Exhibit 10.1

 

Execution Version

 

FACILITY AGREEMENT

FACILITY AGREEMENT (this “Agreement”), dated as of May 7, 2012, between MAKO
Surgical Corp., a Delaware corporation (the “Borrower”), and the lenders set
forth on Schedule 1 attached hereto ( the “Lenders” and, together with the
Borrower, the “Parties”).

W I T N E S S E T H:

WHEREAS, the Borrower wishes to borrow from the Lenders fifty million Dollars
($50,000,000) for the purpose described in Section 2.1; and

WHEREAS, the Lenders desire to make loans to the Borrower for such purpose,

NOW, THEREFORE, in consideration of the mutual agreements set forth herein, the
Parties agree as follows:

ARTICLE 1

DEFINITIONS

Section 1.1                  General Definitions. Wherever used in this
Agreement, the Exhibits or the Schedules attached hereto, unless the context
otherwise requires, the following terms have the following meanings:

“Affiliate” means, with respect to any Person, any other Person:

(a)                 that owns, directly or indirectly, in the aggregate more
than 10% of the beneficial ownership interest of such Person;

(b)                 that directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common control with,
such Person; or

(c)                 that directly or indirectly is a general partner,
controlling shareholder, or managing member of such Person.

“Borrower SEC Reports” means the annual, quarterly and periodic reports filed by
the Borrower with the SEC, including the Borrower’s quarterly report on Form
10-Q for its quarter ended March 31, 2012 to be filed on the date hereof.

“Business Day” means a day on which banks are open for business in The City of
New York.

“Code” means the Internal Revenue Code of 1986, as amended, and any Treasury
Regulations promulgated thereunder.

“Common Stock” means the common stock, par value $0.001 per share, of the
Borrower.

 

 

“Default” means any event which, at the giving of notice, lapse of time or
fulfillment of any other applicable condition (or any combination of the
foregoing), would constitute an Event of Default.

“Disbursement” has the meaning given to it in Section 2.2.

“Disbursement Date” means the date on which a Disbursement occurs.

“Disbursement Request” has the meaning given to it in Section 2.2.

“Dollars” and the “$” sign mean the lawful currency of the United States of
America.

“Event of Default” has the meaning given to it in Section 5.4.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, including
the rules and regulations promulgated thereunder.

“Excluded Taxes” means, with respect to any Lender, (a) income or franchise
Taxes imposed on (or measured by) such recipient’s net income by the United
States of America, or by the jurisdiction (or any political subdivision thereof)
under the laws of which such recipient is organized or incorporated or in which
its principal office is located or, in the case of a Lender, in which an
applicable lending office is located, (b) any branch profits Taxes imposed by
the United States of America, or (c) any withholding Tax that is imposed on
amounts payable to the Lender at the time the Lender becomes a party to this
Agreement (or designates a new lending office) or is directly attributable to
such Lender’s failure or inability to comply with Section 2.5(d), except to the
extent that the Lender (or its assignor, if any) was entitled, at the time of
designation of a new lending office (or assignment), to receive additional
amounts from the Borrower with respect to such withholding Tax pursuant to
Section 2.5(a) or is legally unable to comply with Section 2.5(d) as a result of
any change in law occurring subsequent to the date such Lender becomes a party
to this Agreement (or designates a new lending office).

“Final Payment” means such amount as may be necessary to repay the outstanding
principal amount of the Notes and any other amounts owing by the Borrower to the
Lenders pursuant to the Financing Documents.

“Final Payment Date” means for each Disbursement the third anniversary of the
Disbursement Date for such Disbursement.

“Financing Documents” means this Agreement, the Notes, the Registration Rights
Agreement, the Security Agreement, the Warrants and any other document or
instrument delivered in connection with any of the foregoing whether or not
specifically mentioned herein or therein.

“GAAP” means generally accepted accounting principles consistently applied as
set forth in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the accounting
profession).

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“Government Authority” means any government, governmental department, ministry,
cabinet, commission, board, bureau, agency, tribunal, regulatory authority,
instrumentality, judicial, legislative, fiscal, or administrative body or
entity, whether domestic or foreign, federal, state or local, having
jurisdiction over the matter or matters and Person or Persons in question,
including, without limitation, the SEC.

“Indebtedness” means the following, whether direct or contingent:

(a)                 all indebtedness for borrowed money;

(b)                 the deferred purchase price of assets or services (other
than trade payables and other liabilities to employees and officers arising in
the ordinary course of business and not related to any financing) which in
accordance with GAAP would be shown to be a liability (or on the liability side
of a balance sheet);

(c)                 all guaranty obligations;

(d)                 the maximum amount of all letters of credit issued or
acceptance facilities established for the account of the Borrower and, without
duplication, all drafts drawn thereunder (other than letters of credit
supporting other indebtedness of Borrower and which are otherwise permitted
hereunder);

(e)                 all capitalized lease obligations;

(f)                  all indebtedness of another Person secured by any Lien on
any property of the Borrower, whether or not such indebtedness has been assumed
or is recourse;

(g)                 all obligations under take-or-pay or similar arrangements or
under any interest rate swaps, caps, floors, collars and other interest hedge or
protection agreements, treasury locks, equity forward contracts, currency
agreements or commodity purchase or option agreements or other interest or
exchange rate or commodity price hedging agreements and any other derivative
instruments, in each case, whether the Borrower is liable contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which
obligations the Borrower otherwise assures a creditor against loss;

(h)                 indebtedness created or arising under any conditional sale
or title retention agreement; and

(i)                   obligations of the Borrower with respect to withdrawal
liability to or on behalf of any “multi employer plan” as defined in Section
4001(a) of ERISA.

“Indemnified Person” has the meaning given to it in Section 6.11.

“Indemnified Taxes” means all Taxes including Other Taxes, other than Excluded
Taxes.

“Indemnity” has the meaning given to it in Section 6.11.

“Interest Rate” means 6.75% simple interest per annum.

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“Lien” means any lien, pledge, preferential arrangement, mortgage, security
interest, deed of trust, charge, assignment, hypothecation, title retention,
privilege or other encumbrance on or with respect to property or interest in
property having the practical effect of constituting a security interest, in
each case with respect to the payment of any obligation with, or from the
proceeds of, any asset or revenue of any kind.

“Loans” means the loans to be made available by the Lenders to the Borrower
pursuant to Section 2.2 in the aggregate amount of fifty million Dollars
($50,000,000) or, as the context may require, the principal amount thereof from
time to time outstanding.

“Loss” has the meaning given to it in Section 6.11.

“Major Transaction” has the meaning set forth in the Warrants.

“Material Adverse Effect” means a material adverse effect on (a) the business,
operations, condition (financial or otherwise) or assets of the Borrower,
(b) the validity or enforceability of any provision of any Financing Document,
(c) the ability of the Borrower to timely perform the Obligations or (d) the
rights and remedies of the Lenders under any Financing Document.

“Notes” means the notes issued to the Lenders evidencing the Loan in the form
attached hereto as Exhibit A.

“Obligations” means all obligations (monetary or otherwise) of the Borrower
arising under or in connection with the Financing Documents.

“Organizational Documents” means the Certificate of Incorporation and Bylaws,
each as amended to date, of the Borrower or its Subsidiaries, or other
comparable documents, as the context may require.

“Other Taxes” means any and all present or future stamp or documentary taxes or
any other excise or property taxes, duties, other charges or similar levies, and
all liabilities with respect thereto, together with any interest, fees,
additions to tax or penalties applicable thereto (including by reason of any
delay in payment) arising from any payment made hereunder or from the execution,
delivery, registration or enforcement of, or otherwise with respect to, any
Financing Document.

“Permitted Indebtedness” means Indebtedness existing as of the date hereof and
set forth on Exhibit B attached hereto and refinancing of Permitted Indebtedness
on substantially the same terms and conditions.

“Permitted Liens” means: (i) Liens existing on the date hereof and set forth on
Exhibit C attached hereto ; (ii) Liens in favor of the Lenders; (iii) statutory
Liens created by operation of applicable law; (iv) Liens arising in the ordinary
course of business and securing obligations that are not overdue or are being
contested in good faith by appropriate proceedings; (v)  Liens for Taxes not yet
due and payable or that are being contested in good faith by appropriate
proceedings; (vi) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default; (vii) Liens in favor of
financial institutions arising in connection with the Borrower’s accounts
maintained in the ordinary course of the Borrower’s business held at such
institutions to secure standard fees for services charged by, but not financing
made available by, such institutions, (viii) purchase money liens and (ix)
lessor liens.

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“Person” means and includes any natural person, individual, partnership, joint
venture, corporation, trust, limited liability company, limited company, joint
stock company, unincorporated organization, government entity or any political
subdivision or agency thereof, or any other entity.

“Register” has the meaning set forth in Section 1.4.

“Registration Rights Agreement” means the Registration Rights Agreement, dated
as of the date hereof, by and among the Borrower and the Lenders.

“SEC” means the United States Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended, including the
rules and regulations promulgated thereunder.

“Security Agreement” means the Security Agreement, among the Borrower and the
Lenders in the form attached hereto as Exhibit A(2).

“Subsidiary or Subsidiaries” means, as to the Borrower, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned by the Borrower.

“Taxes” means all present or future taxes, levies, imposts, stamp or other
duties, fees, assessments, deductions, withholdings, all other governmental
charges, and all liabilities with respect thereto, together with any interest,
fees, additions to tax or penalties applicable thereto (including by reason of
any delay in payment).

“Warrants” has the meaning given to it in Section 2.10.

“Warrant Shares” means the shares of Common Stock issuable upon exercise of the
Warrants.

Section 1.2                  Interpretation. In this Agreement, unless the
context otherwise requires, all words and personal pronouns relating thereto
shall be read and construed as the number and gender of the party or parties
requires and the verb shall be read and construed as agreeing with the required
word and pronoun; the division of this Agreement into Articles and Sections and
the use of headings and captions is for convenience of reference only and shall
not modify or affect the interpretation or construction of this Agreement or any
of its provisions; the words “herein,” “hereof,” “hereunder,” “hereinafter” and
“hereto” and words of similar import refer to this Agreement as a whole and not
to any particular Article or Section hereof; the words “include,” “including,”
and derivations thereof shall be deemed to have the phrase “without limitation”
attached thereto unless otherwise expressly stated; references to a specified
Article, Exhibit, Section or Schedule shall be construed as a reference to that
specified Article, Exhibit, Section or Schedule of this Agreement; and any
reference to any of the Financing Documents means such document as the same
shall be amended, supplemented or modified and from time to time in effect.

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Section 1.3                  Business Day Adjustment. If the day by which a
payment is due to be made is not a Business Day, that payment shall be made by
the next succeeding Business Day.

Section 1.4                  Register.

(a)                 The Borrower shall record on its books and records the
amount of the Loan, the interest rate applicable, all payments of principal and
interest thereon and the principal balance thereof from time to time
outstanding. Such record shall, absent manifest error, be conclusive evidence of
the amount of the Loan made by the Lenders to the Borrower and the interest and
payments thereon.

(b)                 The Borrower shall establish and maintain at its address
referred to in Section 6.1, (i) a record of ownership (the “Register”) in which
the Borrower agrees to register by book entry the interests (including any
rights to receive payment hereunder) of each Lender in the Loan, and any
assignment of any such interest, and (ii) accounts in the Register in accordance
with its usual practice in which it shall record (1) the names and addresses of
the Lenders (and any change thereto pursuant to this Agreement), (2) the amount
of the Loan and each funding of any participation therein, (3) the amount of any
principal or interest due and payable or paid, and (4) any other payment
received by the Lenders from the Borrower and its application to the Loan.

(c)                 Notwithstanding anything to the contrary contained in this
Agreement, the Loan (including any Notes evidencing the Loan) is a registered
obligation, the right, title and interest of the Lenders and their assignees in
and to the Loan shall be transferable only upon notation of such transfer in the
Register and no assignment thereof shall be effective until recorded therein.
This Section 1.4 and Section 6.5 shall be construed so that the Loan is at all
times maintained in “registered form” within the meaning of Sections 163(f),
871(h)(2) and 881(c)(2) of the Code.

(d)                 The Borrower and the Lenders shall treat each Person whose
name is recorded in the Register as a Lender for all purposes of this Agreement.
Information contained in the Register with respect to any Lender shall be
available for access by the Borrower or such Lender at any reasonable time and
from time to time upon reasonable prior notice.

 

ARTICLE 2

AGREEMENT FOR THE LOAN

Section 2.1                  Use of Proceeds. The proceeds of the Loan will be
used for working capital and other lawful corporate purposes.

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Section 2.2                  Disbursement. The Lenders shall advance to the
Borrower Loans in disbursements (a “Disbursement”) of $10 million each upon the
Borrower’s request (a “Disbursement Request”) in the form of Schedule 2,
delivered to the Lenders not fewer than 15 Business Days prior to the date
designated by the Borrower in the Disbursement Request for such Disbursement;
provided, however, that the date so designated for the Disbursement shall be no
earlier than the second Business Day of the month following the month in which
the Disbursement Request is delivered. Against each Disbursement, the Borrower
shall deliver to the Lenders a completed receipt (the “Evidence of
Disbursement”) in the form of Schedule 3, which receipt shall not be effective
until the Disbursement is actually advanced to the Borrower. The Borrower’s
ability to issue Disbursement Requests shall terminate on May 15, 2013. The
Lenders shall fulfill each Disbursement Request in accordance with their
respective allocations set forth on Schedule 1.

Section 2.3                  Payment. (a) The Borrower shall pay to the Lenders
the outstanding principal amount of the Notes on (i) each Final Payment Date
with respect to a Disbursement in the amount of such Disbursement, (ii)  the
date the principal amount of the Note is declared to be or automatically becomes
due and payable following an Event of Default and (iii) pursuant to the
provisions of Section 5.3. The Borrower may otherwise prepay the Notes at any
time, without premium.

(b)                 The Notes shall be deemed prepaid and without premium, to
the extent a Lender satisfies the payment of the Exercise Price (as such term is
defined in the Warrants) through a reduction of the principal amount outstanding
under such Lender’s Note in accordance with Section 3(a)(i) of the Warrants.

(c)                 Each voluntary prepayment shall be applied first, to accrued
and unpaid interest and second, to principal and shall be allocated among the
Lenders in accordance with their respective allocations set forth on Schedule 1
hereto as such allocations may be revised by the Lenders prior to the date of
Disbursement.

Section 2.4                  Payments. Payments of any amounts due to the
Lenders under this Agreement shall be made in Dollars in immediately available
funds prior to 11:00 a.m New York City time on such date that any such payment
is due, at such bank or places, as the Lenders shall from time to time designate
in writing at least 5 Business Days prior to the date such payment is due. The
Borrower shall pay all and any costs (administrative or otherwise) imposed by
banks, clearing houses, or any other financial institution, in connection with
making any payments under any of the Financing Documents, except for any costs
imposed by the Lenders’ banking institutions.

Section 2.4A                 Fee. If no Disbursement has been made by May 15,
2013, the Borrower shall pay to Deerfield Management Company, L.P. on such date
a fee of $1,000,000.

Section 2.5                  Taxes, Duties and Fees.

(a)                 Any and all payments hereunder or under any other Financing
Document shall be made, in accordance with this Section 2.5, free and clear of
and without deduction for any and all present or future Indemnified Taxes except
as required by applicable law. If Borrower shall be required by law to deduct
any Indemnified Taxes from or in respect of any sum payable hereunder or under
any other Financing Document, (i) the sum payable shall be increased by as much
as shall be necessary so that after making all required deductions (including
deductions applicable to additional sums payable under this Section 2.5) the
Lenders shall receive an amount equal to the sum they would have received had no
such deductions been made (any and all such additional amounts payable to
Lenders shall hereafter be referred to as the “Additional Amounts”), (ii)
Borrower shall make such deductions, and (iii) Borrower shall pay the full
amount deducted to the relevant taxing or other authority in accordance with
applicable law. Within thirty (30) days after the date of any payment of such
Taxes, Borrower shall furnish to the applicable Lender the original or a
certified copy of a receipt evidencing payment thereof or other evidence of such
payment reasonably satisfactory to such Lender.

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(b)                 In addition, Borrower agrees to pay, and authorizes Lenders
to pay in its name, all Other Taxes. Within 30 days after the date of any
payment of Other Taxes, Borrower shall furnish to Lenders the original or a
certified copy of a receipt evidencing payment thereof or other evidence of such
payment reasonably satisfactory to Lenders.

(c)                 Borrower shall reimburse and indemnify, within 10 days after
receipt of demand therefor, each Lender for all Indemnified Taxes (including all
Taxes and Other Taxes imposed by any jurisdiction on amounts payable under this
Section 2.5(c)) paid by such Lender, whether or not such Indemnified Taxes were
correctly or legally asserted. A certificate of the applicable Lender(s) setting
forth the amounts to be paid thereunder and delivered to Borrower shall be
conclusive, binding and final for all purposes, absent manifest error.

(d)                 Each Lender (other than a Foreign Person (as hereinafter
defined)) on or before the date hereof shall provide to Borrower a properly
completed and executed IRS Form W-9 certifying that such Lender is organized
under the laws of the United States. Each Lender organized under the laws of a
jurisdiction outside the United States (a “Foreign Person”) that is entitled to
an exemption from or reduction in U.S. withholding tax shall provide Borrower
with a properly completed and executed IRS Form W-8ECI, W-8BEN, W-8IMY or other
applicable form, or any other applicable certificate or document reasonably
requested by the Borrower, and, if such Foreign Person is relying on the
portfolio interest exception of Section 871(h) or Section 881(c) of the Code,
shall also provide the Borrower with a certificate (the “Portfolio Interest
Certificate”) representing that such Foreign Person is not a “bank” for purposes
of Section 881(c) of the Code, is not a 10% holder of the Borrower described in
Section 871(h)(3)(B) of the Code, is not a controlled foreign corporation
receiving interest from a related person (within the meaning of Sections
881(c)(3)(C) and 864(d)(4) of the Code, and is not a conduit entity
participating in a conduit financing arrangement as defined in Treasury
Regulation Section 1.881-3. Each Lender shall provide new forms (or successor
forms) upon the expiration or obsolescence of any previously delivered forms and
shall promptly notify the Borrower of any change in circumstances which would
modify or render invalid any claimed exemption or reduction.

(e)                 If a Lender determines in good faith that it has received a
refund from a Government Authority of Taxes in respect of which the Borrower
paid Additional Amounts or made a payment pursuant to Section 2.5(c), such
Lender shall promptly pay such refund to the Borrower, net of all out-of-pocket
expense (including any Taxes imposed thereon) of such Lender incurred in
obtaining such refund, provided that the Borrower, upon the request of such
Lender, agrees to repay the amount paid over to the Borrower (plus any
penalties, interest or other charges imposed by the relevant Governmental
Authority) to such Lender if such Lender is required to repay such refund to
such Governmental Authority. Nothing in this Section shall require any Lender to
disclose any information it deems confidential (including, without limitation,
its tax returns) to any Person, including Borrower.

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Section 2.6                  Costs, Expenses and Losses. If, as a result of any
failure by the Borrower to pay any sums due under this Agreement on the due date
therefor (after the expiration of any applicable grace periods), or to borrow in
accordance with the Disbursement Request, the Lenders shall incur costs,
expenses and/or losses, by reason of the liquidation or redeployment of deposits
from third parties or in connection with obtaining funds to make or maintain the
Disbursement, the Borrower shall pay to the Lenders upon request by the Lenders,
the amount of such costs, expenses and/or losses within fifteen (15) days after
receipt by it of a certificate from the Lenders setting forth in reasonable
detail such costs, expenses and/or losses, along with supporting documentation.
For the purposes of the preceding sentence, “costs, expenses and/or losses”
shall include, without limitation, any interest paid or payable to carry any
unpaid amount and any loss, premium, penalty or expense which may be incurred in
obtaining, liquidating or employing deposits of or borrowings from third parties
in order to make, maintain or fund the Loan or any portion thereof.

Section 2.7                  Interest. The outstanding principal amount of the
Notes shall bear interest at the Interest Rate (calculated on the basis of the
actual number of days elapsed in each month). Interest shall be paid quarterly
in arrears commencing the last Business Day on the first such calendar quarter
end following the initial Disbursement and on the last Business Day of each
calendar quarter thereafter.

Section 2.8                  Interest on Late Payments. Without limiting the
remedies available to the Lenders under the Financing Documents or otherwise, to
the maximum extent permitted by applicable law, if the Borrower fails to make
any payment of principal or interest with respect to the Loans when due (after
the expiration of any applicable grace periods), the Borrower shall pay, in
respect of the outstanding principal amount and interest of the Loans, interest
at the rate per annum equal to the Interest Rate plus ten percent (10%) for so
long as such payment remains outstanding. Such interest shall be payable on
demand.

Section 2.9                  [Reserved]

Section 2.10              Delivery of Warrants.

(a)                 On the date hereof, the Borrower shall issue to the Lenders
warrants to purchase an aggregate of two hundred and seventy five thousand
(275,000) shares of Common Stock in substantially the form set forth on Exhibit
D-1 hereto (together with any Warrants issuable pursuant to subsection (b)
below, the “Warrants”) at an initial Exercise Price (as defined in the Warrants)
determined in accordance with Section 3(a) of such Exhibit D-1.

(b)                 Concurrently with each Disbursement, the Borrower shall
issue to Lenders warrants to purchase one hundred and forty thousand (140,000)
shares of Common Stock per ten million dollar ($10,000,000) Disbursement in the
form annexed hereto as Exhibit D-2 containing an initial Exercise Price
determined in accordance with Section 3(a) of such Exhibit D-2.

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(c)                 All Warrants issued pursuant to this Section 2.10 shall be
allocated among the Lenders as set forth on Schedule 1.

(d)                 Notwithstanding anything herein to the contrary, the number
of shares of Common Stock into which a Warrant is exercisable and the Exercise
Price of any Warrant on any relevant issue date pursuant to subsection (b) above
shall be adjusted to reflect any adjustments in the number of shares of Common
Stock into which such Warrant is exercisable that would have taken effect
pursuant to the terms of the Warrant had such Warrant been issued on the date
hereof and remained outstanding through the date of such issuance.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES

Section 3.1                  Representations and Warranties of the Borrower. The
Borrower represents and warrants as of the date hereof that except as set forth
in a Schedule to this Agreement or the Borrower SEC Reports for the year ended
2011 and the first quarter of 2012:

(a)                 Each of the Borrower and each Subsidiary is conducting its
business in compliance with its Organizational Documents. The Organizational
Documents of the Borrower as currently in effect have been made available to the
Lenders and remain in full force and effect with no defaults outstanding
thereunder.

(b)                 No Default or Event of Default (or any other default or
event of default, however described) has occurred under any of the Financing
Documents.

(c)                 Each of the Borrower and each Subsidiary (i) is capable of
paying its debts as they fall due, is not unable and has not admitted its
inability to pay debts as they fall due, (ii) is not bankrupt or insolvent and
(iii) has not taken action, and no such action has been taken by a third party,
for the Borrower’s or such Subsidiary's winding up, dissolution, or liquidation
or similar executory or judicial proceeding or for the appointment of a
liquidator, custodian, receiver, trustee, administrator or other similar officer
for the Borrower or any Subsidiary or any or all of their respective assets or
revenues.

(d)                 No Lien exists on the Borrower’s or any Subsidiary's assets,
except for Permitted Liens.

(e)                 The obligation of the Borrower to make any payment under
this Agreement (together with all charges in connection therewith) is absolute
and unconditional, and there exists no right of setoff or recoupment,
counterclaim, cross-claim or defense of any nature whatsoever to any such
payment.

(f)                  No Indebtedness of the Borrower or any Subsidiary exists
other than Permitted Indebtedness.

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(g)                 Each of the Borrower and its Subsidiaries is validly
existing as a corporation in good standing under the laws of its jurisdiction of
incorporation. Each of the Borrower and its Subsidiaries has full power and
authority to own its properties and conduct its business, and is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction in which the conduct of its business makes such qualification
necessary and in which the failure to so qualify would not have a Material
Adverse Effect.

(h)                 There is not pending or, to the knowledge of the Borrower,
threatened, any action, suit or other proceeding before any Governmental
Authority (a) to which the Borrower or any of its Subsidiaries is a party or (b)
which has as the subject thereof any assets owned by the Borrower or any of its
Subsidiaries. There are no current or, to the knowledge of the Borrower,
pending, legal, governmental or regulatory enforcement actions, suits or other
proceedings to which the Borrower or any of its Subsidiaries or any of their
respective assets is subject.

(i)                   The Financing Documents have been duly authorized,
executed and delivered by the Borrower, and constitute a valid, legal and
binding obligation of the Borrower, enforceable in accordance with their terms,
except as such enforceability may be limited by (i) applicable insolvency,
bankruptcy, reorganization, moratorium or other similar laws affecting
creditors’ rights generally, and (ii) applicable equitable principles (whether
considered in a proceeding at law or in equity). The execution, delivery and
performance of the Financing Documents by the Borrower and the consummation of
the transactions therein contemplated will not (A) conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, or result in the creation or imposition of any Lien upon any
assets of the Borrower pursuant to any agreement to which the Borrower or any of
its Subsidiaries is a party or by which the Borrower or any of its Subsidiaries
is bound or to which any of the assets of the Borrower or any of its
Subsidiaries is subject, (B) result in any violation of or conflict with, the
provisions of the Organizational Documents of the Borrower or any of its
Subsidiaries or (C) result in the violation of any law or any judgment, order,
rule, regulation or decree of any Governmental Authority, except, in the case of
clauses (A) and (C) above, for any such conflict, breach or violation that would
not, individually or in the aggregate, have a Material Adverse Effect. No
consent, approval, authorization or order of, or registration or filing with any
Governmental Authority is required for the execution, delivery and performance
of any of the Financing Documents or for the consummation by the Borrower of the
transactions contemplated hereby except (x) for such registrations and filings
in connection with the issuance of the Warrants and Warrant Shares pursuant the
Financing Documents that are necessary to comply with federal and state
securities laws, rules and regulations, and (y) filings contemplated by the
Security Agreement; and the Borrower has corporate power and authority to enter
into the Financing Documents and to consummate the transactions contemplated
thereunder.

(j)                  Each of the Borrower and each of its Subsidiaries holds,
and is operating in compliance in all material respects with, all franchises,
grants, authorizations, licenses, permits, easements, consents, certificates and
orders of any Governmental Authority (collectively, “Necessary Documents”)
required for the conduct of its business and all Necessary Documents are valid
and in full force and effect; and neither the Borrower nor any of its
Subsidiaries has received written notice of any revocation or modification of
any of the Necessary Documents and neither the Borrower nor any of its
Subsidiaries has reason to believe that any of the Necessary Documents will not
be renewed in the ordinary course, which revocation, modification or
non-renewal, individually or in the aggregate, would result in a Material
Adverse Effect; and each of the Borrower and each of its Subsidiaries is in
compliance in all respects with all applicable federal, state, local and foreign
laws, regulations, orders and decrees applicable to the conduct of its business,
except as would not result in a Material Adverse Effect.

11

 

(k)                 Each of the Borrower and each of its Subsidiaries have good
and marketable title to all of its assets free and clear of all Liens except
Permitted Liens. The property held under lease by the Borrower and its
Subsidiaries is held by them under valid, subsisting and enforceable leases with
only such exceptions with respect to any particular lease as do not interfere in
any material respect with the conduct of the business of the Borrower or its
Subsidiaries.

(l)                   To the knowledge of the Borrower, except as would not
reasonably be expected to have a Material Adverse Effect (A) each of the
Borrower and its Subsidiaries owns or has the right to use pursuant to a valid
and enforceable written license, implied license or other legally enforceable
right, all of the Intellectual Property (as defined below) that is necessary for
the conduct of its business as currently conducted (the “IP”); (B) there is no
outstanding, pending, or threatened action, suit, other proceeding or claim by
any third person challenging or contesting the validity, scope, use, ownership,
enforceability, or other rights of the Borrower or its Subsidiaries in or to any
IP and the Borrower and its Subsidiaries have not received any written notice
regarding, any such action, suit, or other proceeding; and (C) there is no
pending, threatened action, suit, other proceeding or claim by others that the
Borrower or any of its Subsidiaries infringes upon, violates or uses the
Intellectual Property rights of others without authorization, and the Borrower
and its Subsidiaries have not received any written notice regarding, any such
action, suit, other proceeding or claim. The term “Intellectual Property” as
used herein means (i) all patents, patent applications, patent disclosures and
inventions (whether patentable or unpatentable and whether or not reduced to
practice), (ii) all trademarks, service marks, trade dress, trade names,
slogans, logos, and corporate names and Internet domain names, together with all
of the goodwill associated with each of the foregoing, (iii) copyrights,
copyrightable works, and licenses, (iv) registrations and applications for
registration for any of the foregoing, (v) computer software (including but not
limited to source code and object code), data, databases, and documentation
thereof, (vi) trade secrets and other confidential information, (vii) other
intellectual property, and (viii) copies and tangible embodiments of the
foregoing (in whatever form and medium).

(m)               Neither the Borrower nor any of its Subsidiaries is in
violation of its Organizational Documents, or in breach of or otherwise in
default, and no event has occurred which, with notice or lapse of time or both,
would constitute such breach or other default in the performance of any
agreement or condition contained in any agreement under which any of them may be
bound, or to which any of their assets is subject, except for such breaches or
default that would not have a Material Adverse Effect.

(n)                 The Borrower and its Subsidiaries have timely filed,
including pursuant to all extensions, all federal, state, local and foreign
income and franchise tax returns required to be filed (except where the failure
to do so would not have a Material Adverse Effect) and are not in default in the
payment of any taxes which were payable pursuant to said returns or any
assessments with respect thereto. There is no pending dispute with any taxing
authority relating to any of such returns, and the Borrower has no knowledge of
any proposed liability for any tax to be imposed upon the properties or assets
of the Borrower.

12

 

(o)                 Except as would not reasonably be expected to have a
Material Adverse Effect, the Borrower has not granted rights to develop,
manufacture, produce, assemble, distribute, license, market or sell its products
to any other Person and is not bound by any agreement that affects the exclusive
right of the Borrower to develop, manufacture, produce, assemble, distribute,
license, market or sell its products.

