Exhibit 10.4

 

SUBORDINATION AGREEMENT

 

This Subordination Agreement is made as of ________, 2014 by and among each of
the undersigned creditors (individually, a “Creditor” and, collectively, the
“Creditors”), BAXANO SURGICAL, INC., a Delaware corporation (“Borrower”), and
the undersigned lenders (individually, a “Lender” and collectively, the
“Lenders”).

 

Recitals

 

A.           Borrower has obtained certain loans or other credit accommodations
from Lenders to the terms of those certain subordinated convertible debentures
with an aggregate principal amount of $10 million, due April 22, 2017, issued by
the Borrower to the Lenders on April 22, 2014 (the “Debentures”) pursuant to the
certain securities purchase agreement by and among the Borrower and the Lenders,
dated as of March 11, 2014 (the “March 11, 2014 Purchase Agreement”).

 

B.           Each Creditor has extended loans or other credit accommodations to
Borrower, and/or may extend loans or other credit accommodations to Borrower
from time to time, subject to the terms of the Debentures.

 

C.           Each Creditor is willing to subordinate: (i) all of Borrower’s
indebtedness and obligations to such Creditor arising under those certain
Subordinated Convertible Debentures issued by Borrower to the Creditors (the
“Subordinated Debentures”), and under the other Transaction Documents referred
to in the Subordinated Debentures, whether presently existing or arising in the
future (the “Subordinated Debt”) to all of Borrower’s indebtedness and
obligations to the Lenders; and (ii) all of such Creditor’s security interests,
if any, in Borrower’s property, to all of the Lenders’ security interests in the
Borrower’s property, if any. For purposes hereof, references to the Creditor
shall mean the Creditor solely in its capacity as a holder of the Subordinated
Debt.

 

NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:

 

1.         Each Creditor hereby acknowledges and agrees that (i) such Creditor
does not have any lien on or security interest in any property of Borrower,
whether now owned or hereafter acquired, and (ii) such Creditor shall not take
any lien on or security interest in any property of Borrower whether now owned
or hereafter acquired. In furtherance of the foregoing, each Creditor hereby
subordinates to each Lender any security interest or lien that such Creditor may
have in any property of Borrower. Notwithstanding the respective dates of
attachment or perfection of any security interest of a Creditor and the security
interest of any Lender, the lien and security interest of any Lender in the any
property of Borrower, whether now owned or hereafter acquired, shall at all
times be senior to the lien and security interest of such Creditor. Capitalized
terms not otherwise defined herein shall have the same meaning as in the
Debentures.

 

2.          All Subordinated Debt is subordinated in right of payment to all
obligations of Borrower to the Lenders now existing or hereafter arising,
together with all reasonable and customary costs of collecting such obligations
(including attorneys’ fees), including, without limitation, all stated interest
accruing after the commencement by or against Borrower of any Bankruptcy,
reorganization or similar proceeding, and all obligations under the Debentures
(the “Senior Debt”).

 

3.          (a)          Except as expressly set forth otherwise under this
Agreement, each Creditor, severally and not jointly with the other Creditors,
will not demand or receive from Borrower (and Borrower will not pay to such
Creditor) all or any part of the Subordinated Debt, by way of payment,
prepayment, setoff, lawsuit or otherwise, nor will such Creditor exercise any
remedy with respect to any assets of the Borrower, nor will such Creditor
commence, or cause to commence, prosecute or participate in any administrative,
legal or equitable action against Borrower (“Enforcement Action”), for so long
as any portion of the Senior Debt remains outstanding, unless, in each case, (i)
an event of default shall have occurred and be continuing under any one or more
agreements between and among a Creditor, the Borrower and/or any of their
respective subsidiaries which would entitle such Creditor to take such action
(each, a “Creditor Default”), (ii) such Creditor shall have provided each Lender
written notice of the occurrence of each such Creditor Default and that it
intends to take an Enforcement Action, specifically referencing this section and
indicating what actions are contemplated (each, a “Creditor Enforcement Action
Notice”), (iii) a period of at least 90 days shall have elapsed after the
receipt by the Lenders of the respective Creditor Enforcement Action Notice,
(iv) no Lender is diligently pursuing an Enforcement Action pursuant to the
Debentures, and (v) no Insolvency Proceeding shall have been commenced.

 

 

 

 

(b)       Notwithstanding the foregoing, nothing under this Agreement shall
restrict in any way (i) each Creditor’s right to receive shares of (and warrants
exercisable for shares of) the Borrower’s common stock in satisfaction of
principal, interest or other obligations owed to the Creditors, including but
not limited to shares issuable upon conversion of the Subordinated Debt and
exercise of other securities issued in connection therewith and satisfaction or
settlement of other obligations of the Borrower to the Creditors, (ii) each
Creditor’s right to seek specific performance of the Borrower’s obligation to
issue shares of its common stock as described in preceding clause (i), and (iii)
so long as each Creditor has provided each Lender with at least 3 business days’
notice thereof (with a copy to the Borrower), each Creditor’s right to receive
payment of cash interest, liquidated damages, buy-in compensation and other
fees, expenses and amounts required to be paid pursuant to the Transaction
Documents (registration rights agreement), in an amount not to exceed $1,500,000
in the aggregate for all Creditors pursuant to this clause (iii).

 

4.         Except to the extent permitted to be retained by Creditor under
Section 3(b) of this Agreement, each Creditor shall promptly deliver to each
Lender, on a pro rata basis based on the percentage of the aggregate principal
amount of Debentures then held by each Lender, in the form received (except for
endorsement or assignment by such Creditor where required by the Lenders) for
application to the Senior Debt any payment, distribution, security or proceeds
received by such Creditor with respect to the Subordinated Debt other than in
accordance with this Agreement.

