Document:

TERM LOAN AND SECURITY AGREEMENT

 

This TERM LOAN AND
SECURITY AGREEMENT (this “Agreement”), dated as of January 31, 2013, is by and between HP
Winston-Salem LLC, a Delaware limited liability company (the “Borrower”), and THE PRIVATEBANK
AND TRUST COMPANY, an Illinois banking corporation (together with its successors and assigns, the “Lender”).

 

RECITALS:

 

A.           Pursuant
to the Danby House Purchase Agreement, the Borrower desires to purchase the Property (as defined in the Danby House Purchase Agreement)
from the Danby House Seller.

 

B.           The
Borrower desires that the Lender extend the Loan to allow Borrower to pay a portion of the purchase price payable to the
Danby House Seller under the Danby House Purchase Agreement.

 

C.           The
Borrower desires to secure all of the Liabilities by granting to the Lender, a security interest in and lien upon all of its tangible
and intangible assets, including the Real Property, the Sinking Fund Account and the Lease Deposit Account.

 

NOW THEREFORE, in consideration
of the mutual agreements contained herein, and of any loans or other financial accommodations now or hereafter made to or for the
benefit of the Borrower by the Lender, and for other good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto (intending to be legally bound) hereby agree as follows:

 

1.           DEFINITIONS.

 

1.1          General
Terms. When used herein, the following terms shall have the following meanings:

 

“Affiliate”
means, with respect to any Person, any other Person (including, without limitation, to the extent applicable, shareholders, members,
directors, partners, managers, and officers of such Person) directly or indirectly controlling, controlled by, or under direct
or indirect common control with, such Person. A Person shall be deemed to control another Person if such first Person possesses,
directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether
through ownership of voting securities, by contract or otherwise.

 

“Agreement”
means this Term Loan and Security Agreement as the same may be amended, restated, supplemented or otherwise modified from time
to time.

 

“Applicable
Libor Margin” means an amount equal to four-hundred (400) basis points.

 

“Assignment
of Rents and Leases” means that certain Assignment of Rents and Leases made by the Borrower, dated of even date herewith,
as the same may be amended, supplemented or modified from time to time.

 

    	 

    	 

    

 

“Asset Disposition”
shall mean the sale, lease, assignment or other transfer for value (each a “Disposition”) by any Person of any
asset or right of such Person (including, the loss, destruction or damage of any thereof or any actual or threatened (in writing
to such Person) condemnation, confiscation, requisition, seizure or taking thereof), other than (a) the Disposition of any asset
which is to be replaced, and is in fact replaced, within thirty (30) days with another asset performing the same or a similar function
and (b) the sale or lease of inventory in the ordinary course of business.

 

“Bank Product
Agreements” shall mean those certain agreements entered into from time to time by the Borrower with the Lender or any
Affiliate of the Lender concerning Bank Products.

 

“Bank Product
Obligations” shall mean all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing
by the Borrower to the Lender or any Affiliate of the Lender pursuant to or evidenced by the Bank Product Agreements and irrespective
of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or
hereafter arising.

 

“Bank Products”
shall mean any service or facility extended to the Borrower by the Lender or any Affiliate of the Lender including: (a) credit
cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) automated clearing house or ACH transactions,
(f) cash management, including controlled disbursement, accounts or services or (g) Interest Rate Protection Agreements.

 

“Base Rate”
means the corporate base rate of interest per annum identified from time to time by the Lender, as its base or prime rate, which
rate shall not necessarily be the lowest rate of interest which the Lender charges its customers plus 175 basis points.
Any change in the Base Rate shall be effective as of the effective date of such change. Notwithstanding
anything to the contrary contained herein, for purposes of calculating the rate of interest in this Agreement and the Note, in
no event shall the Base Rate be below 5.0%.

 

“Base Rate
Loan” means a Loan that bears interest at an interest rate based on the Base Rate.

 

“Borrowing Notice” shall
have the meaning ascribed to such term in Section 2.10 hereof.

 

“Business
Day” means (a) with respect to any borrowing, payment or rate selection of Libor Loans, a day other than Saturday or
Sunday on which banks are open for business in Chicago, Illinois and on which dealings in United States dollars are carried on
in the London interbank market and (b) for all other purposes, a day other than Saturday or Sunday on which banks are open for
business in Chicago, Illinois.

 

“Capital Expenditures”
means, as to any Person, any and all expenditures of such Person for fixed or capital assets, including, without limitation, the
incurrence of Capitalized Lease Obligations, all as determined in accordance with GAAP, except that Capital Expenditures shall
not include expenditures for fixed or capital assets to the extent such expenditures are paid for or reimbursed from the proceeds
of insurance or the sale of other fixed or capital assets, to the extent permitted hereunder.

 

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“Capital Securities”
shall mean, as to any Person, all shares, interests, participations or other equivalents (however designated, whether voting or
non-voting) of such Person’s capital, whether now outstanding or issued or acquired after the date hereof, including common
shares, preferred shares, membership interests in a limited liability company, limited or general partnership interests in a partnership
or any other equivalent of such ownership interest.

 

“Capitalized
Lease Obligations” means any amount payable with respect to any lease of any tangible or intangible property (whether
real, personal or mixed), however denoted, which either (i) is required by GAAP to be reflected as a liability on the face of the
balance sheet of the lessee thereunder or (ii) based on actual circumstances existing and ascertainable, either at the commencement
of the term of such lease or at any subsequent time at which any property becomes subject thereto, can reasonably be anticipated
to impose on such lessee substantially the same economic risks and burdens, having regard to such lessee’s obligations and
the lessor’s rights thereunder both during and at the termination of such lease, as would be imposed on such lessee by any
lease which is required to be so reflected or by the ownership of the leased property.

 

“CERCLA”
means the Comprehensive Environmental Response Compensation and Liability Act of 1980, 42 U.S.C. § 9601 et
seq., as amended.

