shall promptly provide to Lender copies of all applications that any Credit Party files for patents or for the registration of trademarks, servicemarks, copyrights or mask works, together with evidence of the recording of the intellectual property security agreement necessary for Lender to perfect and maintain a first priority perfected security interest in such property.

6.9 Litigation Cooperation . From the date hereof and continuing through the termination of this Agreement, each Credit Party shall, at the written request of Lender, make available to Lender, without expense to Lender, each Credit Party and its officers, employees and agents and such Credit Party’s books and records, to the extent that Lender may deem them reasonably necessary to prosecute or defend any third-party suit or proceeding instituted by or against Lender with respect to any Collateral or relating to any Credit Party.

6.10 Notices of Litigation and Default . Borrower shall give prompt written notice to Lender of any litigation, other than litigation disclosed on the Perfection Certificates, or governmental proceedings pending or threatened (in writing) against any Credit Party which would reasonably be expected to result in a Material Adverse Change. Without limiting or contradicting any other more specific provision of this Agreement, promptly (and in any event within three (3) Business Days) upon any Credit Party (or any officer thereof) becoming aware of the existence of any Event of Default or event which, with the giving of notice or passage of time, or both, would constitute an Event of Default, Borrower shall give written notice to Lender of such occurrence, which such notice shall include a reasonably detailed description of such Event of Default or event which, with the giving of notice or passage of time, or both, would constitute an Event of Default.

 

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6.11 Creation/Acquisition of Subsidiaries . (a) Borrower shall give prompt written notice to Lender of the creation or acquisition by any Credit Party of any Subsidiary, (b) and each such Credit Party, as applicable, shall take all such action as may be reasonably required by Lender to cause such Subsidiary to guarantee the Obligations and grant a security interest in the assets of such Subsidiary to Lender on terms reasonably acceptable to Lender, and (c) each such Credit Party, as applicable, shall grant to Lender a first priority perfected security interest in the stock, units or other evidence of ownership of such Subsidiary owned by such Credit Party on terms reasonably acceptable to Lender. Lender acknowledges that the bylaws of Scient’x, S.A. require that each director of Scient’x, S.A. hold at least one share of its stock. Lender agrees that until such time as the bylaws of Scient’x, S.A. are amended to eliminate this requirement, Lender will, upon the request of Scient’x, S.A. in connection with the appointment of a new member of the Scient’x, S.A. board of directors, promptly release one share of Scient’x, S.A. stock from the pledge of Scient’x, S.A. shares referred to in Section 3.1(g) on the same terms as other shares of existing directors, to allow such share to be transferred to the new member of the board of Scient’x, S.A. pursuant to an agreement called “Prêt de consommation d’action”; provided that upon amendment of such bylaws, such “Prêt de consommation d’action” shall be automatically terminated and any such shares shall become subject to the pledge.

6.12 Advances to Credit Parties . All advances or Investments by any Credit Party to or in another Credit Party shall be evidenced by one or more promissory note(s) or loan agreements substantially in the forms attached as Schedule 2.1.1 or otherwise by documents reasonably acceptable to Lender and such promissory note(s) and/or documents shall be pledged to Lender as Collateral in the case of Borrower and pursuant to the relevant guarantee and security documentation with respect to other Credit Parties. Any advance or Investment to or in Surgiview, S.A.S. or Scient’x Australia Pty Ltd, shall be secured by a first priority charge over the personal property of such entity. Except when the direct recipient of the advance is Surgiview, S.A.S. or Scient’x Australia Pty Ltd, the proceeds of such advances or Investments shall be funded into one or more accounts over which Lender has a security interest.

6.13 Scient’x Italia S.r.l.; Scient’x Australia Pty Ltd . (a) Within one hundred eighty (180) days after the Closing Date, (i) Scient’x Italia S.r.l. shall deliver to Lender an unconditional guaranty and security instruments and (ii) Scient’x, S.A. shall deliver to Lender an agreement pledging the shares of Scient’x Italia S.r.l. owned by Scient’x, S.A., such documents in each case to be in form and substance reasonably acceptable to Lender, provided that if Lender has not received those documents within such 180 day period, but Credit Parties are exercising commercially reasonable efforts to deliver them to Lender, then subject to the consent of Lender, not to be unreasonably withheld, Credit Parties may have an additional time period, not to exceed 180 days, in which to cause those documents to be delivered. 