 

5.         In the event of Borrower’s insolvency, reorganization or any case or
proceeding under any bankruptcy or insolvency law or laws relating to the relief
of debtors (each, an “Insolvency Proceeding”), these provisions shall remain in
full force and effect, and the Lenders’ claims against Borrower and the estate
of Borrower shall be paid in full before any payment is made to any Creditor.

 

6.         Each Creditor shall immediately affix a legend to the instruments
evidencing the Subordinated Debt stating that the instruments are subject to the
terms of this Agreement. No amendment of the documents evidencing or relating to
the Subordinated Debt shall directly or indirectly modify the provisions of this
Agreement in any manner which might terminate or impair the subordination of the
Subordinated Debt or the subordination of the security interest or lien that
such Creditor may have in any property of Borrower. By way of example, such
instruments shall not be amended to (i) increase the rate of interest with
respect to the Subordinated Debt, or (ii) accelerate the payment of the
principal or interest or any other portion of the Subordinated Debt.

 

7.         This Agreement shall remain effective for so long as the Borrower
owes any amounts to the Lenders under the Debentures or otherwise. If, at any
time after payment in full of the Senior Debt any payments of the Senior Debt
must be disgorged by the Lenders for any reason (including, without limitation,
the bankruptcy of Borrower), this Agreement and the relative rights and
priorities set forth herein shall be reinstated as to all such disgorged
payments as though such payments had not been made and each Creditor shall
immediately pay over to each Lender, on a pro rata basis based on the percentage
of the aggregate principal amount of Debentures then held by each Lender, all
payments received with respect to the Subordinated Debt to the extent that such
payments would have been prohibited hereunder. At any time and from time to
time, without notice to Creditors, Lenders may take such actions with respect to
the Senior Debt as each Lender, in its sole discretion, may deem appropriate,
including, without limitation, terminating advances to Borrower, increasing the
principal amount, extending the time of payment, increasing applicable interest
rates, renewing, compromising or otherwise amending the terms of any documents
affecting the Senior Debt and any collateral securing the Senior Debt, and
enforcing or failing to enforce any rights against Borrower or any other person.
No such action or inaction shall impair or otherwise affect Lenders’ rights
hereunder.

 

8.         This Agreement shall bind any successors or assignees of a Creditor
and shall benefit any successors or assigns of the Lenders. This Agreement is
solely for the benefit of each Creditor and each Lender and not for the benefit
of Borrower or any other party. Each Creditor further agrees that if Borrower is
in the process of refinancing a portion of the Senior Debt with a new lender,
and any Lender makes a request of such Creditor, Creditor shall agree to enter
into a new subordination agreement with the new lender on substantially the
terms and conditions of this Agreement.

 

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9.         This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall constitute one
instrument.

 

10.       This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Jurisdiction shall lie in the State of California. THE
UNDERSIGNED ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE,
BUT THAT IT MAY BE WAIVED UNDER CERTAIN CIRCUMSTANCES. TO THE EXTENT PERMITTED
BY LAW, EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT)
WITH COUNSEL OF ITS, HIS OR HER CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THE
MUTUAL BENEFIT OF ALL PARTIES, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF
LITIGATION ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OTHER DOCUMENT,
INSTRUMENT OR AGREEMENT BETWEEN THE UNDERSIGNED PARTIES. If the jury waiver set
forth in this Section is not enforceable, then any dispute, controversy or claim
arising out of or relating to this Agreement or any of the transactions
contemplated herein shall be resolved by judicial reference pursuant to Code of
Civil Procedure Section 638 et seq before a mutually acceptable referee or, if
none is selected, then a referee chosen by the Presiding Judge of the California
Superior Court for Santa Clara County, provided this provision shall not
restrict any party from seeking to enforce any prejudgment remedies.

 

11.       This Agreement represents the entire agreement with respect to the
subject matter hereof, and supersedes all prior negotiations, agreements and
commitments. No Creditor is relying on any representations by any Lender or
Borrower in entering into this Agreement, and each Creditor has kept and will
continue to keep itself fully apprised of the financial and other condition of
Borrower. This Agreement may be amended only by written instrument signed by
each Creditor and each Lender.

 

12.       In the event of any legal action to enforce the rights of a party
under this Agreement, the party prevailing in such action shall be entitled, in
addition to such other relief as may be granted, all reasonable costs and
expenses, including reasonable attorneys’ fees, incurred in such action.

 

13.       Borrower and Creditor each acknowledges, confirms and agrees that any
Creditor Default or any default or event of default by Borrower under the
Subordinated Debentures and/or any other document executed in connection
therewith, including, without limitation, any stock purchase agreement, warrant
agreement and/or registration rights agreement, or any failure by Borrower to
register shares as required under any of the foregoing, shall constitute an
immediate Event of Default (as such term is defined in the Debentures) under the
Debentures, for which no grace period or notice requirement shall apply.

 

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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date
first above written.

 

LENDERS:   SABBY HEALTHCARE VOLATILITY MASTER FUND, LTD.   By:     Name: Title:
  SABBY VOLATILITY WARRANT MASTER FUND, LTD.   By:     Name: Title:   DAFNA
LIFESCIENCE, L.P.   By:     Name: Title:   BORROWER:   BAXANO SURGICAL, INC.  
By:     Name: Title:

 

 

 

 

CREDITOR:         Name:            By:     Name:   Title:  

 

[Signature Page to Baxano Subordination Agreement]