Document:

appa8k072811ex101.htm

Exhibit 10.1

 

THIRD AMENDMENT TO LEASE

This Third Amendment to Lease ("Amendment") is entered into as of July 28, 2011 (the "Effective Date") by and between METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation ("Landlord"), and AP PHARMA, INC., a Delaware corporation ("Tenant"), with reference to the following facts ("Recitals"):

A.       Landlord and Tenant are the current parties to that certain Lease dated as of November 7, 1997 (the “Original Lease’) executed by Landlord and Tenant's predecessor-in-interest, Advanced Polymer Systems, as amended by that certain Amendment to Lease Agreement dated as of March 29, 2004 executed by Landlord and Tenant, and that certain Second Amendment to Lease dated April 1, 2011 executed by Landlord and Tenant (as amended, the "Existing Lease") for certain Premises described therein commonly known as 123 Saginaw Drive, Redwood City, California 94063, all as more particularly described in the Existing Lease.

B.       Tenant and Landlord desire to provide for the extension of the Term and other amendments of the Existing Lease, but only in strict accordance with and as more particularly set forth in this Amendment.

NOW, THEREFORE, in consideration of the foregoing, and of the mutual covenants set forth herein and of other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

Section 1.                       Scope of Amendment; Defined Terms.  Except as expressly provided in this Amendment, the Existing Lease shall remain in full force and effect.  Should any inconsistency arise between this Amendment and the Existing Lease as to the specific matters which are the subject of this Amendment, the terms and conditions of this Amendment shall control.  The term "Lease" as used herein and, from and after the Effective Date, in the Existing Lease shall refer to the Existing Lease as modified by this Amendment.  Unless otherwise indicated, capitalized terms used in this Amendment shall be defined as set forth in the Lease.  Landlord and Tenant agree that this Amendment shall be effective as of the Effective Date with the same force and effect as if executed on that date.

Section 2.                       Security Deposit.  Notwithstanding any provision of the Existing Lease to the contrary, from and after the Effective Date the Security Deposit shall be cash in the amount of One Hundred Two Thousand  Five Hundred Ninety Seven Dollars and Seventy-Six Cents ($102,597.76).

Section 3.                       Extension of Term.  Landlord and Tenant acknowledge and agree that notwithstanding any provision of the Existing Lease to the contrary, the current Term pursuant to the Existing Lease expires on September 30, 2011, and that the Term is hereby extended for the period of sixty-two (62) months (the "Third Extended Term") commencing on October 1, 2011 and expiring November 30, 2016 (hereafter, the “Expiration Date” in lieu of the date provided in the Existing Lease), unless sooner terminated pursuant to the terms of the Lease.   This extension is with respect to the entire Premises and this extension is further upon and subject to the same conditions, terms, covenants and agreements contained in the Existing Lease except as otherwise provided in this Amendment.  Landlord and Tenant acknowledge and agree that this Amendment provides all rights and obligations of the parties with respect to extension of the current Term, whether or not in accordance with any other provisions, if any, of the Existing Lease or otherwise regarding renewal or extension, and any such provisions, options or rights for renewal or extension are hereby deleted as of the Effective Date.

Section 4.                       Basic Annual Rent.  Notwithstanding any provision of the Existing Lease to the contrary, Basic Annual Rent and Monthly Installments thereof shall continue to be due and payable by Tenant with respect to the Third Extended Term in the same manner required under the Lease therefor in the following amounts:

	  	
Period From/To

	
Monthly Installments

	
Basic Annual Rent

	  	
October 1, 2011 – September 30, 2013*

	
$44,313.90  

	
$531,766.80

	  	
October 1, 2013 – September 30, 2014

	
$46,529.60

	
$558,355.14

	  	
October 1, 2014 – September 30, 2015

	
$48,856.07

	
$586,272.90

	  	
October 1, 2015 -  November 30, 2016

	
$51,298.88

	
$615,586.54

             *Notwithstanding anything in the foregoing to the contrary, provided that a monetary default

  

  

  

(as set forth in Section 25 of the Original Lease) (the “Default”) by Tenant has not occurred prior to September 30, 2014, Landlord agrees to forbear in the collection of and abate the Basic Annual Rent due and payable for the period beginning on October 1, 2011 and continuing through November 30, 2011 of the Term, totaling not more than Eighty-Eight Thousand Six Hundred Twenty-Seven Dollars and Eighty Cents ($88,627.80) in the aggregate (collectively, “Abated Rent”); provided, further, that in the event of a monetary Default by Tenant prior to September 30, 2014, all previously Abated Rent shall be immediately due and payable in full at that time without the necessity of further notice or action by Landlord.

Section 5.                       Condition of Premises.  Notwithstanding any provision of the Existing Lease to the contrary, Tenant acknowledges and agrees that: (1) Tenant has been in occupancy of the Premises since 1997; (2) Tenant has investigated the condition of the Premises to the extent Tenant desires to do so; (3) Tenant is leasing the Premises in its "As Is" condition; (4) no representation regarding the condition of the Premises has been made by or on behalf of Landlord; and (5) in connection with this Amendment, Landlord has no obligation to remodel or to make any repairs, alterations or improvements in connection with this Amendment, or to provide Tenant any allowance therefor.

