LOAN AND SECURITY AGREEMENT

Exhibit 10.26

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this “ Agreement ”) dated as of December 5, 2008 (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 ”), provides the terms on which Lenders shall lend to Borrowers and Borrowers shall repay Lenders. 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) Availability . Subject to the terms and conditions of this Agreement, Lenders agree, severally and not jointly, to lend to Borrowers, on the Effective Date or as soon thereafter as is practical, an advance (the “ Growth Capital Advance ”), according to each Lender’s pro rata share of the Growth Capital Loan Commitment (based upon the respective Growth Capital Commitment Percentage of each Lender). When repaid, the Growth Capital Advance may not be re-borrowed.

(b) Repayment . Borrowers shall make monthly payments of interest only on the Growth Capital Advance, in arrears commencing on January 1, 2009 and continuing thereafter on the first day of each successive calendar month during the Growth Capital Interest Only Period. Commencing on the Growth Capital Amortization Date, Borrowers shall make thirty (30) consecutive equal monthly payments of principal and interest in arrears, which would fully amortize the outstanding Growth Capital Advance as of the Growth Capital Amortization Date over the Growth Capital Repayment Period and continuing thereafter during the Growth Capital Repayment Period on the first day of each successive calendar month. 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) 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.

(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).

(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) Within thirty (30) days of 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) Until such Lockbox is established, the proceeds of the Accounts shall be paid by the Account Debtors to an address consented to by the Lender. Upon receipt by a Borrower of such proceeds, 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 Lender, 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 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 the lesser of (A) the greater of (x) eleven and one quarter percent (11.25%) or (y) 800 basis points (8.00%) above the 3-month LIBOR as of the date that the Notes for the Growth Capital Advance are prepared or (B) fourteen and one half percent (14.50%).

(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) (x) when Borrowers’ Net Income, for one (1) of any of the two (2) consecutive quarters preceding the date of payment is less than Seven Hundred Fifty Thousand Dollars ($750,000), two and one half percent (2.50%) above the Prime Rate; and (y) when Borrowers’ Net Income, for the two (2) consecutive quarters preceding the date of payment is greater than Seven Hundred Fifty Thousand Dollars ($750,000) per quarter, two percent (2.00%) above the Prime Rate or (B) six and one half percent (6.50%); in each case, 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. 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.

2.5 Fees. Borrowers shall pay to Collateral Agent:

(a) Growth Capital Loan Fee . A fully earned, non-refundable loan fee on account of the Growth Capital Loan Commitment of One Hundred Fifty Thousand Dollars ($150,000), to be shared among the Lenders pro rata according to the Growth Capital Commitment Percentage of each Lender; receipt of One Hundred Thousand Dollars ($100,000) of which hereby is acknowledged, with the balance due and payable on the Effective Date;

(b) Revolving Commitment Fee . A fully earned, non-refundable commitment fee on account of the Revolving Line in the amount of One Hundred Fifty Thousand Dollars ($150,000) on the Effective Date, to be shared among the Lenders pro rata according to their Revolving Commitment Percentages of the Revolving Line;

(c) 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;

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

(e) 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;

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

(g) 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) a duly executed original signature to the Warrant to be issued to Oxford and a duly executed original signature to the Warrant to be issued to Bank;

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

(d) their Operating Documents and a good standing certificate of each Borrower and of Guarantor certified by the Secretary of State of the States of Delaware (with respect to Parent) and California (with respect to Borrowers and Guarantor) as of a date no earlier than thirty (30) days prior to the Effective Date;

(e) duly executed original signatures to the completed Borrowing Resolutions for each Borrower, Guarantor, Milverton and API (one set for each Lender);

(f) the certificate(s) for the Shares, together with stock powers, duly executed in blank by the applicable Borrower;

(g) duly executed copies of the Milverton Organizational Documents and the API Organizational Documents;

(h) 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;

(i) landlord’s consents for each of Borrowers’ leased properties executed in favor of Collateral Agent, for the ratable benefit of the Lenders, provided, however, that no landlord consent shall be required for Borrowers’ leased properties located at 6350 Yarrow Drive, Carlsbad, CA 92011 and 6078 Corte Del Cedro, Ste. B, Carlsbad, CA 92011 so long as Borrowers have vacated such properties no later than April 1, 2009;

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

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

(l) a duly executed copy of the Payoff Letter;

(m) 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; and

(n) 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 in the amount of such Lender’s Growth Capital Advance;

(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;

(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.

(a) Growth Capital Advance . To obtain the Growth Capital Advance, Alphatec must deliver to Collateral Agent a completed Payment/Advance Form in the form attached as Exhibit B . Upon receipt of the Payment/Advance Form, Collateral Agent shall promptly provide a copy of the same to each Lender. On the Growth Capital Funding Date, each Lender shall credit and/or transfer (as applicable) to the Designated Deposit Account, an amount equal to its Growth Capital Commitment Percentage multiplied by the amount of the Growth Capital Advance, less any amounts owing from Borrowers to GE as of the Growth Capital Funding Date, such amounts to be sent by Lenders via wire transfer directly to GE in accordance with the terms of the Payoff Letter. Each Lender may rely on any telephone notice given by a person whom such Lender reasonably believes is a Responsible Officer. Borrowers shall indemnify each Lender for any loss Lender suffers due to such reliance.

(b) Revolving Advances . 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.

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.

 

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 (and with respect solely to Parent, the Warrants) 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.

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).

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 repayment of all Indebtedness owing to GE (as expressly permitted hereunder), 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).

 

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 and Warrants 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

(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.

(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.

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 Alphatec shall be permitted one hundred eighty (180) days from the Effective Date to close its lockbox account with Bank of the West provided that no later than thirty (30) days after the Effective Date, such account is subject to an account control agreement in favor of Collateral Agent, for the benefit of Lenders.

(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 Financial Covenants. 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) Performance to Plan . As of the last day of each quarter, Borrowers’ Revenue for such quarter shall be at least eighty percent (80%) of Borrowers’ projected Revenue for such quarter as outlined in Borrowers’ projections attached hereto as Annex I.

(b) EBITDA . Borrowers’ shall achieve quarterly EBITDA of not less than the following amounts for the respective periods:

 

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.

6.13 Creation/Acquisition of Subsidiaries. In the event a Borrower or Guarantor creates or acquires any Subsidiary, such Borrower or Guarantor 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 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 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