(b) Within sixty (60) days of the Closing Date, (i) Scient’x Australia Pty Ltd shall deliver to Lender an acknowledgement of this Agreement and a Perfection Certificate and (ii) Scient’x, S.A. shall deliver to Lender an agreement pledging the shares of Scient’x Australia Pty Ltd. owned by Scient’x, S.A., such documents in each case to be in form and substance reasonably acceptable to Lender.

(c) No Credit Party shall make any advance to, or Investment in, Scient’x Italia S.r.l. until Lender has received the documents set forth in Section 6.13(a). No Credit Party shall make any advance to, or Investment in, Scient’x Australia Pty Ltd until Lender has received the documents set forth in Section 6.13(b). Failure to deliver the documents set forth in this Section 6.13 within the period(s) specified shall constitute an Event of Default.

6.14 Further Assurances . Each Credit Party shall execute any further instruments and take further action as Lender reasonably requests in writing to perfect or continue Lender’s Lien in the Collateral or to effect the purposes of this Agreement and the other Loan Documents.

7 NEGATIVE COVENANTS

7.1 Dispositions . No Credit Party shall convey, sell, lease, transfer or otherwise dispose of (collectively, “ Transfer ”), all or any part of its business or property, except for Transfers (a) of Inventory in the ordinary course of business; (b) of Inventory among Credit Parties for the purpose of reducing costs or enhancing deliveries to customers; (c) of worn-out or obsolete Equipment; (d) in connection with Permitted Liens and Permitted Investments; and (e) of non-exclusive licenses for the use of the property of any Credit Party or its Subsidiaries in the ordinary course of business.

 

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7.2 Changes in Business, Management, Control, or Business Locations . Without the prior written consent of Lender, (a) no Credit Party shall engage in any business other than the businesses currently engaged in by such Credit Party, as applicable, or reasonably related thereto; (b) no Credit Party shall liquidate or dissolve; or (c) no Credit Party shall (i) have a Key Person Event or (ii) permit or shall suffer any Change in Control. Without at least ten (10) days prior written notice to Lender, no Credit Party shall: (1) add any new offices or business locations, including warehouses (unless such new offices or business locations contain less than One Hundred Thousand Dollars ($100,000) in such Credit Party’s assets or property), (2) change its jurisdiction of organization, (3) change its organizational structure or type, (4) change its legal name, or (5) change any organizational number (if any) assigned by its jurisdiction of organization.

7.3 Mergers or Acquisitions . Without the prior written consent of Lender, no Credit Party shall merge or consolidate with any other Person, or acquire all or substantially all of the capital stock or property of another Person, provided that a Subsidiary may merge or consolidate into another Subsidiary or into another Credit Party.

7.4 Indebtedness . Without the prior consent of Lender, no Credit Party shall create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness.

7.5 Encumbrance . Except for Permitted Liens, (a) no Credit Party shall create, incur, allow, or suffer any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts; (b) Borrower shall not permit any Collateral not to be subject to the first priority security interest granted herein; and (c) no Credit Party shall enter into any agreement, document, instrument or other arrangement (except with or in favor of Lender) with any Person that directly or indirectly prohibits or has the effect of prohibiting any Credit Party from assigning, mortgaging, pledging, granting a security interest in or upon, or encumbering any Credit Party’s property.

7.6 Maintenance of Collateral Accounts . No Credit Party shall maintain any Collateral Account except pursuant to the terms of Section 6.6 hereof.

7.7 Distributions; Investments . Without the prior consent of Lender, no Credit Party shall (a) pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock other than Permitted Distributions; or (b) directly or indirectly acquire or own any Person, or make any Investment in any Person, other than Permitted Investments.

7.8 Transactions with Affiliates . No Credit Party shall enter into or permit to exist any material transaction with any Affiliate of any Credit Party except for transactions contemplated by the Loan Documents (including as permitted under Section 7.1) and transactions that are in the ordinary course of business, upon fair and reasonable terms (when viewed in the context of any series of transactions of which it may be a part, if applicable).

7.9 Subordinated Debt . No Credit Party shall (a) make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof or adversely affect the subordination thereof to Obligations owed to Lender.

7.10 Compliance . No Credit Party shall become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940, as amended, or undertake as one of its important activities extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Credit Extension for that purpose. No Credit Party shall (i) fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, (ii) fail to comply with the Federal Fair Labor Standards Act or violate in any material respect any other material law or regulation, (iii) withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any present pension, profit sharing and deferred compensation plan, in all cases where such failure or withdrawal could reasonably be expected to result in a Material Adverse Change.