Section 6.                          Assignment and Subletting.  Paragraph 15 of the Original Lease shall be amended by inserting the following to the end of such Paragraph:

“(i)           For purposes of this Lease, a “Permitted Transferee” shall mean any individual, partnership, trust, corporation, firm or other entity  (“Person”) which:  (i) is an Affiliate (defined below); or (ii) is the corporation or other entity (the “Successor”) resulting from a merger, consolidation or non-bankruptcy reorganization with Tenant; or (iii) is otherwise a deemed assignee due to a transfer, assignment or hypothecation of any stock or interest under Paragraph 15(f); or (iv) purchases substantially all the assets of Tenant as a going concern (the “Purchaser”).  For purposes of this Paragraph, “Affiliate” shall mean any Person which is controlled by, controls, or is under common control with Tenant (for purposes of this definition, the word "control," shall mean, with respect to a Person that is a corporation or a limited liability company, the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the shares or membership interests of the controlled Person and, with respect to a Person that is not a corporation, the possession, directly or indirectly, of the power at all times to direct or cause the direction of the management of the controlled Person).  Notwithstanding anything to the contrary in Paragraphs 15(a), (c), (d) and (e), provided there is no uncured default under this Lease, Tenant shall have the right, without the prior written consent of Landlord, to assign this Lease to a Permitted Transferee or to sublease the Premises or any part thereof to a Permitted Transferee provided that:  (1) Landlord receives thirty (30) days prior written notice of an assignment or sublease (including a proposed transaction described in subparts (i), (ii), (iii) or (iv) of this Paragraph 15(i)); (2) with respect to an assignment of the Lease or a sublease of more than half the Premises to an entity described in subparts (ii) or (iv) of this Paragraph 15(i), the Permitted Transferee’s net worth is not less than Tenant’s net worth immediately prior to such assignment or subletting; (3) with respect to an assignment of the Lease or a sublease of more than half the Premises to an entity described in subparts (i) or (iii) of this Paragraph 15(i), Tenant (as the assignor or sublandord) continues in existence with a net worth not less than Tenant’s net worth immediately prior to such assignment or subletting; (4) the Permitted Transferee expressly assumes (except a Permitted Transferee which is a deemed assignee under subpart (iii) of this Paragraph 15(i) or which is a sublessee in the event of a sublease under this Paragraph 15(i)) in writing satisfactory to Landlord all of the obligations of Tenant under this Lease and delivers such assumption to Landlord no later than fifteen (15) days prior to the effective date of the assignment; (5) Landlord receives no later than five (5) days before the effective date a fully executed copy of the applicable assignment or sublease agreement between Tenant and the Permitted Transferee; and (6) promptly after Landlord's written request, Tenant and the Permitted Transferee provide such reasonable documents and information which Landlord reasonably requests for the purpose of substantiating whether or not the assignment or sublease is to a Permitted Transferee.  All determinations of net worth for purposes of this Subparagraph shall exclude any value attributable to goodwill or going concern value.  With respect to any proposed assignment under subparts (ii) or (iv) of this 

  

  

  

Paragraph 15(i)), Tenant shall pay Landlord, no later than thirty (30) days prior to the effective date of such proposed assignment, a processing fee of Five Thousand Dollars ($5,000.00), which shall be Landlord’s earned fee whether or not the proposed assignment is completed by Tenant.”

       Section 7.                          Option to Extend.

(a)           Landlord hereby grants Tenant a single option to extend the Term of the Lease for an additional period of three (3) years (such period may be referred to as the "Option Term"), as to the entire Premises as it then exists, upon and subject to the terms and conditions of this Section (the "Option To Extend"), and provided that at the time of exercise of such option (and each Option, if more than one Option is granted), Tenant must be conducting regular, active, ongoing business in, and be in occupancy (and occupancy by a subtenant, licensee or other party permitted or suffered by Tenant shall not satisfy such condition) of the Premises.

(b)           Tenant's election (the "Election Notice") to exercise the Option To Extend must be given to Landlord in writing no earlier than the date which is twelve (12) months prior to the Expiration Date and no later than the date which is nine (9) months prior to the Expiration Date.  If Tenant either fails or elects not to exercise the Option to Extend by not timely giving its Election Notice, then the Option to Extend shall be null and void, including, if more than one Option is granted, the then applicable Option to Extend and all further Options to Extend.

(c)           The Option Term (and each Option Term, if more than one Option is granted) shall commence immediately after the expiration of the preceding Term of the Lease.  Tenant's leasing of the Premises during the Option Term shall be upon and subject to the same terms and conditions contained in the Lease except that (i) Tenant shall pay the "Option Term Rent", defined and determined in the manner set forth in the immediately following Subsection; (ii) the Security Deposit shall be increased to an amount that is the same percentage or proportion of Option Term Rent as the prior amount of Security Deposit was in relation to Rent for the Term prior to the Option Term, but in no event shall the Security Deposit be decreased; and (iii) Tenant shall accept the Premises in its "as is" condition without any obligation of Landlord to repaint, remodel, repair, improve or alter the Premises or to provide Tenant any allowance therefor, except to the extent tenants leasing space in Comparable Transactions receive an allowance pursuant to the definition of Fair Market Rental Rate defined in Exhibit A hereto, provided, however, Landlord by notice given to Tenant within thirty (30) days after final determination of the Fair Market Rental Rate, may elect to provide, in lieu of such allowance for alterations to the Premises, a rent credit equal to the amount of the allowance that would have otherwise been given, credited toward the rents applicable only to the Premises and due starting after such rent obligation commences.  If Tenant timely and properly exercises the Option To Extend, references in the Lease to the Term shall be deemed to mean the preceding Term as extended by the Option Term unless the context clearly requires otherwise.