(p)                 To the knowledge of the Borrower, except as would not
reasonably be expected to have a Material Adverse Effect, the Borrower and its
Subsidiaries: (A) have not received any warning letter or other correspondence
or notice from the U.S. Food and Drug Administration (“FDA”) or from any other
Governmental Authority as of the date of this Agreement alleging or asserting
noncompliance with any of the statutes, rules and regulations of the FDA and of
other Governmental Authorities exercising regulatory authority similar to that
of the FDA applicable to the ownership, testing, development, manufacture,
packaging, processing, use, distribution, marketing, labeling, promotion, sale,
offer for sale, storage, import, export or disposal of any product manufactured
or distributed by or on behalf of the Borrower or its Subsidiaries (“Applicable
Laws”); (B) possess all licenses, certificates, approvals, clearances,
authorizations, permits and supplements or amendments thereto required by any
Applicable Laws (together, the “Authorizations”) which are valid and in full
force and effect and have not received any notice from the FDA or any other
Governmental Authority as of the date of this Agreement alleging or asserting
noncompliance with any Authorizations; and (C) have not received written notice
that any Governmental Authority has taken, is taking or intends to take action
to limit, suspend, modify or revoke any Authorization and have no knowledge that
any Governmental Authority is considering such action.

(q)                 Except as disclosed in writing to the Lenders, as of the
date of this Agreement the Borrower has not, either voluntarily or
involuntarily, initiated, conducted, or issued or caused to be initiated,
conducted or issued, any recall, market withdrawal or replacement, safety alert,
post-sale warning, “dear doctor” letter, or other notice or action relating to
the alleged lack of safety or efficacy of any product or any alleged product
defect or violation and, to the Borrower’s knowledge, no third party has
initiated, conducted or issued any such notice or actions.

(r)                  (i) To the knowledge of the Borrower, no “prohibited
transaction” as defined under Section 406 of ERISA or Section 4975 of the Code,
or any individual or class exemption issued and not exempt under ERISA Section
408 and the regulations and published interpretations thereunder has occurred
with respect to any Employee Benefit Plan, except as for such transaction that
would not have a Material Adverse Effect, (ii) at no time within the last seven
(7) years has the Borrower or any ERISA Affiliate maintained, sponsored,
participated in, contributed to or has or had any liability or obligation in
respect of any Employee Benefit Plan subject to Section 302 of ERISA, Title IV
of ERISA, or Section 412 of the Code or any “multiemployer plan” as defined in
Section 3(37) of ERISA or any multiple employer plan for which the Borrower or
any ERISA Affiliate has incurred or could incur liability under Section

13

 

4063 or 4064 of ERISA, (iii) no Employee Benefit Plan represents any current or
future liability for retiree health, life insurance, or other retiree welfare
benefits except as may be required by the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, or similar state law, (iv) each Employee
Benefit Plan is and has been operated in compliance with its terms and all
applicable laws, including but not limited to ERISA and the Code, except for
such failures to comply that would not have a Material Adverse Effect, (v) no
event has occurred (including a “reportable event” as such term is defined in
Section 4043 of ERISA) and no condition exists that would subject the Borrower
or any ERISA Affiliate to any tax, fine, lien, penalty or liability imposed by
ERISA, the Code or other applicable law, except for any such tax, fine, lien,
penalty or liability that would not, individually or in the aggregate, have a
Material Adverse Effect, (vi) the Borrower does not maintain any Foreign Benefit
Plan, (vii) the Borrower does not have any obligations under any collective
bargaining agreement. As used in this clause (r), “Employee Benefit Plan” means
any material “employee benefit plan” within the meaning of Section 3(3) of
ERISA, including, without limitation, all stock purchase, stock option,
stock-based severance, employment, change-in-control, medical, disability,
fringe benefit, bonus, incentive, deferred compensation, employee loan and all
other employee benefit plans, agreements, programs, policies or other
arrangements, whether or not subject to ERISA, under which (A) any current or
former employee, director or independent contractor of the Borrower or any of
its Subsidiaries has any present or future right to benefits and which are
contributed to, sponsored by or maintained by the Borrower or any of its
respective Subsidiaries or (B) the Borrower or any of its Subsidiaries has had
or has any present or future obligation or liability; “ERISA” means the Employee
Retirement Income Security Act of 1974, as amended; “ERISA Affiliate” means any
member of the Borrower’s controlled group as defined in Code Section 414 (b),
(c), (m) or (o); and “Foreign Benefit Plan” means any Employee Benefit Plan
established, maintained or contributed to outside of the United States of
America or which covers any employee working or residing outside of the United
States.

(s)                  The financial statements of the Borrower annexed hereto as
Schedule 4 together with the related notes fairly present the financial
condition of the Borrower and its consolidated Subsidiaries as of the dates
indicated and the results of operations and changes in cash flows for the
periods therein specified in conformity with GAAP consistently applied
throughout the periods involved, subject, in the case of unaudited financial
statements, to year-end adjustments; and, except as disclosed in such Schedule,
there are no material off-balance sheet arrangements or any other relationships
with unconsolidated entities or other persons, that may have a material current
or, to the Borrower’s knowledge, material future effect on the Borrower’s
financial condition, results of operations, liquidity, capital expenditures,
capital resources or significant components of revenue or expenses.

(t)                  Subsequent to March 31, 2012, neither the Borrower nor any
of its Subsidiaries has declared or paid any dividends or made any distribution
of any kind with respect to its capital stock; and there has not been any change
in the capital stock (other than a change in the number of outstanding shares of
Common Stock due to the issuance of shares upon the exercise of outstanding
options or warrants), or any issuance of options, warrants, convertible
securities or other rights to purchase the capital stock, of the Borrower or any
of its Subsidiaries, except as such transactions may have occurred in under the
Borrower’s equity compensation plans and/or employee stock purchase plan.

14

 

(u)                 All of the issued and outstanding shares of capital stock of
the Borrower are duly authorized and validly issued, fully paid and
nonassessable, have been issued in compliance with all federal and state and
foreign securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities that
have not been waived in writing; the Warrants and the shares of Common Stock
issuable upon exercise of the Warrants (the “Warrant Shares”), have been duly
authorized and the Warrant Shares when issued, delivered and paid for in
accordance with the terms of the Warrants, will have been validly issued and
will be fully paid and nonassessable. There are no preemptive rights or other
rights to subscribe for or to purchase, or any restriction upon the voting or
transfer of any shares of Common Stock pursuant to the Borrower’s Organizational
Documents or any agreement to which the Borrower or any of its Subsidiaries is a
party or by which the Borrower or any of its Subsidiaries is bound. All of the
issued and outstanding shares of capital stock of each of the Borrower’s
Subsidiaries have been duly and validly authorized and issued and are fully paid
and nonassessable, and the Borrower owns of record and beneficially, free and
clear of any claims, Liens, proxies, or equities , all of the issued and
outstanding shares of such stock. There are no options, warrants, agreements,
contracts or other rights in existence to purchase or acquire from the Borrower
or any Subsidiary of the Borrower any shares of the capital stock of the
Borrower or any Subsidiary of the Borrower.

(v)                 The Borrower maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management’s general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management’s general
or specific authorization; and (iv) the recorded accountability for material
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.

(w)                The Borrower has no Subsidiaries except as permitted under
Section 5.2(a).

(x)                 The Borrower’s Annual Report on Form 10-K for 2011 and its
periodic report for the first quarter of 2012 comply with the disclosure
standards under the Securities Exchange Act of 1934.

Section 3.2                  Borrower Acknowledgment. The Borrower acknowledges
that it has made the representations and warranties referred to in Section 3.1
with the intention of persuading the Lenders to enter into the Financing
Documents and that the Lenders have entered into the Financing Documents on the
basis of, and in full reliance on, each of such representations and warranties.

Section 3.3                  Representations and Warranties of the Lenders. Each
of the Lenders represents and warrants to the Borrower as of the date hereof
that:

(a)                 It is acquiring the Warrants and the Warrant Shares solely
for its account for investment, not as an agent or nominee, and not with a view
to or for resale in connection with any distribution of the Warrants or Warrant
Shares or any part thereof.

15

 

(b)                 The Warrants and the Warrants Shares have not been
registered under the Securities Act on the basis that no distribution or public
offering of the stock of the Borrower is to be effected. It realizes that the
basis for the exemptions may not be present if, notwithstanding its
representations, such Lender has a present intention of acquiring the securities
for a fixed or determinable period in the future, selling (in connection with a
distribution or otherwise), granting any participation in, or otherwise
distributing the securities. None of the Lenders has such present intention.

(c)                 The Warrants and the Warrant Shares must be held
indefinitely unless they are subsequently registered under the Securities Act or
an exemption for such registration is available.

(d)                 Neither the Warrants nor the Warrant Shares may be sold
pursuant to Rule 144 adopted under the Securities Act unless certain conditions
are met.

(e)                 It will not make any disposition of all or any part of the
Warrants or Warrant Shares until:

(i)                 The Borrower shall have received a letter secured by such
Lender or its counsel from the SEC stating that no action will be recommended to
the SEC with respect to the proposed disposition;

(ii)               There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with said registration statement; or

(iii)             Such Lender shall have notified the Borrower of the proposed
disposition and, in the case of a sale or transfer in a so-called “4(1) and a
half” transaction, shall have furnished counsel for the Borrower with an opinion
of counsel, substantially in the form annexed as Exhibit C to the Warrant. The
Borrower agrees that it will not require an opinion of counsel with respect to
transactions under Rule 144 or Rule 144A of the Securities Act.

(f)                  It understands and agrees that all certificates evidencing
the shares to be issued to the Lenders upon exercise of the Warrants may bear a
legend as set forth in the Warrants.

(g)                 Such Lender is an “accredited investor” as defined in
Regulation D promulgated the Securities Act.

(h)                 Such Lender is duly organized and validly existing under the
laws of the jurisdiction of its formation.

(i)                   Each Financing Document to which it is a party has been
duly authorized, executed and delivered by such Lender and constitutes the valid
and legally binding obligation of such Lender, enforceable in accordance with
its terms, except as such enforceability may be limited by (i) applicable
insolvency, bankruptcy, reorganization, moratorium or other similar laws
affecting creditors’ rights generally, and (ii) applicable equitable principles
(whether considered in a proceeding at law or in equity).

16

 

(j)                  Such Lender has full power and authority to make each
Disbursement and to enter into and perform its other obligations under each of
the Financing Documents and carry out the other transactions contemplated
thereby.

(k)                 Such Lender (A) has had reasonable opportunity to ask
questions of and receive answers from Borrower concerning the Financing
Documents, (B) has been permitted access, to such Lender’s satisfaction, to the
Borrower SEC Reports, and (C) understands that the entry into the Financing
Documents and the investment in the securities issued thereunder is subject to
risks as stated in the risk factors disclosed in the Borrower SEC Reports or as
otherwise may be applicable to similar investments and acknowledges that it has
had an opportunity to review, and upon review, fully understands such risk
factors.

ARTICLE 4

CONDITIONS OF DISBURSEMENT

Section 4.1                  Conditions to each Disbursement. The obligation of
the Lenders to make each Disbursement shall be subject to the fulfillment of the
following conditions:

(a)                 The Lenders shall have received executed counterparts of the
Financing Documents from the Borrower, a certificate as to Organizational
Documents, resolutions, incumbency and an opinion of its counsel reasonably
acceptable to the Lenders;

(b)                 All actions required to be taken by the Borrower pursuant to
Section 2.10 shall have been taken;

(c)                 No Default or Event of Default has occurred or would result
from the Disbursement; and

(d)                 The Borrower does not possess publicly undisclosed material
adverse information with respect to the Borrower.

ARTICLE 5

PARTICULAR COVENANTS AND EVENTS OF DEFAULT

Section 5.1                  Affirmative Covenants. Unless the Lenders shall
otherwise agree:

(a)                 Each of the Borrower and each of its Subsidiaries shall
(i) maintain its existence and qualify and remain qualified to do its business
as currently conducted, except where the failure to so maintain such
qualification would not reasonably be expected to have a Material Adverse
Effect, (ii) maintain all approvals necessary for the Financing Documents to be
in effect, and (iii) operate its business with reasonable due diligence,
efficiency and in conformity with sound business practices consistent with its
past practice.

17

 

(b)                 The Borrower and each of its Subsidiaries shall comply in
all material respects with all applicable laws, rules, regulations and orders of
any Government Authority, except where the necessity of compliance therewith is
contested in good faith by appropriate proceedings or where the failure to
comply would not have a Material Adverse Effect.

(c)                 Each of the Borrower and each of its Subsidiaries shall
obtain, make and keep in full force and effect all Authorizations from and
registrations with Government Authorities that may be required to conduct its
business, except where to failure to do so would not have a Material Adverse
Effect

(d)                 The Borrower shall promptly notify the Lenders of the
occurrence of (i) any Default or Event of Default; or (ii) any claims,
litigation, arbitration, mediation or administrative or regulatory proceedings
that are instituted or threatened against the Borrower and that would have a
Material Adverse Effect (provided that such notice shall be given concurrently
with public disclosure of any such claims or proceedings), and (iii) each event
which, at the giving of notice, lapse of time, determination of materiality or
fulfillment of any other applicable condition (or any combination of the
foregoing), would constitute an event of default (however described) under any
of the Financing Documents.

(e)                 The Borrower shall comply with the terms of each of the
Financing Documents.

(f)                  (i) If the Borrower is not required to file reports
pursuant to Sections 13 or 15(d) of the Exchange Act, the Borrower will provide
quarterly financial statements for itself and its Subsidiaries within 45 days
after the end of each quarter, and audited annual financial statements within
120 days after the end of each year prepared in accordance with GAAP with a
report thereon by the Borrower's independent certified public accountants; (ii)
the Borrower will timely file with the SEC (subject to appropriate extensions
made under Rule 12b-25 of the Exchange Act) any annual reports, quarterly
reports and other periodic reports required to be filed pursuant to Section 13
or 15(d) of the Exchange Act; and (iii) the Borrower and its Subsidiaries will
provide to the Lenders copies of all documents, reports, financial data and
other information not containing any material non-public information that the
Lenders may reasonably request.

Section 5.2                  Negative Covenants. Unless the Lenders shall
otherwise agree:

(a)                 The Borrower shall not and shall not permit any Subsidiary
to (i) liquidate or dissolve, or (ii) establish any Subsidiary unless such
Subsidiary enters into a security agreement in the form attached hereto;
provided, however, that Subsidiaries may merge with each other.

(b)                 The Borrower shall not and shall not permit any Subsidiary
to (i) enter into any partnership, joint venture, syndicate, pool,
profit-sharing or royalty agreement or other combination, or engage in any
transaction with an Affiliate, whereby its income or profits are, or might be,
shared with another Person other than a wholly-owned Subsidiary except that the
Borrower or a Subsidiary may enter into arrangements in the ordinary course of
business with other Persons relating to product development and
commercialization, (ii) enter into any management contract or similar
arrangement whereby a substantial part of its business is managed by another
Person, or (iii) distribute, or permit the distribution of, any of its assets,
including its intangibles, to any shareholder of the Borrower or an Affiliate of
such shareholder.

18

 

(c)                 The Borrower shall not and shall not permit any Subsidiary
to: (i) create, incur or suffer any Lien upon any of its assets, now owned or
hereafter acquired, except Permitted Liens; or (ii) assign, sell, transfer or
otherwise dispose of, any of the Financing Documents, or the rights and
obligations thereunder.

(d)                 The Borrower shall not and shall not permit any Subsidiary
to create, incur, assume, guarantee or be remain liable with respect to any
Indebtedness, other than Permitted Indebtedness.

(e)                 The Borrower shall not and shall not permit any Subsidiary
to acquire any assets (other than assets acquired in the ordinary course of
business consistent with past practices, including, without limitation,
acquisitions of intellectual property assets and assets of vendors to the
Borrower), directly or indirectly, in one or more related transaction, for a
consideration, in cash or other property (valued at its fair market value)
greater than $500,000.

Section 5.3                  Major Transaction. The Borrower shall give the
Lenders notice of the consummation of a Major Transaction on the shorter of 30
days prior to such consummation or 2 days following the public announcement
thereof. Within 5 days after the receipt of such notice, the Lenders, in the
exercise of their sole discretion, may deliver a notice to the Borrower (the
“Put Notice”), that the Final Payment shall be due and payable. If the Lenders
deliver a Put Notice, then simultaneously with consummation of such Major
Transaction, the Borrower shall make the Final Payment to the Lenders and upon
the Lenders receipt of the Final Payment, the Obligations shall terminate. The
Borrower shall not consummate any Major Transaction without complying with the
provisions of this Section 5.3.

Section 5.4                  General Acceleration Provision upon Events of
Default. If one or more of the events specified in this Section 5.4 shall have
happened and be continuing beyond the applicable cure period (each, an “Event of
Default”), the Lenders, by written notice to the Borrower, may cancel the
Borrower’s right to request a Disbursement and declare the principal of, accrued
and unpaid interest on, the Notes or any part of any of them (together with any
other amounts accrued or payable under the Financing Documents) to be, and the
same shall thereupon become, immediately due and payable, without any further
notice and without any presentment, demand, or protest of any kind, all of which
are hereby expressly waived by the Borrower, and take any further action
available at law or in equity, including, without limitation, the sale of the
Loan and all other rights acquired in connection with the Loan:

(a)                 The Borrower shall have failed to make payment of (i)
principal when due, or (ii) interest and any other amounts due under the Notes
within five (5) Business Days of their due date.

(b)                 The Borrower shall have failed to comply with the due
observance or performance of any covenant contained in any Financing Document
(other than the covenant described in (a) above) and such failure shall not have
been cured by Borrower within 30 days after receiving written notice of such
failure from the Lenders.

19

 

(c)                 Any representation or warranty made by the Borrower in any
Financing Document shall be incorrect, false or misleading in any material
respect as of the date it was made or reaffirmed.

(d)                 (i)  The Borrower shall generally be unable to pay its debts
as such debts become due, or shall admit in writing its inability to pay its
debts as they come due or shall make a general assignment for the benefit of
creditors; (ii) the Borrower shall declare a moratorium on the payment of its
debts; (iii) the commencement by the Borrower of proceedings to be adjudicated
bankrupt or insolvent, or the consent by it to the commencement of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization, intervention or other similar relief under
any applicable law, or the consent by it to the filing of any such petition or
to the appointment of an intervenor, receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of all or substantially all of its
assets; (iv) the commencement against the Borrower of a proceeding in any court
of competent jurisdiction under any bankruptcy or other applicable law (as now
or hereafter in effect) seeking its liquidation, winding up, dissolution,
reorganization, arrangement, adjustment, or the appointment of an intervenor,
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official), and any such proceeding shall continue undismissed, or any order,
judgment or decree approving or ordering any of the foregoing shall continue
unstayed or otherwise in effect, for a period of ninety (90) days; (v) the
making by the Borrower of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debt generally as they
become due; or (vi) any other event shall have occurred which under any
applicable law would have an effect analogous to any of those events listed
above in this subsection.

(e)                 One or more judgments against the Borrower or attachments
against any of its property, which in the aggregate exceed $150,000 (not covered
by insurance), or which could have a Material Adverse Effect remain(s) unpaid,
unstayed on appeal, undischarged, unbonded or undismissed for a period of 45
days from the date of entry of such judgment.

(f)                  Any Authorization held by the Borrower from any Government
Authority shall have been suspended, canceled or revoked and such suspension,
cancellation or revocation could reasonably be expected to have a Material
Adverse Effect, and shall not have been cured within 45 days.

(g)                 Any authorization necessary for the execution, delivery or
performance of any Financing Document or for the validity or enforceability of
any of the Obligations is not given or is withdrawn or ceases to remain in full
force or effect.

(h)                 The validity of any Financing Document shall be contested by
the Borrower, or any treaty, law, regulation, communiqué, decree, ordinance or
policy of any jurisdiction shall purport to render any material provision of any
Financing Document invalid or unenforceable or shall purport to prevent or
materially delay the performance or observance by the Borrower of the
Obligations.

20

 

(i)                   The Borrower has failed to comply in any material respect
with the reporting requirements of the Exchange Act, if applicable.

(j)                  There is a failure to perform any agreement to which the
Borrower is a party with a third party resulting in a right by such third party
to accelerate the maturity of any Indebtedness for borrowed money in an amount
in excess of $150,000.

(k)                 If an Event of Default pursuant to the Warrants (as such
term is defined in the Warrants) shall have occurred.

(l)                   The shares of Common Stock cease to be listed, traded or
publicly quoted on The NASDAQ Global Select Market and are not promptly relisted
or requoted on either the New York Stock Exchange, the NYSE Alternext U.S., the
NASDAQ Global Market or the NASDAQ Capital Market.

Section 5.5                  Automatic Acceleration on Dissolution or
Bankruptcy. Notwithstanding any other provisions of this Agreement, if an Event
of Default under Section 5.4(d) shall occur, the principal of the Notes
(together with any other amounts accrued or payable under this Agreement) shall
thereupon become immediately due and payable without any presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived by the
Borrower.

Section 5.6                  Recovery of Amounts Due. If any amount payable
hereunder is not paid as and when due, the Borrower hereby authorizes the
Lenders to proceed, to the fullest extent permitted by applicable law, without
prior notice, by right of set-off, banker’s lien or counterclaim, against any
moneys or other assets of the Borrower to the full extent of all amounts payable
to the Lenders.

ARTICLE 6

MISCELLANEOUS

Section 6.1                  Notices. Any notice, request or other communication
to be given or made under this Agreement shall be in writing. Such notice,
request or other communication shall be deemed to have been duly given or made
when it shall be delivered by hand, overnight mail, courier (confirmed by
facsimile), or facsimile (with a hard copy delivered within two (2) Business
Days) to the Party to which it is required or permitted to be given or made at
such Party’s address specified below or at such other address as such Party
shall have designated by notice to the other Parties.

For the Borrower:

2555 Davie Road

Fort Lauderdale, FL

Attention: General Counsel
Facsimile: (954) 707-5360

21

 

with a courtesy copy to:

Foley & Lardner LLP
777 E. Wisconsin Avenue
Milwaukee, WI 53202
Fax: (414) 297-4900
Attn:    Edward Hammond, Esq.
                 Jay O. Rothman, Esq.

For the Lenders c/o:

Deerfield Management

780 Third Avenue, 37th Floor

New York, New York 10017

Attention: James E. Flynn

Facsimile: (212) 573-8111

with a courtesy copy to:

Katten Muchin Rosenman LLP

575 Madison Avenue

New York, New York 10022-2585

Facsimile: (212) 894-5827

Attention: Mark I. Fisher

Section 6.2                  Waiver of Notice. Whenever any notice is required
to be given to the Lenders or the Borrower under the any of the Financing
Documents, a waiver thereof in writing signed by the person or persons entitled
to such notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.

Section 6.3                  Reimbursement of Legal and Other Expenses. If any
amount owing to the Lenders under any Financing Document shall be collected
through enforcement of this Agreement, any refinancing or restructuring of the
Loan in the nature of a work-out, settlement, negotiation, or any process of
law, or shall be placed in the hands of third Persons for collection, the
Borrower shall pay (in addition to all monies then due in respect of the Loan or
otherwise payable under any Financing Document) reasonable attorneys’ and other
fees and expenses incurred in respect of such collection.

Section 6.4                  Applicable Law and Consent to Non-Exclusive New
York Jurisdiction. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to the
conflicts of laws principles thereof other than Sections 5-1401 and 5-1402 of
the General Obligations Law of such State.

(a)                 Each Party hereby irrevocably agrees that any legal action,
suit or other proceeding arising out of any Financing Document may be brought in
the courts of the State of New York or of the United States of America for the
Southern District of New York. Each Party irrevocably consents to the service of
any process in any such legal action, suit or other proceeding by the mailing of
copies of such process to such Party at its address specified in Section 6.1 by
registered mail, return receipt requested. By the execution and delivery of this
Agreement, each Party hereby irrevocably consents and submits to the
jurisdiction of any such court in any such action, suit or other proceeding.
Final judgment against each Party in any such action, suit or other proceeding
shall be conclusive and may be enforced in any other jurisdiction by suit on the
judgment. Nothing contained in any Financing Document shall affect the right of
the Parties to commence legal proceedings in any court having jurisdiction, or
concurrently in more than one jurisdiction, or to serve process, pleadings and
other legal papers upon the other Parties in any manner authorized by the laws
of any such jurisdiction.

22

 

(b)                 Each Party irrevocably waives, to the fullest extent
permitted by applicable law, any objection which it may now or hereafter have to
the laying of venue of any action, suit or other proceeding arising out of or
relating to any Financing Document, brought in the courts of the State of New
York or in the United States District Court for the Southern District of New
York, and any claim that any such action, suit or other proceeding brought in
any such court has been brought in an inconvenient forum.

(c)                 Each Party hereby waives any and all rights to demand a
trial by jury in any action, suit or other proceeding arising out of any
Financing Document or the transactions contemplated by any Financing Document.

(d)                 To the extent that each Party may, in any suit, action or
other proceeding brought in any court arising out of or in connection with any
Financing Document, be entitled to the benefit of any provision of law requiring
another Party in such suit, action or other proceeding to post security for the
costs of another Party, or to post a bond or to take similar action, each Party
hereby irrevocably waive such benefit, in each case to the fullest extent now or
hereafter permitted under any applicable law.

Section 6.5                  Successors and Assigns. This Agreement shall bind
and inure to the respective successors and assigns of the Parties, except that
Borrower may not assign or otherwise transfer all or any part of its rights
under this Agreement or the Obligations (a “Transfer”) without the prior written
consent of the Lenders and the Lenders may not effect a Transfer to an entity
that is an operating business (rather than an investment vehicle) without the
consent of the Borrower, which shall not be unreasonably withheld. Subject to
the recording of an assignment by a Lender in the Register pursuant to Section
1.4(b), (i) the assignee thereunder shall become a party hereto and, to the
extent that rights and obligations under Financing Documents have been assigned
to such assignee pursuant to such assignment, shall have the rights and
obligations of a Lender, (ii) any applicable Note shall be transferred to such
assignee through such entry and (iii) the assignor thereunder shall, to the
extent that its rights and obligations under this Agreement have been assigned
by it pursuant to such assignment, relinquish its rights (except for those
surviving the payment in full of the Obligations) and be released from its
obligations under the Financing Documents, other than those relating to events
or circumstances occurring prior to such assignment (and, in the case of an
assignment covering all or the remaining portion of an assigning Lender’s rights
and obligations under the Loan Documents, such Lender shall cease to be a party
hereto).

Section 6.6                  Entire Agreement. The Financing Documents contain
the entire understanding of the Parties with respect to the matters covered
thereby and supersede any and all other written and oral communications,
negotiations, commitments and writings with respect thereto. The provisions of
this Agreement may be waived, modified, supplemented or amended only by an
instrument in writing signed by the authorized officer of each Party.

23

 

Section 6.7                  Severability. If any provision of this Agreement
shall be invalid, illegal or unenforceable in any respect under any law, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby. The Parties shall endeavor in good
faith negotiations to replace the invalid, illegal or unenforceable provisions
with valid provisions the economic effect of which comes as close as possible to
that of the invalid, illegal or unenforceable provision.

Section 6.8                  Counterparts. This Agreement may be executed in
several counterparts, and by each Party on separate counterparts, each of which
and any photocopies and facsimile copies thereof shall be deemed an original,
but all of which together shall constitute one and the same agreement.

Section 6.9                  Survival.

(a)                 This Agreement and all agreements, representations and
warranties made in the Financing Documents, and in any document, certificate or
statement delivered pursuant thereto or in connection therewith shall be
considered to have been relied upon by the other Parties and shall survive the
execution and delivery of this Agreement and the making of the Loan hereunder
regardless of any investigation made by any such other Party or on its behalf,
and shall continue in force until all amounts payable under the Financing
Documents shall have been fully paid in accordance with the provisions thereof,
and the Lenders shall not be deemed to have waived, by reason of making the
Loan, any Event of Default that may arise by reason of such representation or
warranty proving to have been false or misleading, notwithstanding that the
Lenders may have had notice or knowledge of any such Event of Default or may
have had notice or knowledge that such representation or warranty was false or
misleading at the time the Disbursement was made.

(b)                 The obligations of the Borrower under Section 2.5 and the
obligations of the Borrower and the Lenders under this Article 6 shall survive
and remain in full force and effect regardless of the consummation of the
transactions contemplated hereby, the repayment of the Loan, or the termination
of this Agreement or any provision hereof.

Section 6.10              Waiver. Neither the failure of, nor any delay on the
part of, any Party in exercising any right, power or privilege hereunder, or
under any agreement, document or instrument mentioned herein, shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
privilege hereunder, or under any agreement, document or instrument mentioned
herein, preclude other or further exercise thereof or the exercise of any other
right, power or privilege; nor shall any waiver of any right, power, privilege
or default hereunder, or under any agreement, document or instrument mentioned
herein, constitute a waiver of any other right, power, privilege or default or
constitute a waiver of any default of the same or of any other term or
provision. No course of dealing and no delay in exercising, or omission to
exercise, any right, power or remedy accruing to the Lenders upon any default
under this Agreement, or any other agreement shall impair any such right, power
or remedy or be construed to be a waiver thereof or an acquiescence therein; nor
shall the action of the Lenders in respect of any such default, or any
acquiescence by it therein, affect or impair any right, power or remedy of the
Lenders in respect of any other default. All rights and remedies herein provided
are cumulative and not exclusive of any rights or remedies otherwise provided by
law.

24

 

Section 6.11              Indemnity.

(a)                 The Parties shall, at all times, indemnify and hold each
other harmless (the “Indemnity”) and each of their respective directors,
partners, officers, employees, agents, counsel and advisors (each, an
“Indemnified Person”) in connection with any losses, claims (including the cost
of defending against such claims), damages, liabilities, penalties, or other
expenses arising out of, or relating to, the Financing Documents, the extension
of credit hereunder or the Loan or the use or intended use of the Loan, which an
Indemnified Person may incur or to which an Indemnified Person may become
subject (each, a “Loss”). The Indemnity shall not apply to the extent that a
court or arbitral tribunal with jurisdiction over the subject matter of the
Loss, and over the Lenders or the Borrower, as applicable, and such other
Indemnified Person that had an adequate opportunity to defend its interests,
determines that such Loss resulted from the gross negligence or willful
misconduct of the Indemnified Person, which determination results in a final,
non-appealable judgment or decision of a court or tribunal of competent
jurisdiction. The Indemnity is independent of and in addition to any other
agreement of any Party under any Financing Document to pay any amount to the
Lenders or the Borrower, as applicable, and any exclusion of any obligation to
pay any amount under this subsection shall not affect the requirement to pay
such amount under any other section hereof or under any other agreement.

(b)                 Without prejudice to the survival of any other agreement of
any of the Parties hereunder, the agreements and the obligations of the Parties
contained in this Section 6.11 shall survive the termination of each other
provision hereof and the payment of all amounts payable to the Lenders
hereunder.