 

“CHAMPVA”
means, collectively, the Civilian Health and Medical Program of the Department of Veteran Affairs, a program of medical benefits
covering dependents of disabled veterans or dependents of certain deceased veterans not covered by TRICARE, and all laws, rules,
regulations, manuals, orders, guidelines or requirements pertaining to such program including, without limitation, (a) all federal
statutes (whether set forth in 38 U.S.C. §1781 or elsewhere) affecting such program or, to the extent applicable to CHAMPVA
and (b) all rules, regulations, manuals, orders and administrative, reimbursement and other guidelines of all governmental authorities
promulgated in connection with such program (whether or not having the force of law), in each case as the same may be amended,
supplemented or otherwise modified from time to time.

 

“Change of
Control” shall mean the occurrence of any of the following events: (a) Cornerstone Core Properties, REIT, Inc. or one
of its Affiliates shall cease to control the Parent or (b) the Parent shall cease to, directly or indirectly, own and control 100%
of each class of the outstanding Capital Securities of the Borrower. For the purpose hereof, the terms “control” or
“controlling” shall mean the possession of the power to direct, or cause the direction of, the management and policies
of the Borrower by contract or voting of securities or ownership interests.

 

“Closing Date” means
January 31, 2013.

 

“CMS”
means the Centers for Medicare and Medicaid Services of HHS and any Person succeeding to the functions thereof.

 

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“Code”
means the Uniform Commercial Code as adopted in the State of Illinois; provided, that if by reason of mandatory provisions
of law, the perfection or the effect of perfection or non-perfection of the security interests in any Collateral or the availability
of any remedy hereunder is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction,
“Code” means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof
relating to such perfection or effect of perfection or non-perfection or availability of such remedy.

 

“Collateral”
shall have the meaning ascribed to such term in Section 6.1 hereof.

 

“Commitment”
shall have the meaning ascribed to such term in Section 2.1 hereof.

 

“Conversion
Date” means a date on which any portion of the Loan is converted from a Base Rate Loan to a Libor Loan.

“Credit Parties”
means the Parent and the Borrower.

 

“Danby House
Assignment of Representations and Warranties” shall mean that certain Assignment of Representations and Warranties executed
by Borrower in favor of Lender and acknowledged by the Danby House Seller dated as of the Closing Date.

 

“Danby House
Purchase” means the transactions represented by the purchase
of the assets of the Danby House Seller by Borrower,
pursuant to, and together with the other transactions described in, the Danby House Purchase
Documents.

 

“Danby House
Purchase Agreement” shall mean that certain Purchase and Sale Agreement by and between Cornerstone
Healthcare Real Estate Fund, Inc., a Maryland corporation, or its assignee and the
Danby House Seller dated as of November 1, 2012, as such Purchase and Sale Agreement has been amended by a First Amendment to Purchase
and Sale Agreement dated as of December 20, 2012 and as the same has been assigned by Cornerstone Healthcare
Real Estate Fund, Inc. to the Borrower pursuant to that certain Assignment and Assumption of
Purchase Agreement dated as of the Closing Date.

 

“Danby House
Purchase Documents” shall mean the Danby House Purchase Agreement and all agreements, certificates, schedules, exhibits
and other documents executed and/or delivered in connection therewith, including, without limitation, the Real Estate Lease.

 

“Danby
House Seller” shall mean IP-Winston Salem Health Holdings, LLC, a North Carolina limited liability company.

 

“Default”
means an event, circumstance or condition which through the passage of time or the service of notice or both would (assuming no
action is taken to cure the same) mature into an Event of Default.

 

“Default Rate”
shall have the meaning ascribed to such term in Section 2.5(a) hereof.

 

“Deposit Accounts”
means any deposit, securities, operating, lockbox, cash collateral and blocked account, together with any funds, instruments or
other items credited to any such account from time to time, and all interest earned thereon, including, without limitation, the
Lease Deposit Account.

 

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“Depreciation”
shall mean the total amounts added to depreciation, amortization, obsolescence, valuation and other proper reserves, as reflected
on any Person’s financial statements and determined in accordance with GAAP.

 

“Duly Authorized
Person” means (i) the manager of the Borrower or any duly authorized person of the Borrower designated by the manager
of the Borrower and (ii) the manager of Parent or any duly authorized person of the Parent designed by the manager of the Parent.

 

“EBITDA”
means with respect to any Person, for any period of determination, the sum for such period of: (i) Net Income for such period,
plus (ii) Interest Charges for such period, plus (iii) federal and state income taxes paid in cash during such period,
plus (iv) Depreciation, consistently applied.

 

“EBITDAR”
means with respect to the Operating Company, but limited, however, to the Operating Company’s operation of the Facility,
for any period of determination, the sum for such period of: (i) Net Income for such period, plus (ii) Interest Charges
for such period, plus (iii) federal and state income taxes paid in cash during such period, plus (iv) Depreciation,
consistently applied plus (v) Rent Expense; provided, however, that for purposes of calculating EBITDAR of the Operating
Company, the aggregate expenses associated with management fees paid by the Operating Company during any period of determination
shall be deemed to be equal to the greater of (y) five (5%) of the gross revenues of the Operating Company or (z) the actual amount
paid by the Operating Company in respect of management fees during such period.

 

“Environmental
Indemnity Agreement” means that certain Environmental Indemnity Agreement of even date herewith made by the Borrower
in favor of the Lender, in form and substance acceptable to the Lender, as the same may be amended or modified from time to time

 

“Environmental
Laws” means all applicable federal, state, local and foreign laws, statutes, ordinances, codes, rules, standards, regulations
and common law, now or hereafter in effect, and any applicable judicial or administrative interpretation thereof, including any
applicable judicial or administrative order, consent decree, order or judgment, imposing liability or standards of conduct for
or relating to the regulation and protection of human health, safety, the environment and natural resources (including ambient
air, surface water, groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic species and vegetation). Without
limiting the generality of the foregoing, Environmental Laws include CERCLA, the Hazardous Materials Transportation Authorization
Act of 1994 (49 U.S.C. §§ 5101 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. §§
136 et seq.), the Solid Waste Disposal Act (42 U.S.C. §§ 6901 et seq.), the Toxic Substance Control
Act (15 U.S.C. §§ 2601 et seq.), the Clean Air Act (42 U.S.C. §§ 7401 et seq.), the Federal Water
Pollution Control Act (33 U.S.C. §§ 1251 et seq.), the Occupational Safety and Health Act (29 U.S.C. §§
651 et seq.), and the Safe Drinking Water Act (42 U.S.C. §§ 300(f) et seq.), and any rules and regulations
promulgated thereunder, and all analogous state, local and foreign counterparts or equivalents and any transfer of ownership notification
or approval statutes, and all common law relating to Hazardous Substances, or protection or restoration of, or liability for damage
to, human health, the environment or natural resources.