(d)           The Option Term Rent shall mean the sum of the Basic Annual Rent at the Fair Market Rental Rate (as defined in Exhibit A) plus Additional Rent and/or certain Operating Expenses (if applicable, based upon a step-up to change the base year or base amount for calculation of Operating Expenses in connection with determination of the Fair Market Rental Rate) plus other charges pursuant to the Lease payable to Landlord.  The determination of Fair Market Rental Rate and Option Term Rent shall be made by Landlord, in the good faith exercise of Landlord's reasonable business judgment.  Within forty-five (45) days after Tenant's exercise of the Option To Extend, Landlord shall notify Tenant of Landlord's determination of the Fair Market Rental Rate and Option Term Rent for the Premises.  Tenant may, within fifteen (15) days after receipt thereof, deliver to Landlord a written notice either:  (i) accepting Landlord's determination, in which case the extension shall be effective and binding (subject to Subsection (f) below) at the accepted rate; or (ii) setting forth Tenant's good faith estimate, in which case Landlord and Tenant will promptly confer and attempt to agree upon the Fair Market Rental Rate and Option Term Rent.  Tenant's failure to timely deliver such notice within such fifteen (15) day period shall be deemed its cancellation of the Option.  In the event Tenant has delivered notice setting forth Tenant’s different estimate, but no agreement in writing between Tenant and Landlord on Fair Market Rental Rate and Option Term Rent is reached within thirty (30) days after Landlord's receipt of Tenant's estimate, the Fair Market Rental Rate shall be determined in accordance with the terms of

  

  

  

Exhibit A.  To the extent that Tenant pays directly the utility or service provider for utilities or services which Tenant is to obtain directly pursuant to the Lease, Tenant shall continue to pay such amounts, but such amounts shall not be counted as part of the Preceding Rent or the Fair Market Rental Rate as used herein.

(e)           Promptly after final determination of the Fair Market Rental Rate, Landlord shall prepare a memorandum confirming the specific dates, amounts and terms of the extension for the Option Term in accordance with the terms and conditions of this Option to Extend, in the form of an amendment to the Lease, and Tenant shall execute such amendment within ten (10) business days after Landlord and Tenant agree to the form of the proposed amendment and Landlord shall execute it promptly after Tenant.  Notwithstanding any of the foregoing to the contrary, the failure of Landlord to prepare such amendment or of either party to execute an amendment shall not affect the validity and effectiveness of the extension for the Option Term in accordance with the terms and conditions of this Option to Extend.

(f)           Upon the occurrence of any of the following events, Landlord shall have the option, exercisable at any time prior to commencement of the Option Term, to terminate all of the provisions of this Section with respect to the Option to Extend, whereupon any prior or subsequent exercise of this Option to Extend shall be of no force or effect:

(i)   Tenant's failure to timely exercise or timely to perform the Option to Extend in strict accordance with the provisions of this Section.

(ii)  The existence at the time Tenant exercises the Option to Extend or at the commencement of the Option Term of a Default on the part of Tenant under the Lease or of any state of facts which with the passage of time or the giving of notice, or both, would constitute such a Default.

(g)           Without limiting the generality of any provision of the Lease, time shall be of the essence with respect to all of the provisions of this Section.

        (h)           This Option to Extend is personal to AP Pharma, Inc. and may not be used by, and shall not be transferable or assignable (voluntarily or involuntarily) to any person or entity other than a Permitted Transferee which is an assignee of the Lease and which has satisfied the requirements of Section 6 of this Amendment.

 

Section 8.                       Time of Essence.  Without limiting the generality of any other provision of the Existing Lease, time is of the essence to each and every term and condition of this Amendment.

        Section 9.                       Brokers.  Notwithstanding any other provision of the Existing Lease to the contrary, Tenant represents that in connection with this Amendment it is represented by Chris Jacobs of CBRE (“Tenant's Broker”) and, except for Tenant’s Broker and Kristoph Lodge of Cornish & Carey Commercial (“Landlord’s Broker”), Tenant has not dealt with any real estate broker, sales person, or finder in connection with this Amendment, and no such person initiated or participated in the negotiation of this Amendment.  Tenant hereby indemnifies and agrees to protect, defend and hold Landlord and Landlord’s Broker harmless from and against all claims, losses, damages, liability, costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses) by virtue of any broker, agent or other person claiming a commission or other form of compensation by virtue of alleged representation of, or dealings or discussions with, Tenant with respect to the subject matter of this Amendment, except for Landlord’s Broker and except for a commission payable to Tenant’s Broker to the extent provided for in a separate written agreement between Tenant’s Broker and Landlord’s Broker.  Tenant is not obligated to pay or fund any amount to Landlord's Broker, and Landlord hereby agrees to pay such commission, if any, to which Landlord's Broker is entitled in connection with the subject matter of this Amendment pursuant to Landlord's separate written agreement with Landlord's Broker.  Such commission shall include an amount to be shared by Landlord’s Broker with Tenant’s Broker to the extent that Tenant's Broker and Landlord's Broker have entered into a separate agreement between themselves to share the commission paid to Landlord's Broker by Landlord.  Landlord hereby indemnifies and agrees to protect, defend and hold Tenant harmless from and against all claims, losses, damages, liability, costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses) by virtue of any broker, agent or other person claiming a commission or other form of compensation by virtue of alleged representation of, or dealings or discussions with, Landlord with respect to the subject matter of this Amendment, except for a commission payable to Tenant’s Broker (except to the extent provided for in a separate written agreement between Tenant’s Broker and Landlord’s Broker).  The provisions of this Section shall survive the expiration or earlier termination of the Amendment or the Lease.