Section 6.12              No Usury. The Financing Documents are hereby expressly
limited so that in no contingency or event whatsoever, whether by reason of
acceleration or otherwise, shall the amount paid or agreed to be paid to the
Lenders for the Loan exceed the maximum amount permissible under applicable law.
If from any circumstance whatsoever fulfillment of any provision hereof, at the
time performance of such provision shall be due, shall involve transcending the
limit of validity prescribed by law, then, ipso facto, the obligation to be
fulfilled shall be reduced to the limit of such validity, and if from any such
circumstance the Lenders shall ever receive anything which might be deemed
interest under applicable law, that would exceed the highest lawful rate, such
amount that would be deemed excessive interest shall be applied to the reduction
of the principal amount owing on account of the Loan, or if such deemed
excessive interest exceeds the unpaid balance of principal of the Loan, such
deemed excess shall be refunded to the Borrower. All sums paid or agreed to be
paid to the Lenders for the Loan shall, to the extent permitted by applicable
law, be deemed to be amortized, prorated, allocated and spread throughout the
full term of the Loan until payment in full so that the deemed rate of interest
on account of the Loan is uniform throughout the term thereof. The terms and
provisions of this Section shall control and supersede every other provision of
this Agreement and the Notes.

25

 

Section 6.13              Further Assurances. From time to time, the Borrower
shall perform any and all acts and execute and deliver to the Lenders such
additional documents as may be necessary or as requested by the Lenders to carry
out the purposes of any Financing Document or any or to preserve and protect the
Lenders’ rights as contemplated therein.

 

[SIGNATURE PAGE FOLLOWS]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

IN WITNESS WHEREOF, the Lenders and the Borrower have caused this Agreement to
be duly executed as of the date first above written.

BORROWER:

 

MAKO SURGICAL CORP.

 

By:  /s/ Maurice R. Ferré   Name:  Maurice R. Ferré, M.D.   Title:    President
and CEO               LENDER:         DEERFIELD PRIVATE DESIGN FUND II, L.P.    
  By: Deerfield Capital, L.P., General Partner By: J. E. Flynn Capital LLC,
General Partner       By: /s/ James E. Flynn   Name:  James E. Flynn   Title:   
President               LENDER:         DEERFIELD PRIVATE DESIGN INTERNATIONAL
II, L.P.       By: Deerfield Capital, L.P., General Partner By: J. E. Flynn
Capital LLC, General Partner       By: /s/ James E. Flynn   Name:  James E.
Flynn   Title:    President  

 

 

 

FACILITY AGREEMENT

 

 

SCHEDULE 1

LENDER

ALLOCATION OF DISBURSEMENT, PREPAYMENTS AND WARRANTS

 

DEERFIELD PRIVATE DESIGN FUND II, L.P.

 

46.60%

DEERFIELD PRIVATE DESIGN INTERNATIONAL II, L.P.

 

53.40%

 

 

 

 

 

 

 

 

 

 

 

 

 

SCHEDULE 2

FORM OF DISBURSEMENT REQUEST

[LETTERHEAD OF THE BORROWER]

[Date]

Ladies and Gentlemen:

Request for Disbursement of the Loan

1.                 Please refer to the Facility Agreement (the “Facility
Agreement”), dated as of May__, 2012 between MAKO Surgical Corp. (the
“Borrower”) and the Lenders (as defined therein).

2.                 Terms defined in the Facility Agreement shall have the same
meanings herein.

3.                 The Borrower hereby requests a Disbursement, on [date], of
the amount of [amount of drawdown], in accordance with the provisions of
Section 2.2 of the Facility Agreement. You are requested to pay the amount to
the following account [account number] at [name of bank].

4.                 Attached hereto is a signed but undated receipt for the
amount hereby requested to be disbursed, and we hereby authorize the Lenders to
date such receipt as of the date of actual disbursement by the Lenders of the
funds hereby requested to be disbursed.

5.                 The Borrower hereby certifies as follows:

(a)                 The representations and warranties in Article 3 of the
Facility Agreement are true in all material respects on the date hereof with the
same effect as though such representations and warranties had been made on
today’s date;

(b)                 No Event of Default or Default has occurred and is
continuing; and

(c)                 The conditions to such Disbursement set forth in Article 4
of the Facility Agreement have been fulfilled. .

6.                 The above certifications are effective as of the date of this
request for Disbursement and will continue to be effective as of the
Disbursement Date. If any of these certifications is no longer valid as of or
prior to the Disbursement Date, the Borrower will immediately notify the Lenders
and will repay the amount disbursed upon demand by the Lenders if Disbursement
is made prior to the receipt of such notice.

  MAKO SURGICAL CORP.             By:       Name:        Title:    

 

 

 

 

SCHEDULE 3

FORM OF EVIDENCE OF DISBURSEMENT

[LETTERHEAD OF THE BORROWER]

[Date]

Ladies and Gentlemen:

Re:      Disbursement Receipt

MAKO Surgical Corp. (the “Borrower”) hereby acknowledge receipt of the sum of
[insert amount of disbursement] disbursed to us by the Lenders (as defined
therein) under the Loan provided for in the Facility Agreement, dated as of
May__, 2012, between the Borrower and the Lenders.

 

  Yours faithfully,           MAKO SURGICAL CORP.             By:       Name:   
    Title:    

 

 

 

 

 

 

 

 

 

 

 

 

 

SCHEDULE 3.1

 

Disclosures Pursuant to Section 3.1 of the Facility Agreement

dated as of May 7, 2012 between MAKO Surgical Corp.

and the Lenders Named Therein

 

 

1.                   Section 3.1(h) - In addition to the litigation and other
proceedings disclosed in the Borrower SEC Reports, from time to time the
Borrower becomes party to various litigation matters generally arising in the
normal course of business, including disputes with former employees and product
liability claims.

2.                   Section 3.1(p) clause (A) - Warning letters or other
similar correspondence from the FDA - None as of the date of the Facility
Agreement.

3.                   Section 3.1(u) - The Company has reserved 85,000 common
shares for future option grants made pursuant to ordinary course arrangements
with contractors to the Company who are not otherwise eligible for grants under
the Company’s 2004 and 2008 option plans. From time to time the Company grants
shares of Common Stock pursuant to its employee stock purchase program and the
balance of shares remaining for future grant is disclosed annually by the
Company in its Form 10-K.

 

 

 

 

 

 

 

 

 

 

SCHEDULE 4

MAKO SURGICAL CORP.

Condensed Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

    March 31,
2012     December 31,
2011   ASSETS                 Current Assets:                 Cash and cash
equivalents   $ 8,693     $ 13,438   Short-term investments     36,345      
36,354   Accounts receivable, net of allowances of $203 and $158, at March 31,
2012 and December 31, 2011, respectively     12,520       20,783   Inventory    
23,248       19,529   Deferred cost of revenue     390       160   Prepaid and
other current assets     4,133       1,800   Total current assets     85,329    
  92,064   Long-term investments     1,754       8,902   Property and equipment,
net     21,239       19,389   Intangible assets, net     6,864       7,284  
Other assets     119       132   Total assets   $ 115,305     $ 127,771        
            LIABILITIES AND STOCKHOLDERS’ EQUITY                 Current
Liabilities:                 Accounts payable   $ 5,575     $ 4,231   Accrued
compensation and employee benefits     2,872       7,579   Other accrued
liabilities     7,556       10,622   Deferred revenue     5,269       4,826  
Total current liabilities     21,272       27,258                     Deferred
revenue, non-current     75       75   Total liabilities     21,347       27,333
                    Commitments and contingencies (Note 5)                      
            Stockholders’ equity:                 Preferred stock, $0.001 par
value; 27,000,000 authorized; 0 shares issued and outstanding as of March 31,
2012 and December 31, 2011     ―       ―   Common stock, $0.001 par value;
135,000,000 authorized; 42,089,513 and 41,439,057 shares issued and outstanding
as of March 31, 2012 and December 31, 2011, respectively     42       41  
Additional paid-in capital     294,604       289,352   Accumulated deficit    
(200,755 )     (189,025 ) Accumulated other comprehensive gain     67       70  
Total stockholders’ equity     93,958       100,438   Total liabilities and
stockholders’ equity   $ 115,305     $ 127,771  

 

See accompanying notes.

 

 

MAKO SURGICAL CORP.

 

Condensed Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

    Three Months Ended
March 31,       2012     2011   Revenue:                 Procedures   $ 11,562  
  $ 6,467   Systems – RIO     5,871       5,364   Service     2,206       1,195
  Total revenue     19,639       13,026   Cost of revenue:                
Procedures     2,657       1,798   Systems – RIO     2,448       2,038   Service
    381       259   Total cost of revenue     5,486       4,095   Gross profit  
  14,153       8,931   Operating costs and expenses:                 Selling,
general and administrative     19,788       14,809   Research and development  
  4,854       4,194   Depreciation and amortization     1,274       975   Total
operating costs and expenses     25,916       19,978   Loss from operations    
(11,763 )     (11,047 ) Other income, net     58       92   Loss before income
taxes     (11,705 )     (10,955 ) Income tax expense     25       40   Net loss
  $ (11,730 )   $ (10,995 ) Net loss per share – Basic and diluted   $ (0.28 )  
$ (0.27 ) Weighted average common shares outstanding – Basic and diluted    
41,694       40,107  

 

See accompanying notes.

 

 

 

 

MAKO SURGICAL CORP.

 

Condensed Statements of Comprehensive Loss

(in thousands)

 

    Three Months Ended March 31,       2012     2011                 Net loss  
$ (11,730 )   $ (10,995 ) Other comprehensive loss:                 Unrealized
losses on available-for-sale securities     (3 )     (26 ) Comprehensive loss  
$ (11,733 )   $ (11,021 )

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

MAKO SURGICAL CORP.

 

Condensed Statements of Cash Flows

(in thousands, except share data)

(Unaudited)

 

    Three Months Ended March 31,       2012     2011   Operating activities:    
            Net loss   $ (11,730 )   $ (10,995 ) Adjustments to reconcile net
loss to net cash used in operating activities:                 Depreciation    
1,378       834   Amortization of intangible assets     420       320  
Stock-based compensation     2,721       2,300   Inventory write-down     28    
  ―   Amortization of premium on investment securities     128       108   Loss
on asset impairment     249       148   Provision for doubtful accounts     45  
    101   Issuance of restricted stock under development agreement     227      
720   Changes in operating assets and liabilities:                 Accounts
receivable     8,218       3,376   Inventory     (5,041 )     (2,266 ) Deferred
cost of revenue     (230 )     (380 ) Prepaid and other current assets    
(2,333 )     (876 ) Other assets     13       17   Accounts payable     1,344  
    (59 ) Accrued compensation and employee benefits     (4,707 )     (3,357 )
Other accrued liabilities     (3,066 )     (732 ) Deferred revenue     443      
1,079   Net cash used in operating activities     (11,893 )     (9,662 )
Investing activities:                 Purchase of investments     (3,160 )    
(15,086 ) Proceeds from sales and maturities of investments     10,186      
15,636   Acquisition of property and equipment     (2,183 )     (1,263 ) Net
cash provided by (used in) investing activities     4,843       (713 ) Financing
activities:                 Proceeds from employee stock purchase plan     360  
    241   Exercise of common stock options and warrants for cash     2,026      
516   Payment of payroll taxes relating to vesting of restricted stock     (81 )
    (357 ) Net cash provided by financing activities     2,305       400   Net
decrease in cash and cash equivalents     (4,745 )     (9,975 ) Cash and cash
equivalents at beginning of period     13,438       27,108   Cash and cash
equivalents at end of period   $ 8,693     $ 17,133                     Non-cash
investing and financing activities:                 Receipt of 2,278 and 20,390
shares of common stock delivered in payment of payroll taxes for the three
months ended March 31, 2012 and 2011, respectively   $ 81     $ 357   Transfers
of inventory to property and equipment     1,294       1,153   Issuance of
restricted stock under development agreement     227       720  

 

See accompanying notes.

 

 

MAKO SURGICAL CORP.

 

Notes to Condensed Financial Statements

March 31, 2012

(Unaudited)

 

 

1.  Organization and Basis of Presentation

 

MAKO Surgical Corp. (the “Company” or “MAKO”) is an emerging medical device
company that markets its advanced robotic arm solution and orthopedic implants
for orthopedic procedures called MAKOplasty®. The Company was incorporated in
the State of Delaware on November 12, 2004 and is headquartered in
Fort Lauderdale, Florida. The Company’s common stock trades on The NASDAQ Global
Select Market under the ticker symbol “MAKO.”

 

Basis of Presentation

 

In the opinion of management, the accompanying unaudited condensed financial
statements (“condensed financial statements”) of the Company have been prepared
on a basis consistent with the Company’s December 31, 2011 audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary to fairly state the information set forth herein. These
condensed financial statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission and, therefore, omit
certain information and footnote disclosure necessary to present the statements
in accordance with accounting principles generally accepted in the United
States. These quarterly condensed financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company’s annual report on Form 10-K for the year ended December 31, 2011
(the “Form 10-K”). The results of operations for the three months ended March
31, 2012 may not be indicative of the results to be expected for the entire year
or any future periods.

 

Liquidity and Operations

 

In executing its current business plan, the Company believes its existing cash,
cash equivalents and investment balances will be sufficient to meet its
anticipated cash requirements for at least the next twelve months. To the extent
the Company’s available cash, cash equivalents and investment balances are
insufficient to satisfy its operating requirements, the Company will need to
seek additional sources of funds, including selling additional equity, debt or
other securities or drawing on our available credit facility (see Note 8 for a
discussion of the Facility Agreement), or modifying its current business plan.
The sale of additional equity or convertible debt securities may result in
dilution to the Company’s current stockholders. If the Company raises additional
funds through the issuance of debt securities, these securities may have rights
senior to those of its common stock and could contain covenants that could
restrict the Company’s operations and ability to issue dividends. The Company
may also require additional capital beyond its currently forecasted amounts. Any
required additional capital, whether forecasted or not, may not be available on
reasonable terms, or at all. If the Company is unable to obtain additional
financing, the Company may be required to reduce the scope of, delay or
eliminate some or all of its planned research, development and commercialization
activities, which could materially harm its business and results of operations.

 

Concentrations of Credit Risk and Other Risks and Uncertainties

 

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
investments, and accounts receivable. The Company’s cash and cash equivalents
are held in demand and money market accounts at four large financial
institutions. The Company’s investments are held in a variety of interest
bearing instruments, including notes and bonds from U.S. government agencies and
certificates of deposit at three large financial institutions. Such deposits are
generally in excess of insured limits. The Company has not experienced any
historical losses on its deposits of cash and cash equivalents.

 

 

 

The Company may perform credit evaluations of its customers’ financial condition
and, generally, requires no collateral from its customers. The Company provides
an allowance for doubtful accounts when collections become doubtful but has not
experienced any significant credit losses to date.

 

The Company is subject to risks common to emerging companies in the medical
device industry including, but not limited to: new technological innovations,
dependence on key personnel, dependence on key suppliers, changes in general
economic conditions and interest rates, protection of proprietary technology,
compliance with new and established domestic and foreign government regulations
and taxes, uncertainty of widespread market acceptance of products, access to
credit for capital purchases by our customers, product liability and the need to
obtain additional financing. The Company’s products include components subject
to rapid technological change. Certain components used in manufacturing have
relatively few alternative sources of supply and establishing additional or
replacement suppliers for such components cannot be accomplished quickly. The
inability of any of these suppliers to fulfill the Company’s supply requirements
may negatively impact future operating results. While the Company has ongoing
programs to minimize the adverse effect of such uncertainty and considers
technological change in estimating the net realizable value of its inventory,
uncertainty continues to exist.

 

The Company expects to derive most of its revenue from capital sales of its RIO®
Robotic Arm Interactive Orthopedic (“RIO”) system, current and future MAKOplasty
applications to the RIO system, recurring sales of implants and disposable
products required for each MAKOplasty procedure, and service plans that are sold
with the RIO system. If the Company is unable to achieve broad commercial
acceptance of MAKOplasty or obtain regulatory clearances or approvals for future
products, including other orthopedic products, its revenue would be adversely
affected and the Company would not become profitable.

 

The Company’s current versions of its RIO system, its MAKOplasty partial knee
and total hip arthroplasty applications, and its RESTORIS® MCK
multicompartmental knee implant systems and RESTORIS total hip implant systems
have been cleared by the U.S. Food and Drug Administration (“FDA”). Certain
products currently under development by the Company will require clearance or
approval by the FDA or other international regulatory agencies prior to
commercial sale. There can be no assurance that the Company’s products will
receive the necessary clearances or approvals. If the Company were to be denied
any such clearance or approval or such clearance or approval were delayed, it
could have a material adverse impact on the Company.

 

2.  Summary of Significant Accounting Policies

 

Revenue Recognition

 

Revenue is generated: from (1) unit sales of the Company’s RIO system and
MAKOplasty applications (collectively, the “RIO system”), including associated
instrumentation, installation services and training; (2) sales of implants and
disposable products utilized in MAKOplasty procedures; and (3) sales of warranty
and maintenance services. The Company recognizes revenue in accordance with ASC
605-10, Revenue Recognition, when persuasive evidence of an arrangement exists,
the fee is fixed or determinable, collection of the fee is probable and delivery
has occurred. For all sales, the Company uses either a signed agreement or a
binding purchase order as evidence of an arrangement.

 

 

 

The Company’s multiple-element arrangements are generally comprised of the
following elements that qualify as separate units of accounting: (1) RIO system
sales; (2) sales of implants and disposable products; and (3) warranty and
maintenance services on the RIO system hardware. The Company’s revenue
recognition policies generally result in revenue recognition at the following
points:

 

1.   RIO system sales: Revenues related to RIO system sales are recognized upon
installation of the system, training of at least one surgeon, which typically
occurs prior to or concurrent with the RIO system installation, and customer
acceptance, if required.     2. Procedure revenue: Revenues from the sale of
implants and disposable products utilized in MAKOplasty procedures are
recognized at the time of sale (i.e., at the time of the related surgical
procedure).     3. Service revenue: Revenues from warranty and maintenance
services, including extended warranty services, on the RIO system hardware are
deferred and recognized ratably over the service period until no further
obligation exists. Sales of the Company’s RIO system generally include a
one-year warranty and maintenance obligation for services. Costs associated with
providing warranty and maintenance services are expensed to cost of revenue as
incurred.

 

Provisions for discounts and rebates to customers are established as a reduction
to revenue in the same period as the related sales are recorded.

 

A portion of the Company’s end-user customers acquire the RIO system through a
leasing arrangement with qualified third-party leasing companies. In these
instances, the Company sells the RIO system to the third-party leasing company,
and the end-user customer enters into an independent leasing arrangement with
the third-party leasing company. The Company recognizes RIO system revenue for a
RIO system sale to a third-party leasing company on the same basis as a RIO
system sale directly to an end-user customer. The Company sells implants and
disposable products utilized in MAKOplasty procedures directly to end-user
customers under a separate agreement.

 

The Company’s domestic sales contracts generally do not provide the customer
with a right of return. If such a right is provided, all related revenues would
be deferred until such right expires or is waived. The Company’s domestic sales
contracts generally do not provide the customer with a customer acceptance
period.  If such a right is provided, all related revenues would be deferred
until the customer has unconditionally accepted the RIO system.

 

Sales of implants and disposable products to independent international
distributors generally provide for a right of return. Accordingly, no revenue is
recognized for these sales until the right of return expires or is waived. Sales
of the Company’s RIO system to international distributors generally do not
provide the distributor with a right of return. If such a right is provided, all
related revenues would be deferred until such right expires or is waived. The
one-year warranty for RIO system sales to international distributors is limited
to replacing parts within the warranty period and does not provide for
maintenance services. The Company accrues for the estimated costs of providing
the one-year warranty for RIO system sales to international distributors upon
installation as a component of cost of revenue - systems in the statements of
operations.

 

The Company’s RIO system includes software that is essential to the
functionality of the product. Since the RIO system’s software and non-software
components function together to deliver the RIO system’s essential
functionality, they are considered one deliverable that is excluded from the
software revenue recognition guidance. 

 

 

 

The Company allocates arrangement consideration to the RIO systems and
associated instrumentation, its implants and disposables and its warranty and
maintenance services based upon the relative selling-price method. Under this
method, revenue is allocated at the time of sale to all deliverables based on
their relative selling price using a specific hierarchy. The hierarchy is as
follows: vendor-specific objective evidence (“VSOE”) of fair value of the
respective elements, third-party evidence of selling price, or best estimate of
selling price (“ESP”).

 

The Company allocates arrangement consideration using ESP for its RIO system,
ESP for its implants and disposables and VSOE of fair value for its warranty and
maintenance services. VSOE of fair value is based on the price charged when the
element is sold separately. ESP is established by determining the price at which
the Company would transact a sale if the product was sold on a stand-alone
basis. The Company determines ESP for its products by considering multiple
factors including, but not limited to, geographies, type of customer, and market
conditions. The Company regularly reviews ESP and maintains internal controls
over the establishment and updates of these estimates.

 

Costs associated with establishing an accrual for royalties covered by licensing
arrangements related to the sale of RIO systems are expensed upon installation
and are included in cost of revenue - systems, in the statements of operations.

 

Deferred Revenue and Deferred Cost of Revenue

 

Deferred revenue consists of deferred service revenue, deferred system revenue
and deferred procedure revenue. Deferred service revenue results from the
advance payment for services to be delivered over a period of time, usually in
one-year increments. Deferred system revenue arises from timing differences
between the installation of RIO systems and satisfaction of all revenue
recognition criteria consistent with the Company’s revenue recognition policy.
Deferred procedure revenue arises from sales to independent international
distributors which provide for a right of return. No revenue is recognized for
these sales until the right of return expires or is waived. Deferred revenue
expected to be realized within one year is classified as a current liability.
Deferred cost of revenue consists of the direct costs associated with the
manufacture of RIO systems and implants and disposable products for which the
revenue has been deferred in accordance with the Company’s revenue recognition
policy. The deferred revenue balance as of March 31, 2012 consisted primarily of
deferred service revenue for warranty and maintenance services on the RIO system
hardware.

 

Inventory

 

Inventory is stated at the lower of cost or market value on a first-in,
first-out basis. Inventory costs include direct materials, direct labor and
manufacturing overhead. The Company reviews its inventory periodically to
determine net realizable value and considers product upgrades in its periodic
review of realizability. The Company writes down inventory, if required, based
on forecasted demand and technological obsolescence. These factors are impacted
by market and economic conditions, technology changes and new product
introductions and require estimates that may include uncertain elements.

 

Net Loss Per Share

 

The Company calculated net loss per share in accordance with ASC 260, Earnings
per Share. Basic earnings per share (“EPS”) is calculated by dividing the net
income or loss 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 or loss 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. The following table sets forth potential shares of
common stock that are not included in the calculation of diluted net loss per
share because to do so would be anti-dilutive as of the end of each period
presented:

 

 

 

(in thousands)   March 31,       2012     2011   Stock options outstanding    
5,541       5,332   Warrants to purchase common stock     1,053       1,972  
Unvested restricted stock     456       537   Total     7,050       7,841  

 

Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board issued new accounting
guidance related to the presentation of comprehensive income that increases
comparability between U.S. generally accepted accounting principles and
International Financial Reporting Standards. This guidance will require
companies to present the components of net income and other comprehensive income
(“OCI”) either as one continuous statement or as two consecutive statements,
eliminating the option to present components of other comprehensive income as
part of the statement of changes in stockholders’ equity. This guidance is
effective for the Company’s interim and annual periods beginning January 1,
2012. The Company early adopted this guidance in 2011 and reports OCI in a
separate statement. The adoption did not have a material impact on the Company’s
results of operations or financial position.

 

3.  Investments

 

The Company’s investments are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses included in other comprehensive gain (loss) within
stockholders’ equity. Realized gains and losses, interest and dividends,
amortization of premium and discount on investment securities and declines in
value determined to be other-than-temporary on available-for-sale securities are
included in other income, net. During the three months ended March 31, 2012 and
2011, realized gains and losses recognized on the sale of investments were not
significant. The cost of securities sold is based on the specific identification
method.

 

The amortized cost and fair value of short and long-term investments, with gross
unrealized gains and losses, were as follows:

 

As of March 31, 2012

 

(in thousands)   Amortized
Cost     Gross
Unrealized
Gains     Gross
Unrealized
Losses     Fair
Value   Short-term investments:                                 U.S. government
agencies   $ 17,912     $ 28     $ (6 )   $ 17,934   Certificates of deposit    
18,378       39       (6 )     18,411   Long-term investments:                  
              U.S. government agencies     1,010       5       ―       1,015  
Certificates of deposit     732       7       ―       739   Total investments  
$ 38,032     $ 79     $ (12 )   $ 38,099  

 

 

 

 

As of December 31, 2011

 

(in thousands)   Amortized
Cost     Gross
Unrealized
Gains     Gross
Unrealized
Losses     Fair
Value   Short-term investments:                                 U.S. government
agencies   $ 19,733     $ 23     $ (3 )   $ 19,753   Certificates of deposit    
16,588       24       (11 )     16,601   Long-term investments:                
                U.S. government agencies     3,761       21       ―       3,782
  Certificates of deposit     5,104       18       (2 )     5,120   Total
investments   $ 45,186     $ 86     $ (16 )   $ 45,256  

 

As of March 31, 2012 and December 31, 2011, all short-term investments had
maturity dates of less than one year. As of March 31, 2012 and December 31,
2011, all long-term investments had maturity dates between one and two years.

 

The fair values of the Company’s investments based on the level of inputs are
summarized below:

 

(in thousands)        

Fair Value Measurements at the Reporting Date Using

 

    March 31, 2012     Quoted Prices in
Active Markets for Identical Assets (Level 1)     Significant Other Observable
Inputs (Level 2)     Significant Unobservable Inputs
(Level 3) Short-term investments:                             U.S. government
agencies   $ 17,934     $ 4,261     $ 13,673     $― Certificates of deposit    
18,411       ―       18,411     ― Long-term investments:                        
    U.S. government agencies     1,015       507       508     ― Certificates of
deposit     739       ―       739     ― Total investments   $ 38,099     $ 4,768
    $ 33,331     $―

 

Level 2 securities are priced using quoted market prices and other observable
market inputs for similar securities or discounted cash flow techniques. There
have been no transfers between Level 1 and Level 2 measurements during the three
months ended March 31, 2012. No investments measured at fair value on a
recurring basis used Level 3 or significant unobservable inputs for the three
months ended March 31, 2012.

 

Carrying amounts of certain of the Company’s financial instruments, including
cash and cash equivalents, investments, accounts receivable and other accrued
liabilities approximate fair value due to their short maturities or market rates
of interest.

 

 

 

4.  Inventory

 

Inventory consisted of the following:

 

(in thousands)   March 31,     December 31,       2012     2011                
    Raw materials   $ 3,657     $ 3,051   Work-in-process     1,347       866  
Finished goods     18,244       15,612   Total inventory   $ 23,248     $ 19,529
 

 

The Company reviews its inventory periodically to determine net realizable value
and considers product upgrades in its periodic review of realizability.
Depending on demand for the Company’s products and technical obsolescence,
future write-offs of the Company’s inventory may occur.

 

5.  Commitments and Contingencies

 

Purchase Commitments

 

At March 31, 2012, the Company was committed to make future purchases for
inventory and other items that occur in the ordinary course of business under
various purchase arrangements with fixed purchase provisions aggregating $16.5
million.

 

Contingencies

 

The Company accrues a liability for legal contingencies when it believes that it
is both probable that a liability has been incurred and that it can reasonably
estimate the amount of the loss. The Company reviews these accruals and adjusts
them to reflect ongoing negotiations, settlements, rulings, advice of legal
counsel and other relevant information. To the extent new information is
obtained and the Company's views on the probable outcomes of claims, suits,
assessments, investigations or legal proceedings change, changes in the
Company's accrued liabilities would be recorded in the period in which such
determination is made. For the matters referenced below, the amount of liability
is not probable or the amount cannot be reasonably estimated; and, therefore,
accruals have not been made. In addition, in accordance with the relevant
authoritative guidance, for matters which the likelihood of material loss is at
least reasonably possible, the Company provides disclosure of the possible loss
or range of loss; however, if a reasonable estimate cannot be made, the Company
will provide disclosure to that effect.

 

The Company is a defendant in various litigation matters generally arising in
the normal course of business. Although it is difficult to predict the ultimate
outcomes of these cases, the Company believes that it is not reasonably possible
that the ultimate outcomes will materially and adversely affect its business,
financial position, results of operations or cash flows.

 

 

 

6.  Stockholders’ Equity

 

Preferred Stock

 

As of March 31, 2012 and December 31, 2011, the Company was authorized to issue
27,000,000 shares of $0.001 par value preferred stock. As of March 31, 2012 and
December 31, 2011, there were no shares of preferred stock issued or
outstanding.

 

Common Stock

 

As of March 31, 2012 and December 31, 2011, the Company was authorized to issue
135,000,000 shares of $0.001 par value common stock. Common stockholders are
entitled to dividends as and if declared by the Board of Directors, subject to
the rights of holders of all classes of stock outstanding having priority rights
as to dividends. There have been no dividends declared to date on the common
stock. The holder of each share of common stock is entitled to one vote.

 

Stock Option Plans and Stock-Based Compensation

 

The Company recognizes compensation expense for its stock-based awards in
accordance with ASC 718, Compensation-Stock Compensation. ASC 718 requires the
recognition of compensation expense, using a fair value based method, for costs
related to all stock-based payments including stock options. ASC 718 requires
companies to estimate the fair value of stock-based payment awards on the date
of grant using an option-pricing model.

 

During the three months ended March 31, 2012 and 2011, stock-based compensation
expense was $2.7 million and $2.3 million, respectively. Included within
stock-based compensation expense for the three months ended March 31, 2012 were
$2.2 million related to stock option grants, $386,000 related to restricted
stock granted to the Company’s CEO at various dates from 2009 through 2011, and
$125,000 related to employee stock purchases under the 2008 Employee Stock
Purchase Plan.

 

The Company’s 2004 Stock Incentive Plan (the “2004 Plan”), its 2008 Omnibus
Incentive Plan (the “2008 Plan,” and together with the 2004 Plan, the “Plans”),
and its 2008 Employee Stock Purchase Plan are described in the notes to
financial statements in the Form 10-K. Generally, the Company’s outstanding
stock options vest over four years. Stock options granted to certain
non-employee directors generally vest over one year. Continued vesting typically
terminates when the employment or consulting relationship ends. Vesting
generally begins on the date of grant.