 

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“Environmental
Notice” means any summons, citation, written directive, written information request, written notice of potential responsibility,
notice of deficiency or violation, written order, written claim, written complaint, investigation, proceeding, judgment, or letter
to the Borrower or any officer thereof from the United States Environmental Protection Agency or other federal, state or local
agency or authority, or any other Person concerning any intentional or unintentional act or omission that involves Management of
Hazardous Substances on or off the Real Property that could reasonably be expected to result in the Borrower incurring a material
liability or that could reasonably be expected to have a Material Adverse Effect, or the imposition of any Lien on any property
of Borrower, or any alleged violation of or responsibility under Environmental Laws that is reasonably likely to result in the
Borrower incurring a material liability or that is reasonably likely to have a Material Adverse Effect, and, after reasonable inquiry,
any knowledge of any facts that is reasonably likely to give rise to any of the foregoing.

 

“ERISA”
means the Employee Retirement Income Security Act of 1974, as amended, together with the regulations thereunder.

 

“ERISA Affiliate”
means any corporation, trade or business, which together with any Credit Party would be treated as a single employer under Section
4001 of ERISA.

 

“Event of
Default” shall have the meaning ascribed to such term in Section 10.1 hereof.

 

“Facility”
means the ninety-nine (99) bed assisted living and memory care facility known as the Danby House located at 3150 Burke Mill Rd.,
Winston-Salem, North Carolina 27103 operated by the Operating Company.

 

“Financing
Agreements” means the Note, the Pledge Agreement, the Mortgage, the Assignment of Rents and Leases, the Environmental
Indemnity Agreement, the Danby House Assignment of Representations and Warranties, any Interest Rate Protection Agreement, any
Bank Product Agreement, and any other instrument, document or agreement executed or delivered in connection with this Agreement
or any of the foregoing, in each case evidencing, securing or relating to the Loans and the Liabilities, whether heretofore, now,
or hereafter executed by or on behalf of the Borrower, any Affiliate of the Borrower, or any other Person, and delivered to or
in favor of the Lender, together with all agreements and documents referred to therein or contemplated thereby, as each may be
amended, modified, replaced, restated or supplemented from time to time.

 

“Fiscal Quarter”
means the three (3) month period ending on each March 31, June 30, September 30 and December 31 of each calendar year.

 

“Fiscal Year”
means the twelve (12) month period commencing on January 1 and ending on December 31 of each calendar year.

 

“Fixed
Charge Coverage Ratio” means, for any period of determination, on a trailing twelve-month basis, the ratio of (a) EBITDA
of the Borrower, to (b) Fixed Charges of the Borrower; provided, however, that (i) with respect to the calculation
for the Fiscal Quarter ended March 31, 2013, the Fixed Charge Coverage Ratio will be calculated for the three (3) month period
then ended, (ii) with respect to the calculation for the Fiscal Quarter ended June 30, 2013, the Fixed Charge Coverage Ratio will
be calculated for the six (6) month period then ended, (iii) with respect to the calculation for the Fiscal Quarter ended September
30, 2013, the Fixed Charge Coverage Ratio will be calculated for the nine (9) month period then ended and (iv) with respect to
the calculation for the Fiscal Quarter ended December 31, 2013 and for the calculation as of each Fiscal Quarter thereafter, the
Fixed Charge Coverage Ratio will be calculated for the twelve (12) month period then ended.

 

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“Fixed Charges”
means, for any period of determination, the sum of, without duplication, (a) the aggregate amount of any and all advances and distributions
made by Borrower or to any Person, including, without limitation, to any Affiliate of the Borrower, (b) Interest Charges of the
Borrower for Indebtedness that is paid or becomes due during such period, (c) regularly scheduled principal payments made by the
Borrower for Indebtedness during such period, (d) unfinanced Capital Expenditures of the Borrower and (e) payments made by Borrower
in respect of federal, state and local taxes during such period, including taxes assessed in connection with Real Property.

 

“GAAP”
means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards
Board (or any successor authority) that are applicable to the circumstances as of the date of determination.

 

“General Intangibles”
means “general intangibles” as defined in the Code, including, without limitation, any and all general intangibles,
choses in action, causes of action, rights to the payment of money (other than accounts receivable), and all other intangible personal
property of the Borrower of every kind and nature wherever located and whether currently owned or hereafter acquired by the Borrower
(other than accounts receivable), including, without limitation, corporate or other business records, inventions, designs, patents,
patent applications, service marks, service mark applications, trademark applications, brand names, tradenames, trademarks and
all goodwill symbolized thereby and relating thereto, tradestyles, trade secrets, registrations, computer software, advertising
materials, distributions on certificated and uncertificated securities, investment property, securities entitlements, goodwill,
operational manuals, product formulas for industrial processes, blueprints, drawings, copyrights, copyright applications, rights
and benefits under contracts, licenses, license agreements, permits, approvals, authorizations which are associated with the operation
of the Borrower’s business and granted by any Person, franchises, customer lists, deposit accounts, tax refunds, tax refund
claims, and any letters of credit, guarantee claims, security interests or other security held by or granted to the Borrower to
secure payment by an account debtor of any of Borrower’s accounts receivable, and, to the maximum extent permitted by applicable
law, any recoveries or amounts received in connection with any litigation or settlement of any litigation.

 

“Hazardous
Substances” means any substance, material or waste that is regulated by, or forms the basis of liability now or hereafter
under, any Environmental Laws, including any material or substance that is (a) defined as a “solid waste,” “hazardous
waste,” “hazardous material,” “hazardous substance,” “extremely hazardous waste,” “restricted
hazardous waste,” “pollutant,” “contaminant,” “hazardous constituent,” “special
waste,” “toxic substance,” “medical wastes” or other similar term or phrase under any Environmental
Laws, or (b) petroleum or any fraction or by-product thereof, asbestos, polychlorinated biphenyls (PCB’s), or any radioactive
substance.