 

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7.11 Indebtedness Payments . Except for regularly scheduled payments made in respect of the financial, equipment, automobile and other leases set forth in the Perfection Certificates, no Credit Party shall (i) prepay, redeem, purchase, defease or otherwise satisfy in any manner prior to the scheduled repayment thereof any Indebtedness for borrowed money (other than amounts due under this Agreement or due Lender) or lease obligations, (ii) amend, modify or otherwise change the terms of any Indebtedness for borrowed money or lease obligations so as to accelerate the scheduled repayment thereof or (iii) repay any notes to officers, directors or shareholders.

8 EVENTS OF DEFAULT

Any one of the following shall constitute an event of default (an “ Event of Default ”) under this Agreement:

8.1 Payment Default . Borrower fails to (a) make any payment of principal or interest on any Credit Extension on its due date, or (b) pay any other Obligations within three (3) Business Days after such Obligations are due and payable (which three (3) day grace period shall not apply to payments due on the Maturity Date).

8.2 Covenant Default .

(a) Any Credit Party fails or neglects to perform any obligation in Section 6.2, 6.3, 6.4, 6.6, 6.7, 6.11, 6.12 or 6.13 or violates any covenant in Section 7; or

(b) Any Credit Party fails or neglects to perform, keep, or observe any other term, provision, condition, covenant or agreement contained in this Agreement or any Loan Document to which it is a party, and as to any default (other than those specified in this Section 8) under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within fifteen (15) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the fifteen (15) day period or cannot after diligent attempts by such Credit Party be cured within such fifteen (15) day period, and such default is likely to be cured within a reasonable time, then such Credit Party shall have an additional period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of Default (provided that, as to any guaranty provided by a Guarantor, the cure period, if any, will be as stated in the guaranty, as specified in Section 8.10, and not the fifteen (15) days specified in this Section);

8.3 Material Adverse Change . A Material Adverse Change occurs;

8.4 Attachment; Levy; Restraint on Business . (a) (i) The service of process seeking to attach, by trustee or similar process, any funds in excess of One Hundred Thousand Dollars ($100,000) of a Credit Party or of any entity under control of a Credit Party (including a Subsidiary) on deposit with any of the banks or financial institutions disclosed in the Perfection Certificates, or (ii) a notice of lien, levy, or assessment is filed against any of a Credit Party’s assets having a fair market value in excess of One Hundred Thousand Dollars ($100,000) by any government agency, and the same under subclauses (a)(i) and (ii) hereof are not, within thirty (30) days after the occurrence thereof, discharged or stayed (whether through the posting of a bond or otherwise) and the Borrower shall not, within such thirty (30) day period, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; and (b) (i) any material portion of a Credit Party’s assets is attached, seized, levied on, or comes into possession of a trustee or receiver, or (ii) any court order enjoins, restrains, or prevents a Credit Party from conducting any part of its business, and the same under (b)(i) and (ii) hereof shall not have been discharged, bonded or a stay of execution thereof shall not have been procured, within thirty (30) days from the date of entry thereof and the Borrower shall not, within such thirty (30) day period, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal;

8.5 Insolvency . (a) Any Credit Party is unable to pay its debts (including trade debts but excluding uncalled obligations of any Credit Party to Lender under any guaranty issued to Lender) as they become due; (b) any Credit Party otherwise becomes insolvent under the laws of the applicable jurisdiction; (c) any Credit Party begins an Insolvency Proceeding; or (d) an Insolvency Proceeding is begun against any Credit Party and not dismissed or stayed within thirty (30) days;

 

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8.6 Other Agreements . There is a default in any agreement to which any Credit Party is a party with a third party or parties resulting in a right, by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could reasonably be expected to result in a Material Adverse Change;

8.7 Judgments . One or more judgments, orders, or decrees for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Thousand Dollars ($100,000) (not covered by independent third-party insurance as to which liability has not been denied by such insurance carrier) shall be rendered against any Credit Party and shall remain unsatisfied, unvacated, or unstayed for a period of thirty (30) days after the entry thereof (provided that no Credit Extensions will be made prior to the satisfaction, vacation, or stay of such judgment, order, or decree);