 

The 2008 Plan contains an evergreen provision whereby the authorized shares
increase on January 1st of each year in an amount equal to the least of (1) 4%
of the total number of shares of the Company’s common stock outstanding on
December 31st of the preceding year, (2) 2.5 million shares and (3) a number of
shares determined by the Company’s Board of Directors that is lesser than (1)
and (2). The number of additional shares authorized under the 2008 Plan on
January 1, 2012 was approximately 1,676,000.

 

Under the terms of the Plans, the maximum term of options intended to be
incentive stock options granted to persons who own at least 10% of the voting
power of all outstanding stock on the date of grant is 5 years. The maximum term
of all other options is 10 years. Options issued under the 2008 Plan that are
forfeited or expire will again be made available for issuing grants under the
2008 Plan. Options issued under the 2004 Plan that are forfeited or expire will
not be made available for issuing grants under the 2008 Plan. All future equity
awards will be made under the Company’s 2008 Plan.

 

 

 

Activity under the Plans is summarized as follows:

 

(in thousands, except per share data)         Outstanding Options      
Shares/Options
Available
For Grant     Number of
Options     Weighted
Average
Exercise
Price   Balance at December 31, 2011     469       4,753     $ 11.06   Shares
reserved     1,676       ―        ―   Net shares settled under the 2008 Plan    
1       ―           ―   Options granted     (1,126 )     1,126       36.40  
Options exercised     ―       (257 )     8.33   Options forfeited under the 2004
Plan     ―       (1 )     11.12   Options forfeited under the 2008 Plan     80  
    (80 )     14.37   Balance at March 31, 2012     1,100       5,541      
16.29  

 

The Company records stock-based compensation expense on a straight-line basis
over the vesting period. As of March 31, 2012, there was total unrecognized
compensation cost of $32.1 million, net of estimated forfeitures, related to
non-vested stock-based payments (including stock option grants, restricted stock
grants and compensation expense relating to shares issued under the 2008
Employee Stock Purchase Plan). The unrecognized compensation cost will be
adjusted for future changes in estimated forfeitures, and is expected to be
recognized over a remaining weighted average period of 3.0 years as of March 31,
2012.

 

The estimated grant date fair values of the employee stock options were
calculated using the Black-Scholes valuation model, based on the following
assumptions:

 

    Three Months Ended March 31,       2012     2011   Risk-free interest rate  
  1.35% - 1.40%       2.71% - 2.92%   Expected life     6.25 years       6.25
years   Expected dividends     ―       ―   Expected volatility     48.49% -
48.62%       49.87% - 50.12%  

 

During the three months ended March 31, 2012, 2,278 shares of common stock were
surrendered by the CEO to the Company to cover payroll taxes associated with the
taxable income from the vesting of restricted stock previously granted to the
CEO. As of March 31, 2012, 1,064,387 shares of restricted stock granted to the
CEO were issued and outstanding.

 

Warrants

 

In December 2004, the Company issued warrants to purchase 462,716 shares of
common stock at a purchase price of $0.03 per share. The warrants were
immediately exercisable at an exercise price of $3.00 per share, with the
exercise period expiring in December 2014. As of March 31, 2012, 310,872
warrants were outstanding and exercisable.                

 

In October 2008, the Company issued warrants to purchase 1,290,323 shares of
common stock at a purchase price of $0.125 per share and an exercise price of
$7.44 per share. The warrants became exercisable on April 29, 2009 and have a
seven-year term. As of March 31, 2012, 598,741 warrants were outstanding and
exercisable.

 

 

 

In October 2008, the Company issued warrants to purchase 322,581 shares of
common stock at a purchase price of $0.125 per share and an exercise price of
$6.20 per share. These warrants became exercisable on December 31, 2009 and have
a seven-year term. As of March 31, 2012, 143,157 warrants were outstanding and
exercisable.

 

See Note 8 for a discussion of warrants issued after March 31, 2012.

 

7.  Income Taxes

 

The Company accounts for income taxes under ASC 740, Income Taxes. Deferred
income taxes are determined based upon differences between financial reporting
and income tax bases of assets and liabilities and are measured using the
enacted income tax rates and laws that will be in effect when the differences
are expected to reverse. The Company recognizes any interest and penalties
related to unrecognized tax benefits as a component of income tax expense.

 

Due to uncertainty surrounding realization of the deferred income tax assets in
future periods, the Company has recorded a 100% valuation allowance against its
net deferred tax assets. If it is determined in the future that it is more
likely than not that the deferred income tax assets are realizable, the
valuation allowance will be reduced.

 

8.  Subsequent Event

 

On May 7, 2012, the Company entered into a Facility Agreement with affiliates of
Deerfield Management Company, L.P. (“Deerfield”), pursuant to which Deerfield
agreed to loan the Company up to $50 million, subject to the terms and
conditions set forth in the Facility Agreement. Under the terms of the
agreement, the Company has the flexibility, but is not required, to draw down on
the Facility Agreement in $10 million increments at any time until May 15, 2013.
The Company was not required to pay an upfront transaction fee to Deerfield
under the Facility Agreement.

 

Any amounts drawn under the Facility Agreement accrue interest at a rate of
6.75% per annum and will be secured by all of the Company’s assets excepting
only the Company’s intellectual property assets. Accrued interest is payable
quarterly in cash. The Company has the right to prepay any amounts owed without
penalty. All principal amounts outstanding under the Facility Agreement are
payable on the third anniversary of each draw. If no funds have been drawn under
the Facility Agreement by May 15, 2013, the Company is required to pay Deerfield
a fee of $1.0 million. As of May 7, 2012, the Company has not drawn any amounts
under the Facility Agreement.

 

In connection with the execution of the Facility Agreement, on May 7, 2012, the
Company issued to Deerfield warrants to purchase 275,000 shares of the Company’s
common stock at an exercise price equal to a 20% premium to the mean closing
price of the Company’s common stock over the 20 trading days beginning on May 8,
2012. As noted above, the Company has the right to draw down on the Facility
Agreement one or more cash disbursements in the minimum amount of $10 million
per disbursement. Each $10 million disbursement shall be accompanied by the
issuance to Deerfield of warrants to purchase 140,000 shares of common stock, at
an exercise price equal to a 20% premium to the mean closing price of the
Company’s common stock over the 5 trading days following receipt by Deerfield of
the draw notice. If the Company, in its discretion, elects to draw down the
entire $50 million available under the Facility Agreement, the Company will have
issued warrants to purchase a total of 975,000 shares of its common stock. The
warrants expire seven years from their issuance.

 

 

 

 

Exhibit A

Notes

PROMISSORY NOTE

May __, 2012

FOR VALUE RECEIVED, MAKO Surgical Corp., a Delaware corporation (the “Maker”),
by means of this Promissory Note (this “Note”), hereby unconditionally promises
to pay to Deerfield Private Design Fund II, L.P. (the “Payee”), a principal
amount equal to the lesser of (i) $23,300,000 and (ii) the aggregate amount of
the Disbursements allocated to the Payee pursuant to Section 2.2 of the Facility
Agreement (as defined below), in lawful money of the United States of America
and in immediately available funds, on the dates provided in the Facility
Agreement.

This Note is a “Note” referred to in the Facility Agreement dated as of the date
hereof between the Maker, the Payee and the other parties thereto (as modified
and supplemented and in effect from time to time, the “Facility Agreement”),
with respect to the Loans made by the Payee thereunder. Capitalized terms used
herein and not expressly defined in this Note shall have the respective meanings
assigned to them in the Facility Agreement.

This Note shall bear interest on the principal amount hereof pursuant to the
provisions of the Facility Agreement.

The Maker shall make all payments to the Payee of interest and principal under
this Note in the manner provided in and otherwise in accordance with the
Facility Agreement. If default is made in the punctual payment of principal or
any other amount under this Note in accordance with the Facility Agreement, or
if any other Event of Default has occurred and is continuing, this Note shall,
at the Payee’s option exercised at any time upon or after the occurrence and
during the continuance of any such payment default or other Event of Default and
in accordance with the applicable provisions of the Facility Agreement, become
immediately due and payable.

All payments of any kind due to the Payee from the Maker pursuant to this Note
shall be made in the full face amount thereof. Subject to the terms of the
Facility Agreement, all such payments will be free and clear of, and without
deduction or withholding for, any present or future taxes. The Maker shall pay
all and any costs (administrative or otherwise) imposed by the Maker’s banks,
clearing houses, or any other financial institution, in connection with making
any payments hereunder.

The Maker shall pay all costs of collection, including, without limitation, all
reasonable, documented legal expenses and attorneys’ fees, paid or incurred by
the Payee in collecting and enforcing this Note.

Other than those notices required to be provided by Payee to Maker under the
terms of the Facility Agreement, the Maker and every endorser of this Note, or
the obligations represented hereby, expressly waives presentment, protest,
demand, notice of dishonor or default, and notice of any kind with respect to
this Note and the Facility Agreement or the performance of the obligations under
this Note and/or the Facility Agreement. No renewal or extension of this Note or
the Facility Agreement, no release of any Person primarily or secondarily liable
on this Note or the Facility Agreement, including the Maker and any endorser, no
delay in the enforcement of payment of this Note or the Facility Agreement, and
no delay or omission in exercising any right or power under this Note or the
Facility Agreement shall affect the liability of the Maker or any endorser of
this Note.

 

 

 

No delay or omission by the Payee in exercising any power or right hereunder
shall impair such right or power or be construed to be a waiver of any default,
nor shall any single or partial exercise of any power or right hereunder
preclude the full exercise thereof or the exercise of any other power or right.
The provisions of this Note may be waived or amended only in a writing signed by
the Maker and the Payee. This Note may be prepaid in whole or in part in
accordance with the provisions of the Facility Agreement.

This Note, and any rights of the Payee arising out of or relating to this Note,
may, at the option of the Payee, be enforced by the Payee in the courts of the
United States of America located in the Southern District of the State of New
York or in any other courts having jurisdiction. For the benefit of the Payee,
the Maker hereby irrevocably agrees that any legal action, suit or other
proceeding arising out of or relating to this Note may be brought in the courts
of the State of New York or of the United States of America for the Southern
District of New York, and hereby consents that personal service of summons or
other legal process may be made as set forth in Section 6.1 of the Facility
Agreement, which service the Maker agrees shall be sufficient and valid. The
Maker hereby waives any and all rights to demand a trial by jury in any action,
suit or other proceeding arising out of or relating to this Note or the
transactions contemplated by this Note.

This Note shall be governed by, and construed in accordance with, the laws of
the State of New York applicable to contracts made and to be performed in such
State, without giving effect to the conflicts of laws principles thereof other
than Sections 5-1401 and 5-1402 of the General Obligations Law of the State of
New York.

IN WITNESS WHEREOF, an authorized representative of the Maker has executed this
Note as of the date first written above.

 

  MAKO SURGICAL CORP.,             By:          Name:       Title:  

 

 

 
 

PROMISSORY NOTE

May __, 2012

FOR VALUE RECEIVED, MAKO Surgical Corp., a Delaware corporation (the “Maker”),
by means of this Promissory Note (this “Note”), hereby unconditionally promises
to pay to Deerfield Private Design International II, L.P. (the “Payee”), a
principal amount equal to the lesser of (i) $26,700,000 and (ii) the aggregate
amount of the Disbursements allocated to the Payee pursuant to Section 2.2 of
the Facility Agreement (as defined below), in lawful money of the United States
of America and in immediately available funds, on the dates provided in the
Facility Agreement.

This Note is a “Note” referred to in the Facility Agreement dated as of the date
hereof between the Maker, the Payee and the other parties thereto (as modified
and supplemented and in effect from time to time, the “Facility Agreement”),
with respect to the Loans made by the Payee thereunder. Capitalized terms used
herein and not expressly defined in this Note shall have the respective meanings
assigned to them in the Facility Agreement.

This Note shall bear interest on the principal amount hereof pursuant to the
provisions of the Facility Agreement.

The Maker shall make all payments to the Payee of interest and principal under
this Note in the manner provided in and otherwise in accordance with the
Facility Agreement. If default is made in the punctual payment of principal or
any other amount under this Note in accordance with the Facility Agreement, or
if any other Event of Default has occurred and is continuing, this Note shall,
at the Payee’s option exercised at any time upon or after the occurrence and
during the continuance of any such payment default or other Event of Default and
in accordance with the applicable provisions of the Facility Agreement, become
immediately due and payable.

All payments of any kind due to the Payee from the Maker pursuant to this Note
shall be made in the full face amount thereof. Subject to the terms of the
Facility Agreement, all such payments will be free and clear of, and without
deduction or withholding for, any present or future taxes. The Maker shall pay
all and any costs (administrative or otherwise) imposed by the Maker’s banks,
clearing houses, or any other financial institution, in connection with making
any payments hereunder.

The Maker shall pay all costs of collection, including, without limitation, all
reasonable, documented legal expenses and attorneys’ fees, paid or incurred by
the Payee in collecting and enforcing this Note.

Other than those notices required to be provided by Payee to Maker under the
terms of the Facility Agreement, the Maker and every endorser of this Note, or
the obligations represented hereby, expressly waives presentment, protest,
demand, notice of dishonor or default, and notice of any kind with respect to
this Note and the Facility Agreement or the performance of the obligations under
this Note and/or the Facility Agreement. No renewal or extension of this Note or
the Facility Agreement, no release of any Person primarily or secondarily liable
on this Note or the Facility Agreement, including the Maker and any endorser, no
delay in the enforcement of payment of this Note or the Facility Agreement, and
no delay or omission in exercising any right or power under this Note or the
Facility Agreement shall affect the liability of the Maker or any endorser of
this Note.

 

 

 

No delay or omission by the Payee in exercising any power or right hereunder
shall impair such right or power or be construed to be a waiver of any default,
nor shall any single or partial exercise of any power or right hereunder
preclude the full exercise thereof or the exercise of any other power or right.
The provisions of this Note may be waived or amended only in a writing signed by
the Maker and the Payee. This Note may be prepaid in whole or in part in
accordance with the provisions of the Facility Agreement.

This Note, and any rights of the Payee arising out of or relating to this Note,
may, at the option of the Payee, be enforced by the Payee in the courts of the
United States of America located in the Southern District of the State of New
York or in any other courts having jurisdiction. For the benefit of the Payee,
the Maker hereby irrevocably agrees that any legal action, suit or other
proceeding arising out of or relating to this Note may be brought in the courts
of the State of New York or of the United States of America for the Southern
District of New York, and hereby consents that personal service of summons or
other legal process may be made as set forth in Section 6.1 of the Facility
Agreement, which service the Maker agrees shall be sufficient and valid. The
Maker hereby waives any and all rights to demand a trial by jury in any action,
suit or other proceeding arising out of or relating to this Note or the
transactions contemplated by this Note.

This Note shall be governed by, and construed in accordance with, the laws of
the State of New York applicable to contracts made and to be performed in such
State, without giving effect to the conflicts of laws principles thereof other
than Sections 5-1401 and 5-1402 of the General Obligations Law of the State of
New York.

IN WITNESS WHEREOF, an authorized representative of the Maker has executed this
Note as of the date first written above.

 

  MAKO SURGICAL CORP.,             By:          Name:       Title:  

 

 

 

 

Exhibit B

Permitted Indebtedness

Permitted Indebtedness
  Note
  Key Equipment Finance Equipment owned by the Company; Key Equipment Finance
has a security interest in the equipment as it is collateral for a business
loan.

 

 

 

 

 

 

 

 

 

Exhibit C

Permitted Liens

Permitted Liens
  Note
  Key Equipment Finance Equipment owned by the Company; Key Equipment Finance
has a security interest in the equipment as it is collateral for a business
loan.

 

 

 

 

 

 

 

 

Exhibit D-1

 

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (I) A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS MUST
RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS
INVOLVED.

Warrant to Purchase
                    shares Warrant Number 

 

Warrant to Purchase Common Stock
of
MAKO Surgical Corp.

THIS CERTIFIES that ____________ or any subsequent holder hereof (“Holder”) has
the right to purchase from MAKO Surgical Corp., a Delaware corporation, (the
“Company”), ________ (______) fully paid and nonassessable shares of the
Company’s common stock, $0.001 par value per share (“Common Stock”), subject to
adjustment as provided herein, at a price equal to the Exercise Price as defined
in Section 3 below, at any time during the Term (as defined below).

Holder agrees with the Company that this Warrant to Purchase Common Stock of the
Company (this “Warrant” or this “Agreement”) is issued and all rights hereunder
shall be held subject to all of the conditions, limitations and provisions set
forth herein.

1. Date of Issuance and Term.

This Warrant shall be deemed to be issued on May 7, 2012 (“Date of Issuance”).
The term of this Warrant begins on the Date of Issuance and ends at 5:00 p.m.,
New York City time, on the date that is seven (7) years after the Date of
Issuance (the “Term”). This Warrant was issued in conjunction with that certain
Facility Agreement (the “Facility Agreement”) and the Registration Rights
Agreement (“Registration Rights Agreement”) by and between the Company, Holder
and __________, each dated May 7, 2012, entered into in conjunction herewith.

Notwithstanding anything herein to the contrary, the Company shall not issue to
the Holder, and the Holder may not acquire, a number of shares of Common Stock
upon exercise of this Warrant to the extent that, upon such exercise, the number
of shares of Common Stock then beneficially owned by the Holder and its
Affiliates and any other persons or entities whose beneficial ownership of
Common Stock would be aggregated with the Holder’s for purposes of Section 13(d)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
(including shares held by any “group” of which the Holder is a member, but
excluding shares beneficially owned by virtue of the ownership of securities or
rights to acquire securities that have limitations on the right to convert,
exercise or purchase similar to the limitation set forth herein) would exceed
9.985% of the total number of shares of Common Stock then issued and outstanding
(the “9.985% Cap”), provided, however, that the 9.985% Cap shall not apply with
respect to the issuance of shares of Common Stock pursuant to a Cashless Major
Exercise (as defined below) in connection with a Major Transaction (as defined
below) covered by the provisions of Section 5(c)(i)(A)(1) below in which the
Company is not the surviving entity (a “Non-Surviving Change of Control
Transaction”) to the extent that the number of shares beneficially owned by the
Holder and its affiliates in the successor entity immediately following
consummation of such Non-Surviving Change of Control Transaction does not exceed
9.985% of the outstanding common stock of such successor entity and provided,
further, that the 9.985% Cap shall only apply to the extent that the Common
Stock is deemed to constitute an “equity security” pursuant to Rule 13d-1(i)
promulgated under the Exchange Act. For purposes hereof, “group” has the meaning
set forth in Section 13(d) of the Exchange Act and applicable regulations of the
Securities and Exchange Commission (the “SEC”), and the percentage held by the
Holder shall be determined in a manner consistent with the provisions of
Section 13(d) of the Exchange Act. Upon the written request of the Holder, the
Company shall, within two (2) Trading Days, confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding.

 

 

“Affiliate” means any person or entity that, directly or indirectly through one
or more intermediaries, controls or is controlled by or is under common control
with a person or entity, as such terms are used in and construed under Rule 144
under the Securities Act of 1933, as amended (the “Securities Act”). With
respect to a Holder of Warrants, any investment fund or managed account that is
managed on a discretionary basis by the same investment manager as such Holder
will be deemed to be an Affiliate of such Holder.

“Holder” means ______ and any transferee or assignee pursuant to the terms of
this Warrant.

2. Exercise.

(a) Manner of Exercise. Beginning on the twenty-first (21st) Trading Day
following the Date of Issuance and continuing during the Term, this Warrant may
be Exercised as to all or any lesser number of whole shares of Common Stock
covered hereby (the “Warrant Shares” or the “Shares”) upon surrender of this
Warrant, with the Exercise Form attached hereto as Exhibit A (the “Exercise
Form”) duly completed and executed, together with the full Exercise Price (as
defined below, which may be satisfied by a Cash Exercise or a Cashless Exercise,
as each is defined below) for each share of Common Stock as to which this
Warrant is Exercised, at the office of the Company, 2555 Davie Road, Fort
Lauderdale, FL 33317, Phone: (954) 927-2044, Fax: (954) 707-5360, electronic
mail:adminteam@makosurgical.com), or at such other office or agency as the
Company may designate in writing, by overnight mail, with an advance copy of the
Exercise Form sent to the Company by facsimile or electronic mail (such
surrender and payment of the Exercise Price hereinafter called the “Exercise” of
this Warrant).

(b) Date of Exercise. The “Date of Exercise” of the Warrant shall be defined as
the date that the Exercise Form attached hereto as Exhibit A, completed and
executed, is sent by facsimile or electronic mail to the Company, provided that
the original Warrant and Exercise Form are received by the Company and the
Exercise Price is satisfied, each as soon as practicable thereafter but in no
event later than two (2) business days following the date of such facsimile or
electronic mail. Alternatively, the Date of Exercise shall be defined as the
date the original Exercise Form is received by the Company, if Holder has not
sent advance notice by facsimile or electronic mail. Upon delivery of the
Exercise Form to the Company by facsimile, electronic mail or otherwise, the
Holder shall be deemed for all corporate purposes to have become the holder of
record of the Warrant Shares with respect to which this Warrant has been
Exercised, irrespective of the date such Warrant Shares are credited to the
Holder’s Depository Trust Company (“DTC”) account or the date of delivery of the
certificates evidencing such Warrant Shares, as the case may be; provided,
however, that in the event of a Cashless Major Exercise in respect of a
Non-Surviving Change of Control Transaction, the Holder shall be deemed to have
become the holder of record of the shares issuable upon such exercise
immediately prior to the consummation of such Non-Surviving Change of Control
Transaction.

(c) Delivery of Common Stock Upon Exercise. Within three (3) business days after
the Date of Exercise (but, in the case of a Cash Exercise, within two (2)
business days following the Company’s receipt of the full Exercise Price, if
later) or, in the case of a Cashless Major Exercise or a Cashless Default
Exercise (each as defined in Section 5(c) below), within the period provided in
Section 5(c)(iv) or Section 3(c), as applicable (the “Delivery Period”), the
Company shall issue and deliver (or cause its Transfer Agent to issue and
deliver) in accordance with the terms hereof to or upon the order of the Holder
that number of shares of Common Stock (“Exercise Shares”) for the portion of
this Warrant converted as shall be determined in accordance herewith. Upon the
Exercise of this Warrant or any part hereof, the Company shall, at its own cost
and expense, take all necessary action, including obtaining and delivering an
opinion of counsel, to assure that the Company’s transfer agent (the “Transfer
Agent”) shall issue stock certificates in the name of Holder (or its nominee) or
such other persons as designated by Holder and in such denominations to be
specified at Exercise representing the number of shares of Common Stock issuable
upon such Exercise. The Company warrants that no instructions other than these
instructions have been or will be given to the Transfer Agent and that, unless
waived by the Holder, this Warrant and the Exercise Shares will be free-trading,
and freely transferable, and will not contain a legend restricting the resale or
transferability of the Exercise Shares if the Unrestricted Conditions (as
defined below) are met.

2

 

(d) Delivery Failure. In addition to any other remedies which may be available
to the Holder, in the event that the Company fails for any reason to effect
delivery of the Exercise Shares by the end of the Delivery Period (a “Delivery
Failure”), the Holder will be entitled to revoke all or part of the relevant
Exercise Form by delivery of a notice to such effect to the Company whereupon
the Company and the Holder shall each be restored to their respective positions
immediately prior to the delivery of such notice, except that the liquidated
damages described herein shall be payable through the date notice of revocation
or rescission is given to the Company.

(e) Legends.

(i) Restrictive Legend. The Holder understands that until such time as this
Warrant, the Exercise Shares and the Failure Payment Shares have been registered
under the Securities Act as contemplated by the Registration Rights Agreement or
otherwise may be sold pursuant to Rule 144 under the Securities Act or an
exemption from registration under the Securities Act without any restriction as
to the number of securities as of a particular date that can then be immediately
sold, this Warrant, the Exercise Shares and the Failure Payment Shares, as
applicable, may bear a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of the certificates
for such securities):

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER SAID ACT, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER SAID ACT INCLUDING, WITHOUT LIMITATION, PURSUANT TO RULES 144 OR 144A
UNDER SAID ACT OR PURSUANT TO A PRIVATE SALE EFFECTED UNDER APPLICABLE FORMAL OR
INFORMAL SEC INTERPRETATION OR GUIDANCE, SUCH AS A SO-CALLED “4(1) AND A HALF”
SALE.”

“THE SALE, TRANSFER OR ASSIGNMENT OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN REGISTRATION
RIGHTS AGREEMENT DATED AS OF MAY 7, 2012, AS AMENDED FROM TIME TO TIME, AMONG
THE COMPANY AND CERTAIN HOLDERS OF ITS OUTSTANDING SECURITIES. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY.”

(ii) Removal of Restrictive Legends. This Warrant and the certificates
evidencing the Exercise Shares and the Failure Payment Shares, as applicable,
shall not contain any legend restricting the transfer thereof (including the
legend set forth above in subsection 2(e)(i)): (A) while a registration
statement (including a Registration Statement, as defined in the Registration
Rights Agreement) covering the sale or resale of such security is effective
under the Securities Act, or (B) following any sale of such Warrant, Exercise
Shares and/or Failure Payment Shares pursuant to Rule 144, or (C) if such
Warrant, Exercise Shares and/or Failure Payment Shares are eligible for sale
under Rule 144(b)(1), or (D) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the SEC) (collectively, the “Unrestricted
Conditions”). The Company shall cause its counsel to issue a legal opinion to
the Transfer Agent promptly after the Effective Date if required by the
Company’s transfer agent to effect the issuance of the Exercise Shares or the
Failure Payment Shares, as applicable, without a restrictive legend or removal
of the legend hereunder. If the Unrestricted Conditions are met at the time of
issuance of this Warrant, the Exercise Shares or the Failure Payment Shares,
then such Warrant, Exercise Shares or Failure Payment Shares, as applicable,
shall be issued free of all legends. The Company agrees that following the
Effective Date at such time as the Unrestricted Conditions are met or such
legend is otherwise no longer required under this Section 2(e), it will, no
later than three (3) Trading Days following the delivery (the “Unlegended Shares
Delivery Deadline”) by the Holder to the Company or the Transfer Agent of this
Warrant and a certificate representing Exercise Shares and/or Failure Payment
Shares, as applicable, issued with a restrictive legend (such third Trading Day,
the “Legend Removal Date”), deliver or cause to be delivered to such Holder a
certificate (or electronic transfer) representing such shares that is free from
all restrictive and other legends. For purposes hereof, “Effective Date” shall
mean the date that the Registration Statement that the Company is required to
file pursuant to the Registration Rights Agreement has been declared effective
by the SEC.

3

 

(iii) Sale of Unlegended Shares. Holder agrees that the removal of the
restrictive legend from this Warrant and any certificates representing
securities as set forth in Section 2(e) above is predicated upon the Company’s
reliance that the Holder will sell this Warrant or any Exercise Shares and/or
any Failure Payment Shares, as applicable, pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus delivery
requirements, or an exemption therefrom, and that if such securities are sold
pursuant to a Registration Statement, they will be sold in compliance with the
plan of distribution set forth therein.

(f) Cancellation of Warrant. This Warrant shall be canceled upon the full
Exercise, of this Warrant, and, as soon as practical after the Date of Exercise,
Holder shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise of this Warrant, and if this Warrant is not
Exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.

(g) Holder of Record. Each person in whose name any Warrant for shares of Common
Stock is issued shall, for all purposes, be deemed to be the Holder of record of
such shares on the Date of Exercise of this Warrant, irrespective of the date of
delivery of the Common Stock purchased upon the Exercise of this Warrant. Prior
to the exercise of this Warrant, nothing in this Warrant shall be construed as
conferring upon Holder any rights as a stockholder of the Company.

(h) Delivery of Electronic Shares. In lieu of delivering physical certificates
representing the Common Stock issuable upon Exercise or legend removal, or
representing Failure Payment Shares, provided the Transfer Agent is
participating in the DTC Fast Automated Securities Transfer (“FAST”) program,
upon written request of the Holder, the Company shall use its best efforts to
cause its Transfer Agent to electronically transmit the Common Stock issuable
upon Exercise to the Holder by crediting the account of the Holder’s prime
broker with DTC through its Deposit Withdrawal Agent Commission (DWAC) system.
The time periods for delivery and penalties described herein shall apply to the
electronic transmittals described herein. Any delivery not effected by
electronic transmission shall be effected by delivery of physical certificates.

(i) Buy-In. In addition to any other rights available to the Holder, if the
Company fails to cause its Transfer Agent to transmit to the Holder a
certificate or certificates, or electronic shares through DWAC, representing the
Exercise Shares pursuant to an Exercise on or before the Delivery Period (other
than a failure caused by any incorrect or incomplete information provided by
Holder to the Company hereunder), and if after such date the Holder is required
by its broker to purchase (in an open market transaction or otherwise) or the
Holder’s brokerage firm otherwise purchases shares of Common Stock to deliver in
satisfaction of a sale by the Holder of the Exercise Shares which the Holder
anticipated receiving upon such Exercise (a “Buy-In”), then the Company shall
(1) pay in cash to the Holder the amount by which (x) the Holder’s total
purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the
number of Exercise Shares that the Company was required to deliver to the Holder
in connection with the Exercise at issue times and (B) the price at which the
sell order giving rise to such purchase obligation was executed, and (2) at the
option of the Holder, either reinstate the portion of the Warrant and equivalent
number of Exercise Shares for which such Exercise was not honored or deliver to
the Holder the number of shares of Common Stock that would have been issued had
the Company timely complied with its Exercise and delivery obligations
hereunder. For example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
Exercise to cover the sale of Common Stock with an aggregate sale price giving
rise to such purchase obligation of $10,000, under clause (1) of the immediately
preceding sentence the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts payable
to the Holder in respect of the Buy-In, together with applicable confirmations
and other evidence reasonably requested by the Company. Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Company’s failure to
timely deliver certificates representing shares of Common Stock upon Exercise of
the Warrant as required pursuant to the terms hereof.

4

 

3. Payment of Warrant Exercise Price for Cash Exercise or Cashless Exercise;
Cashless Major Exercise and Cashless Default Exercise.

(a) Exercise Price. The Exercise Price (“Exercise Price”) shall initially equal
120% of the mean of the closing share prices of the Common Stock on NASDAQ (as
defined below) as reported by Bloomberg (as defined below) over the twenty (20)
consecutive Trading Day period beginning on May 8, 2012, subject to adjustment
pursuant to the terms hereof, including but not limited to Section 5 below. As
soon as practicable following the foregoing twenty (20) Trading Day period, the
Company shall send a notice by facsimile to the Holder of the Company’s
calculation of the Exercise Price. The Company’s calculation of the Exercise
Price shall be deemed to be final and binding upon the Holder unless, within two
(2) business days of receipt of such notice, the Holder sends a notice by
facsimile ((954) 707-5360) to the Company disputing the calculation of the
Exercise Price. If the Holder and the Company are unable to agree upon the
Exercise Price within two (2) business days following the receipt by the Company
of the Holder’s notice disputing the calculation of the exercise price, then the
dispute shall be submitted by the Company to the Company’s independent outside
accountant and resolved in accordance with Section 3(d).