 

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“Healthcare
Laws” means all applicable laws relating to the possession, control, warehousing, marketing, sale and distribution of
pharmaceuticals, the operation of medical or senior housing facilities (such as, but not limited to, nursing homes, skilled nursing
facilities, rehabilitation hospitals, intermediate care facilities, assisted living and adult care facilities and other long-term
care facilities), patient healthcare, patient healthcare information, patient abuse, the quality and adequacy of medical care,
rate setting, equipment, personnel, operating policies, fee splitting, including, without limitation, (a) all federal and state
fraud and abuse laws, including, but not limited to the federal Anti-Kickback Statute (42 U.S.C. §1320a-7b(6)), the Stark
Law (42 U.S.C. §1395nn), the civil False Claims Act (31 U.S.C. §3729 et seq.); (b) HIPAA, (c) Medicare; (d) Medicaid;
(e) TRICARE and CHAMPVA; (f) quality, safety and accreditation standards and requirements of all applicable state laws or regulatory
bodies; (g) all laws, policies, procedures, requirements and regulations pursuant to which licenses, approvals and accreditation
certificates are issued in order to operate medical or senior housing facilities; and (h) any and all other applicable health care
laws (whether federal, state/commonwealth, or otherwise), regulations, manual provisions, policies and administrative guidance,
as each of the foregoing may be amended from time to time.

 

“HHS”
means the United States Department of Health and Human Services and any Person succeeding to the functions thereof.

 

“HIPAA”
means the Health Insurance Portability and Accountability Act of 1996, as the same may be amended, modified or supplemented from
time to time, and any successor statute thereto, and any and all rules or regulations promulgated from time to time thereunder

 

“Indebtedness”
with respect to any Person means, as of the date of determination thereof, (a) all of such Person’s indebtedness for borrowed
money, (b) all indebtedness of such Person or any other Person secured by any Lien with respect to any property or asset owned
or held by such Person, regardless whether the indebtedness secured thereby shall have been assumed by such Person or such Person
has become liable for the payment thereof, (c) all Capitalized Lease Obligations, or conditional sale or other title retention
agreement with respect to property used and/or acquired by Borrower even though the rights and remedies of the lessor, seller and/or
lender thereunder are limited to repossession of such property, (d) all unfunded pension fund obligations and liabilities, (e)
all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (f) all obligations in respect of
letters of credit, whether or not drawn, and bankers’ acceptances issued for the account of such Person, (g) deferred and/or
accrued taxes, (h) all guarantees by such Person, or any undertaking by such Person to be liable for, the debts or obligations
of any other Person and (i) all other indebtedness of such Person, now or hereafter owing, due or payable, however evidenced, created,
incurred or owing and however arising, which is customarily identified as indebtedness on a balance sheet or financial statement.

 

“Indemnified
Parties” shall have the meaning ascribed to such term in Section 11.16 hereof.

 

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“Interest
Charges” shall mean, as to any Person, for any period, the sum of: (a) all interest, charges and related expenses payable
with respect to that fiscal period to a lender in connection with borrowed money or the deferred purchase price of assets that
are treated as interest in accordance with GAAP, plus (b) the portion of Capitalized Lease Obligations with respect to that
fiscal period that should be treated as interest in accordance with GAAP, plus (c) all charges paid or payable (without
duplication) during that period with respect, in the case of a the Borrower or the Operating Company, to any Interest Rate Protection
Agreements.

 

“Interest
Rate Protection Agreement” means any interest rate, currency or commodity swap agreement, cap agreement or collar agreement
or any other so-called “swap” agreement, or similar arrangement entered into at any time with the intent of protecting
against fluctuations in interest rates, between the Borrower and the Lender (or any Affiliate of the Lender) relating to any of
the Liabilities, as the same may be amended, restated, supplemented or otherwise modified from time to time.

 

“Lease Deposit
Account” has the meaning set forth in Section 8.9 of this Agreement.

 

“Liabilities”
means any and all of the Borrower’s liabilities, obligations and Indebtedness to the Lender of any and every kind and nature,
whether heretofore, now or hereafter owing, arising, due or payable and howsoever evidenced, created, incurred, acquired, or owing,
whether primary, secondary, direct, indirect, contingent, absolute, fixed or otherwise (including, without limitation, payments
of or for principal, interest, default interest, fees, costs, expenses, and/or indemnification, and obligations of performance,
and any interest that accrues after commencement of any insolvency or bankruptcy proceeding regardless of whether allowed or allowable
in whole or in part as a claim in any such insolvency or bankruptcy proceeding), under, evidenced by or relating to this Agreement
(including, without limitation, the Loan or the Bank Product Obligations) or the other Financing Agreements to which the Borrower
is a party (including, without limitation, any Interest Rate Protection Agreement), and any refinancings, substitutions, extensions,
renewals, replacements and modifications for or of any or all of the foregoing.

 

“Libor Base
Rate” means a rate of interest equal to (a) the per annum rate of interest at which United States dollar deposits for
a period equal to the relevant Libor Interest Period are offered in the London Interbank Eurodollar market at 11:00 a.m. (London
time) two Business Days prior to the commencement of such Libor Interest Period (or three Business Days prior to the commencement
of such Libor Interest Period if banks in London, England were not open and dealing in offshore United States dollars on such second
preceding Business Day), as displayed in the Bloomberg Financial Markets system (or other authoritative source selected by the
Lender in its sole discretion), divided by (b) a number determined by subtracting 1.00 from the then stated maximum reserve percentage
for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities
as defined in Regulation D (or any successor category of liabilities under Regulation D). The Lender’s determination of the
Libor Base Rate shall be conclusive, absent manifest error. Notwithstanding anything to the contrary
contained herein, for purposes of calculating the rate of interest in this Agreement and any Note, in no event shall the Libor
Base Rate be below one percent (1.00%).