8.8 Misrepresentations . Any Credit Party or any Person acting for such Credit Party makes any representation, warranty, or other statement now or later in this Agreement, any Loan Document or in any writing delivered to Lender or to induce Lender to enter this Agreement or any Loan Document, and such representation, warranty, or other statement is incorrect in any material respect when made;

8.9 Subordinated Debt . A default or breach occurs under any agreement between any Credit Party and any creditor of such Credit Party that signed a subordination, intercreditor, or other similar agreement with Lender, or any creditor that has signed such an agreement with Lender breaches any terms of such agreement;

8.10 Guaranty . (a) Any guaranty of any Obligations terminates or ceases for any reason to be in full force and effect or (b) any Guarantor does not perform any obligation or covenant under any guaranty of the Obligations and such failure continues beyond the grace or cure period, if any, specified in such guaranty.

8.11 Governmental Approvals . Any Governmental Approval shall have been (a) revoked, rescinded, suspended, modified in an adverse manner or not renewed in the ordinary course for a full term or (b) subject to any decision by a Governmental Authority that designates a hearing with respect to any applications for renewal of any of such Governmental Approval or that could result in the Governmental Authority taking any of the actions described in clause (a) above that could reasonably be expected to result in a Material Adverse Change.

9 LENDER’S RIGHTS AND REMEDIES

9.1 Rights and Remedies . While an Event of Default occurs and continues Lender may, without notice or demand, do any or all of the following:

(a) declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Lender);

(b) stop advancing money or extending credit for Borrower’s benefit under this Agreement or under any other agreement between Borrower and Lender;

(c) settle or adjust disputes and claims directly with Account Debtors for amounts on terms and in any order that Lender considers advisable, notify any Person owing any Credit Party money of Lender’s security interest in such funds, and verify the amount of such account;

(d) make any payments and do any acts it considers necessary or reasonable to protect the Collateral and/or its security interest in the Collateral. Borrower shall assemble the Collateral if Lender requests and make it available at a place to be designated by Lender that is commercially reasonable. Lender may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Lender a license to enter and occupy any of its premises, without charge, to exercise any of Lender’s rights or remedies;

 

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(e) apply to the Obligations any (i) balances and deposits of any Credit Party over which it has control, or (ii) any amount held by Lender owing to or for the credit or the account of any Credit Party;

(f) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Borrower hereby grants Lender, effective for the duration of any Event of Default and to the extent permitted by law, a non-exclusive, royalty-free license or other right to use, without charge, each Credit Party’s labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Lender’s exercise of its rights under this Section and for no other purpose;

(g) deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any Control Agreement or similar agreements providing control of any Collateral;

(h) demand and receive possession of Borrower’s Books; and

(i) exercise all rights and remedies available to Lender under the Loan Documents or at law or equity, including all remedies provided under the Code (including disposal of the Collateral pursuant to the terms thereof).

9.2 Power of Attorney . Borrower irrevocably appoints Lender as its lawful attorney-in-fact, exercisable upon the occurrence and during the continuance of an Event of Default, to: (a) endorse Borrower’s name on any checks or other forms of payment or security; (b) sign Borrower’s name on any invoice or bill of lading for any Account or drafts against Account Debtors; (c) settle and adjust disputes and claims about the Accounts directly with Account Debtors, for amounts and on terms Lender determines reasonable; (d) make, settle, and adjust all claims under Borrower’s insurance policies; (e) pay, contest or settle any Lien, charge, encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; and (f) transfer the Collateral into the name of Lender or a third party as the Code permits. Borrower appoints Lender as its lawful attorney-in-fact to sign Borrower’s name on any documents necessary to perfect or continue the perfection of Lender’s security interest in the Collateral regardless of whether an Event of Default has occurred until all Obligations have been satisfied in full and Lender is under no further obligation to make Credit Extensions hereunder. Lender’s foregoing appointment as Borrower’s attorney in fact, and all of Lender’s rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Lender’s obligation to provide Credit Extensions terminates.

9.3 Protective Payments . If any Credit Party fails to obtain the insurance called for by Section 6.5 or fails to pay any premium thereon or fails to pay any other amount which Borrower is obligated to pay under this Agreement or any other Loan Document, Lender may obtain such insurance or make such payment, and all amounts so paid by Lender are Lender Expenses and immediately due and payable, bearing interest at the then highest applicable rate, and secured by the Collateral. Lender will make reasonable efforts to provide Borrower with notice of Lender obtaining such insurance at the time it is obtained or within a reasonable time thereafter. No payments by Lender are deemed an agreement to make similar payments in the future or Lender’s waiver of any Event of Default.