Payment of the Exercise Price may be made by either of the following, or a
combination thereof, at the election of Holder:

(i) Cash Exercise: The Holder, at its option, may exercise this Warrant in cash,
bank or cashier’s check, wire transfer or through a reduction of an amount of
principal outstanding under any Notes (as defined in the Facility Agreement) in
accordance with Section 2.3 of the Facility Agreement, then held by the Holder
(a “Cash Exercise”); or

(ii) Cashless Exercise: The Holder may exercise this Warrant in a cashless
exercise transaction. In order to effect a Cashless Exercise, the Holder shall
surrender this Warrant at the principal office of the Company together with
notice of cashless election, in which event the Company shall issue Holder a
number of shares of Common Stock computed using the following formula (a
“Cashless Exercise”):

X = Y (A-B)/A

where:X = the number of shares of Common Stock to be issued to Holder.

Y = the number of shares of Common Stock for which this Warrant is being
Exercised.

A = the Market Price of one (1) share of Common Stock (for purposes of this
Section 3(a)(ii), where “Market Price,” as of any date, means the Volume
Weighted Average Price (as defined herein) of the Company’s Common Stock for the
ten (10) consecutive Trading Day period immediately preceding the date in
question.

B = the Exercise Price.

As used herein, “Volume Weighted Average Price” for any security as of any date
means the volume weighted average sale price on The NASDAQ Global Select Market
(“NASDAQ”) as reported by, or based upon data reported by Bloomberg Financial
Markets or an equivalent, reliable reporting service mutually acceptable to and
hereinafter designated by holders of a majority in interest of the Warrants and
the Company (“Bloomberg”) or, if NASDAQ is not the principal trading market for
such security, the volume weighted average sale price of such security on the
principal securities exchange or trading market where such security is listed or
traded as reported by Bloomberg or, if no volume weighted average sale price is
reported for such security by Bloomberg, then the last closing trade price of
such security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security that are listed in the over the counter market
by the Financial Industry Regulatory Authority, Inc. or on the “over the
counter” Bulletin Board (or any successor) or in the “pink sheets” (or any
successor) by the OTC Markets Group, Inc. If the Volume Weighted Average Price
cannot be calculated for such security on such date in the manner provided
above, the Volume Weighted Average Price shall be the fair market value as
mutually determined by the Company and the Holders of a majority in interest of
the Warrants being Exercised for which the calculation of the Volume Weighted
Average Price is required in order to determine the Exercise Price of such
Warrants. “Trading Day” shall mean any day on which the Common Stock is traded
for any period on NASDAQ, or on the principal securities exchange or other
securities market on which the Common Stock is then being traded.

5

 

For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended,
understood and acknowledged that the Common Stock issuable upon Exercise of this
Warrant in a Cashless Exercise transaction shall be deemed to have been acquired
at the time this Warrant was issued. Moreover, it is intended, understood and
acknowledged that the holding period for the Common Stock issuable upon Exercise
of this Warrant in a Cashless Exercise transaction shall be deemed to have
commenced on the date this Warrant was issued.

(b) Cashless Major Exercise. To the extent the Holder shall exercise this
Warrant or any portion thereof as a Cashless Major Exercise pursuant to Section
5(c)(i) below, the Holder shall surrender this Warrant at the principal office
of the Company together with the Exercise Form indicating that the Holder is
exercising this Warrant (or such portion thereof) pursuant to a Cashless Major
Exercise, in which event the Company shall issue a number of shares of Common
Stock equal to the Black-Scholes Value (as defined in Section 5(c)(iii) below)
of the Warrant (or such applicable portion being exercised) divided by the
closing price of the Common Stock on the principal securities exchange or other
securities market on which the Common Stock is then traded on the Trading Day
immediately preceding the date on which the applicable Major Transaction is
consummated.

(c) Cashless Default Exercise. To the extent the Holder exercises this Warrant
as a Cashless Default Exercise pursuant to Section 11(b)(i) below, the Holder
shall surrender this Warrant to the principal office of the Company together
with the Exercise Form indicating that the Holder is exercising this Warrant
pursuant to a Cashless Default Exercise, in which event the Company shall, at
the election of the Company, (i) issue to the Holder, within five (5) Trading
Days of the applicable Default Notice, a number of shares of Common Stock (which
shares shall be valued at the Volume Weighted Average Price for the five (5)
Trading Days prior to the applicable Default Notice) equal to the Black-Scholes
value (determined by use of the Black-Scholes Option Pricing Model using the
criteria set forth on Schedule I hereto) of the remaining unexercised portion of
this Warrant on the date of such Default Notice (the “Cashless Default Exercise
Amount”), or (ii) pay the Cashless Default Exercise Amount to the Holder in
cash.

(d) Dispute Resolution. Subject to the provisions of Section 3(a), in the case
of a dispute as to the determination of the closing price or Volume Weighted
Average Price of the Company’s Common Stock or the arithmetic calculation of the
Exercise Price, Market Price or any Major Transaction Warrant Early Termination
Price, the Company shall submit the disputed determinations or arithmetic
calculations via facsimile within two (2) business days of receipt, or deemed
receipt, of the Exercise Notice or Major Transaction Early Termination Notice,
or other event giving rise to such dispute, as the case may be, to the Holder.
If the Holder and the Company are unable to agree upon such determination or
calculation within two (2) business days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall,
within two (2) business days submit via facsimile (i) the disputed determination
of the closing price or the Volume Weighted Average Price of the Company’s
Common Stock to an independent, reputable investment bank selected by the
Company and approved by the Holder, which approval shall not be unreasonably
withheld or (ii) the disputed arithmetic calculation of the Exercise Price,
Market Price or any Major Transaction Warrant Early Termination Price to the
Company’s independent, outside accountant. The Company shall use reasonable
commercial efforts to cause the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and
the Holder of the results no later than five (5) business days from the time it
receives the disputed determinations or calculations. Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error, and the Company and the Holder shall
each pay one half of the fees and costs of such investment banker or accountant.

4. Transfer and Registration.

(a) Transfer Rights. Subject to the provisions of Section 8 of this Warrant,
this Warrant may be transferred on the books of the Company, in whole or in
part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.

6

 

(b) Registrable Securities. The Common Stock issuable upon the Exercise of this
Warrant has registration rights pursuant to the Registration Rights Agreement.

5. Adjustments Upon Certain Events.

(a) Participation. The Holder, as the holder of this Warrant, shall be entitled
to receive such dividends paid and distributions of any kind made to the holders
of Common Stock of the Company to the same extent as if the Holder had Exercised
this Warrant into Common Stock (without regard to any limitations on exercise
herein or elsewhere and without regard to whether or not a sufficient number of
shares are authorized and reserved to effect any such exercise and issuance) and
had held such shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made concurrently
with the dividend or distribution to the holders of Common Stock.

(b) Recapitalization or Reclassification. If the Company shall at any time
effect a stock split, payment of stock dividend, recapitalization,
reclassification or other similar transaction of such character that the shares
of Common Stock shall be changed into or become exchangeable for a larger or
smaller number of shares, then upon the effective date thereof, the number of
shares of Common Stock which Holder shall be entitled to purchase upon Exercise
of this Warrant shall be increased or decreased, as the case may be, in direct
proportion to the increase or decrease in the number of shares of Common Stock
by reason of such stock split, payment of stock dividend, recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give Holder the same notice it provides to holders of Common Stock
of any transaction described in this Section 5(b).

(c) Rights Upon Major Transaction.

(i) Major Transaction. In the event that a Major Transaction (as defined below)
occurs, then (1) in the case of a Major Transaction covered by the provisions of
Section 5(c)(i)(A) below in which the Company is not the surviving entity and in
which the consideration consists solely of securities of a Publicly Traded
Successor Entity, as defined below (a “Qualified Change of Control
Transaction”), the Company shall have the right to treat such Major Transaction
as an Assumption, (2) in the case of a Cash-Out Major Transaction, and in the
case of a Mixed Major Transaction to the extent of the percentage of the cash
consideration in the Mixed Major Transaction (determined in accordance with the
definition of a Mixed Major Transaction below), the Holder, at its option, may
require the Company to redeem the Holder’s outstanding Warrants in accordance
with Section 5(c)(iii) below and (3) in the case of all other Major Transactions
(including, without limitation, a Qualified Change of Control Transaction for
which the Company does not make an Assumption Election (as defined below)), and
in the case of a Mixed Major Transaction to the extent of the percentage of the
consideration represented by securities of a Successor Entity in the Mixed Major
Transaction, the Holder shall have the right to exercise this Warrant as a
Cashless Major Exercise. In the event the Holder shall not have exercised any of
its rights under clauses (2) or (3) above within the applicable time periods set
forth herein, then the Major Transaction shall be treated as an Assumption (as
defined below) in accordance with Section 5(c)(ii) below. Notwithstanding
anything herein to the contrary, the Holder may waive its rights under this
Section 5(c) with respect to any Major Transaction in which event none of the
provisions of this Section 5(c) shall apply with respect to such Major
Transaction. In the event of a Major Transaction in which all shares of Common
Stock are cancelled and converted into the right to receive cash and/or
securities of Another Entity (as defined below), then, any portion of this
Warrant that is neither redeemed, assumed or exercised pursuant to the terms of
this Warrant prior to the closing of such Major Transaction, shall automatically
and immediately convert into shares of Common Stock, and shall be deemed to have
been exercised pursuant to a Cashless Exercise, immediately prior to the
consummation of such Major Transaction. Each of the following events shall
constitute a “Major Transaction”.

(A) a consolidation, merger, exchange of shares, recapitalization,
reorganization, business combination or other similar event, (1) following which
the holders of Common Stock immediately preceding such consolidation, merger,
exchange, recapitalization, reorganization, combination or event either (a) no
longer hold a majority of the shares of Common Stock or (b) no longer have the
ability to elect a majority of the board of directors of the Company or (2) as a
result of which shares of Common Stock shall be changed into (or the shares of
Common Stock become entitled to receive) a different class or classes of stock
or securities of the Company or another entity (collectively, a “Change of
Control Transaction”);

7

 

(B) the sale or transfer in one transaction or a series of related transactions
of (i) all or substantially all of the assets of the Company, or (ii) assets of
the Company for a purchase price equal to more than 50% of the Enterprise Value
(as defined below) of the Company. For purposes of this clause (B), “Enterprise
Value” shall mean (I) the product of (x) the number of issued and outstanding
shares of Common Stock on the date the Company delivers the Major Transaction
Notice (defined below) multiplied by (y) the per share closing price of the
Common Stock on such date plus (II) the amount of the Company’s debt as shown on
the latest financial statements filed with the SEC (the “Current Financial
Statements”) less (III) the amount of cash and cash equivalents of the Company
as shown on the Current Financial Statements;

(C) a purchase, tender or exchange offer made to the holders of outstanding
shares of Common Stock, such that following such purchase, tender or exchange
offer a Change of Control Transaction shall have occurred; or

(D) the liquidation, bankruptcy, insolvency, dissolution or winding-up (or the
occurrence of any analogous proceeding) of the Company.

(ii) Assumption. The Company shall not enter into or be party to a Major
Transaction that is to be treated as an Assumption pursuant to Section 5(c)(i),
unless (A) the successor entity resulting from such Major Transaction (in each
case, a “Successor Entity”), assumes in writing all of the obligations of the
Company under this Warrant, the Facility Agreement (but only if there will be an
outstanding balance under the Facility Agreement immediately following the
closing of the Major Transaction) and the Registration Rights Agreement  in
accordance with the provisions of this Section (ii) pursuant to written
agreements in form and substance reasonably satisfactory to the Holder and
approved by the Holder prior to such Major Transaction (not to be unreasonably
withheld or delayed), including agreements to deliver to each holder of Warrants
in exchange for such Warrants a security of the Successor Entity evidenced by a
written instrument substantially similar in form and substance to the Warrants,
including, without limitation, representing the appropriate number of shares of
the Successor Entity, having similar exercise rights as the Warrants (including
but not limited to a similar Exercise Price and similar Exercise Price
adjustment provisions based on the price per share or conversion ratio to be
received by the holders of Common Stock in the Major Transaction) and similar
registration rights as provided by the Registration Rights Agreement, reasonably
satisfactory to the Holder and (B) the Successor Entity is a Public Successor
Entity. Upon the occurrence of any Major Transaction, any Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Major Transaction, the provisions of this Warrant and the Registration Rights
Agreement referring to the “Company” shall refer instead to the Successor
Entity), and may exercise every right and power of the Company and shall assume
all of the obligations of the Company under this Warrant with the same effect as
if such Successor Entity had been named as the Company herein. Upon consummation
of the Major Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon exercise or redemption of this
Warrant at any time after the consummation of the Major Transaction, in lieu of
the shares of Common Stock (or other securities, cash, assets or other property)
issuable upon the exercise of the Warrants prior to such Major Transaction, such
shares of publicly traded common stock (or their equivalent) of the Successor
Entity, as adjusted in accordance with the provisions of this Warrant. The
provisions of this Section shall apply similarly and equally to successive Major
Transactions and shall be applied without regard to any limitations on the
exercise of this Warrant other than any applicable beneficial ownership
limitations. Any assumption of Company obligations under this paragraph shall be
referred to herein as an “Assumption”

(iii) Notice; Major Transaction Early Termination Right; Notice of Cashless
Major Exercise. At least thirty (30) days prior to the consummation of any Major
Transaction, but, in any event, within five (5) Business Days following the
first to occur of (x) the date of the public announcement of such Major
Transaction if such announcement is made before 4:00 p.m., New York City time,
or (y) the day following the public announcement of such Major Transaction if
such announcement is made on and after 4:00 p.m., New York City time, the
Company shall deliver written notice thereof via facsimile and overnight courier
to the Holder (a “Major Transaction Notice”). The Major Transaction Notice with
respect to a Qualified Change of Control Transaction shall also state whether
the Company is electing to treat such Major Transaction as an Assumption (an
“Assumption Election”). At any time during the period beginning after the
Holder’s receipt of a Major Transaction Notice and ending five (5) Trading Days
prior to the consummation of such Major Transaction (the “Early Termination
Period”), the Holder may require the Company to redeem (an “Early Termination
Upon Major Transaction”) all or any portion of this Warrant not treated as an
Assumption and not eligible to be treated as a Cashless Major Exercise (without
taking into consideration the 9.985% Cap) by delivering written notice thereof
(“Major Transaction Early Termination Notice”) to the Company, which Major
Transaction Early Termination Notice shall indicate the portion of this Warrant,
measured by the number of Shares then subject to this Warrant (the “Early
Termination Principal Amount”) of the Warrant that the Holder is electing to
have redeemed. The portion of this Warrant subject to early termination pursuant
to this Section 5(c)(iii) (the “Redeemable Shares”), shall be redeemed by the
Company at a price (the “Major Transaction Warrant Early Termination Price”)
payable in cash equal to the “Black Scholes Value” of the Redeemable Shares
determined by use of the Black Scholes Option Pricing Model using the criteria
set forth in Schedule 1 hereto (the “Black Scholes Value”). In the event the
Major Transaction Notice relating to a Qualified Change of Control Transaction
includes an Assumption Election, the Holder shall send written notice to the
Company within the Early Termination Period if the Holder elects to waive this
Section 5(c) in its entirety in which event no Assumption shall occur.

8

 

To the extent the Holder shall elect to effect a Cashless Major Exercise in
respect of a Major Transaction, the Holder shall deliver its exercise notice in
accordance with Section 3(b), within the Early Termination Period.

(iv) Escrow; Payment of Major Transaction Warrant Early Termination Price.
Following the receipt of a Major Transaction Early Termination Notice or a
Cashless Major Exercise from the Holder, the Company shall not effect a Major
Transaction that is being treated as an early termination or is eligible to be
treated as a Cashless Major Exercise unless either (a) it obtains the written
agreement of the Successor Entity that payment of the Major Transaction Warrant
Early Termination Price and/or issuance of the applicable Exercise Shares shall
be made to the Holder prior to consummation of such Major Transaction and such
issuance or payment shall be a condition precedent to consummation of such Major
Transaction or (b) it shall first place into an escrow account with an
independent escrow agent, at least three (3) business days prior to the closing
date of the Major Transaction (the “Major Transaction Escrow Deadline”), an
amount in shares of Common Stock or cash, as applicable, equal to the Major
Transaction Warrant Early Termination Price and/or applicable Exercise Shares.
Concurrently upon closing of such Major Transaction, the Company shall pay or
shall instruct the escrow agent to pay the Major Transaction Warrant Early
Termination Price and/or to deliver the applicable Exercise Shares to the
Holder. For purposes of determining the amount required to be placed in escrow
pursuant to the provisions of this subsection (iv) and without affecting the
amount of the actual Major Transaction Warrant Early Termination Price and/or
applicable Exercise Shares, the calculation of the price referred to in clause
(1) of the first column of Schedule 1 hereto with respect to Stock Price shall
be determined based on the Closing Market Price (as defined on Schedule I) of
the Common Stock on the Trading Day immediately preceding the date that the
funds and/or applicable Exercise Shares, as applicable, are deposited with the
escrow agent.

(v) Injunction. Following the receipt of a Major Transaction Early Termination
Notice or notice of a Cashless Major Exercise from the Holder, in the event that
the Company attempts to consummate a Major Transaction without either (1)
placing the Major Transaction Warrant Early Termination Price or applicable
Exercise Shares, as applicable, in escrow in accordance with subsection (iv)
above, (2) payment of the Major Transaction Warrant Early Termination Price or
issuance of the applicable Exercise Shares, as applicable, to the Holder prior
to consummation of such Major Transaction or (3) obtaining the written agreement
of the Successor Entity described in subsection (iv) above, the Holder shall
have the right to apply for an injunction in any state or federal courts sitting
in the City of New York, borough of Manhattan to prevent the closing of such
Major Transaction until the Major Transaction Warrant Early Termination Price is
paid to the Holder, in full or the applicable Exercise Shares are delivered or
deposited in escrow, as applicable.

An early termination required by this Section 5(c) shall be made in accordance
with the provisions of Section 12 and shall have priority to payments to holders
of Common Stock in connection with a Major Transaction , and to the extent an
early termination required by this Section 5(c)(iii) are deemed or determined by
a court of competent jurisdiction to be prepayments of the Warrant by the
Company, such early termination shall be deemed to be voluntary prepayments.
Notwithstanding anything to the contrary in this Section 5, until the Major
Transaction Warrant Early Termination Price is paid in full, this Warrant may be
exercised, in whole or in part, by the Holder into shares of Common Stock, or in
the event the Exercise Date is after the consummation of the Major Transaction,
shares of publicly traded common stock (or their equivalent) of the Successor
Entity pursuant to Section 5(c). The parties hereto agree that in the event of
the early termination of any portion of the Warrant under this Section 5(c), the
Holder’s damages would be uncertain and difficult to estimate because of the
parties’ inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder.
Accordingly, any premium due under this Section 5(c) is intended by the parties
to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of
its investment opportunity and not as a penalty.

9

 

For purposes hereof:

“Another Entity” shall mean an entity in which the holders of a majority of the
shares of Common Stock of the Company immediately prior to the consummation of a
Major Transaction do not hold a majority of the equity securities in such
entity.

“Cash-Out Major Transaction” means a Major Transaction in which the
consideration payable to holders of Common Stock in connection with the Major
Transaction consists solely of cash.

“Cashless Default Exercise” shall mean an exercise of this Warrant as a
“Cashless Default Exercise” in accordance with Section 3(c) and 11(b) hereof.

“Cashless Major Exercise” shall mean an exercise of this Warrant or portion
thereof as a “Cashless Major Exercise” in accordance with Section 3(b) and
5(c)(i) hereof.

“Eligible Market” means the over the counter Bulletin Board, the New York Stock
Exchange, Inc., the NYSE Arca, the NASDAQ Capital Market, the NASDAQ Global
Market, the NASDAQ Global Select Market or the NYSE Alternext U.S.

“Mixed Major Transaction” means a Major Transaction in which the consideration
payable to the stockholders of the Company consists partially of cash and
partially of securities of a Successor Entity. If the Successor Entity is a
Publicly Traded Successor Entity, the percentage of consideration represented by
securities of such Successor Entity shall be equal to the percentage that the
value of the aggregate anticipated number of shares of the Publicly Traded
Successor Entity to be issued to holders of Common Stock of the Company
represents in comparison to the aggregate value of all consideration, including
cash consideration, in such Mixed Major Transaction, as such values are set
forth in any definitive agreement for the Mixed Major Transaction that has been
executed at the time of the first public announcement of the Major Transaction
or, if no such value is determinable from such definitive agreement, based on
the closing market price for shares of the Publicly Traded Successor Entity on
its principal securities exchange on the Trading Day preceding the first public
announcement of the Mixed Major Transaction. If the Successor Entity is a
Private Successor Entity, the percentage of consideration represented by
securities of such Successor Entity shall be determined in good-faith by the
Company's Board of Directors

“Parent Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity
security is quoted or listed on an Eligible Market, or, if there is more than
one such Person or Parent Entity, the Person or Parent Entity with the largest
public market capitalization as of the date of consummation of a Major
Transaction.

“Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.

“Private Successor Entity” means a Successor Entity that is not a Publicly
Traded Successor Entity.

“Publicly Traded Successor Entity” means a Successor Entity that is a publicly
traded corporation whose common stock is quoted on or listed for trading on an
Eligible Market (as defined above).

“Successor Entity” means any Person purchasing the Company’s assets or Common
Stock, or any successor entity resulting from such Major Transaction, or if the
Warrant is to be exercisable for shares of capital stock of its Parent Entity
(as defined above), its Parent Entity.

10

 

(d) Exercise Price Adjusted. As used in this Warrant, the term “Exercise Price”
shall mean the purchase price per share specified in Section 3(a) of this
Warrant, until the occurrence of an event stated in this Section 5 or otherwise
set forth in this Warrant, and thereafter shall mean said price as adjusted from
time to time in accordance with the provisions of said subsection. No adjustment
made pursuant to any provision of this Section 5 shall have the net effect of
increasing the Exercise Price in relation to the split adjusted and distribution
adjusted price of the Common Stock.

(e) Adjustments: Additional Shares, Securities or Assets. In the event that at
any time, as a result of an adjustment made pursuant to this Section 5 or
otherwise, Holder shall, upon Exercise of this Warrant, become entitled to
receive shares and/or other securities or assets (other than Common Stock) then,
wherever appropriate, all references herein to shares of Common Stock shall be
deemed to refer to and include such shares and/or other securities or assets;
and thereafter the number of such shares and/or other securities or assets shall
be subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.

(f) Notice of Adjustments. Whenever the Exercise Price is adjusted pursuant to
the terms of this Warrant, the Company shall promptly mail to the Holder a
notice (an “Exercise Price Adjustment Notice”) setting forth the Exercise Price
after such adjustment and setting forth a statement of the facts requiring such
adjustment. The Company shall, upon the written request at any time of the
Holder, furnish to such Holder a like Warrant setting forth (i) such adjustment
or readjustment, (ii) the Exercise Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon Exercise of the Warrant. For
purposes of clarification, whether or not the Company provides an Exercise Price
Adjustment Notice pursuant to this Section 5(f), upon the occurrence of any
event that leads to an adjustment of the Exercise Price, the Holder would be
entitled to receive a number of Exercise Shares based upon the new Exercise
Price, as adjusted, for exercises occurring on or after the date of such
adjustment, regardless of whether the Holder accurately refers to the adjusted
Exercise Price in the Exercise Form.

6. Fractional Interests.

No fractional shares or scrip representing fractional shares shall be issuable
upon the Exercise of this Warrant, but on Exercise of this Warrant, Holder may
purchase only a whole number of shares of Common Stock. If, on Exercise of this
Warrant, Holder would be entitled to a fractional share of Common Stock or a
right to acquire a fractional share of Common Stock, such fractional share shall
be disregarded and the number of shares of Common Stock issuable upon Exercise
shall be the next higher whole number of shares.

7. Reservation of Shares.

From and after the date hereof, the Company shall at all times reserve for
issuance such number of authorized and unissued shares of Common Stock (or other
securities substituted therefor as herein above provided) as shall be sufficient
for the Exercise of this Warrant and payment of the Exercise Price. If at any
time the number of shares of Common Stock authorized and reserved for issuance
is below the number of shares sufficient for the Exercise of this Warrant (a
“Share Authorization Failure”) (based on the Exercise Price in effect from time
to time), the Company will promptly take all corporate action necessary to
authorize and reserve a sufficient number of shares, including, without
limitation, calling a special meeting of stockholders to authorize additional
shares to meet the Company’s obligations under this Section 7, in the case of an
insufficient number of authorized shares, and using its best efforts to obtain
stockholder approval of an increase in such authorized number of shares. The
Company covenants and agrees that upon the Exercise of this Warrant, all shares
of Common Stock issuable upon such Exercise shall be duly and validly issued,
fully paid and nonassessable and not subject to preemptive rights, rights of
first refusal or similar rights of any Person.

8. Restrictions on Transfer.

(a) Registration or Exemption Required. This Warrant has been issued in a
transaction exempt from the registration requirements of the Securities Act by
virtue of Regulation D and exempt from state registration or qualification under
applicable state laws. None of the Warrant, the Exercise Shares or Failure
Payment Shares may be pledged, transferred, sold or assigned except pursuant to
an effective registration statement or an exemption to the registration
requirements of the Securities Act and applicable state laws including, without
limitation, a so-called “4(1) and a half” transaction.

11

 

(b) Assignment. Subject to Section 8(a), the Holder may sell, transfer, assign,
pledge, or otherwise dispose of this Warrant, in whole or in part. Holder shall
deliver a written notice to Company, substantially in the form of the Assignment
attached hereto as Exhibit B, indicating the Person or Persons to whom the
Warrant shall be assigned and the respective number of warrants to be assigned
to each assignee. The Company shall effect the assignment within three (3)
business days (the “Transfer Delivery Period”), and shall deliver to the
assignee(s) designated by Holder a Warrant or Warrants of like tenor and terms
for the appropriate number of shares. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
assigns of the Holder. The provisions of this Warrant are intended to be for the
benefit of all Holders from time to time of this Warrant, and shall be
enforceable by any such Holder. For avoidance of doubt, in the event Holder
notifies the Company that such sale or transfer is a so called “4(1) and half”
transaction, the parties hereto agree that a legal opinion from outside counsel
for the Holder delivered to counsel for the Company substantially in the form
attached hereto as Exhibit C shall be the only requirement to satisfy an
exemption from registration under the Securities Act to effectuate such “4(1)
and half” transaction.

9. Noncircumvention.

The Company hereby covenants and agrees that the Company will not, by amendment
of its certificate of incorporation, bylaws or through any reorganization,
transfer of assets, consolidation, merger, scheme of arrangement, dissolution,
issue or sale of securities, or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, and
will at all times in good faith carry out all the provisions of this Warrant and
take all action as may be reasonably required to protect the rights of the
Holder. Without limiting the generality of the foregoing, the Company (i) shall
not increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the Exercise Price then in effect, and (ii) shall
take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.

10. Events of Failure; Definition of Black Scholes Value.

(a) Definition.

The occurrence of each of the following shall be considered to be an “Event of
Failure.”

(i) A Delivery Failure occurs, where a “Delivery Failure” shall be deemed to
have occurred if the Company fails to use its best efforts to deliver Exercise
Shares to the Holder within any applicable Delivery Period (other than due to
the limitation contained in the proviso in the second paragraph of Section 1);

(ii) A Legend Removal Failure occurs, where a “Legend Removal Failure” shall be
deemed to have occurred if the Company fails to use its best efforts to issue
this Warrant and/or Exercise Shares without a restrictive legend, or fails to
use it best efforts to remove a restrictive legend, when and as required under
Section 2(e) hereof;

(iii) a Transfer Delivery Failure occurs, where a “Transfer Delivery Failure”
shall be deemed to have occurred if the Company fails to use its best efforts to
deliver a Warrant within any applicable Transfer Delivery Period; and

(iv) a Registration Failure (as defined below).

12

 

For purpose hereof, “Registration Failure” means that (A) the Company fails to
file with the SEC on or before the Filing Deadline (as defined in the
Registration Rights Agreement) any Registration Statement required to be filed
pursuant to Section 2(a) of the Registration Rights Agreement, (B) the Company
fails to use its reasonable commercial efforts to obtain effectiveness with the
SEC, prior to the Registration Deadline (as defined in the Registration Rights
Agreement), and if such Registration Statement is not so filed prior to the
Registration Deadline, as soon as possible thereafter, of any Registration
Statement (as defined in the Registration Rights Agreement) that are required to
be filed pursuant to Section 2(a) of the Registration Rights Agreement, or fails
to use reasonable commercial efforts to keep such Registration Statement current
and effective as required in Section 3 of the Registration Rights Agreement, (C)
The Company fails to file any additional Registration Statements required to be
filed pursuant to Section 2(a)(ii) of the Registration Rights Agreement on or
before the Additional Filing Deadline or fails to use its reasonable commercial
efforts to cause such new Registration Statement to become effective on or
before the Additional Registration Deadline, and if such effectiveness does not
occur within such period, as soon as possible thereafter, (D) the Company fails
to file any amendment to any Registration Statement, or any additional
Registration Statement required to be filed pursuant to Section 3(b) of the
Registration Rights Agreement within twenty (20) days of the applicable
Registration Trigger Date (as defined in the Registration Rights Agreement), or
fails to use its reasonable commercial efforts to cause such amendment and/or
new Registration Statement to become effective within sixty (60) days of the
applicable Registration Trigger Date, and, if such effectiveness does not occur
within such period, as soon as possible thereafter, (E) any Registration
Statement required to be filed under the Registration Rights Agreement, after
its initial effectiveness and during the Registration Period (as defined in the
Registration Rights Agreement), lapses in effect or sales of all of the
Registrable Securities (as defined in the Registration Rights Agreement) cannot
otherwise be made thereunder (whether by reason of the Company’s failure to
amend or supplement the prospectus included therein in accordance with the
Registration Rights Agreement, the Company’s failure to file and, use reasonable
commercial efforts to obtain effectiveness with the SEC of an additional
Registration Statement or amended Registration Statement required pursuant to
Sections 2(a)(ii) or 3(b) of the Registration Rights Agreement, as applicable,
or otherwise), and (F) the Company fails to provide a commercially reasonable
written response to any comments to any Registration Statement submitted by the
SEC within twenty (20) days of the date that such SEC comments are received by
the Company.