 

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“Libor Interest
Period” means, with respect to a Libor Loan, a period of thirty (30) days commencing on a Business Day. Such Libor Interest
Period shall end on (but exclude) the day which corresponds numerically to the date thirty (30) days thereafter; provided,
however, that if a Libor Interest Period would otherwise end on a day that is not a Business Day, such Libor Interest Period
shall end on the next succeeding Business Day; provided, further, that if such next succeeding Business Day occurs
after the applicable period, such Libor Interest Period shall end on the immediately preceding Business Day.

 

“Libor Loan”
means a Loan which bears interest at a Libor Rate.

 

“Libor Rate”
means, with respect to a Libor Loan for the relevant Libor Interest Period, the sum of the Libor Base Rate applicable to that Libor
Interest Period, plus the Applicable Libor Margin.

 

“Lien”
means any lien, security interest, mortgage, pledge, hypothecation, collateral assignment, or other charge, encumbrance or preferential
arrangement, including, without limitation, the retained security title of a conditional vendor or lessor.

 

“Loan Account”
shall have the meaning ascribed to such term in Section 2.3 hereof.

 

“Loan”
shall have the meaning ascribed to such term in Section 2.1 hereof.

 

“Manage”
or “Management” means to generate, handle, manufacture, process, treat, store, use, re-use, refine, recycle,
reclaim, blend or burn for energy recovery, incinerate, accumulate speculatively, transport, transfer, dispose of, release, threaten
to release or abandon Hazardous Substances.

 

“Management
Agreement” means the Management Agreement by and between the Operating Company and the Management Company, with
respect to the provision of certain services for the Facility.

 

“Management
Company” means, collectively, Meridian Senior Living, LLC and its Affiliates.

 

“Material
Adverse Change” or “Material Adverse Effect” means either (a) the termination of the Operating Company’s
continued participation in Medicaid reimbursement program for any reason, or (b) any other change, event, action, condition or
effect which, individually or in the aggregate, either (i) impairs the legality, validity or enforceability of this Agreement or
any Financing Agreement, (ii) impairs the fully perfected first priority status of the Liens granted hereunder and under the Financing
Agreements in favor of the Lender in the Collateral or any other assets pledged in favor of Lender to secure the Liabilities or
any portion thereof (subject only to the Permitted Liens) or (iii) materially and adversely affects the business, property or assets
(whether real or personal), operations, performance, or condition (financial or otherwise) of the Borrower or any or all of the
Collateral, or the ability of the Borrower to repay the Liabilities when due or declared due and perform the Borrower’s obligations
under this Agreement and the Financing Agreements to which it is a party.

 

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“Maturity
Date” means, the earlier of (i) January 31, 2016, (ii) such other date on which the Commitment shall terminate pursuant
to Section 10.2 hereof, or (iii) such other date as is mutually agreed in writing between the Borrower and the Lender.

 

“Maximum Facility”
means, as of the Closing Date, an amount equal to the lesser of (i) Seven Million Two Hundred Seventy Five Thousand and No/100
Dollars ($7,275,000.00), (ii) 75% of the loan-to-value ratio using an income approach of the Real Property as set forth on the
most recent appraisal prepared and delivered to Lender in accordance with the terms hereof or (iii) 75% of the purchase price required
to be paid by Borrower under the Danby House Purchase Agreement in connection with its acquisition of the Real Property.

 

“Medicaid”
means the medical assistance programs administered by state agencies and approved by CMS pursuant to the terms of Title XIX of
the Social Security Act, codified at 42 U.S.C. 1396 et seq.

 

“Medicare”
means the program of health benefits for the aged and disabled administered by CMS pursuant to the terms of Title XVIII of the
Social Security Act, codified at 42 U.S.C. 1395 et seq.

 

“Mortgage”
means that certain Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing made by the Borrower, dated of even
date herewith, granting and conveying to the Lender a first mortgage Lien on that certain Real Property commonly identified as
the Danby House located at 3150 Burke Mill Rd., Winston-Salem, North Carolina 27103, as the same may be amended, restated, supplemented
or otherwise modified from time to time.

 

“Multiemployer
Plan” shall have the meaning ascribed to such term in Section 7.19 hereof.

 

“Net Income”
shall mean, with respect to any Person for any period, the net income (or loss) of such Person for such period as determined in
accordance with GAAP, excluding any gains from Asset Dispositions, any extraordinary gains and any gains from discontinued
operations.

 

“Note”
shall have the meaning ascribed to such term in Section 2.1 hereof.

 

“Operating
Company” means Danby House, LLC, a North Carolina limited liability company.

 

“Parent”
means Healthcare Property Holding Co., LLC, a Delaware limited liability company.

 

“PBGC”
shall have the meaning ascribed to such term in Section 7.19 hereof.

 

“Permitted
Liens” shall have the meaning ascribed to such term in Section 9.1 hereof.

 

“Permitted
Prepayment” means the refinancing of the Liabilities in full in cash through the U.S. Department of Housing and Urban
Development.

 

    	- 11 -

    	 

    

 

“Person”
means any individual, sole proprietorship, partnership, joint venture, trust, limited liability company, unincorporated organization,
association, corporation, institution, entity, party, or government (whether national, federal, state, provincial, county, city,
municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof).

 

“Plan”
shall have the meaning ascribed to such term in Section 7.19 hereof.

 

“Pledge Agreement”
means the Pledge Agreement dated of even date herewith executed by Parent, in favor of the Lender, pursuant
to which the Parent has pledged all of the Capital Securities of the Borrower to Lender as security for the Liabilities, as the
same may be amended, restated, supplemented or otherwise modified from time to time.

 

“Prepayment
Premium” means, with respect to prepayment of the Loan: (i) three percent (3%) of the amount of the outstanding principal
balance of the Loan prepaid if such prepayment occurs on or prior to the first (1st) year anniversary of the Closing
Date; (ii) two percent (2%) of the amount of the outstanding principal balance of the Loan prepaid if such prepayment occurs on
or prior to the second (2nd) year anniversary of the Closing Date; and (iii) one percent (1%) of the amount of the outstanding
principal balance of the Loan prepaid if such prepayment occurs on or prior to the third (3rd) year anniversary of the
Closing Date; provided, however, that, to the extent any prepayment of the Loan occurs in connection with the Permitted Prepayment,
the Prepayment Premium shall be 0%.