9.4 Application of Payments and Proceeds . No Credit Party shall have any right to specify the order or the accounts to which Lender shall allocate or apply any payments required to be made by any Credit Party to Lender or otherwise received by Lender under this Agreement when any such allocation or application is not specified elsewhere in this Agreement. If an Event of Default has occurred and is continuing, Lender may apply any funds in its possession, whether from Borrower account balances, payments, proceeds realized as the result of any collection of Accounts or other disposition of the Collateral, or otherwise, to the Obligations in such order as Lender shall determine in its sole discretion. Each Credit Party shall remain liable to Lender for any deficiency. If Lender, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Lender shall have the option, exercisable at any time, of either reducing the Obligations by the principal amount of the purchase price or deferring the reduction of the Obligations until the actual receipt by Lender of cash therefor.

 

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9.5 Lender’s Liability for Collateral . Lender shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person. The Credit Parties bear all risk of loss, damage or destruction of the Collateral.

9.6 No Waiver; Remedies Cumulative . Lender’s failure, at any time or times, to require strict performance by any Credit Party of any provision of this Agreement or any other Loan Document shall not waive, affect, or diminish any right of Lender thereafter to demand strict performance and compliance herewith or therewith. No waiver hereunder shall be effective unless signed by Lender and then is only effective for the specific instance and purpose for which it is given. Lender’s rights and remedies under this Agreement and the other Loan Documents are cumulative. Lender has all rights and remedies provided under the Code, by law, or in equity. Lender’s exercise of one right or remedy is not an election, and Lender’s waiver of any Event of Default is not a continuing waiver. Lender’s delay in exercising any remedy is not a waiver, election, or acquiescence.

9.7 Demand Waiver . Borrower, for itself an on behalf of each other Credit Party, waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Lender on which any Credit Party is liable.

10 NOTICES

All notices, consents, requests, approvals, demands, or other communication by any party to this Agreement or any other Loan Document must be in writing and shall be deemed to have been validly served, given, or delivered: (a) upon the earlier of actual receipt and three (3) Business Days after deposit in the U.S. mail, first class, registered or certified mail return receipt requested, with proper postage prepaid; (b) upon transmission, when sent by facsimile transmission or electronic mail transmission, provided that a transmission by electronic mail shall be deemed to have been validly served, given, or delivered only if notice is also delivered by one of the methods of delivery set forth in Sections 10(a), (c) or (d) within two (2) Business Days of such email transmission; (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address, facsimile number, or email address indicated below. Lender or Borrower may change its mailing or electronic mail address or facsimile number by giving the other party written notice thereof in accordance with the terms of this Section 10.

 

If to Borrower:    SCIENT’X USA, INC.
   900 Airport Road, Suite 3B
   West Chester, PA 19380
   Attn: Chief Financial Officer
   Fax: (610) 840 6295
   Email: A.Custin@scientxusa.com

 

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If to Lender:    OXFORD FINANCE CORPORATION
   133 N. Fairfax Street
   Alexandria, VA 22314
   Attn: Tim A. Lex, Chief Operating Officer
   Fax: (703) 519-5225
   Email: tlex@oxfordfinance.com

11 CHOICE OF LAW, VENUE, JURY TRIAL WAIVER

New York law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Lender each submit to the exclusive jurisdiction of the State and Federal courts in the Borough of Manhattan, New York; provided, however, that nothing in this Agreement shall be deemed to operate to preclude Lender from bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment or other court order in favor of Lender. Borrower submits and consents in advance to such jurisdiction in any action or suit commenced in any such court, and Borrower waives any objection that it may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens and consents to the granting of such legal or equitable relief as is deemed appropriate by such court. Borrower waives personal service of the summons, complaints, and other process issued in such action or suit and agrees that service of such summons, complaints, and other process may be made by registered or certified mail addressed to Borrower at the address set forth in Section 10 of this Agreement and that service so made shall be deemed completed upon the earlier to occur of Borrower’s actual receipt thereof or three (3) days after deposit in the U.S. mails, proper postage prepaid.

TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND LENDER EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL .

12 GENERAL PROVISIONS

12.1 Successors and Assigns . This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights or obligations under it without Lender’s prior written consent (which may be granted or withheld in Lender’s discretion). Lender has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Lender’s obligations, rights, and benefits under this Agreement and the other Loan Documents.