  

  

  

Section 10.                       Attorneys' Fees.  Each party to this Amendment shall bear its own attorneys' fees and costs incurred in connection with the discussions preceding, negotiations for and documentation of this Amendment.  In the event any party brings any suit or other proceeding with respect to the subject matter or enforcement of this Amendment or the Lease, the prevailing party (as determined by the court, agency or other authority before which such suit or proceeding is commenced) shall, in addition to such other relief as may be awarded, be entitled to recover attorneys' fees, expenses and costs of investigation as actually incurred, including court costs, expert witness fees, costs and expenses of investigation, and all attorneys' fees, costs and expenses in any such suit or proceeding (including in any action or participation in or in connection with any case or proceeding under the Bankruptcy Code, 11 United States Code Sections 101 et seq., or any successor statutes, in establishing or enforcing the right to indemnification, in appellate proceedings, or in connection with the enforcement or collection of any judgment obtained in any such suit or proceeding).

Section 11.                       Effect of Headings.  The titles or headings of the various parts or sections hereof are intended solely for convenience and are not intended and shall not be deemed to or in any way be used to modify, explain or place any construction upon any of the provisions of this Amendment.

Section 12.                       Entire Agreement; Amendment.  This Amendment taken together with the Existing Lease, together with all exhibits, schedules, riders and addenda to each, constitutes the full and complete agreement and understanding between the parties hereto and shall supersede all prior communications, representations, understandings or agreements, if any, whether oral or written, concerning the subject matter contained in this Amendment and the Existing Lease, as so amended, and no provision of the Lease as so amended may be modified, amended, waived or discharged, in whole or in part, except by a written instrument executed by all of the parties hereto.

Section 13.                       OFAC.  Landlord advises Tenant hereby that the purpose of this Section is to provide to the Landlord information and assurances to enable Landlord to comply with the law relating to OFAC.

Tenant hereby represents, warrants and covenants to Landlord, either that (i) Tenant is regulated by the SEC, FINRA or the Federal Reserve (a "Regulated Entity") or (ii) neither Tenant nor any person or entity that directly or indirectly (a) controls Tenant or (b) has an ownership interest in Tenant of twenty-five percent (25%) or more, appears on the list of Specially Designated Nationals and Blocked Persons ("OFAC List") published by the Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury.

If, in connection with the Lease, there is one or more Guarantors of Tenant's obligations under the Lease, then Tenant further represents, warrants and covenants either that  (i) any such Guarantor is a Regulated Entity or (ii) neither Guarantor nor any  person or entity that directly or indirectly (a) controls such Guarantor or (b) has an ownership interest in such Guarantor of twenty-five percent (25%) or more, appears on the OFAC List.

Tenant covenants during the term of the Lease to provide to Landlord information reasonably requested by Landlord, including, without limitation, organizational structural charts and organizational documents, which Landlord may deem to be necessary ("Tenant OFAC Information") in order for Landlord to confirm Tenant's continuing compliance with the provisions of this Section.  Tenant represents and warrants that the Tenant OFAC Information it has provided or to be provided to Landlord or Landlord's Broker in connection with the execution of this Amendment is true and complete.

Section 14.                       Ratification.  Tenant represents to Landlord as of the Effective Date that: (a) the Existing Lease is in full force and effect and has not been modified except as provided by this Amendment; (b) that to Tenant’s actual knowledge, there are no defaults or unfulfilled obligations on the part of Landlord under the Lease; and (c) Tenant is currently in possession of the entire Premises and neither the Premises, nor any part thereof, is occupied by any subtenant or other party other than Tenant.  Landlord represents to Tenant as of the Effective Date that the Existing Lease is in full force and effect and has not been modified except as provided by this Amendment.

  

  

  

Section 15.                       Authority.  Each person executing this Amendment represents and warrants that he or she is duly authorized and empowered to execute it, and does so as the act of and on behalf of the party indicated below.

Section 16.                       Counterparts.  This Amendment may be executed in duplicates or counterparts, or both, and such duplicates or counterparts together shall constitute but one original of the Amendment. The parties contemplate that they may be executing counterparts of this Amendment transmitted by facsimile and agree and intend that a signature by facsimile machine shall bind the party so signing with the same effect as though the signature were an original signature.  Each duplicate and counterpart shall be equally admissible in evidence, and each original shall fully bind each party who has executed it.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the Effective Date.

TENANT:                                                      AP PHARMA, INC.,

a Delaware corporation

By: /s/ John B. Whelan                                                          

Print Name: John B. Whelan                                                          

Title:       CEO                         

 

LANDLORD:                                                METROPOLITAN LIFE INSURANCE COMPANY,

a New York corporation

By: /s/ Joel R. Redmon____________

Print Name: Joel R. Redmon_______

Title: Regional Director____________

  

  

  