 

“Prohibited
Transaction” shall have the meaning ascribed to such term in ERISA.

 

“Property”
means, as applicable, any and all real property owned, leased, sub-leased or used at any time by Borrower, including, without limitation,
the Real Property.

 

“Rate Option”
means the Libor Rate or the Base Rate.

 

“Real Estate
Lease” means that certain Lease dated as of the Closing Date between the Borrower and the Operating Company regarding
the Facility, pursuant to which the Borrower leases the Real Property to the Operating Company.

 

“Real Property”
means the real estate on which the Facility is located.

 

“Release”
means any actual or threatened spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching,
dumping or disposing of Hazardous Substances into the environment, as “environment” is defined in CERCLA.

 

“Rent Expense”
shall mean all rental or lease expense of the Operating Company in connection with leased Real Property by Borrower to the Operating
Company.

 

“Respond”
or “Response” means any action taken pursuant to Environmental
Laws to correct, remove, remediate, cleanup, prevent, mitigate, monitor, evaluate, investigate or assess the Release of a Hazardous
Substance.

 

    	- 12 -

    	 

    

 

“Sinking Fund
Account” shall have the meaning ascribed to such term in Section 6.8 hereof.

 

“Subordinated
Debt” means any and all Indebtedness owing by the Borrower to a third party that has been subordinated to the Liabilities
in writing on terms and conditions satisfactory to the Lender in its sole and absolute determination.

 

“Tax Code”
shall have the meaning ascribed to such term in Section 7.19 hereof.

 

“Tax Liability
Amount” shall have the meaning ascribed to such term in Section 9.9 hereof.

 

“Taxes”
shall have the meaning ascribed to such term in Section 3.3 hereof.

 

“TRICARE”
means the medical program for active duty members, qualified family members, CHAMPUS eligible retirees and their family members
and survivors, of all uniformed services.

 

1.2          Accounting
Terms. Any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily
given to such terms in accordance with GAAP. If changes in GAAP shall be mandated by the Financial Accounting Standards Board or
shall be recommended by the Borrower’s certified public accountants, and such changes would materially modify the interpretation
or computation of the financial covenants set forth in Section 9.12 hereof at the time of execution hereof, then in such
event such changes shall not be followed in calculating such financial covenants.

 

1.3          Others
Defined in Code. All terms contained in this Agreement (and which are not otherwise specifically defined herein) shall have
the meanings provided by the Code to the extent the same are used or defined therein.

 

1.4          Other
Interpretive Provisions.

 

(a)          The
meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. Whenever the context so
requires, the neuter gender includes the masculine and feminine, the single number includes the plural, and vice versa.

 

(b)          Section
and Schedule references are to this Agreement unless otherwise specified. The words “hereof”, “herein”
and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement.

 

(c)          The
term “including” is not limiting, and means “including, without limitation”.

 

(d)          In
the computation of periods of time from a specified date to a later specified date, the word “from” means “from
and including”; the words “to” and “until” each mean “to but excluding”, and the word
“through” means “to and including”.

 

    	- 13 -

    	 

    

 

(e)          Unless
otherwise expressly provided herein, (i) references to agreements (including this Agreement and the other Financing Agreements)
and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements and other modifications
thereto, but only to the extent such amendments, restatements, supplements and other modifications are not prohibited by the terms
of this Agreement or any Financing Agreement, and (ii) references to any statute or regulation shall be construed as including
all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation.

 

2.           COMMITMENT;
INTEREST; FEES.

 

2.1          Loan.
On the terms and subject to the conditions set forth in this Agreement, and provided there does not then exist an Event of Default,
the Lender shall, following the execution of this Agreement by the Borrower and the Lender, extend in one (1) advance a term loan
(the “Loan”) to the Borrower in an aggregate principal amount equal to Seven Million Two Hundred Seventy Five
Thousand and No/100 Dollars ($7,275,000.00). The Borrower agrees to deposit with the Lender (for further deposit into the Sinking
Fund Account), payments in respect of the Term Loan based on a twenty-five (25) year amortization schedule in consecutive monthly
installments as follows:

 

	Year 1:	$170,000 annually ($14,167/month)
	Year 2:	$170,000 annually ($14,167/month)
	Year 3:	$180,000 annually ($15,000/month)

 

, together with
interest accrued thereon, each payable on the first day of each calendar month, commencing on March 1, 2013, and otherwise in accordance
with Section 2.5 hereof, with a final installment of the aggregate unpaid principal balance of the Loan, together with interest
accrued thereon, payable on the Maturity Date. Monthly interest payments on the Loan shall be computed using the interest rate
then in effect and based on the outstanding principal balance of the Loan. Any amounts paid or applied to the principal balance
of the Loan (whether by mandatory prepayment or otherwise) may not be reborrowed hereunder. The Lender's commitment hereunder to
make the Loan is hereinafter called the “Commitment”. At the Maturity Date, the outstanding principal balance
of the Loan shall be immediately due and payable, together with any remaining accrued interest thereon, to Lender by Borrower.
At the Maturity Date, the Borrower hereby authorizes and directs the Lender to apply all amounts deposited in the Sinking Fund
Account to the outstanding amount of the Term Loan. The Loan shall be evidenced by a promissory note (hereinafter, as the same
may be amended, modified or supplemented from time to time, and together with any renewals or extensions thereof or exchanges or
substitutions therefor, called the “Note”), duly executed and delivered by the Borrower, in form and substance
reasonably satisfactory to the Lender, with appropriate insertions, dated the Closing Date, payable to the order of the Lender
in the principal amount of Seven Million Two Hundred Seventy Five Thousand and No/100 Dollars ($7,275,000.00). THE PROVISIONS OF
THE NOTE NOTWITHSTANDING, THE LOAN SHALL BECOME IMMEDIATELY DUE AND PAYABLE UPON THE EARLIEST TO OCCUR OF (X) THE MATURITY DATE;
(Y) THE ACCELERATION OF THE LIABILITIES PURSUANT TO SECTION 10.2 HEREOF; AND (Z) THE TERMINATION OF THIS AGREEMENT (WHETHER
BY PREPAYMENT OR OTHERWISE) IN ACCORDANCE WITH ITS TERMS.