12.2 Indemnification . Borrower shall indemnify, defend and hold Lender and its directors, officers, employees, agents, attorneys, or any other Person affiliated with or representing Lender (each, an “ Indemnified Person ”) harmless against: (a) all obligations, demands, claims, and liabilities (collectively, “ Claims ”) asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Lender Expenses incurred, or paid by such Indemnified Person from, following, or arising from transactions between Lender and Borrower, except for Claims and/or losses directly caused by such Indemnified Person’s gross negligence or willful misconduct.

12.3 Limitation of Liability . Lender shall in no case be liable for any punitive, special, indirect or consequential damages relating to this Agreement or any other Loan Document or arising out of its activities in connection herewith or therewith.

12.4 Time of Essence . Time is of the essence for the performance of all Obligations in this Agreement.

12.5 Severability of Provisions . Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.

 

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12.6 Correction of Loan Documents . Lender may correct patent errors and fill in any blanks in this Agreement and the other Loan Documents consistent with the agreement of the parties.

12.7 Amendments in Writing; Integration . All amendments to this Agreement must be in writing and signed by both Lender and Borrower. This Agreement and the Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement and the Loan Documents merge into this Agreement and the Loan Documents.

12.8 Counterparts . This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement.

12.9 Survival . All covenants, representations and warranties made in this Agreement continue in full force until this Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) have been satisfied. The obligation of Borrower in Section 12.2 to indemnify Lender shall survive until the statute of limitations with respect to such claim or cause of action shall have run.

12.10 Confidentiality . The terms and conditions set forth in the Confidentiality Agreement between Lender and Borrower, dated March 9, 2008 and attached hereto as Exhibit F shall govern the use and disclosure by Lender of any of the Credit Parties’ confidential information in connection with this Agreement. Lender may use confidential information regarding the terms of this Agreement and any Credit Party’s financial results for the development of client databases, reporting purposes and market analysis so long as Lender does not disclose Borrower’s identity or the identity of any person associated with Borrower unless otherwise expressly permitted by such Confidentiality Agreement. The provisions of the immediately preceding sentence shall survive the termination of this Agreement.

12.11 Attorneys’ Fees, Costs and Expenses . In any action or proceeding between Borrower and Lender arising out of or relating to the Loan Documents, the prevailing party shall be entitled to recover its reasonable attorneys’ fees and other costs and expenses incurred, in addition to any other relief to which it may be entitled.

13 DEFINITIONS

13.1 Definitions . As used in this Agreement, the following terms have the following meanings:

Account ” is any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to Borrower.

Account Debtor ” is any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.

Affiliate ” of any Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.

Agreement ” is defined in the preamble hereof.

Amortization Date ” means January 1, 2010.

Borrower ” is defined in the preamble hereof.

 

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Borrower’s Books ” are all Borrower’s books and records including ledgers, federal and state tax returns, records regarding Borrower’s assets or liabilities, the Collateral, business operations or financial condition, including records of Board minutes, and all computer programs or storage or any equipment containing such information.

Borrowing Resolutions ” are, with respect to any Person, those resolutions adopted by such Person’s Board of Directors or similar governing body and delivered by such Person to Lender approving the Loan Documents to which such Person is a party and the transactions contemplated thereby, together with a certificate executed by its secretary on behalf of such Person certifying that (a) such Person has the authority to execute, deliver, and perform its obligations under each of the Loan Documents to which it is a party, (b) that attached as Exhibit A to such certificate is a true, correct, and complete copy of the resolutions then in full force and effect authorizing and ratifying the execution, delivery, and performance by such Person of the Loan Documents to which it is a party, (c) the name(s) of the Person(s) authorized to execute the Loan Documents on behalf of such Person, together with a sample of the true signature(s) of such Person(s), and (d) that Lender may conclusively rely on such certificate unless and until such Person shall have delivered to Lender a further certificate canceling or amending such prior certificate, and if such Person is a foreign corporation such similar resolutions and certificates as may be required in the applicable foreign jurisdiction.

Business Day ” is any day that is not a Saturday, Sunday or a recognized public holiday in the United States or France, or a day on which Lender is closed.

Cash Equivalents ” means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc.; (c) Lender’s certificates of deposit issued maturing no more than one (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of this definition.