EXHIBIT A

FAIR MARKET RENTAL RATE

1.Definition of Fair Market Rental Rate.  "Fair Market Rental Rate" shall mean the Basic Annual Rent equal to the monthly base rental per rentable square foot which a willing tenant would pay and which a willing landlord would accept for space comparable to the Premises in the Building and in other buildings of class A standards in Seaport Centre and along the Highway 101 corridor in Redwood City, Redwood Shores, San Carlos and Belmont (the “Applicable Market”) for the period for which such rental is to be paid and for a lease on terms substantially similar to those of the Lease (including, without limitation, those applicable to Taxes, Operating Expenses and exclusions, but also considering so-called net and triple net leases, and leases utilizing operating expense stops or base years, and making appropriate adjustment between such leases and this Lease, as described below), based on prevailing market conditions in the Applicable Market at the time such determination is made ("Comparable Transactions").  Without limiting the generality of the foregoing, Comparable Transactions shall be for a term similar to the term of tenancy and for space comparable in use, floor levels, view and orientation, square footage and location within the Building and in the Applicable Market as the transaction for which Fair Market Rental Rate is being determined; however, leases of unusual or odd shaped spaces shall not be considered.  In any determination of Fair Market Rental Rate, the stated or contract monthly net or base rental in Comparable Transactions shall be appropriately adjusted to take into account the different terms and conditions prevailing in such transactions and those present in the Lease, including, without limitation: (a) the extent to which average annual expenses and taxes per rentable square foot payable by tenants in Comparable Transactions vary from those payable by Tenant under the Lease, and so, for example, if the Lease provides for payment of Additional Rent and/or certain Operating Expenses on the basis of increases over a base year, then the rate of Basic Annual Rent under the Lease shall be based upon a step-up to change the calendar year which serves as the base year for calculation of the base for such Operating Expenses for the Option Term to be the full calendar year in which the Option Term commences, and such step-up shall be considered in the determination of the Fair Market Rental Rate; (b) tenant improvements, value of existing tenant improvements, the concessions, if any, being given by landlords in Comparable Transactions, such as parking charge abatement, free rent or rental abatement applicable after substantial completion of any tenant improvements (and no adjustment shall be made for any free or abated rent during any construction periods), loans at below-market interest rates, moving allowances, space planning allowances, lease takeover payments and work allowances, as compared to any tenant improvement, refurbishment or repainting allowance given to Tenant under the Lease for the space for which Fair Market Rental Rate is being determined; (c) the brokerage commissions, fees and bonuses payable by landlords in Comparable Transactions (whether to tenant's agent, such landlord or any person or entity affiliated with such landlord), as compared to any such amounts payable by Landlord to the broker(s) identified with respect to the transaction for which Fair Market Rental Rate is being determined; (d) the time value of money; (e) any material difference between the definition of rentable area and the ratio of project rentable to useable square feet in Comparable Transactions, as compared to such figures applicable to the space for which Fair Market Rental Rate is being determined; and (f) the extent to which charges for parking by tenants in Comparable Transactions vary from those payable by Tenant under the Lease.

2.           Sealed Estimates.  In the event the Lease requires Fair Market Rental Rate to be determined in accordance with this Exhibit, Landlord and Tenant shall meet within ten (10) business days thereafter and each simultaneously submit to the other in a sealed envelope its good faith estimate of Fair Market Rental Rate (the "Estimates").  If the higher Estimate is not more than one hundred five percent (105%) of the lower Estimate, then Fair Market Rental Rate shall be the average of the two Estimates.  If such simultaneous submission of Estimates does not occur within such ten (10) business day period, then either party may by notice to the other designate any reasonable time within five (5) business days thereafter and any reasonable place at or near the Building for such meeting to take place.  In the event only one party submits an Estimate at that meeting, such Estimate shall be Fair Market Rental.  In the event neither party submits an Estimate at that meeting, the transaction for which Fair Market Rental Rate is being determined shall be deemed cancelled and of no further force or effect.

3.           Selection of Arbitrators.  If the higher Estimate is more than one hundred five percent (105%) of the lower Estimate, then either Landlord or Tenant may, by written notice to the other within five (5) business days after delivery of Estimates at the meeting, require that the disagreement be resolved by arbitration.  In the event neither party gives such notice, the transaction for which Fair Market Rental Rate is

  

  

  

being determined shall be deemed cancelled and of no further force or effect.  Within five (5) business days after such notice, the parties shall select as arbitrators three (3) mutually acceptable independent MAI appraisers with experience in real estate activities, including at least five (5) years experience in appraising comparable laboratory space within Seaport Centre ("Qualified Appraisers").  If the parties cannot timely agree on such arbitrators, then within the following five (5) business days, each shall select and inform the other party of one (1) Qualified Appraiser and within a third period of five (5) business days, the two appraisers (or if only one (1) has been duly selected, such single appraiser) shall select as arbitrators a panel of three additional Qualified Appraisers, which three arbitrators shall proceed to determine Fair Market Rental Rate pursuant to Section 4 of this Exhibit.  Both Landlord and Tenant shall be entitled to present evidence supporting their respective positions to the panel of three arbitrators.

4.           Arbitration Procedure.  Once a panel of arbitrators has been selected as provided above, then as soon thereafter as practicable each arbitrator shall select one of the two Estimates as the one which, in its opinion, is closer to Fair Market Rental Rate.  Upon an Estimate's selection by two (2) of the arbitrators, it shall be the applicable Fair Market Rental Rate and such selection shall be binding upon Landlord and Tenant.  If the arbitrators collectively determine that expert advice is reasonably necessary to assist them in determining Fair Market Rental Rate, then they may retain one or more qualified persons, including but not limited to legal counsel, brokers, architects or engineers, to provide such expert advice.  The party whose Estimate is not chosen by the arbitrators shall pay the costs of the arbitrators and any experts retained by the arbitrators.  Any fees of any counsel or expert engaged directly by Landlord or Tenant, however, shall be borne by the party retaining such counsel or expert.

5.           Rent Pending Determination of Fair Market Rental Rate.  In the event that the determination of Fair Market Rental Rate has not been concluded prior to commencement of the applicable rental period for the applicable space for which the Fair Market Rental Rate is being determined, Tenant shall pay Landlord Basic Annual Rent and Additional Rent as would apply under Landlord’s Estimate pursuant to Section 2 of this Exhibit until the Fair Market Rental Rate is determined.  In the event that the Fair Market Rental Rate subsequently determined is different from the amount paid for the applicable period, then within thirty (30) days after such determination, Tenant shall pay Landlord any greater amounts due and Landlord shall credit Tenant (against the next Basic Annual Rent installments due) for any reduction in the amounts due.ex101.htm

 

	
No. __________ 

	 Exhibit 10.1

 

AUXILIO, INC.