 

    	- 14 -

    	 

    

 

2.2           Reserved.

 

2.3           The
Borrower’s Loan Account. The Lender shall maintain a loan account (the “Loan Account”) on its books
for the Borrower in which shall be recorded (a) all advances of the Loan made by the Lender to the Borrower pursuant to this Agreement,
(b) all payments made by the Borrower on or with respect to such Loan, and (c) all other appropriate debits and credits as provided
in this Agreement, including, without limitation, all fees, charges, expenses and interest. All entries in the Loan Account shall
be made in accordance with the Lender’s customary accounting practices as in effect from time to time. The Borrower promises
to pay the amount reflected as owing by Borrower under its Loan Account and all of its other obligations hereunder as such amounts
become due or are declared due pursuant to the terms of this Agreement. Notwithstanding the foregoing, the failure so to record
any such amount or any error in so recording any such amount shall not limit or otherwise affect the Borrower’s obligations
under this Agreement or under the Note to repay the outstanding principal amount of the Loan together with all interest accruing
thereon.

 

2.4           Statements.
The Loan to the Borrower, and all other debits and credits provided for in this Agreement, shall be evidenced by entries made by
the Lender in its internal data control systems showing the date, amount and reason for each such debit or credit. Until such time
as the Lender shall have rendered to the Borrower written statements of account as provided herein, the balance in the Loan Account,
as set forth on the Lender’s most recent computer printout, shall be rebuttably presumptive evidence of the amounts due and
owing the Lender by the Borrower. From time to time the Lender shall render to the Borrower a statement setting forth the balance
of the Loan Account, including principal, interest, expenses and fees. Each such statement shall be subject to subsequent adjustment
by the Lender but shall, absent manifest errors or omissions, be presumed correct and binding upon the Borrower.

 

2.5           Interest.
(a) The Borrower agrees to pay to the Lender interest on the daily outstanding principal balance
of (i) the Base Rate Loans at the Base Rate from time to time in effect and (ii) the Libor Loans at the Libor Rate; provided, however,
that immediately following the occurrence and during the continuance of an Event of Default, and notwithstanding any other provisions
of this Agreement to the contrary, the Borrower agrees to pay to the Lender interest on the outstanding principal balance of the
Loans at the per annum rate of three percent (3%) plus the rate otherwise payable hereunder with respect to such Loans (the
“Default Rate”).

 

(b)          Accrued
interest on each Base Rate Loan shall be payable in arrears on the first calendar day of each month and at maturity, commencing
with March 1, 2013; provided, however, accrued interest on each Libor Loan shall be payable on the last day of the Libor Interest
Period relating to such Libor Loan and at maturity, commencing with the first such last day of the initial Libor Interest Period.
Monthly interest payments on the Loans shall be computed using the interest rate then in effect and based on the outstanding principal
balance of the Loans. At the Maturity Date, the outstanding principal balance of the Loan shall be immediately due and payable,
together with any remaining accrued interest thereon. Interest shall be computed on the basis of a year of three hundred sixty
(360) days for the actual number of days elapsed. If any payment of principal of, or interest on, the Note falls due on a day that
is not a Business Day, then such due date shall be extended to the next following Business Day, and additional interest shall accrue
and be payable for the period of such extension.

 

    	- 15 -

    	 

    

 

 

2.6           Method
for Making Payments; Authorization to Debit Lease Deposit Account. All payments that the Borrower is required to make to the
Lender under this Agreement or under any of the other Financing Agreements shall be made in immediately available funds not later
than 1:00 p.m. (Chicago time) on the date of payment at the Lender’s office at 120 S. LaSalle St., Chicago, Illinois 60603,
or at such other place as the Lender directs in writing from time to time, or, in the Lender’s sole and absolute discretion,
by appropriate debits to the Loan Account and/or Lease Deposit Account. Borrower hereby irrevocably authorizes and instructs Lender
to direct debit any of Borrower’s operating accounts with Lender, including, without limitation, the Lease Deposit Account,
for all principal, interest, fees and expenses due hereunder with respect to the Loan and the Liabilities or as otherwise is required
to be deposited into the Sinking Fund Account. Payments made after 1:00 p.m. (Chicago time) shall be deemed to have been made on
the next succeeding Business Day.

 

2.7           Term
of this Agreement. The Borrower shall have the right to terminate this Agreement following prepayment of all of the Liabilities
as provided under Section 2.8 hereof; provided, however, that all of the Lender’s rights and remedies
under this Agreement and the Liens created under Section 6.1 hereof and under any of the other Financing Agreements, shall
survive such termination until all of the Liabilities have been indefeasibly paid in full (including, without limitation, all default
interest and all interest accrued after commencement of any insolvency or bankruptcy proceeding, whether or not the foregoing would
be or is allowed or disallowed in whole or in part in any such insolvency or bankruptcy proceeding), and termination of the Lender’s
Commitment hereunder. In addition, the Liabilities may be accelerated as set forth in Section 10.2 hereof. Upon the effective
date of termination, all of the Liabilities shall become immediately due and payable without notice or demand. Notwithstanding
any termination, until all of the Liabilities shall have been indefeasibly paid and satisfied, the Lender shall be entitled to
retain its Liens in and to all existing and future Collateral.

 

2.8           Optional
Prepayment of Loan. The Borrower may, at its option, permanently prepay, at any time during the term of this Agreement all
of the Loan or any portion thereof but in minimum amounts of no less than One Hundred Thousand Dollars ($100,000), subject to the
following conditions: (i) not less than ten (10) days prior to the date upon which the Borrower desires to make any such prepayment,
Borrower shall deliver to the Lender a written notice of its intention to prepay all or such portion of the Loan, which notice
shall be irrevocable and state the type of Loan to be prepaid, the amount of the prepayment and the prepayment date, and (ii) the
Borrower shall pay (A) the Prepayment Premium, if applicable, (in view of the impracticality and extreme difficulty of ascertaining
actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result of such
prepayment), (B) any amount due pursuant to Section 3.4 hereof, and (C) any amounts due in connection with such prepayment
or due under any Interest Rate Protection Agreement. Any such Prepayment Premium shall constitute a part of the Liabilities and
be secured by the Collateral. Prepayments of the Loan shall be applied against installments payable under such applicable Note
in the inverse order of maturity. Amounts prepaid on account of any of the Loan may not be reborrowed. The parties agree that the
Prepayment Premium is not a penalty.