Change in Control ” is a transaction in which any “ person ” or “ group ” (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) becomes the “ beneficial owner ” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of greater than 50% of the shares of all classes of stock then outstanding of Borrower ordinarily entitled to vote in the election of directors.

Closing Date ” is the date Lender executes this Agreement as indicated on the signature page hereof.

Code ” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of New York; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Lender’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of New York, the term “ Code ” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes on the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.

Collateral ” is any and all properties, rights and assets of Borrower described on Exhibit A .

Collateral Account ” is any Deposit Account, Securities Account, or Commodity Account.

Commodity Account ” is any “commodity account” as defined in the Code with such additions to such term as may hereafter be made.

Compliance Certificate ” is that certain certificate in the form attached hereto as Exhibit C .

 

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Contingent Obligation ” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

Control Agreement ” is any control agreement entered into among the depository institution at which Borrower maintains a Deposit Account or the securities intermediary or commodity intermediary at which Borrower maintains a Securities Account or a Commodity Account, Borrower, and Lender pursuant to which Lender obtains control (within the meaning of the Code) over such Deposit Account, Securities Account, or Commodity Account.

Credit Extension ” is the Growth Capital Advance, or any other extension of credit by Lender for Borrower’s benefit.

Credit Party ” means each of Borrower, Scient’x Groupe, S.A., Scient’x, S.A., Surgiview, S.A.S., Scient’x Italia Srl, Scient’x (UK) Limited and Scient’x Australia Pty Ltd., and the direct or indirect Subsidiaries of each.

Default Rate ” is defined in Section 2.3(b).

Deposit Account ” is any “deposit account” as defined in the Code with such additions to such term as may hereafter be made.

Designated Deposit Account ” is Borrower’s deposit account, account number 3300663593, maintained with Silicon Valley Bank.

Dollars , ” “ dollars ” and “ $ ” each mean lawful money of the United States.

Equipment ” is all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

ERISA ” is the Employee Retirement Income Security Act of 1974, as amended, and its regulations.

Event of Default ” is defined in Section 8.

Final Payment ” means a fee (in addition to and not a substitution for any other payment due hereunder) in the amount of Three Hundred Seventy Five Thousand Dollars ($375,000).

Funding Date ” is the date on which the Growth Capital Advance is made to or on account of Borrower.

General Intangibles ” is all “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation, all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, any patents, trademarks, service marks and, to the extent permitted under applicable law, any applications therefor, whether registered or not, any trade secret rights, including any rights to unpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income and other tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

 

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Governmental Approval ” is any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.

Governmental Authority ” is any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.

Growth Capital Advance ” is the cash advance made under Section 2.1.1(a).

Guarantor ” is any present or future guarantor of the Obligations, including Scient’x Groupe, S.A., Scient’x, S.A., Scient’x Italia S.r.l., and Scient’x (UK) Limited.

IFRS ” means the International Financial Reporting Standards maintained by the International Accounting Standards Board which are in force from time to time.

Indebtedness ” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations, and (d) Contingent Obligations.

Indemnified Person ” is defined in Section 12.2.

Insolvency Proceeding ” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

Interest Only Period ” means the period of time commencing on the Funding Date through the day before the Amortization Date.

Inventory ” is all “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

Investment ” is any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any loan, advance or capital contribution to any Person.

Key Person Event ” is any circumstance other than death or disability that results in the Chief Executive Officer or the Chief Financial Officer and Chief Operating Officer of Scient’x, S.A. not being actively engaged in the management of Scient’x, S.A., provided that a Key Person Event shall not be deemed to occur if a replacement for the Chief Executive Officer or Chief Financial Officer and Chief Operating Officer is hired and approved by the Board of Directors of Scient’x, S.A. within one hundred and twenty (120) days of the former Chief Executive Officer or Chief Financial Officer and Chief Operating Officer ceasing his or her role with Scient’x, S.A.

Lender ” is defined in the preamble hereof.

Lender Expenses ” are all reasonable and documented audit fees and expenses, costs, and expenses (including reasonable and documented attorneys’ fees and expenses) for preparing, amending, negotiating, administering, defending and enforcing the Loan Documents (including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower.

 

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Lien ” is a claim, mortgage, deed of trust, levy, charge, pledge, security interest or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.

Loan Documents ” are, collectively, this Agreement, the Perfection Certificates, the Promissory Note, any other note, or notes or guaranties executed by Borrower or any Credit Party, and any other present or future agreement between any Credit Party and/or for the benefit of Lender in connection with this Agreement, all as amended, restated, or otherwise modified.