 

8% CONVERTIBLE PROMISSORY NOTE

 

$_____________ July 29, 2011

 

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES LAWS.  SUCH SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR AN EXEMPTION THEREFROM.  THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT.

 

AUXILIO, INC., a Nevada corporation (the “Company”), for value received, hereby promises to pay to the order of _________________________________ (“Investor”), whose address is _____________________________________________________________, at said address or such other addresses as may be designated in writing by Investor from time to time, or Investor’s registered assigns, the principal amount of _____________________________ and No/100 Dollars ($____,000), together with interest thereon from the date of issuance of this 8% Convertible Promissory Note (the “Note”) on the unpaid principal balance at an annual rate of interest equal to eight percent (8%) per annum, compounded annually (on the basis of a 360-day year), such principal and interest to be payable as provided below on July 29, 2014 (the “Maturity Date”).

 

The following is a statement of rights of the holder of this Note and the conditions to which this Note is subject, to which the holder hereof, by the acceptance of this Note, assents:

 

1. Payment.

 

(A) Principal.  Subject to the provisions of Section 2 hereof relating to the conversion of this Note, the Company shall make payment of principal on the Maturity Date in United States currency.

 

(B) Interest.  Subject to the provisions of Section 2 hereof relating to the conversion of this Note, interest only payments, in arrears, of an amount equal to the interest on the unpaid principal balance of the Note shall be due and payable no later than thirty (30) days following the close of each calendar quarter.  The first interest payment for interest accrued from the date hereof shall be due and payable no later than October 31, 2011.  Payments shall be made in United States currency.

 

(C) Pre-Payment.  The Company may call the Note for prepayment if (a) the Company’s Common Stock (the “Common Stock”) closes at or above $2.00 per share for 20 consecutive days; and (b) the Company’s Common Stock has had daily trading volume at or above 100,000 shares for the same 20 consecutive days. Investor shall have 60 days from the date on which the Company calls the Note (“Call Date”) to convert the Note; thereafter any outstanding Note may be prepaid by the Company. Upon prepayment, each Investor will receive: (i) accrued but unpaid interest to the redemption date; plus (ii) the principal amount of such Investor’s Note; plus (iii) an amount representing interest that would have accrued from the redemption date to the maturity date of the Note had the Note not been prepaid.

 

 

  

  

  

 

 

2. Conversion.

 

(A) Investor Conversion Rights. At any time prior to the Maturity Date the Investor may elect to convert all or part of the unpaid principal amount of this Note and any unpaid interest accrued thereon (the sum of such principal and accrued interest being hereinafter collectively referred to as the “Outstanding Balance”), into shares of Common Stock.  The conversion price (the “Conversion Price”) shall be $1.00 per share of Common Stock.  The number of shares of Common Stock into which this Note shall be convertible shall be determined by dividing (i) the Outstanding Balance by (ii) the Conversion Price.  For the purposes of this Section 2(A), conversion shall be deemed to occur on the date that the Company receives an executed copy of the Notice of Conversion attached hereto as Exhibit A.  Any failure by the Investor to provide such notice shall be deemed to be an election not to convert any portion of the Investor’s Outstanding Balance.

 

(B) Automatic Conversion.  If (a) there is an Extraordinary Corporate Transaction, and (b) the per share price of the Company’s Common Stock in such Transaction equals or exceeds the Conversion Price, then the Note will be automatically converted into Company Common Stock. “Extraordinary Corporate Transaction” shall mean any transaction, or a series of transactions, that results, directly or indirectly, in the transfer of 100% of the Company including, without limitation, any sale of stock, sale of assets, sale of membership interests, merger or consolidation, reorganization, recapitalization or restructuring, tender or exchange offer, negotiated purchase or  leveraged buyout.

 

(C) Surrender of Note.  Upon conversion of this Note into Common Stock as provided in this Section 2, the Investor shall surrender this Note at the offices of the Company at 26300 La Alameda, Suite 100, Mission Viejo, California 92691 and the Company shall, at its expense, deliver to the Investor as soon as practicable a certificate representing the number of shares of Common Stock provided in Section 2(A) or Section 2(B), as applicable.  The Company will place on each certificate a legend substantially the same as that appearing on this Note, in addition to any legend required by any applicable state or federal law.  Irrespective of the date of issuance and delivery of any certificates with respect thereto, shares of Common Stock purchased by conversion under this Section 2 shall be, and be deemed to be, issued to the Investor as the record owner of such shares as of the close of business on the deemed date of conversion as provided in Section 2(A) and Section 2(B).

 

(D) Exchange of Note.  If (a) within one year after the date hereof the Company completes an additional round of debt financing with new investors (“New Debt”) and (b) the New Debt contains Economic Terms (as defined below) that are more favorable to New Debt holders than the Economic Terms of this Note, then the Investor shall have the option to exchange this Note for an equal principal amount of new notes (“New Notes”) with the same Economic Terms as the New Debt. “Economic Terms” shall mean and refer to interest rate, payment frequency, amortization, conversion price, warrant coverage and registration rights.  In the event of an exchange pursuant to Section 2(D), this Note shall be surrendered in the same manner as Section 2(C) above.

 

 

  

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(E) Partial Conversion.  If this Note is converted in part under Section 2(A) above, the remaining portion of this Note not so converted shall remain entitled to the conversion rights provided herein.  In the event the Investor elects a partial conversion, the Note shall be surrendered pursuant to Section 2(C) above, and an amended and restated note for the remaining principal balance shall be issued by the Company to the Investor.