(b) Failure Payments; Black-Scholes Determination. The Company understands that
any Event of Failure (as defined above) could result in economic loss to the
Holder. In the event that any Event of Failure occurs, as compensation to the
Holder for such loss, the Company agrees to pay (as liquidated damages and not
as a penalty) to the Holder an amount (“Failure Payments”) payable, at the
Company’s option, either (i) in cash or (ii) in shares of Common Stock that are
valued for these purposes at the Volume Weighted Average Price on the date of
such calculation (“Failure Payment Shares”), in each case equal to 15% per annum
(or the maximum rate permitted by applicable law, whichever is less) of the
Black-Scholes value (as determined below) of the remaining unexercised portion
of this Warrant on the date of such Event of Failure (as recalculated on the
first business day of each month thereafter for as long as Failure Payments
shall continue to accrue), which shall accrue daily from the date of such Event
of Failure until the Event of Failure is cured, accruing daily and compounded
monthly, provided, however, the Holder shall only receive up to such amount of
shares of Common Stock in respect of Failure Payments such that Holder and any
other persons or entities whose beneficial ownership of Common Stock would be
aggregated with the Holder’s for purposes of Section 13(d) of the Exchange Act
(including shares held by any “group” of which the Holder is a member, but
excluding shares beneficially owned by virtue of the ownership of securities or
rights to acquire securities that have limitations on the right to convert,
exercise or purchase similar to the limitation set forth herein) shall not
collectively beneficially own greater than 9.985% of the total number of shares
of Common Stock of the Company then issued and outstanding. For purposes of
clarification, it is agreed and understood that Failure Payments shall continue
to accrue following any Event of Default until the applicable Default Amount is
paid in full.

Notwithstanding the above, (1) in the event that the Company (i) has, by the
Filing Deadline (as defined the Registration Rights Agreement) filed a
Registration Statement (as defined in the Registration Rights Agreement)
covering the number of shares required by the Registration Rights Agreement, and
(ii) has responded in writing to any comments to the Registration Statement that
the Company has received from the SEC, within seven (7) Business Days of such
receipt, and nevertheless the SEC has not declared effective a Registration
Statement covering the full number of Warrant Shares issuable upon exercise of
the Warrants by the Registration Deadline (as defined in the Registration Rights
Agreement) then, the Failure Payments attributable to such late Registration
Effectiveness shall be reduced from 15% per annum to 12% (calculated as set
forth above) and (2) in no event shall the aggregate Failure Payments
attributable solely to the failure by the SEC to declare a Registration
Statement effective exceed 10% of the Black-Scholes value of the Warrant. The
Company shall satisfy any Failure Payments under this Section pursuant to
Section 10(c) below. Failure Payments are in addition to any Shares that the
Holder is entitled to receive upon Exercise of this Warrant.

For purposes hereof, the “Black-Scholes” value of a Warrant shall be determined
by use of the Black Scholes Option Pricing Model using the criteria set forth on
Schedule 1 hereto.

13

 

(c) Payment of Accrued Failure Payments. The Failure Payment Shares representing
accrued Failure Payments for each Event of Failure shall be issued and delivered
on or before the fifth (5th) business day of each month following a month in
which Failure Payments accrued and shall be the sole measure of damages for the
Event of Failure to which the Failure Payments relate. Nothing herein shall
limit the Holder’s right to pursue a claim for specific performance and/or
injunctive relief. Notwithstanding the above, if a particular Event of Failure
results in an Event of Default pursuant to Section 11 hereof, then the Failure
Payment, for that Event of Failure only, shall be considered to have been
satisfied upon payment to the Holder of an amount equal to the greater of
(i) the Failure Payment, or (ii) the Default Amount, payable in accordance with
Section 11.

(d) Maximum Interest Rate. Nothing contained herein or in any document referred
to herein or delivered in connection herewith shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Company to the Holder and thus refunded to the
Company.

 

11. Default.

(a) Events Of Default. Each of the following events shall be considered to be an
“Event of Default,” unless waived by the Holder:

(i) Failure To Effect Registration. With respect to all Registration Failures, a
Registration Failure occurs and remains uncured for a period of more than
forty-five (45) days (or sixty (60) days in the case where the Company (i) has,
by the Filing Deadline (as defined the Registration Rights Agreement) filed a
Registration Statement (as defined in the Registration Rights Agreement)
covering the number of shares required by the Registration Rights Agreement, and
(ii) has responded in writing to any comments to the Registration Statement that
the Company has received from the SEC, within seven (7) Business Days of such
receipt, and nevertheless the SEC has not declared effective a Registration
Statement covering the Shares by the Registration Deadline (as defined in the
Registration Rights Agreement)), and such Registration Failure relates solely to
the Company’s failure to have the Registration Statement declared effective by
the Registration Deadline (as defined in the Registration Rights Agreement) and
with respect to a Registration Failure provided in clause (E) of the definition
of “Registration Failure”, such Registration Failure occurs and remains uncured
for a period of more than forty-five (45) days.

(ii) Failure To Deliver Common Stock. A Delivery Failure (as defined above)
occurs and remains uncured for a period of more than twenty (20) days; or at any
time, the Company announces or states in writing that it will not honor its
obligations to issue shares of Common Stock to the Holder upon Exercise by the
Holder of the Exercise rights of the Holder in accordance with the terms of this
Warrant.

(iii) Legend Removal Failure. A Legend Removal Failure (as defined above) occurs
and remains uncured for a period of twenty (20) days; and

(iv) Corporate Existence; Major Transaction. (A) The Company has failed to
either (1) place the Major Transaction Warrant Early Termination Price or the
Exercise Shares issuable upon exercise of a Cashless Major Exercise, as the case
may be, into escrow or (2) obtain the written agreement of the Successor Entity
as described in Section 5(c)(iv), or the Company has failed to instruct the
escrow agent to release such amount or such shares, as the case may be, to the
Holder pursuant to Section 5(c)(iv), or (B) with respect to a Major Transaction
that is to be treated as an Assumption under the terms hereof, the Company has
failed to meet the Assumption requirements of Section 5(c)(ii).

(b) Mandatory Early Termination.

(i) Mandatory Early Termination Amount; Cashless Default Exercise. If any Events
of Default shall occur then, unless waived by the Holder, upon the occurrence
and during the continuation of any Event of Default, at the option of the
Holder, such option exercisable through the delivery of written notice to the
Company by such Holder (the “Default Notice”), the Company shall have the right
to terminate the outstanding amount of this Warrant and pay to the Holder (a
“Mandatory Early Termination”), in full satisfaction of its obligations
hereunder by delivery of a notice to such effect to the Holder within two (2)
Business Days following receipt of the Default Notice, an amount payable in cash
(the “Mandatory Early Termination Amount” or the “Default Amount”) equal to the
Black-Scholes value (as determined in accordance with Section 10(b)) of the
remaining unexercised portion of this Warrant on the date of such Default
Notice. In the event the Company does not exercise its right to consummate a
Mandatory Early Termination, then the Holder shall have the right to exercise
this Warrant pursuant to a Cashless Default Exercise in accordance with Section
3(c) above.

14

 

The Mandatory Early Termination Amount shall be payable within five (5) Business
Days following the date of the applicable Default Notice.

(ii) Liquidated Damages. The parties hereto acknowledge and agree that the sums
payable as Failure Payments or pursuant to a Mandatory Early Termination shall
give rise to liquidated damages and not penalties. The parties further
acknowledge that (i) the amount of loss or damages likely to be incurred by the
Holder is incapable or is difficult to precisely estimate, (ii) the amounts
specified bear a reasonable proportion and are not plainly or grossly
disproportionate to the probable loss likely to be incurred by the Holder, and
(iii) the parties are sophisticated business parties and have been represented
by sophisticated and able legal and financial counsel and negotiated this
Agreement at arm’s length.

(c) Posting Of Bond. In the event that any Event of Default occurs hereunder,
the Company may not raise as a legal defense (in any Lawsuit, as defined below,
or otherwise) or justification to such Event of Default any claim that such
Holder or any one associated or affiliated with such Holder has been engaged in
any violation of law, unless the Company has posted a surety bond (a “Surety
Bond”) for the benefit of such Holder in the amount of 130% of the aggregate
Surety Bond Value (as defined below) of all of the Holder’s Warrants (the “Bond
Amount”), which Surety Bond shall remain in effect until the completion of
litigation of the dispute and the proceeds of which shall be payable to such
Holder to the extent Holder obtains judgment.

For purposes hereof, a “Lawsuit” shall mean any lawsuit, arbitration or other
dispute resolution filed by either party herein pertaining to any of this
Warrant, the Facility Agreement and the Registration Rights Agreement.

“Surety Bond Value,” for the Warrants shall mean 130% of the of the
Black-Scholes value of the remaining unexercised portion of this Warrant on the
Trading Day immediately preceding the date that such bond goes into effect).

(d) Remedies, Other Obligations, Breaches And Injunctive Relief. The remedies
provided in this Warrant shall be cumulative and in addition to all other
remedies available under this Warrant, the Facility Agreement and the
Registration Rights Agreement, at law or in equity (including a decree of
specific performance and/or other injunctive relief), and nothing herein shall
limit the right of the Holder to pursue actual damages for any failure by the
Company to comply with the terms of this Warrant. The Company acknowledges that
a breach by it of its obligations hereunder will cause irreparable harm to the
Holder and that the remedy at law for any such breach may be inadequate. The
Company therefore agrees that, in the event of any such breach or threatened
breach, the holder of this Warrant shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.

12. Holder’s Early Terminations.

(a) Mechanics of Holder’s Early Terminations. In the event that the Company does
not deliver the applicable Major Transaction Warrant Early Termination Price or
Default Amount or the Exercise Shares in respect of a Cashless Major Exercise or
a Cashless Default Exercise, as the case may be, to the Holder within ten (10)
days following the time period or as otherwise required pursuant to the terms
hereof, at any time thereafter the Holder shall have the option, upon notice to
the Company, in lieu of early termination, Cashless Major Exercise or Cashless
Default Exercise, as the case may be, to require the Company to promptly return
to the Holder all or any portion of this Warrant that was submitted for early
termination or exercise. Upon the Company’s receipt of such notice, (x) the
applicable early termination or exercise, as the case may be, shall be null and
void with respect to such applicable portion of this Warrant, (y) the Company
shall immediately return this Warrant, or issue a new Warrant to the Holder
representing the portion of this Warrant that was submitted for early
termination or exercise and (z) the Exercise Price of this Warrant or such new
Warrant shall be adjusted to the lesser of (A) the Exercise Price as in effect
on the date on which the applicable early termination, default or exercise
notice, as the case may be, is voided and (B) the lowest closing price for the
Common Stock on NASDAQ, or, if NASDAQ is not the principal trading market for
the Common Stock, the principal securities exchange or other securities market
on which the Common Stock is then being traded, during the period beginning on
and including the date on which the applicable early termination or exercise
notice, as the case may be, is delivered to the Company and ending on and
including the date on which the applicable early termination or exercise is
voided. The Holder’s delivery of a notice voiding an early termination or
exercise and exercise of its rights following such notice shall not affect the
Company’s obligations to make any payments of Failure Payments which have
accrued prior to the date of such notice with respect to the Warrant subject to
such notice.

15

 

13. Benefits of this Warrant.

Nothing in this Warrant shall be construed to confer upon any person other than
the Company and Holder any legal or equitable right, remedy or claim under this
Warrant and this Warrant shall be for the sole and exclusive benefit of the
Company and Holder.

14. Governing Law.

All questions concerning the construction, validity, enforcement and
interpretation of this Agreement shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. Each party agrees that all legal
proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Agreement (whether brought against a party
hereto or its respective affiliates, directors, officers, shareholders,
employees or agents) shall be commenced exclusively in the state and federal
courts sitting in the City of New York. Each party hereby irrevocably submits to
the exclusive jurisdiction of the state and federal courts sitting in the City
of New York, borough of Manhattan for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or is an inconvenient venue for such proceeding. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any other manner permitted by law. The parties hereby waive
all rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of this Agreement, then the prevailing
party in such action or proceeding shall be reimbursed by the other party for
its reasonable attorneys’ fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.

15. Loss of Warrant.

Upon receipt by the Company of evidence of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
indemnity or security reasonably satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.

16. Notice or Demands.

Except as otherwise provided herein, notices or demands pursuant to this Warrant
to be given or made by Holder to or on the Company shall be sufficiently given
or made if sent by overnight delivery with a nationally recognized overnight
courier service or certified or registered mail, return receipt requested,
postage prepaid, and addressed, until another address is designated in writing
by the Company, to the address set forth in Section 2(a) above. Notices or
demands pursuant to this Warrant to be given or made by the Company to or on
Holder shall be sufficiently given or made if sent by overnight delivery with a
nationally recognized overnight courier service or certified or registered mail,
return receipt requested, postage prepaid, and addressed, to the address of
Holder set forth in the Company’s records, until another address is designated
in writing by Holder.

16

 

17. Limitation on Issuance of Common Stock.

Notwithstanding anything herein to the contrary, the maximum number of shares of
Common Stock issued or issuable pursuant to this Warrant and all additional
Warrants issued pursuant to Section 2.10 of the Facility Agreement may not
exceed the aggregate number of shares of Common Stock which the Company may
issue upon exercise of the Warrants without violating NASDAQ Rule 5635(d).

[Signature page follows]

 

 

 

 

 

 

 

 

 

 

17

 

IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the _____
day of ______, 2012.

  MAKO SURGICAL CORP.                     By:       Print Name:
Title:

 

 

 

 

 

WARRANT 

 

EXHIBIT A

EXERCISE FORM FOR WARRANT

TO: MAKO SURGICAL CORP.

CHECK THE APPLICABLE BOX:

□

Cash Exercise or Cashless Exercise

The undersigned hereby irrevocably exercises the attached warrant (the
“Warrant”) with respect to shares of Common Stock (the “Common Stock”) of MAKO
Surgical Corp., a Delaware corporation (the “Company”), and, if pursuant to a
Cashless Exercise, herewith makes payment of the Exercise Price with respect to
such shares in full, all in accordance with the conditions and provisions of
said Warrant.

[IF APPLICABLE: The undersigned hereby encloses $____ as payment of the Exercise
Price.]

[IF APPLICABLE: The undersigned hereby agrees to cancel $____ of principal
outstanding under Notes of the Company held by the Holder.]

□

Cashless Major Exercise

The undersigned hereby irrevocably exercises the Warrant with respect to ____%
of the Warrant currently outstanding pursuant to a Cashless Major Exercise in
accordance with the terms of the Warrant.

□

Cashless Default Exercise

The undersigned hereby irrevocably exercises the Warrant pursuant to a Cashless
Default Exercise, in accordance with the terms of the Warrant.

 

1. The undersigned requests that any stock certificates for such shares be
issued free of any restrictive legend, if appropriate, and a warrant
representing any unexercised portion hereof be issued, pursuant to the Warrant
in the name of the undersigned and delivered to the undersigned at the address
set forth below.

2. Capitalized terms used but not otherwise defined in this Exercise Form shall
have the meaning ascribed thereto in the Warrant.

Dated: _______________

  Signature     Print Name     Address  

NOTICE

The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.

 

 

 

EXHIBIT B

ASSIGNMENT

(To be executed by the registered holder
desiring to transfer the Warrant)

FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
“Warrant”) hereby sells, assigns and transfers unto the person or persons below
named the right to purchase __________ shares of the Common Stock of MAKO
Surgical Corp., a Delaware corporation, evidenced by the attached Warrant and
does hereby irrevocably constitute and appoint __________ attorney to transfer
the said Warrant on the books of the Company, with full power of substitution in
the premises.

 

      Dated:             Signature             Fill in for new registration of
Warrant:                       Name                 Address                

Please print name and address of assignee

(including zip code number)

             

 

 

NOTICE

The signature to the foregoing Assignment must correspond to the name as written
upon the face of the attached Warrant in every particular, without alteration or
enlargement or any change whatsoever.

 

 

 

EXHIBIT C

FORM OF OPINION

 

______, 20__

[___________]

Re: MAKO Surgical Corp. (the “Company”)

Dear Sir:

[___________] (“[__________]”) intends to transfer _______ Warrants (the
“Warrants”) of the Company to __________ (“________”) without registration under
the Securities Act of 1933, as amended (the “Securities Act”). In connection
therewith, we have examined and relied upon the truth of representations
contained in an Investor Representation Letter attached hereto and have examined
such other documents and issues of law as we have deemed relevant.

Based on and subject to the foregoing, we are of the opinion that the transfer
of the Warrants by _______ to ______ may be effected without registration under
the Securities Act, provided, however, that the Warrants to be transferred to
_______ contain a legend restricting its transferability pursuant to the
Securities Act and that transfer of the Warrants is subject to a stop order.

The foregoing opinion is furnished only to ____________ and may not be used,
circulated, quoted or otherwise referred to or relied upon by you for any
purposes other than the purpose for which furnished or by any other person for
any purpose, without our prior written consent.

Very truly yours,

 

 

 

[FORM OF INVESTOR REPRESENTATION LETTER]

_____, 20__

[_________________]

Gentlemen:

_________ (“___”) has agreed to purchase _________ Warrants (the “Warrants”) of
MAKO Surgical Corp. (the “Company”) from [___________] (“[_________]”). We
understand that the Warrants are “restricted securities.” We represent and
warrant that ______ is a sophisticated institutional investor that would qualify
as an “Accredited Investor” as defined in Rule 501 of Regulation D under the
Securities Act of 1933, as amended (the “Securities Act”).

________ represents and warrants as of the date hereof as follows:

1. That it is acquiring the Warrants and the shares of common stock, $0.001 par
value per share underlying such Warrants (the “Exercise Shares”) solely for its
account for investment and not with a view to or for sale or distribution of
said Warrants or Exercise Shares or any part thereof. ________ also represents
that the entire legal and beneficial interests of the Warrants and Exercise
Shares _________ is acquiring is being acquired for, and will be held for, its
account only;

2. That the Warrants and the Exercise Shares have not been registered under the
Securities Act on the basis that no distribution or public offering of the stock
of the Company is to be effected. _______ realizes that the basis for the
exemption may not be present if, notwithstanding its representations, _______
has a present intention of acquiring the securities for a fixed or determinable
period in the future, selling (in connection with a distribution or otherwise),
granting any participation in, or otherwise distributing the securities. _______
has no such present intention;

3. That the Warrants and the Exercise Shares must be held indefinitely unless
they are subsequently registered under the Securities Act or an exemption from
such registration is available. ________ recognizes that the Company has no
obligation to register the Warrants, or to comply with any exemption from such
registration;

4. That neither the Warrants nor the Exercise Shares may be sold pursuant to
Rule 144 adopted under the Securities Act unless certain conditions are met,
including, among other things, the existence of a public market for the shares,
the availability of certain current public information about Company, the resale
following the required holding period under Rule 144 and the number of shares
being sold during any three month period not exceeding specified limitations;

5. That it will not make any disposition of all or any part of the Warrants or
Exercise Shares in any event unless and until:

(i)        The Company shall have received a letter secured by _________ from
the Securities and Exchange Commission stating that no action will be
recommended to the Securities and Exchange Commission with respect to the
proposed disposition;

(ii)       There is then in effect a registration statement under the Securities
Act covering such proposed disposition and such disposition is made in
accordance with said registration statement; or

(iii)       _________ shall have notified the Company of the proposed
disposition and, in the case of a sale or transfer in a so called “4(1) and a
half” transaction, shall have furnished counsel to the Company with an opinion
of counsel, reasonably satisfactory to counsel to the Company.

 

 

We acknowledge that the Company will place stop orders with respect to the
Warrants and the Exercise Shares, and if a registration statement is not
effective, the Exercise Shares shall bear the following restrictive legend:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER SAID ACT, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER SAID ACT INCLUDING, WITHOUT LIMITATION, PURSUANT TO RULES 144 OR 144A
UNDER SAID ACT OR PURSUANT TO A PRIVATE SALE EFFECTED UNDER APPLICABLE FORMAL OR
INFORMAL SEC INTERPRETATION OR GUIDANCE, SUCH AS A SO-CALLED “4(1) AND A HALF”
SALE.”

“THE SALE, TRANSFER OR ASSIGNMENT OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN REGISTRATION
RIGHTS AGREEMENT DATED AS OF MAY 7, 2012, AS AMENDED FROM TIME TO TIME, AMONG
THE COMPANY AND CERTAIN HOLDERS OF ITS OUTSTANDING SECURITIES. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY.”

At any time and from time to time after the date hereof, _________ shall,
without further consideration, execute and deliver to [________] or the Company
such other instruments or documents and shall take such other actions as they
may reasonably request to carry out the transactions contemplated hereby.

Very truly yours,

 

 

 

Schedule 1

Black-Scholes Value

  Calculation Under Section 5(c)(iii) Calculation Under Section 10(b) or 11(b)
Remaining Term Number of calendar days from date of public announcement of the
Major Transaction until the last date on which the Warrant may be exercised.
Number of calendar days from date of the determination until the last date on
which the Warrant may be exercised. Interest Rate A risk-free interest rate
corresponding to the US$ LIBOR/Swap rate for a period equal to the Remaining
Term. A risk-free interest rate corresponding to the US$ LIBOR/Swap rate for a
period equal to the Remaining Term (rounded to the nearest year). Volatility

If the first public announcement of the Major Transaction is made at or prior to
4:00 p.m., New York City time, the arithmetic mean of the historical volatility
for the 10, 30 and 50 Trading Day periods ending on the date of such first
public announcement, obtained from the HVT or similar function on Bloomberg.
 

If the first public announcement of the Major Transaction is made after 4:00
p.m., New York City time, the arithmetic mean of the historical volatility for
the 10, 30 and 50 Trading Day periods ending on the next succeeding Trading Day
following the date of such first public announcement, obtained from the HVT or
similar function on Bloomberg.

Historic volatility of the Company’s stock price for the preceding year ending
on the date of exercise Stock Price The greater of (1) the closing price of the
Common Stock on NASDAQ, or, if that is not the principal trading market for the
Common Stock, such principal market on which the Common Stock is traded or
listed (the “Closing Market Price”) on the trading day immediately preceding the
date on which a Major Transaction is consummated, (2) the first Closing Market
Price following the first public announcement of a Major Transaction, or (3) the
Closing Market Price as of the date immediately preceding the first public
announcement of the Major Transaction. The closing price on the date of exercise
or other event requiring calculation. Dividends Zero. Zero. Strike Price
Exercise Price as defined in section 3(a). Exercise Price as defined in section
3(a).

 

 

 

Exhibit D-2

 

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (I) A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. HOLDERS MUST
RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS
INVOLVED.

Warrant to Purchase
                    shares Warrant Number 

 

 

Warrant to Purchase Common Stock
of
MAKO Surgical Corp.

THIS CERTIFIES that ____________ or any subsequent holder hereof (“Holder”) has
the right to purchase from MAKO Surgical Corp., a Delaware corporation, (the
“Company”), ________ (______) fully paid and nonassessable shares of the
Company’s common stock, $0.001 par value per share (“Common Stock”), subject to
adjustment as provided herein, at a price equal to the Exercise Price as defined
in Section 3 below, at any time during the Term (as defined below).

Holder agrees with the Company that this Warrant to Purchase Common Stock of the
Company (this “Warrant” or this “Agreement”) is issued and all rights hereunder
shall be held subject to all of the conditions, limitations and provisions set
forth herein.

1. Date of Issuance and Term.

This Warrant shall be deemed to be issued on ____________ (“Date of Issuance”).
The term of this Warrant begins on the Date of Issuance and ends at 5:00 p.m.,
New York City time, on the date that is seven (7) years after the Date of
Issuance (the “Term”). This Warrant was issued in conjunction with that certain
Facility Agreement (the “Facility Agreement”) and the Registration Rights
Agreement (“Registration Rights Agreement”) by and between the Company, Holder
and __________, each dated May 7, 2012, entered into in conjunction herewith.

Notwithstanding anything herein to the contrary, the Company shall not issue to
the Holder, and the Holder may not acquire, a number of shares of Common Stock
upon exercise of this Warrant to the extent that, upon such exercise, the number
of shares of Common Stock then beneficially owned by the Holder and its
Affiliates and any other persons or entities whose beneficial ownership of
Common Stock would be aggregated with the Holder’s for purposes of Section 13(d)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
(including shares held by any “group” of which the Holder is a member, but
excluding shares beneficially owned by virtue of the ownership of securities or
rights to acquire securities that have limitations on the right to convert,
exercise or purchase similar to the limitation set forth herein) would exceed
9.985% of the total number of shares of Common Stock then issued and outstanding
(the “9.985% Cap”), provided, however, that the 9.985% Cap shall not apply with
respect to the issuance of shares of Common Stock pursuant to a Cashless Major
Exercise (as defined below) in connection with a Major Transaction (as defined
below) covered by the provisions of Section 5(c)(i)(A)(1) below in which the
Company is not the surviving entity (a “Non-Surviving Change of Control
Transaction”) to the extent that the number of shares beneficially owned by the
Holder and its affiliates in the successor entity immediately following
consummation of such Non-Surviving Change of Control Transaction does not exceed
9.985% of the outstanding common stock of such successor entity and provided,
further, that the 9.985% Cap shall only apply to the extent that the Common
Stock is deemed to constitute an “equity security” pursuant to Rule 13d-1(i)
promulgated under the Exchange Act. For purposes hereof, “group” has the meaning
set forth in Section 13(d) of the Exchange Act and applicable regulations of the
Securities and Exchange Commission (the “SEC”), and the percentage held by the
Holder shall be determined in a manner consistent with the provisions of
Section 13(d) of the Exchange Act. Upon the written request of the Holder, the
Company shall, within two (2) Trading Days, confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding.

 

 

“Affiliate” means any person or entity that, directly or indirectly through one
or more intermediaries, controls or is controlled by or is under common control
with a person or entity, as such terms are used in and construed under Rule 144
under the Securities Act of 1933, as amended (the “Securities Act”). With
respect to a Holder of Warrants, any investment fund or managed account that is
managed on a discretionary basis by the same investment manager as such Holder
will be deemed to be an Affiliate of such Holder.

“Holder” means ______ and any transferee or assignee pursuant to the terms of
this Warrant.

2. Exercise.

(a) Manner of Exercise. Beginning on the Date of Issuance and continuing during
the Term, this Warrant may be Exercised as to all or any lesser number of whole
shares of Common Stock covered hereby (the “Warrant Shares” or the “Shares”)
upon surrender of this Warrant, with the Exercise Form attached hereto as
Exhibit A (the “Exercise Form”) duly completed and executed, together with the
full Exercise Price (as defined below, which may be satisfied by a Cash Exercise
or a Cashless Exercise, as each is defined below) for each share of Common Stock
as to which this Warrant is Exercised, at the office of the Company, 2555 Davie
Road, Fort Lauderdale, FL 33317, Phone: (954) 927-2044, Fax: (954) 707-5360,
electronic mail:adminteam@makosurgical.com), or at such other office or agency
as the Company may designate in writing, by overnight mail, with an advance copy
of the Exercise Form sent to the Company by facsimile or electronic mail (such
surrender and payment of the Exercise Price hereinafter called the “Exercise” of
this Warrant).

(b) Date of Exercise. The “Date of Exercise” of the Warrant shall be defined as
the date that the Exercise Form attached hereto as Exhibit A, completed and
executed, is sent by facsimile or electronic mail to the Company, provided that
the original Warrant and Exercise Form are received by the Company and the
Exercise Price is satisfied, each as soon as practicable thereafter but in no
event later than two (2) business days following the date of such facsimile or
electronic mail. Alternatively, the Date of Exercise shall be defined as the
date the original Exercise Form is received by the Company, if Holder has not
sent advance notice by facsimile or electronic mail. Upon delivery of the
Exercise Form to the Company by facsimile, electronic mail or otherwise, the
Holder shall be deemed for all corporate purposes to have become the holder of
record of the Warrant Shares with respect to which this Warrant has been
Exercised, irrespective of the date such Warrant Shares are credited to the
Holder’s Depository Trust Company (“DTC”) account or the date of delivery of the
certificates evidencing such Warrant Shares, as the case may be; provided,
however, that in the event of a Cashless Major Exercise in respect of a
Non-Surviving Change of Control Transaction, the Holder shall be deemed to have
become the holder of record of the shares issuable upon such exercise
immediately prior to the consummation of such Non-Surviving Change of Control
Transaction.

(c) Delivery of Common Stock Upon Exercise. Within three (3) business days after
the Date of Exercise (but, in the case of a Cash Exercise, within two (2)
business days following the Company’s receipt of the full Exercise Price, if
later) or, in the case of a Cashless Major Exercise or a Cashless Default
Exercise (each as defined in Section 5(c) below), within the period provided in
Section 5(c)(iv) or Section 3(c), as applicable (the “Delivery Period”), the
Company shall issue and deliver (or cause its Transfer Agent to issue and
deliver) in accordance with the terms hereof to or upon the order of the Holder
that number of shares of Common Stock (“Exercise Shares”) for the portion of
this Warrant converted as shall be determined in accordance herewith. Upon the
Exercise of this Warrant or any part hereof, the Company shall, at its own cost
and expense, take all necessary action, including obtaining and delivering an
opinion of counsel, to assure that the Company’s transfer agent (the “Transfer
Agent”) shall issue stock certificates in the name of Holder (or its nominee) or
such other persons as designated by Holder and in such denominations to be
specified at Exercise representing the number of shares of Common Stock issuable
upon such Exercise. The Company warrants that no instructions other than these
instructions have been or will be given to the Transfer Agent and that, unless
waived by the Holder, this Warrant and the Exercise Shares will be free-trading,
and freely transferable, and will not contain a legend restricting the resale or
transferability of the Exercise Shares if the Unrestricted Conditions (as
defined below) are met.

2

 

(d) Delivery Failure. In addition to any other remedies which may be available
to the Holder, in the event that the Company fails for any reason to effect
delivery of the Exercise Shares by the end of the Delivery Period (a “Delivery
Failure”), the Holder will be entitled to revoke all or part of the relevant
Exercise Form by delivery of a notice to such effect to the Company whereupon
the Company and the Holder shall each be restored to their respective positions
immediately prior to the delivery of such notice, except that the liquidated
damages described herein shall be payable through the date notice of revocation
or rescission is given to the Company.

(e) Legends.