Material Adverse Change ” is (a) a material impairment in the perfection or priority of Lender’s Lien in the Collateral or in the value of such Collateral; (b) a material adverse change in the business, operations, or condition (financial or otherwise) of Borrower, Scient’x Groupe, S.A., Scient’x, S.A. or Surgiview, S.A.S.; or (c) a material adverse change in the business, operations, or condition (financial or otherwise) of any Credit Party not named in clause (b) that, in the reasonable judgment of Lender, materially impairs the prospect of repayment of any portion of the Obligations.

Maturity Date ” is June 1, 2012, or such earlier date as the Growth Capital Advance or any portion of the Obligations is accelerated, whether by prepayment or otherwise.

Obligations ” are Borrower’s obligation to pay when due any debts, principal, interest, Lender Expenses and other amounts that Borrower owes to Lender from time to time under the Loan Documents or otherwise, including, without limitation, all obligations relating to letters of credit (including reimbursement obligations for drawn and undrawn letters of credit), cash management services, and foreign exchange contracts, if any, and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of any Credit Party assigned to Lender.

Operating Documents ” are, for any Person, such Person’s formation documents, as certified with the Secretary of State or other relevant competent body of such Person’s state of formation on a date that is no earlier than thirty (30) days prior to the Closing Date, and, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), and (d) if such Person is a foreign corporation, its similar governing documents, each of the foregoing with all current amendments or modifications thereto.

Payment/Advance Form ” is that certain form attached hereto as Exhibit B .

Perfection Certificates ” means the completed certificates delivered to Lender prior to the Closing Date with respect to the Credit Parties (other than Scient’x Australia Pty ltd.) and the completed certificate of Scient’x Australia Pty Ltd. to be delivered to Lender in accordance with Section 6.13.

Permitted Distributions ” means:

(a) purchases of capital stock from former employees, consultants and directors pursuant to repurchase agreements or other similar agreements in an aggregate amount not to exceed One Hundred Thousand Dollars ($100,000) in any fiscal year, provided that at the time of such purchase no Event of Default has occurred and is continuing;

(b) distributions or dividends consisting solely of a Credit Party’s capital stock; and

(c) purchases of capital stock in connection with the exercise of stock options or stock appreciation rights by way of cashless exercise in an aggregate amount not to exceed One Hundred Thousand Dollars ($100,000) or in connection with the satisfaction of withholding tax obligations.

Permitted Indebtedness ” is:

(a) Borrower’s Indebtedness to Lender under this Agreement and any other Loan Document;

 

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(b) any Indebtedness existing on the Closing Date and evidenced by the financial, automobile, equipment and other leases shown on the Perfection Certificates;

(c) Subordinated Debt;

(d) unsecured Indebtedness to trade creditors incurred in the ordinary course of business, including Indebtedness incurred in the ordinary course of business with corporate credit cards of up to $100,000;

(e) Indebtedness consisting of interest rate, currency, or commodity swap agreements, interest rate cap or collar agreements or arrangements designated to protect Borrower against fluctuations in interest rates, currency exchange rates, or commodity prices, in each case evidenced by agreements approved by Lender, such approval not to be unreasonably withheld or delayed;

(f) Indebtedness that also constitutes a Permitted Investment;

(g) Indebtedness secured by Permitted Liens;

(h) capitalized leases and purchase money Indebtedness not to exceed One Hundred Thousand Dollars ($100,000) in the aggregate in any fiscal year secured by Permitted Liens; and

(i) refinanced Permitted Indebtedness, provided that the amount of such Indebtedness is not increased except by an amount equal to a reasonable premium or other reasonable amount paid in connection with such refinancing and by an amount equal to any existing, but unutilized, commitment thereunder.

Permitted Investments ” are:

(a) Investments existing on the Closing Date;

(b)(i) marketable direct obligations issued or unconditionally guaranteed by the United States or its agencies or any State maturing within one (1) year from its acquisition and (ii) commercial paper maturing no more than two (2) years after its creation and having the highest rating from either Standard & Poor’s Corporation or Moody’s Investors Service, Inc.;

(c) Investments consisting of Collateral Accounts in the name of Borrower or any Subsidiary so long as Lender has a first priority, perfected security interest in such Collateral Accounts;

(d) Cash Equivalents;