 

(F) No Fractional Shares.  No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Note.  With respect to any fraction of a share called for upon the conversion exercise of this Note, an amount equal to such fraction multiplied by the Conversion Price shall be paid in cash to the Investor.

 

(G) General.  The foregoing conversion rights are subject in all respects to compliance by the Company with all applicable laws, rules and regulations.

 

3. Pari Passu.  This Note is one of several convertible promissory notes of the Company issued contemporaneously herewith (the “July 2011 Notes”) evidencing indebtedness incurred by the Company for interim financing provided to the Company.  This Note and the other July 2011 Notes shall rank pari passu as to the payment of principal and interest.  The Investor agrees that any payments or prepayments to Investor and to the holders of the other July 2011 Notes, whether principal, interest or otherwise, shall be made pro rata among  the Investor and the holders of the other July 2011 Notes based upon the aggregate unpaid principal amount of this Note and the other July 2011 Notes.  By accepting this Note, the Investor agrees that if the Investor or any other holder of a July 2011 Note obtains any payments (whether voluntary, involuntary, by prepayment, set-off or otherwise) of the principal or interest on this Note or any other July 2011 Note in excess of such holder’s pro rata share of payments received by all holders of the July 2011 Notes, such holder shall purchase from the other holders of this Note and the other July 2011 Notes such participation in such promissory notes held by them as is necessary to cause all such holders to share the excess payment ratably among each of them as provided in this Section 3.

 

4. Adjustments.  Subject and pursuant to the provisions of this Section 4, the Conversion Price shall be subject to adjustment from time to time as set forth hereinafter.

 

(A)     If the Company shall, at any time or from time to time while this Note is outstanding, pay a dividend or make a distribution on its Common Stock in shares of Common Stock, subdivide its outstanding shares of Common Stock into a greater number of shares or combine its outstanding shares of Common Stock into a smaller number of shares or issue by reclassification of its outstanding shares of Common Stock any shares of its capital stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the Conversion Price in effect immediately prior to the date on which such change shall become effective shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such change and the denominator of which shall be the number of shares of Common Stock outstanding immediately after giving effect to such change.  Such adjustments shall be made successively whenever any event listed above shall occur.

 

 

  

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(B) In case the Company shall fix a payment date for the making of a distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness or assets (other than cash dividends or cash distributions payable out of consolidated earnings or earned surplus or dividends or distributions referred to in Section 4(A)), or subscription rights or warrants, the Conversion Price to be in effect after such payment date shall be determined by multiplying the Conversion Price in effect immediately prior to such payment date by a fraction, the numerator of which shall be the total number of shares of Common Stock outstanding multiplied by the closing bid price of the Common Stock as listed on the applicable public market immediately prior to such payment date (the “Market Price”), less the fair market value (as determined by the Company’s Board of Directors in good faith) of said assets or evidences of indebtedness so distributed, or of such subscription rights or warrants, and the denominator of which shall be the total number of shares of Common Stock outstanding multiplied by such Market Price.

 

(C) An adjustment to the Conversion Price shall become effective immediately after the payment date in the case of each dividend or distribution and immediately after the effective date of each other event which requires an adjustment.

 

(D) In the event that, as a result of an adjustment made pursuant to this Section 4, the Investor shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, the number of such other shares so receivable upon conversion of this Note shall be subject thereafter to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Conversion Shares.

 

5. Default Interest; Collection Fees; Waiver.  Any and all past due principal and interest on the Notes shall accrue interest at 12% per annum from and after the date it becomes due.  In the event of a default on the Notes and if the Notes are placed in the hands of an attorney for collection (whether or not suit is filed), or if the amount owing under the Notes is collected by suit or legal proceedings or through bankruptcy proceedings, the Company agrees to pay in addition to all sums then due, including outstanding principal and accrued but unpaid interest, all reasonable attorneys’ fees and expenses incurred in any action to collect amounts owing under the Notes.

 

The Company hereby waives demand and presentment for payment, notice of nonpayment, protest, notice of protests, notice of dishonor, notice of intention to accelerate and notice of acceleration, bringing of suit and diligence in taking any action to collect amounts called for hereunder and in the handling of securities at any time existing in connection herewith. In addition, the Company is and shall be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder.

 

 

  

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6. Maximum Rate of Interest.  Notwithstanding any provisions to the contrary in this Note, or in any of the documents relating hereto, in no event shall this Note or such documents require the payment or permit the charging or collection of interest in excess of the maximum amount or highest lawful rate permitted by the applicable usury laws.  It is the intention of the Company and the Investor to comply in all respects with applicable usury laws, and in no event shall the Company pay, for the use, forebearance or detention of money, interest at a rate or in an amount in excess of the highest lawful rate permitted by applicable law.  If any such excess interest is contracted for, charged or received under this Note or under the terms of any of the documents relating hereto, or in the event the maturity of the indebtedness evidenced by this Note is accelerated in whole or in part, or in the event that all or part of the principal or accrued unpaid interest of this Note shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received under this Note or under any of the documents relating hereto, on the amount of principal actually outstanding from time to time under this Note, shall exceed the maximum amount of interest permitted by the applicable usury laws, then in any such event (a) the provisions of this Section 6 shall govern and control, (b) neither the Company nor any other person or entity now or hereafter liable for the payment hereof, shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by the applicable usury laws, (c) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to the Company, at the holder’s option, and (d) the effective rate of interest shall be automatically reduced to the maximum lawful rate of interest allowed under the applicable usury laws as now or hereafter construed by the courts having jurisdiction thereof.  It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under this Note or under such other documents which are made for the purpose of determining whether such rate exceeds the maximum lawful rate of interest, shall be made, to the extent permitted by the applicable usury laws, by amortizing, prorating, allocating and spreading during the period of the full stated term of the indebtedness evidenced hereby, all interest at any time contracted for, charged or received from the Company or otherwise by the holder or holders hereof in connection with such indebtedness.