(i) Restrictive Legend. The Holder understands that until such time as this
Warrant, the Exercise Shares and the Failure Payment Shares have been registered
under the Securities Act as contemplated by the Registration Rights Agreement or
otherwise may be sold pursuant to Rule 144 under the Securities Act or an
exemption from registration under the Securities Act without any restriction as
to the number of securities as of a particular date that can then be immediately
sold, this Warrant, the Exercise Shares and the Failure Payment Shares, as
applicable, may bear a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of the certificates
for such securities):

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER SAID ACT, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER SAID ACT INCLUDING, WITHOUT LIMITATION, PURSUANT TO RULES 144 OR 144A
UNDER SAID ACT OR PURSUANT TO A PRIVATE SALE EFFECTED UNDER APPLICABLE FORMAL OR
INFORMAL SEC INTERPRETATION OR GUIDANCE, SUCH AS A SO-CALLED “4(1) AND A HALF”
SALE.”

“THE SALE, TRANSFER OR ASSIGNMENT OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN REGISTRATION
RIGHTS AGREEMENT DATED AS OF MAY 7, 2012, AS AMENDED FROM TIME TO TIME, AMONG
THE COMPANY AND CERTAIN HOLDERS OF ITS OUTSTANDING SECURITIES. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY.”

(ii) Removal of Restrictive Legends. This Warrant and the certificates
evidencing the Exercise Shares and the Failure Payment Shares, as applicable,
shall not contain any legend restricting the transfer thereof (including the
legend set forth above in subsection 2(e)(i)): (A) while a registration
statement (including a Registration Statement, as defined in the Registration
Rights Agreement) covering the sale or resale of such security is effective
under the Securities Act, or (B) following any sale of such Warrant, Exercise
Shares and/or Failure Payment Shares pursuant to Rule 144, or (C) if such
Warrant, Exercise Shares and/or Failure Payment Shares are eligible for sale
under Rule 144(b)(1), or (D) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the SEC) (collectively, the “Unrestricted
Conditions”). The Company shall cause its counsel to issue a legal opinion to
the Transfer Agent promptly after the Effective Date if required by the
Company’s transfer agent to effect the issuance of the Exercise Shares or the
Failure Payment Shares, as applicable, without a restrictive legend or removal
of the legend hereunder. If the Unrestricted Conditions are met at the time of
issuance of this Warrant, the Exercise Shares or the Failure Payment Shares,
then such Warrant, Exercise Shares or Failure Payment Shares, as applicable,
shall be issued free of all legends. The Company agrees that following the
Effective Date at such time as the Unrestricted Conditions are met or such
legend is otherwise no longer required under this Section 2(e), it will, no
later than three (3) Trading Days following the delivery (the “Unlegended Shares
Delivery Deadline”) by the Holder to the Company or the Transfer Agent of this
Warrant and a certificate representing Exercise Shares and/or Failure Payment
Shares, as applicable, issued with a restrictive legend (such third Trading Day,
the “Legend Removal Date”), deliver or cause to be delivered to such Holder a
certificate (or electronic transfer) representing such shares that is free from
all restrictive and other legends. For purposes hereof, “Effective Date” shall
mean the date that the Registration Statement that the Company is required to
file pursuant to the Registration Rights Agreement has been declared effective
by the SEC.

3

 

(iii) Sale of Unlegended Shares. Holder agrees that the removal of the
restrictive legend from this Warrant and any certificates representing
securities as set forth in Section 2(e) above is predicated upon the Company’s
reliance that the Holder will sell this Warrant or any Exercise Shares and/or
any Failure Payment Shares, as applicable, pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus delivery
requirements, or an exemption therefrom, and that if such securities are sold
pursuant to a Registration Statement, they will be sold in compliance with the
plan of distribution set forth therein.

(f) Cancellation of Warrant. This Warrant shall be canceled upon the full
Exercise, of this Warrant, and, as soon as practical after the Date of Exercise,
Holder shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise of this Warrant, and if this Warrant is not
Exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.

(g) Holder of Record. Each person in whose name any Warrant for shares of Common
Stock is issued shall, for all purposes, be deemed to be the Holder of record of
such shares on the Date of Exercise of this Warrant, irrespective of the date of
delivery of the Common Stock purchased upon the Exercise of this Warrant. Prior
to the exercise of this Warrant, nothing in this Warrant shall be construed as
conferring upon Holder any rights as a stockholder of the Company.

(h) Delivery of Electronic Shares. In lieu of delivering physical certificates
representing the Common Stock issuable upon Exercise or legend removal, or
representing Failure Payment Shares, provided the Transfer Agent is
participating in the DTC Fast Automated Securities Transfer (“FAST”) program,
upon written request of the Holder, the Company shall use its best efforts to
cause its Transfer Agent to electronically transmit the Common Stock issuable
upon Exercise to the Holder by crediting the account of the Holder’s prime
broker with DTC through its Deposit Withdrawal Agent Commission (DWAC) system.
The time periods for delivery and penalties described herein shall apply to the
electronic transmittals described herein. Any delivery not effected by
electronic transmission shall be effected by delivery of physical certificates.

(i) Buy-In. In addition to any other rights available to the Holder, if the
Company fails to cause its Transfer Agent to transmit to the Holder a
certificate or certificates, or electronic shares through DWAC, representing the
Exercise Shares pursuant to an Exercise on or before the Delivery Period (other
than a failure caused by any incorrect or incomplete information provided by
Holder to the Company hereunder), and if after such date the Holder is required
by its broker to purchase (in an open market transaction or otherwise) or the
Holder’s brokerage firm otherwise purchases shares of Common Stock to deliver in
satisfaction of a sale by the Holder of the Exercise Shares which the Holder
anticipated receiving upon such Exercise (a “Buy-In”), then the Company shall
(1) pay in cash to the Holder the amount by which (x) the Holder’s total
purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the
number of Exercise Shares that the Company was required to deliver to the Holder
in connection with the Exercise at issue times and (B) the price at which the
sell order giving rise to such purchase obligation was executed, and (2) at the
option of the Holder, either reinstate the portion of the Warrant and equivalent
number of Exercise Shares for which such Exercise was not honored or deliver to
the Holder the number of shares of Common Stock that would have been issued had
the Company timely complied with its Exercise and delivery obligations
hereunder. For example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
Exercise to cover the sale of Common Stock with an aggregate sale price giving
rise to such purchase obligation of $10,000, under clause (1) of the immediately
preceding sentence the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts payable
to the Holder in respect of the Buy-In, together with applicable confirmations
and other evidence reasonably requested by the Company. Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Company’s failure to
timely deliver certificates representing shares of Common Stock upon Exercise of
the Warrant as required pursuant to the terms hereof.

4

 

3. Payment of Warrant Exercise Price for Cash Exercise or Cashless Exercise;
Cashless Major Exercise and Cashless Default Exercise.

(a) Exercise Price. The Exercise Price (“Exercise Price”) shall initially equal
120% of the mean of the Closing Prices (as defined below) of the Common Stock
for each of the five (5) consecutive Trading Days beginning with the first full
Trading Day following receipt by the Lenders of a Disbursement Request (as such
terms are defined in the Facility Agreement), subject to adjustment pursuant to
the terms hereof, including but not limited to Section 5 below. The Company’s
calculation of the Exercise Price shall be deemed to be final and binding upon
the Holder unless, within two (2) business days of receipt of such notice, the
Holder sends a notice by facsimile ((954) 707-5360) to the Company disputing the
calculation of the Exercise Price. If the Holder and the Company are unable to
agree upon the Exercise Price within two (2) business days following the receipt
by the Company of the Holder’s notice disputing the calculation of the exercise
price, then the dispute shall be submitted by the Company to the Company’s
independent outside accountant and resolved in accordance with Section 3(d). As
used herein, the “Closing Price” for the Common Stock as of any date means the
closing trade price (based on regular hours trading) of the Common Stock on
NASDAQ, as reported by Bloomberg or, if NASDAQ is not the principal trading
market for the Common Stock, the closing trade price of the Common Stock on the
principal securities exchange or trading market where the Common Stock is listed
or traded as reported by Bloomberg or, if no last closing trade price is
reported for the Common Stock by Bloomberg, the average of the bid prices of any
market makers for the Common Stock in the over the counter market maintained by
the Financial Industry Regulatory Authority, Inc. or in the “pink sheets” (or
any successor) maintained by the OTC Markets Group, Inc.

Payment of the Exercise Price may be made by either of the following, or a
combination thereof, at the election of Holder:

(i) Cash Exercise: The Holder, at its option, may exercise this Warrant in cash,
bank or cashier’s check, wire transfer or through a reduction of an amount of
principal outstanding under any Notes (as defined in the Facility Agreement) in
accordance with Section 2.3 of the Facility Agreement, then held by the Holder
(a “Cash Exercise”); or

(ii) Cashless Exercise: The Holder may exercise this Warrant in a cashless
exercise transaction. In order to effect a Cashless Exercise, the Holder shall
surrender this Warrant at the principal office of the Company together with
notice of cashless election, in which event the Company shall issue Holder a
number of shares of Common Stock computed using the following formula (a
“Cashless Exercise”):

X = Y (A-B)/A

where:X = the number of shares of Common Stock to be issued to Holder.

Y = the number of shares of Common Stock for which this Warrant is being
Exercised.

A = the Market Price of one (1) share of Common Stock (for purposes of this
Section 3(a)(ii), where “Market Price,” as of any date, means the Volume
Weighted Average Price (as defined herein) of the Company’s Common Stock for the
ten (10) consecutive Trading Day period immediately preceding the date in
question.

B = the Exercise Price.

5

 

As used herein, “Volume Weighted Average Price” for any security as of any date
means the volume weighted average sale price on The NASDAQ Global Select Market
(“NASDAQ”) as reported by, or based upon data reported by Bloomberg Financial
Markets or an equivalent, reliable reporting service mutually acceptable to and
hereinafter designated by holders of a majority in interest of the Warrants and
the Company (“Bloomberg”) or, if NASDAQ is not the principal trading market for
such security, the volume weighted average sale price of such security on the
principal securities exchange or trading market where such security is listed or
traded as reported by Bloomberg or, if no volume weighted average sale price is
reported for such security by Bloomberg, then the last closing trade price of
such security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security that are listed in the over the counter market
by the Financial Industry Regulatory Authority, Inc. or on the “over the
counter” Bulletin Board (or any successor) or in the “pink sheets” (or any
successor) by the OTC Markets Group, Inc. If the Volume Weighted Average Price
cannot be calculated for such security on such date in the manner provided
above, the Volume Weighted Average Price shall be the fair market value as
mutually determined by the Company and the Holders of a majority in interest of
the Warrants being Exercised for which the calculation of the Volume Weighted
Average Price is required in order to determine the Exercise Price of such
Warrants. “Trading Day” shall mean any day on which the Common Stock is traded
for any period on NASDAQ, or on the principal securities exchange or other
securities market on which the Common Stock is then being traded.

For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended,
understood and acknowledged that the Common Stock issuable upon Exercise of this
Warrant in a Cashless Exercise transaction shall be deemed to have been acquired
at the time this Warrant was issued. Moreover, it is intended, understood and
acknowledged that the holding period for the Common Stock issuable upon Exercise
of this Warrant in a Cashless Exercise transaction shall be deemed to have
commenced on the date this Warrant was issued.

(b) Cashless Major Exercise. To the extent the Holder shall exercise this
Warrant or any portion thereof as a Cashless Major Exercise pursuant to Section
5(c)(i) below, the Holder shall surrender this Warrant at the principal office
of the Company together with the Exercise Form indicating that the Holder is
exercising this Warrant (or such portion thereof) pursuant to a Cashless Major
Exercise, in which event the Company shall issue a number of shares of Common
Stock equal to the Black-Scholes Value (as defined in Section 5(c)(iii) below)
of the Warrant (or such applicable portion being exercised) divided by the
closing price of the Common Stock on the principal securities exchange or other
securities market on which the Common Stock is then traded on the Trading Day
immediately preceding the date on which the applicable Major Transaction is
consummated.

(c) Cashless Default Exercise. To the extent the Holder exercises this Warrant
as a Cashless Default Exercise pursuant to Section 11(b)(i) below, the Holder
shall surrender this Warrant to the principal office of the Company together
with the Exercise Form indicating that the Holder is exercising this Warrant
pursuant to a Cashless Default Exercise, in which event the Company shall, at
the election of the Company, (i) issue to the Holder, within five (5) Trading
Days of the applicable Default Notice, a number of shares of Common Stock (which
shares shall be valued at the Volume Weighted Average Price for the five (5)
Trading Days prior to the applicable Default Notice) equal to the Black-Scholes
value (determined by use of the Black-Scholes Option Pricing Model using the
criteria set forth on Schedule I hereto) of the remaining unexercised portion of
this Warrant on the date of such Default Notice (the “Cashless Default Exercise
Amount”), or (ii) pay the Cashless Default Exercise Amount to the Holder in
cash.

(b) Dispute Resolution. Subject to the provisions of Section 3(a), in the case
of a dispute as to the determination of the closing price or Volume Weighted
Average Price of the Company’s Common Stock or the arithmetic calculation of the
Exercise Price, Market Price or any Major Transaction Warrant Early Termination
Price, the Company shall submit the disputed determinations or arithmetic
calculations via facsimile within two (2) business days of receipt, or deemed
receipt, of the Exercise Notice or Major Transaction Early Termination Notice,
or other event giving rise to such dispute, as the case may be, to the Holder.
If the Holder and the Company are unable to agree upon such determination or
calculation within two (2) business days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall,
within two (2) business days submit via facsimile (i) the disputed determination
of the closing price or the Volume Weighted Average Price of the Company’s
Common Stock to an independent, reputable investment bank selected by the
Company and approved by the Holder, which approval shall not be unreasonably
withheld or (ii) the disputed arithmetic calculation of the Exercise Price,
Market Price or any Major Transaction Warrant Early Termination Price to the
Company’s independent, outside accountant. The Company shall use reasonable
commercial efforts to cause the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and
the Holder of the results no later than five (5) business days from the time it
receives the disputed determinations or calculations. Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error, and the Company and the Holder shall
each pay one half of the fees and costs of such investment banker or accountant.

6

 

4. Transfer and Registration.

(a) Transfer Rights. Subject to the provisions of Section 8 of this Warrant,
this Warrant may be transferred on the books of the Company, in whole or in
part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.

(b) Registrable Securities. The Common Stock issuable upon the Exercise of this
Warrant has registration rights pursuant to the Registration Rights Agreement.

5. Adjustments Upon Certain Events.

(a) Participation. The Holder, as the holder of this Warrant, shall be entitled
to receive such dividends paid and distributions of any kind made to the holders
of Common Stock of the Company to the same extent as if the Holder had Exercised
this Warrant into Common Stock (without regard to any limitations on exercise
herein or elsewhere and without regard to whether or not a sufficient number of
shares are authorized and reserved to effect any such exercise and issuance) and
had held such shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made concurrently
with the dividend or distribution to the holders of Common Stock.

(b) Recapitalization or Reclassification. If the Company shall at any time
effect a stock split, payment of stock dividend, recapitalization,
reclassification or other similar transaction of such character that the shares
of Common Stock shall be changed into or become exchangeable for a larger or
smaller number of shares, then upon the effective date thereof, the number of
shares of Common Stock which Holder shall be entitled to purchase upon Exercise
of this Warrant shall be increased or decreased, as the case may be, in direct
proportion to the increase or decrease in the number of shares of Common Stock
by reason of such stock split, payment of stock dividend, recapitalization,
reclassification or similar transaction, and the Exercise Price shall be, in the
case of an increase in the number of shares, proportionally decreased and, in
the case of decrease in the number of shares, proportionally increased. The
Company shall give Holder the same notice it provides to holders of Common Stock
of any transaction described in this Section 5(b).

(c) Rights Upon Major Transaction.

(i) Major Transaction. In the event that a Major Transaction (as defined below)
occurs, then (1) in the case of a Major Transaction covered by the provisions of
Section 5(c)(i)(A) below in which the Company is not the surviving entity and in
which the consideration consists solely of securities of a Publicly Traded
Successor Entity, as defined below (a “Qualified Change of Control
Transaction”), the Company shall have the right to treat such Major Transaction
as an Assumption, (2) in the case of a Cash-Out Major Transaction, and in the
case of a Mixed Major Transaction to the extent of the percentage of the cash
consideration in the Mixed Major Transaction (determined in accordance with the
definition of a Mixed Major Transaction below), the Holder, at its option, may
require the Company to redeem the Holder’s outstanding Warrants in accordance
with Section 5(c)(iii) below and (3) in the case of all other Major Transactions
(including, without limitation, a Qualified Change of Control Transaction for
which the Company does not make an Assumption Election (as defined below)), and
in the case of a Mixed Major Transaction to the extent of the percentage of the
consideration represented by securities of a Successor Entity in the Mixed Major
Transaction, the Holder shall have the right to exercise this Warrant as a
Cashless Major Exercise. In the event the Holder shall not have exercised any of
its rights under clauses (2) or (3) above within the applicable time periods set
forth herein, then the Major Transaction shall be treated as an Assumption (as
defined below) in accordance with Section 5(c)(ii) below. Notwithstanding
anything herein to the contrary, the Holder may waive its rights under this
Section 5(c) with respect to any Major Transaction in which event none of the
provisions of this Section 5(c) shall apply with respect to such Major
Transaction. In the event of a Major Transaction in which all shares of Common
Stock are cancelled and converted into the right to receive cash and/or
securities of Another Entity (as defined below), then, any portion of this
Warrant that is neither redeemed, assumed or exercised pursuant to the terms of
this Warrant prior to the closing of such Major Transaction, shall automatically
and immediately convert into shares of Common Stock, and shall be deemed to have
been exercised pursuant to a Cashless Exercise, immediately prior to the
consummation of such Major Transaction. Each of the following events shall
constitute a “Major Transaction”.

7

 

(A) a consolidation, merger, exchange of shares, recapitalization,
reorganization, business combination or other similar event, (1) following which
the holders of Common Stock immediately preceding such consolidation, merger,
exchange, recapitalization, reorganization, combination or event either (a) no
longer hold a majority of the shares of Common Stock or (b) no longer have the
ability to elect a majority of the board of directors of the Company or (2) as a
result of which shares of Common Stock shall be changed into (or the shares of
Common Stock become entitled to receive) a different class or classes of stock
or securities of the Company or another entity (collectively, a “Change of
Control Transaction”);

(B) the sale or transfer in one transaction or a series of related transactions
of (i) all or substantially all of the assets of the Company, or (ii) assets of
the Company for a purchase price equal to more than 50% of the Enterprise Value
(as defined below) of the Company. For purposes of this clause (B), “Enterprise
Value” shall mean (I) the product of (x) the number of issued and outstanding
shares of Common Stock on the date the Company delivers the Major Transaction
Notice (defined below) multiplied by (y) the per share closing price of the
Common Stock on such date plus (II) the amount of the Company’s debt as shown on
the latest financial statements filed with the SEC (the “Current Financial
Statements”) less (III) the amount of cash and cash equivalents of the Company
as shown on the Current Financial Statements;

(C) a purchase, tender or exchange offer made to the holders of outstanding
shares of Common Stock, such that following such purchase, tender or exchange
offer a Change of Control Transaction shall have occurred; or

(D) the liquidation, bankruptcy, insolvency, dissolution or winding-up (or the
occurrence of any analogous proceeding) of the Company.

(ii) Assumption. The Company shall not enter into or be party to a Major
Transaction that is to be treated as an Assumption pursuant to Section 5(c)(i),
unless (A) the successor entity resulting from such Major Transaction (in each
case, a “Successor Entity”), assumes in writing all of the obligations of the
Company under this Warrant, the Facility Agreement (but only if there will be an
outstanding balance under the Facility Agreement immediately following the
closing of the Major Transaction) and the Registration Rights Agreement  in
accordance with the provisions of this Section (ii) pursuant to written
agreements in form and substance reasonably satisfactory to the Holder and
approved by the Holder prior to such Major Transaction (not to be unreasonably
withheld or delayed), including agreements to deliver to each holder of Warrants
in exchange for such Warrants a security of the Successor Entity evidenced by a
written instrument substantially similar in form and substance to the Warrants,
including, without limitation, representing the appropriate number of shares of
the Successor Entity, having similar exercise rights as the Warrants (including
but not limited to a similar Exercise Price and similar Exercise Price
adjustment provisions based on the price per share or conversion ratio to be
received by the holders of Common Stock in the Major Transaction) and similar
registration rights as provided by the Registration Rights Agreement, reasonably
satisfactory to the Holder and (B) the Successor Entity is a Public Successor
Entity. Upon the occurrence of any Major Transaction, any Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Major Transaction, the provisions of this Warrant and the Registration Rights
Agreement referring to the “Company” shall refer instead to the Successor
Entity), and may exercise every right and power of the Company and shall assume
all of the obligations of the Company under this Warrant with the same effect as
if such Successor Entity had been named as the Company herein. Upon consummation
of the Major Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon exercise or redemption of this
Warrant at any time after the consummation of the Major Transaction, in lieu of
the shares of Common Stock (or other securities, cash, assets or other property)
issuable upon the exercise of the Warrants prior to such Major Transaction, such
shares of publicly traded common stock (or their equivalent) of the Successor
Entity, as adjusted in accordance with the provisions of this Warrant. The
provisions of this Section shall apply similarly and equally to successive Major
Transactions and shall be applied without regard to any limitations on the
exercise of this Warrant other than any applicable beneficial ownership
limitations. Any assumption of Company obligations under this paragraph shall be
referred to herein as an “Assumption”

8

 

 

(iii) Notice; Major Transaction Early Termination Right; Notice of Cashless
Major Exercise. At least thirty (30) days prior to the consummation of any Major
Transaction, but, in any event, within five (5) Business Days following the
first to occur of (x) the date of the public announcement of such Major
Transaction if such announcement is made before 4:00 p.m., New York City time,
or (y) the day following the public announcement of such Major Transaction if
such announcement is made on and after 4:00 p.m., New York City time, the
Company shall deliver written notice thereof via facsimile and overnight courier
to the Holder (a “Major Transaction Notice”). The Major Transaction Notice with
respect to a Qualified Change of Control Transaction shall also state whether
the Company is electing to treat such Major Transaction as an Assumption (an
“Assumption Election”). At any time during the period beginning after the
Holder’s receipt of a Major Transaction Notice and ending five (5) Trading Days
prior to the consummation of such Major Transaction (the “Early Termination
Period”), the Holder may require the Company to redeem (an “Early Termination
Upon Major Transaction”) all or any portion of this Warrant not treated as an
Assumption and not eligible to be treated as a Cashless Major Exercise (without
taking into consideration the 9.985% Cap) by delivering written notice thereof
(“Major Transaction Early Termination Notice”) to the Company, which Major
Transaction Early Termination Notice shall indicate the portion of this Warrant,
measured by the number of Shares then subject to this Warrant (the “Early
Termination Principal Amount”) of the Warrant that the Holder is electing to
have redeemed. The portion of this Warrant subject to early termination pursuant
to this Section 5(c)(iii) (the “Redeemable Shares”), shall be redeemed by the
Company at a price (the “Major Transaction Warrant Early Termination Price”)
payable in cash equal to the “Black Scholes Value” of the Redeemable Shares
determined by use of the Black Scholes Option Pricing Model using the criteria
set forth in Schedule 1 hereto (the “Black Scholes Value”). In the event the
Major Transaction Notice relating to a Qualified Change of Control Transaction
includes an Assumption Election, the Holder shall send written notice to the
Company within the Early Termination Period if the Holder elects to waive this
Section 5(c) in its entirety in which event no Assumption shall occur.

To the extent the Holder shall elect to effect a Cashless Major Exercise in
respect of a Major Transaction, the Holder shall deliver its exercise notice in
accordance with Section 3(b), within the Early Termination Period.

(iv) Escrow; Payment of Major Transaction Warrant Early Termination Price.
Following the receipt of a Major Transaction Early Termination Notice or a
Cashless Major Exercise from the Holder, the Company shall not effect a Major
Transaction that is being treated as an early termination or is eligible to be
treated as a Cashless Major Exercise unless either (a) it obtains the written
agreement of the Successor Entity that payment of the Major Transaction Warrant
Early Termination Price and/or issuance of the applicable Exercise Shares shall
be made to the Holder prior to consummation of such Major Transaction and such
issuance or payment shall be a condition precedent to consummation of such Major
Transaction or (b) it shall first place into an escrow account with an
independent escrow agent, at least three (3) business days prior to the closing
date of the Major Transaction (the “Major Transaction Escrow Deadline”), an
amount in shares of Common Stock or cash, as applicable, equal to the Major
Transaction Warrant Early Termination Price and/or applicable Exercise Shares.
Concurrently upon closing of such Major Transaction, the Company shall pay or
shall instruct the escrow agent to pay the Major Transaction Warrant Early
Termination Price and/or to deliver the applicable Exercise Shares to the
Holder. For purposes of determining the amount required to be placed in escrow
pursuant to the provisions of this subsection (iv) and without affecting the
amount of the actual Major Transaction Warrant Early Termination Price and/or
applicable Exercise Shares, the calculation of the price referred to in clause
(1) of the first column of Schedule 1 hereto with respect to Stock Price shall
be determined based on the Closing Market Price (as defined on Schedule I) of
the Common Stock on the Trading Day immediately preceding the date that the
funds and/or applicable Exercise Shares, as applicable, are deposited with the
escrow agent.

9

 

(v) Injunction. Following the receipt of a Major Transaction Early Termination
Notice or notice of a Cashless Major Exercise from the Holder, in the event that
the Company attempts to consummate a Major Transaction without either (1)
placing the Major Transaction Warrant Early Termination Price or applicable
Exercise Shares, as applicable, in escrow in accordance with subsection (iv)
above, (2) payment of the Major Transaction Warrant Early Termination Price or
issuance of the applicable Exercise Shares, as applicable, to the Holder prior
to consummation of such Major Transaction or (3) obtaining the written agreement
of the Successor Entity described in subsection (iv) above, the Holder shall
have the right to apply for an injunction in any state or federal courts sitting
in the City of New York, borough of Manhattan to prevent the closing of such
Major Transaction until the Major Transaction Warrant Early Termination Price is
paid to the Holder, in full or the applicable Exercise Shares are delivered or
deposited in escrow, as applicable.

An early termination required by this Section 5(c) shall be made in accordance
with the provisions of Section 12 and shall have priority to payments to holders
of Common Stock in connection with a Major Transaction , and to the extent an
early termination required by this Section 5(c)(iii) are deemed or determined by
a court of competent jurisdiction to be prepayments of the Warrant by the
Company, such early termination shall be deemed to be voluntary prepayments.
Notwithstanding anything to the contrary in this Section 5, until the Major
Transaction Warrant Early Termination Price is paid in full, this Warrant may be
exercised, in whole or in part, by the Holder into shares of Common Stock, or in
the event the Exercise Date is after the consummation of the Major Transaction,
shares of publicly traded common stock (or their equivalent) of the Successor
Entity pursuant to Section 5(c). The parties hereto agree that in the event of
the early termination of any portion of the Warrant under this Section 5(c), the
Holder’s damages would be uncertain and difficult to estimate because of the
parties’ inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder.
Accordingly, any premium due under this Section 5(c) is intended by the parties
to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of
its investment opportunity and not as a penalty.

For purposes hereof:

“Another Entity” shall mean an entity in which the holders of a majority of the
shares of Common Stock of the Company immediately prior to the consummation of a
Major Transaction do not hold a majority of the equity securities in such
entity.

“Cash-Out Major Transaction” means a Major Transaction in which the
consideration payable to holders of Common Stock in connection with the Major
Transaction consists solely of cash.

“Cashless Default Exercise” shall mean an exercise of this Warrant as a
“Cashless Default Exercise” in accordance with Section 3(c) and 11(b) hereof.

“Cashless Major Exercise” shall mean an exercise of this Warrant or portion
thereof as a “Cashless Major Exercise” in accordance with Section 3(b) and
5(c)(i) hereof.

“Eligible Market” means the over the counter Bulletin Board, the New York Stock
Exchange, Inc., the NYSE Arca, the NASDAQ Capital Market, the NASDAQ Global
Market, the NASDAQ Global Select Market or the NYSE Alternext U.S.

“Mixed Major Transaction” means a Major Transaction in which the consideration
payable to the stockholders of the Company consists partially of cash and
partially of securities of a Successor Entity. If the Successor Entity is a
Publicly Traded Successor Entity, the percentage of consideration represented by
securities of such Successor Entity shall be equal to the percentage that the
value of the aggregate anticipated number of shares of the Publicly Traded
Successor Entity to be issued to holders of Common Stock of the Company
represents in comparison to the aggregate value of all consideration, including
cash consideration, in such Mixed Major Transaction, as such values are set
forth in any definitive agreement for the Mixed Major Transaction that has been
executed at the time of the first public announcement of the Major Transaction
or, if no such value is determinable from such definitive agreement, based on
the closing market price for shares of the Publicly Traded Successor Entity on
its principal securities exchange on the Trading Day preceding the first public
announcement of the Mixed Major Transaction. If the Successor Entity is a
Private Successor Entity, the percentage of consideration represented by
securities of such Successor Entity shall be determined in good-faith by the
Company's Board of Directors

10

 

“Parent Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity
security is quoted or listed on an Eligible Market, or, if there is more than
one such Person or Parent Entity, the Person or Parent Entity with the largest
public market capitalization as of the date of consummation of a Major
Transaction.

“Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.

“Private Successor Entity” means a Successor Entity that is not a Publicly
Traded Successor Entity.

“Publicly Traded Successor Entity” means a Successor Entity that is a publicly
traded corporation whose common stock is quoted on or listed for trading on an
Eligible Market (as defined above).

“Successor Entity” means any Person purchasing the Company’s assets or Common
Stock, or any successor entity resulting from such Major Transaction, or if the
Warrant is to be exercisable for shares of capital stock of its Parent Entity
(as defined above), its Parent Entity.

(d) Exercise Price Adjusted. As used in this Warrant, the term “Exercise Price”
shall mean the purchase price per share specified in Section 3(a) of this
Warrant, until the occurrence of an event stated in this Section 5 or otherwise
set forth in this Warrant, and thereafter shall mean said price as adjusted from
time to time in accordance with the provisions of said subsection. No adjustment
made pursuant to any provision of this Section 5 shall have the net effect of
increasing the Exercise Price in relation to the split adjusted and distribution
adjusted price of the Common Stock.