 

7. Certain Events.  The Outstanding Balance of this Note shall become immediately due and payable upon any of the following events: (i) the admission in writing by the Company of its insolvency, (ii) the commission of any voluntary act of bankruptcy by the Company, (iii) the execution by the Company of a general assignment for the benefit of creditors, (iv) the filing by or against the Company of any petition in bankruptcy or any petition for relief under the provisions of the federal bankruptcy act or any other state or federal law for the relief of debtors and the continuation of such petition without dismissal for a period of sixty (60) days or more, (v) the failure of Company to make any payment required hereunder, provided that the Company shall be given a thirty (30) day right to cure such non-payment, (vi) the appointment of a receiver or trustee to take possession of the property or assets of the Company, (vii) any dissolution of the Company, (viii) the adoption by the Company of any plan of liquidation, (ix) the sale by the Company in bulk of any of its assets pursuant to a plan of liquidation or for the purpose of liquidating its business, (x) the redemption or acquisition by the Company of any of its outstanding stock other than pursuant to a stock purchase agreement or stock repurchase agreements which may currently or hereafter exist between the Company and certain of its employees, consultants or directors, (xi) the commencement against the Company of any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof, or (xii) any challenge or contest by the Company or any affiliate of the Company in any action, suit or proceeding of the validity or enforceability of this Note or the warrants issued on even date herewith by the Company to Investor (each, individually, an “Event of Default”).

 

 

  

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8. Amendments and Waivers.  Except as otherwise provided herein, no provision of this Note may be waived or amended in any respect except by the written consent of the Company and the Investor; provided, however, that if holders of 50.1% or more in principal amount of the outstanding July 2011 Notes agree in writing to waive any provision of or otherwise amend such July 2011 Notes, then in such instance the provisions of this Note shall be so waived or amended; provided, further that no such waiver or amendment may reduce the principal amount of or interest on this Note or change the stated Maturity Date of this Note or reduce the percentage of holders of July 2011 Notes necessary to waive or amend the provisions of this Note, without the written consent of Investor.  INVESTOR ACKNOWLEDGES THAT BECAUSE THIS NOTE MAY BE AMENDED WITH THE CONSENT OF THE INVESTORS HOLDING 50.1% OF THE OUTSTANDING PRINCIPAL AMOUNT OF NOTES, AN INVESTOR’S RIGHTS HEREUNDER MAY BE AMENDED, MODIFIED, TERMINATED OR WAIVED WITHOUT ITS CONSENT.

 

9. Security. This Note is secured by a Security Agreement executed by the Company and the Investor and dated contemporaneously herewith.  Pursuant to the Security Agreement, Investor agrees to subordinate its interest in the collateral securing this Note in the event that the Company issues Senior Debt. “Senior Debt” is defined in the Security Agreement as any loan or debt extended by a commercial bank, commercial finance company, other lending institution or any institutional investor, and shall include lines of credit or similar financing facilities. Pursuant to the Security Agreement, the security interest of the Investors shall be subordinated to Senior Debt for the term of the Note or a New Note.

 

10. Miscellaneous.  The Company hereby waives to the full extent permitted by law all rights to plead any statute of limitations or laches as a defense to any action hereunder.  This Note shall be governed by and construed in accordance with the laws of the State of California applicable to agreements made to be performed in California, without reference to any principles of choice of law or conflicts of law.

 

  

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the date first written above.

 

AUXILIO, INC.

By:                        s/                                                      

Name:  Paul T. Anthony

Title:   Chief Financial Officer

ATTEST:

 

_______________________________

 

  

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AUXILIO, INC.

NOTICE OF CONVERSION

To: Auxilio, Inc.

26300 La Alameda, Suite 100

Mission Viejo, CA 92691

Attn: Paul T. Anthony, CFO

Dear. Mr. Anthony:

The undersigned holder of the Convertible Promissory Note enclosed herewith (the “Note”) and as specified below hereby irrevocably exercises the option to convert the amount due under the Note set forth below, in accordance with the terms of the Note. In the event that the undersigned exercises such option on or after a date on which Auxilio, Inc. (the “Company”) pays any principal or interest, such conversion is subject to the undersigned including together with this notice the amount of such payment. The undersigned (i) agrees to receive, pursuant to the terms of the Note, upon conversion the Company’s common stock (the “Stock”) (as adjusted pursuant to the terms of the Note) and (ii) directs that the Stock deliverable upon the conversion, and any securit(y)(ies) representing any unconverted principal amount hereof, be issued and delivered to the undersigned in full or partial satisfaction of the Note, as the case may be.

	Name:	
______________________________________

	Amount Converted:      	
 

$______________________________________                               

	Address: 	
______________________________________

 

______________________________________

 

______________________________________

 

 

	
 

Amount Received to-date from the Company:

	
 

 

 

 

$______________________________________                              

	Taxpayer ID:	

______________________________________

	  

Dated: ___________________, 20____

	
Note:  THE SIGNATURE MUST CORRESPOND WITH THE NAME OF THE REGISTERED HOLDER AS WRITTEN ON THE NOTE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ANY CHANGE WHATEVER.

 

 

	

Signature

 

 

Individual or Entity Name (and Title, if applicable)

 

 

 

 

Address

	

Signature of Spouse/Partner (if applicable)

 

 

Name 

 

 

 

 

Address

 

Exhibit A

Notice of Conversion Form

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