(e) Adjustments: Additional Shares, Securities or Assets. In the event that at
any time, as a result of an adjustment made pursuant to this Section 5 or
otherwise, Holder shall, upon Exercise of this Warrant, become entitled to
receive shares and/or other securities or assets (other than Common Stock) then,
wherever appropriate, all references herein to shares of Common Stock shall be
deemed to refer to and include such shares and/or other securities or assets;
and thereafter the number of such shares and/or other securities or assets shall
be subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.

(f) Notice of Adjustments. Whenever the Exercise Price is adjusted pursuant to
the terms of this Warrant, the Company shall promptly mail to the Holder a
notice (an “Exercise Price Adjustment Notice”) setting forth the Exercise Price
after such adjustment and setting forth a statement of the facts requiring such
adjustment. The Company shall, upon the written request at any time of the
Holder, furnish to such Holder a like Warrant setting forth (i) such adjustment
or readjustment, (ii) the Exercise Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon Exercise of the Warrant. For
purposes of clarification, whether or not the Company provides an Exercise Price
Adjustment Notice pursuant to this Section 5(f), upon the occurrence of any
event that leads to an adjustment of the Exercise Price, the Holder would be
entitled to receive a number of Exercise Shares based upon the new Exercise
Price, as adjusted, for exercises occurring on or after the date of such
adjustment, regardless of whether the Holder accurately refers to the adjusted
Exercise Price in the Exercise Form.

6. Fractional Interests.

No fractional shares or scrip representing fractional shares shall be issuable
upon the Exercise of this Warrant, but on Exercise of this Warrant, Holder may
purchase only a whole number of shares of Common Stock. If, on Exercise of this
Warrant, Holder would be entitled to a fractional share of Common Stock or a
right to acquire a fractional share of Common Stock, such fractional share shall
be disregarded and the number of shares of Common Stock issuable upon Exercise
shall be the next higher whole number of shares.

11

 

7. Reservation of Shares.

From and after the date hereof, the Company shall at all times reserve for
issuance such number of authorized and unissued shares of Common Stock (or other
securities substituted therefor as herein above provided) as shall be sufficient
for the Exercise of this Warrant and payment of the Exercise Price. If at any
time the number of shares of Common Stock authorized and reserved for issuance
is below the number of shares sufficient for the Exercise of this Warrant (a
“Share Authorization Failure”) (based on the Exercise Price in effect from time
to time), the Company will promptly take all corporate action necessary to
authorize and reserve a sufficient number of shares, including, without
limitation, calling a special meeting of stockholders to authorize additional
shares to meet the Company’s obligations under this Section 7, in the case of an
insufficient number of authorized shares, and using its best efforts to obtain
stockholder approval of an increase in such authorized number of shares. The
Company covenants and agrees that upon the Exercise of this Warrant, all shares
of Common Stock issuable upon such Exercise shall be duly and validly issued,
fully paid and nonassessable and not subject to preemptive rights, rights of
first refusal or similar rights of any Person.

8. Restrictions on Transfer.

(a) Registration or Exemption Required. This Warrant has been issued in a
transaction exempt from the registration requirements of the Securities Act by
virtue of Regulation D and exempt from state registration or qualification under
applicable state laws. None of the Warrant, the Exercise Shares or Failure
Payment Shares may be pledged, transferred, sold or assigned except pursuant to
an effective registration statement or an exemption to the registration
requirements of the Securities Act and applicable state laws including, without
limitation, a so-called “4(1) and a half” transaction.

(b) Assignment. Subject to Section 8(a), the Holder may sell, transfer, assign,
pledge, or otherwise dispose of this Warrant, in whole or in part. Holder shall
deliver a written notice to Company, substantially in the form of the Assignment
attached hereto as Exhibit B, indicating the Person or Persons to whom the
Warrant shall be assigned and the respective number of warrants to be assigned
to each assignee. The Company shall effect the assignment within three (3)
business days (the “Transfer Delivery Period”), and shall deliver to the
assignee(s) designated by Holder a Warrant or Warrants of like tenor and terms
for the appropriate number of shares. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
assigns of the Holder. The provisions of this Warrant are intended to be for the
benefit of all Holders from time to time of this Warrant, and shall be
enforceable by any such Holder. For avoidance of doubt, in the event Holder
notifies the Company that such sale or transfer is a so called “4(1) and half”
transaction, the parties hereto agree that a legal opinion from outside counsel
for the Holder delivered to counsel for the Company substantially in the form
attached hereto as Exhibit C shall be the only requirement to satisfy an
exemption from registration under the Securities Act to effectuate such “4(1)
and half” transaction.

9. Noncircumvention.

The Company hereby covenants and agrees that the Company will not, by amendment
of its certificate of incorporation, bylaws or through any reorganization,
transfer of assets, consolidation, merger, scheme of arrangement, dissolution,
issue or sale of securities, or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, and
will at all times in good faith carry out all the provisions of this Warrant and
take all action as may be reasonably required to protect the rights of the
Holder. Without limiting the generality of the foregoing, the Company (i) shall
not increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the Exercise Price then in effect, and (ii) shall
take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.

12

 

10. Events of Failure; Definition of Black Scholes Value.

(a) Definition.

The occurrence of each of the following shall be considered to be an “Event of
Failure.”

(i) A Delivery Failure occurs, where a “Delivery Failure” shall be deemed to
have occurred if the Company fails to use its best efforts to deliver Exercise
Shares to the Holder within any applicable Delivery Period (other than due to
the limitation contained in the proviso in the second paragraph of Section 1);

(ii) A Legend Removal Failure occurs, where a “Legend Removal Failure” shall be
deemed to have occurred if the Company fails to use its best efforts to issue
this Warrant and/or Exercise Shares without a restrictive legend, or fails to
use it best efforts to remove a restrictive legend, when and as required under
Section 2(e) hereof;

(iii) a Transfer Delivery Failure occurs, where a “Transfer Delivery Failure”
shall be deemed to have occurred if the Company fails to use its best efforts to
deliver a Warrant within any applicable Transfer Delivery Period; and

(iv) a Registration Failure (as defined below).

For purpose hereof, “Registration Failure” means that (A) the Company fails to
file with the SEC on or before the Filing Deadline (as defined in the
Registration Rights Agreement) any Registration Statement required to be filed
pursuant to Section 2(a) of the Registration Rights Agreement, (B) the Company
fails to use its reasonable commercial efforts to obtain effectiveness with the
SEC, prior to the Registration Deadline (as defined in the Registration Rights
Agreement), and if such Registration Statement is not so filed prior to the
Registration Deadline, as soon as possible thereafter, of any Registration
Statement (as defined in the Registration Rights Agreement) that are required to
be filed pursuant to Section 2(a) of the Registration Rights Agreement, or fails
to use reasonable commercial efforts to keep such Registration Statement current
and effective as required in Section 3 of the Registration Rights Agreement, (C)
The Company fails to file any additional Registration Statements required to be
filed pursuant to Section 2(a)(ii) of the Registration Rights Agreement on or
before the Additional Filing Deadline or fails to use its reasonable commercial
efforts to cause such new Registration Statement to become effective on or
before the Additional Registration Deadline, and if such effectiveness does not
occur within such period, as soon as possible thereafter, (D) the Company fails
to file any amendment to any Registration Statement, or any additional
Registration Statement required to be filed pursuant to Section 3(b) of the
Registration Rights Agreement within twenty (20) days of the applicable
Registration Trigger Date (as defined in the Registration Rights Agreement), or
fails to use its reasonable commercial efforts to cause such amendment and/or
new Registration Statement to become effective within sixty (60) days of the
applicable Registration Trigger Date, and, if such effectiveness does not occur
within such period, as soon as possible thereafter, (E) any Registration
Statement required to be filed under the Registration Rights Agreement, after
its initial effectiveness and during the Registration Period (as defined in the
Registration Rights Agreement), lapses in effect or sales of all of the
Registrable Securities (as defined in the Registration Rights Agreement) cannot
otherwise be made thereunder (whether by reason of the Company’s failure to
amend or supplement the prospectus included therein in accordance with the
Registration Rights Agreement, the Company’s failure to file and, use reasonable
commercial efforts to obtain effectiveness with the SEC of an additional
Registration Statement or amended Registration Statement required pursuant to
Sections 2(a)(ii) or 3(b) of the Registration Rights Agreement, as applicable,
or otherwise), and (F) the Company fails to provide a commercially reasonable
written response to any comments to any Registration Statement submitted by the
SEC within twenty (20) days of the date that such SEC comments are received by
the Company.

(b) Failure Payments; Black-Scholes Determination. The Company understands that
any Event of Failure (as defined above) could result in economic loss to the
Holder. In the event that any Event of Failure occurs, as compensation to the
Holder for such loss, the Company agrees to pay (as liquidated damages and not
as a penalty) to the Holder an amount (“Failure Payments”) payable, at the
Company’s option, either (i) in cash or (ii) in shares of Common Stock that are
valued for these purposes at the Volume Weighted Average Price on the date of
such calculation (“Failure Payment Shares”), in each case equal to 15% per annum
(or the maximum rate permitted by applicable law, whichever is less) of the
Black-Scholes value (as determined below) of the remaining unexercised portion
of this Warrant on the date of such Event of Failure (as recalculated on the
first business day of each month thereafter for as long as Failure Payments
shall continue to accrue), which shall accrue daily from the date of such Event
of Failure until the Event of Failure is cured, accruing daily and compounded
monthly, provided, however, the Holder shall only receive up to such amount of
shares of Common Stock in respect of Failure Payments such that Holder and any
other persons or entities whose beneficial ownership of Common Stock would be
aggregated with the Holder’s for purposes of Section 13(d) of the Exchange Act
(including shares held by any “group” of which the Holder is a member, but
excluding shares beneficially owned by virtue of the ownership of securities or
rights to acquire securities that have limitations on the right to convert,
exercise or purchase similar to the limitation set forth herein) shall not
collectively beneficially own greater than 9.985% of the total number of shares
of Common Stock of the Company then issued and outstanding. For purposes of
clarification, it is agreed and understood that Failure Payments shall continue
to accrue following any Event of Default until the applicable Default Amount is
paid in full.

13

 

Notwithstanding the above, (1) in the event that the Company (i) has, by the
Filing Deadline (as defined the Registration Rights Agreement) filed a
Registration Statement (as defined in the Registration Rights Agreement)
covering the number of shares required by the Registration Rights Agreement, and
(ii) has responded in writing to any comments to the Registration Statement that
the Company has received from the SEC, within seven (7) Business Days of such
receipt, and nevertheless the SEC has not declared effective a Registration
Statement covering the full number of Warrant Shares issuable upon exercise of
the Warrants by the Registration Deadline (as defined in the Registration Rights
Agreement) then, the Failure Payments attributable to such late Registration
Effectiveness shall be reduced from 15% per annum to 12% (calculated as set
forth above) and (2) in no event shall the aggregate Failure Payments
attributable solely to the failure by the SEC to declare a Registration
Statement effective exceed 10% of the Black-Scholes value of the Warrant. The
Company shall satisfy any Failure Payments under this Section pursuant to
Section 10(c) below. Failure Payments are in addition to any Shares that the
Holder is entitled to receive upon Exercise of this Warrant.

For purposes hereof, the “Black-Scholes” value of a Warrant shall be determined
by use of the Black Scholes Option Pricing Model using the criteria set forth on
Schedule 1 hereto.

(c) Payment of Accrued Failure Payments. The Failure Payment Shares representing
accrued Failure Payments for each Event of Failure shall be issued and delivered
on or before the fifth (5th) business day of each month following a month in
which Failure Payments accrued and shall be the sole measure of damages for the
Event of Failure to which the Failure Payments relate. Nothing herein shall
limit the Holder’s right to pursue a claim for specific performance and/or
injunctive relief. Notwithstanding the above, if a particular Event of Failure
results in an Event of Default pursuant to Section 11 hereof, then the Failure
Payment, for that Event of Failure only, shall be considered to have been
satisfied upon payment to the Holder of an amount equal to the greater of
(i) the Failure Payment, or (ii) the Default Amount, payable in accordance with
Section 11.

(d) Maximum Interest Rate. Nothing contained herein or in any document referred
to herein or delivered in connection herewith shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Company to the Holder and thus refunded to the
Company.

 

11. Default.

(a) Events Of Default. Each of the following events shall be considered to be an
“Event of Default,” unless waived by the Holder:

(i) Failure To Effect Registration. With respect to all Registration Failures, a
Registration Failure occurs and remains uncured for a period of more than
forty-five (45) days (or sixty (60) days in the case where the Company (i) has,
by the Filing Deadline (as defined the Registration Rights Agreement) filed a
Registration Statement (as defined in the Registration Rights Agreement)
covering the number of shares required by the Registration Rights Agreement, and
(ii) has responded in writing to any comments to the Registration Statement that
the Company has received from the SEC, within seven (7) Business Days of such
receipt, and nevertheless the SEC has not declared effective a Registration
Statement covering the Shares by the Registration Deadline (as defined in the
Registration Rights Agreement)), and such Registration Failure relates solely to
the Company’s failure to have the Registration Statement declared effective by
the Registration Deadline (as defined in the Registration Rights Agreement) and
with respect to a Registration Failure provided in clause (E) of the definition
of “Registration Failure”, such Registration Failure occurs and remains uncured
for a period of more than forty-five (45) days.

14

 

(ii) Failure To Deliver Common Stock. A Delivery Failure (as defined above)
occurs and remains uncured for a period of more than twenty (20) days; or at any
time, the Company announces or states in writing that it will not honor its
obligations to issue shares of Common Stock to the Holder upon Exercise by the
Holder of the Exercise rights of the Holder in accordance with the terms of this
Warrant.

(iii) Legend Removal Failure. A Legend Removal Failure (as defined above) occurs
and remains uncured for a period of twenty (20) days; and

(iv) Corporate Existence; Major Transaction. (A) The Company has failed to
either (1) place the Major Transaction Warrant Early Termination Price or the
Exercise Shares issuable upon exercise of a Cashless Major Exercise, as the case
may be, into escrow or (2) obtain the written agreement of the Successor Entity
as described in Section 5(c)(iv), or the Company has failed to instruct the
escrow agent to release such amount or such shares, as the case may be, to the
Holder pursuant to Section 5(c)(iv), or (B) with respect to a Major Transaction
that is to be treated as an Assumption under the terms hereof, the Company has
failed to meet the Assumption requirements of Section 5(c)(ii).

(b) Mandatory Early Termination.

(i) Mandatory Early Termination Amount; Cashless Default Exercise. If any Events
of Default shall occur then, unless waived by the Holder, upon the occurrence
and during the continuation of any Event of Default, at the option of the
Holder, such option exercisable through the delivery of written notice to the
Company by such Holder (the “Default Notice”), the Company shall have the right
to terminate the outstanding amount of this Warrant and pay to the Holder (a
“Mandatory Early Termination”), in full satisfaction of its obligations
hereunder by delivery of a notice to such effect to the Holder within two (2)
Business Days following receipt of the Default Notice, an amount payable in cash
(the “Mandatory Early Termination Amount” or the “Default Amount”) equal to the
Black-Scholes value (as determined in accordance with Section 10(b)) of the
remaining unexercised portion of this Warrant on the date of such Default
Notice. In the event the Company does not exercise its right to consummate a
Mandatory Early Termination, then the Holder shall have the right to exercise
this Warrant pursuant to a Cashless Default Exercise in accordance with Section
3(c) above.

The Mandatory Early Termination Amount shall be payable within five (5) Business
Days following the date of the applicable Default Notice.

(ii) Liquidated Damages. The parties hereto acknowledge and agree that the sums
payable as Failure Payments or pursuant to a Mandatory Early Termination shall
give rise to liquidated damages and not penalties. The parties further
acknowledge that (i) the amount of loss or damages likely to be incurred by the
Holder is incapable or is difficult to precisely estimate, (ii) the amounts
specified bear a reasonable proportion and are not plainly or grossly
disproportionate to the probable loss likely to be incurred by the Holder, and
(iii) the parties are sophisticated business parties and have been represented
by sophisticated and able legal and financial counsel and negotiated this
Agreement at arm’s length.

(c) Posting Of Bond. In the event that any Event of Default occurs hereunder,
the Company may not raise as a legal defense (in any Lawsuit, as defined below,
or otherwise) or justification to such Event of Default any claim that such
Holder or any one associated or affiliated with such Holder has been engaged in
any violation of law, unless the Company has posted a surety bond (a “Surety
Bond”) for the benefit of such Holder in the amount of 130% of the aggregate
Surety Bond Value (as defined below) of all of the Holder’s Warrants (the “Bond
Amount”), which Surety Bond shall remain in effect until the completion of
litigation of the dispute and the proceeds of which shall be payable to such
Holder to the extent Holder obtains judgment.

15

 

For purposes hereof, a “Lawsuit” shall mean any lawsuit, arbitration or other
dispute resolution filed by either party herein pertaining to any of this
Warrant, the Facility Agreement and the Registration Rights Agreement.

“Surety Bond Value,” for the Warrants shall mean 130% of the of the
Black-Scholes value of the remaining unexercised portion of this Warrant on the
Trading Day immediately preceding the date that such bond goes into effect).

(d) Remedies, Other Obligations, Breaches And Injunctive Relief. The remedies
provided in this Warrant shall be cumulative and in addition to all other
remedies available under this Warrant, the Facility Agreement and the
Registration Rights Agreement, at law or in equity (including a decree of
specific performance and/or other injunctive relief), and nothing herein shall
limit the right of the Holder to pursue actual damages for any failure by the
Company to comply with the terms of this Warrant. The Company acknowledges that
a breach by it of its obligations hereunder will cause irreparable harm to the
Holder and that the remedy at law for any such breach may be inadequate. The
Company therefore agrees that, in the event of any such breach or threatened
breach, the holder of this Warrant shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.

12. Holder’s Early Terminations.

(a) Mechanics of Holder’s Early Terminations. In the event that the Company does
not deliver the applicable Major Transaction Warrant Early Termination Price or
Default Amount or the Exercise Shares in respect of a Cashless Major Exercise or
a Cashless Default Exercise, as the case may be, to the Holder within ten (10)
days following the time period or as otherwise required pursuant to the terms
hereof, at any time thereafter the Holder shall have the option, upon notice to
the Company, in lieu of early termination, Cashless Major Exercise or Cashless
Default Exercise, as the case may be, to require the Company to promptly return
to the Holder all or any portion of this Warrant that was submitted for early
termination or exercise. Upon the Company’s receipt of such notice, (x) the
applicable early termination or exercise, as the case may be, shall be null and
void with respect to such applicable portion of this Warrant, (y) the Company
shall immediately return this Warrant, or issue a new Warrant to the Holder
representing the portion of this Warrant that was submitted for early
termination or exercise and (z) the Exercise Price of this Warrant or such new
Warrant shall be adjusted to the lesser of (A) the Exercise Price as in effect
on the date on which the applicable early termination, default or exercise
notice, as the case may be, is voided and (B) the lowest closing price for the
Common Stock on NASDAQ, or, if NASDAQ is not the principal trading market for
the Common Stock, the principal securities exchange or other securities market
on which the Common Stock is then being traded, during the period beginning on
and including the date on which the applicable early termination or exercise
notice, as the case may be, is delivered to the Company and ending on and
including the date on which the applicable early termination or exercise is
voided. The Holder’s delivery of a notice voiding an early termination or
exercise and exercise of its rights following such notice shall not affect the
Company’s obligations to make any payments of Failure Payments which have
accrued prior to the date of such notice with respect to the Warrant subject to
such notice.

13. Benefits of this Warrant.

Nothing in this Warrant shall be construed to confer upon any person other than
the Company and Holder any legal or equitable right, remedy or claim under this
Warrant and this Warrant shall be for the sole and exclusive benefit of the
Company and Holder.

16

 

14. Governing Law.

All questions concerning the construction, validity, enforcement and
interpretation of this Agreement shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof. Each party agrees that all legal
proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Agreement (whether brought against a party
hereto or its respective affiliates, directors, officers, shareholders,
employees or agents) shall be commenced exclusively in the state and federal
courts sitting in the City of New York. Each party hereby irrevocably submits to
the exclusive jurisdiction of the state and federal courts sitting in the City
of New York, borough of Manhattan for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or is an inconvenient venue for such proceeding. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any other manner permitted by law. The parties hereby waive
all rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of this Agreement, then the prevailing
party in such action or proceeding shall be reimbursed by the other party for
its reasonable attorneys’ fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.

15. Loss of Warrant.

Upon receipt by the Company of evidence of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
indemnity or security reasonably satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.

16. Notice or Demands.

Except as otherwise provided herein, notices or demands pursuant to this Warrant
to be given or made by Holder to or on the Company shall be sufficiently given
or made if sent by overnight delivery with a nationally recognized overnight
courier service or certified or registered mail, return receipt requested,
postage prepaid, and addressed, until another address is designated in writing
by the Company, to the address set forth in Section 2(a) above. Notices or
demands pursuant to this Warrant to be given or made by the Company to or on
Holder shall be sufficiently given or made if sent by overnight delivery with a
nationally recognized overnight courier service or certified or registered mail,
return receipt requested, postage prepaid, and addressed, to the address of
Holder set forth in the Company’s records, until another address is designated
in writing by Holder.

17. Limitation on Issuance of Common Stock.

Notwithstanding anything herein to the contrary, the maximum number of shares of
Common Stock issued or issuable pursuant to this Warrant and all additional
Warrants issued pursuant to Section 2.10 of the Facility Agreement may not
exceed the aggregate number of shares of Common Stock which the Company may
issue upon exercise of the Warrants without violating NASDAQ Rule 5635(d).

[Signature page follows]

 

17

 

IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the _____
day of ______, ____.

  MAKO SURGICAL CORP.                     By:       Print Name:
Title:

 

 

 

 

 

 

 

 

 

 

WARRANT 

 

EXHIBIT A

EXERCISE FORM FOR WARRANT

TO: MAKO SURGICAL CORP.

CHECK THE APPLICABLE BOX:

□

Cash Exercise or Cashless Exercise

The undersigned hereby irrevocably exercises the attached warrant (the
“Warrant”) with respect to shares of Common Stock (the “Common Stock”) of MAKO
Surgical Corp., a Delaware corporation (the “Company”), and, if pursuant to a
Cashless Exercise, herewith makes payment of the Exercise Price with respect to
such shares in full, all in accordance with the conditions and provisions of
said Warrant.

[IF APPLICABLE: The undersigned hereby encloses $____ as payment of the Exercise
Price.]

[IF APPLICABLE: The undersigned hereby agrees to cancel $____ of principal
outstanding under Notes of the Company held by the Holder.]

□

Cashless Major Exercise

The undersigned hereby irrevocably exercises the Warrant with respect to ____%
of the Warrant currently outstanding pursuant to a Cashless Major Exercise in
accordance with the terms of the Warrant.

□

Cashless Default Exercise

The undersigned hereby irrevocably exercises the Warrant pursuant to a Cashless
Default Exercise, in accordance with the terms of the Warrant.

 

1. The undersigned requests that any stock certificates for such shares be
issued free of any restrictive legend, if appropriate, and a warrant
representing any unexercised portion hereof be issued, pursuant to the Warrant
in the name of the undersigned and delivered to the undersigned at the address
set forth below.

2. Capitalized terms used but not otherwise defined in this Exercise Form shall
have the meaning ascribed thereto in the Warrant.

Dated: _______________

  Signature     Print Name     Address  

 

NOTICE

The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.

 

 

 

EXHIBIT B

ASSIGNMENT

(To be executed by the registered holder
desiring to transfer the Warrant)

FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
“Warrant”) hereby sells, assigns and transfers unto the person or persons below
named the right to purchase __________ shares of the Common Stock of MAKO
Surgical Corp., a Delaware corporation, evidenced by the attached Warrant and
does hereby irrevocably constitute and appoint __________ attorney to transfer
the said Warrant on the books of the Company, with full power of substitution in
the premises.

      Dated:             Signature             Fill in for new registration of
Warrant:                       Name                 Address                

Please print name and address of assignee

(including zip code number)

             

 

NOTICE

The signature to the foregoing Assignment must correspond to the name as written
upon the face of the attached Warrant in every particular, without alteration or
enlargement or any change whatsoever.

 

 

 

EXHIBIT C

FORM OF OPINION

 

______, 20__

[___________]

Re:        MAKO Surgical Corp. (the “Company”)

Dear Sir:

[___________] (“[__________]”) intends to transfer _______ Warrants (the
“Warrants”) of the Company to __________ (“________”) without registration under
the Securities Act of 1933, as amended (the “Securities Act”). In connection
therewith, we have examined and relied upon the truth of representations
contained in an Investor Representation Letter attached hereto and have examined
such other documents and issues of law as we have deemed relevant.

Based on and subject to the foregoing, we are of the opinion that the transfer
of the Warrants by _______ to ______ may be effected without registration under
the Securities Act, provided, however, that the Warrants to be transferred to
_______ contain a legend restricting its transferability pursuant to the
Securities Act and that transfer of the Warrants is subject to a stop order.

The foregoing opinion is furnished only to ____________ and may not be used,
circulated, quoted or otherwise referred to or relied upon by you for any
purposes other than the purpose for which furnished or by any other person for
any purpose, without our prior written consent.

Very truly yours,

 

 

 

[FORM OF INVESTOR REPRESENTATION LETTER]

_____, 20__

[_________________]

Gentlemen:

_________ (“___”) has agreed to purchase _________ Warrants (the “Warrants”) of
MAKO Surgical Corp. (the “Company”) from [___________] (“[_________]”). We
understand that the Warrants are “restricted securities.” We represent and
warrant that ______ is a sophisticated institutional investor that would qualify
as an “Accredited Investor” as defined in Rule 501 of Regulation D under the
Securities Act of 1933, as amended (the “Securities Act”).

________ represents and warrants as of the date hereof as follows:

1. That it is acquiring the Warrants and the shares of common stock, $0.001 par
value per share underlying such Warrants (the “Exercise Shares”) solely for its
account for investment and not with a view to or for sale or distribution of
said Warrants or Exercise Shares or any part thereof. ________ also represents
that the entire legal and beneficial interests of the Warrants and Exercise
Shares _________ is acquiring is being acquired for, and will be held for, its
account only;

2. That the Warrants and the Exercise Shares have not been registered under the
Securities Act on the basis that no distribution or public offering of the stock
of the Company is to be effected. _______ realizes that the basis for the
exemption may not be present if, notwithstanding its representations, _______
has a present intention of acquiring the securities for a fixed or determinable
period in the future, selling (in connection with a distribution or otherwise),
granting any participation in, or otherwise distributing the securities. _______
has no such present intention;

3. That the Warrants and the Exercise Shares must be held indefinitely unless
they are subsequently registered under the Securities Act or an exemption from
such registration is available. ________ recognizes that the Company has no
obligation to register the Warrants, or to comply with any exemption from such
registration;

4. That neither the Warrants nor the Exercise Shares may be sold pursuant to
Rule 144 adopted under the Securities Act unless certain conditions are met,
including, among other things, the existence of a public market for the shares,
the availability of certain current public information about Company, the resale
following the required holding period under Rule 144 and the number of shares
being sold during any three month period not exceeding specified limitations;

5. That it will not make any disposition of all or any part of the Warrants or
Exercise Shares in any event unless and until:

(i)        The Company shall have received a letter secured by _________ from
the Securities and Exchange Commission stating that no action will be
recommended to the Securities and Exchange Commission with respect to the
proposed disposition;

(ii)       There is then in effect a registration statement under the Securities
Act covering such proposed disposition and such disposition is made in
accordance with said registration statement; or

(iii)       _________ shall have notified the Company of the proposed
disposition and, in the case of a sale or transfer in a so called “4(1) and a
half” transaction, shall have furnished counsel to the Company with an opinion
of counsel, reasonably satisfactory to counsel to the Company.

 

 

We acknowledge that the Company will place stop orders with respect to the
Warrants and the Exercise Shares, and if a registration statement is not
effective, the Exercise Shares shall bear the following restrictive legend:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER SAID ACT, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER SAID ACT INCLUDING, WITHOUT LIMITATION, PURSUANT TO RULES 144 OR 144A
UNDER SAID ACT OR PURSUANT TO A PRIVATE SALE EFFECTED UNDER APPLICABLE FORMAL OR
INFORMAL SEC INTERPRETATION OR GUIDANCE, SUCH AS A SO-CALLED “4(1) AND A HALF”
SALE.”

“THE SALE, TRANSFER OR ASSIGNMENT OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN REGISTRATION
RIGHTS AGREEMENT DATED AS OF MAY 7, 2012, AS AMENDED FROM TIME TO TIME, AMONG
THE COMPANY AND CERTAIN HOLDERS OF ITS OUTSTANDING SECURITIES. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY.”

At any time and from time to time after the date hereof, _________ shall,
without further consideration, execute and deliver to [________] or the Company
such other instruments or documents and shall take such other actions as they
may reasonably request to carry out the transactions contemplated hereby.

Very truly yours,

 

 

 

Schedule 1

Black-Scholes Value

  Calculation Under Section 5(c)(iii) Calculation Under Section 10(b) or 11(b)
Remaining Term Number of calendar days from date of public announcement of the
Major Transaction until the last date on which the Warrant may be exercised.
Number of calendar days from date of the determination until the last date on
which the Warrant may be exercised. Interest Rate A risk-free interest rate
corresponding to the US$ LIBOR/Swap rate for a period equal to the Remaining
Term. A risk-free interest rate corresponding to the US$ LIBOR/Swap rate for a
period equal to the Remaining Term (rounded to the nearest year). Volatility

If the first public announcement of the Major Transaction is made at or prior to
4:00 p.m., New York City time, the arithmetic mean of the historical volatility
for the 10, 30 and 50 Trading Day periods ending on the date of such first
public announcement, obtained from the HVT or similar function on Bloomberg.

If the first public announcement of the Major Transaction is made after 4:00
p.m., New York City time, the arithmetic mean of the historical volatility for
the 10, 30 and 50 Trading Day periods ending on the next succeeding Trading Day
following the date of such first public announcement, obtained from the HVT or
similar function on Bloomberg.

Historic volatility of the Company’s stock price for the preceding year ending
on the date of exercise Stock Price The greater of (1) the closing price of the
Common Stock on NASDAQ, or, if that is not the principal trading market for the
Common Stock, such principal market on which the Common Stock is traded or
listed (the “Closing Market Price”) on the trading day immediately preceding the
date on which a Major Transaction is consummated, (2) the first Closing Market
Price following the first public announcement of a Major Transaction, or (3) the
Closing Market Price as of the date immediately preceding the first public
announcement of the Major Transaction. The closing price on the date of exercise
or other event requiring calculation. Dividends Zero. Zero. Strike Price
Exercise Price as defined in section 3(a). Exercise Price as defined in section
3(a).