 

    	- 16 -

    	 

    

 

2.9           Limitation
on Charges. It being the intent of the parties that the rate of interest and all other charges to the Borrower be lawful, if
for any reason the payment of a portion of the interest or other charges otherwise required to be paid under this Agreement would
exceed the limit which the Lender may lawfully charge the Borrower, then the obligation to pay interest or other charges shall
automatically be reduced to such limit and, if any amounts in excess of such limit shall have been paid, then such amounts shall
at the sole option of the Lender either be refunded to the Borrower or credited to the principal amount of the Liabilities (or
any combination of the foregoing) so that under no circumstances shall the interest or other charges required to be paid by the
Borrower hereunder exceed the maximum rate allowed by applicable law, and Borrower shall not have any action against Lender for
any damages arising out of the payment or collection of any such excess interest.

 

2.10         Method
of Selecting Rate Options; Additional Provisions Regarding Libor Loans. The Borrower may
select a Libor Rate with respect to a Loan as provided in this Section 2.10; provided, however, that with respect to each and all
Libor Loans made hereunder (i) the amount shall be in an amount not less than One Hundred Thousand Dollars ($100,000) and in integral
multiples of Fifty Thousand Dollars ($50,000) thereafter; and (ii) there shall not exist at any one time outstanding more than
three (3) separate tranches of Libor Loans. Subject to the first proviso in Section 2.5(a) hereof, Loans shall bear interest at
the Base Rate unless the Borrower provides a Borrowing Notice to the Lender in form and substance reasonably acceptable to the
Lender, signed by a Duly Authorized Officer on behalf of the Borrower, irrevocably electing that all or a portion of the Loans
are to bear interest at a Libor Rate (the “Borrowing Notice”). The Borrowing Notice shall be delivered to the
Lender not later than two (2) Business Days before the Borrowing Date for each Libor Loan, specifying:

 

(a)          The
Conversion Date, which shall be a Business Day, of such Loan;

 

(b)          The
type and aggregate amount of such Loan;

 

(c)          The
Rate Option selected for such Loan; and

 

(d)          The
Libor Interest Period applicable thereto.

 

Each Libor Loan shall bear interest from
and including the first day of the Libor Interest Period applicable thereto to (but not including) the last day of such Libor Interest
Period at the interest rate determined as applicable to such Libor Loan. At the end of a Libor Interest Period for an outstanding
Libor Loan, as long as no Event of Default exists at any time, such Loan will automatically be continued for successive Libor Interest
Periods (unless and until such time as the Borrower otherwise notifies the Lender in writing and the Borrower is in compliance
with the other terms and conditions of this Agreement (including payment of such Libor Loan and any required payment pursuant to
Section 3.4 hereof), and otherwise subject to the first proviso in Section 2.5(a) hereof). An outstanding Base Rate Loan may be
converted to a Libor Loan at any time subject to the notice provisions applicable to the type of Loan selected. The Borrower may
not select a Libor Rate for a Loan if there exists an Event of Default. The Borrower shall select Libor Interest Periods with respect
to Libor Loans so that such Libor Interest Period does not expire after the end of the Maturity Date.

 

    	- 17 -

    	 

    

 

2.11         Setoff.
(a) Borrower agrees that Lender has all rights of setoff and banker’s liens provided by applicable law. The Borrower agrees
that, if at any time (i) any amount owing by it under this Agreement or any Financing Agreement is then due and payable to
the Lender or (ii) an Event of Default shall have occurred and be continuing, then the Lender or the holder of the Note issued
hereunder, in its sole discretion, may set off against and apply to the payment of any and all Liabilities, any and all balances,
credits, deposits, accounts or moneys of the Borrower then or thereafter with the Lender or such holder.

 

(b)          Without
limitation of Section 2.11(a) hereof, the Borrower agrees that, upon and after the occurrence and during the continuance
of any Event of Default, the Lender is hereby authorized, at any time and from time to time, without prior notice to the Borrower,
(i) to set off against and to appropriate and apply to the payment of any and all Liabilities any and all amounts which the
Lender is obligated to pay over to the Borrower (whether matured or unmatured, and, in the case of deposits, whether general or
special, time or demand and however evidenced), and (ii) pending any such action, to the extent necessary, to deposit such
amounts with the Lender as Collateral to secure such Liabilities and to dishonor any and all checks and other items drawn against
any deposits so held as the Lender in its sole discretion may elect.

 

(c)          The
rights of the Lender under this Section 2.11 are in addition to all other rights and remedies which the Lender may otherwise
have in equity or at law.

 

2.12         Termination
of Commitment by the Lender. On the date on which the Commitment terminates pursuant to Section 10.2 hereof, the Loan
and other Liabilities shall become immediately due and payable, without presentment, demand or notice of any kind.

 

2.13         Commitment
Fee. On the Closing Date, the Borrower shall pay to the Lender a one-time commitment fee in the amount of Seventy Two Thousand
Seven Hundred Fifty and 00/100 ($72,750.00), which shall be deemed fully earned as of the Closing Date.

 

2.14         Late
Charge. If any installment of principal or interest due hereunder shall become overdue
for five (5) days after the date when due, the Borrower shall pay to the Lender on demand a “late charge” of five cents
($.05) for each dollar so overdue in order to defray part of the increased cost of collection occasioned by any such late payment,
as liquidated damages and not as a penalty.

 

3.            CHANGE
IN CIRCUMSTANCES.

 

3.1           Yield
Protection. If, after the date of this Agreement, the adoption of any law or any governmental or quasi-governmental rule, regulation,
policy, guideline or directive (whether or not having the force of law), or any change therein, or any change in the interpretation
or administration thereof, or the compliance of the Lender therewith, or Regulation D of the Board of Governors of the Federal
Reserve System,

 

(a)          subjects
the Lender to any tax, duty, charge or withholding on or from payments due from the Borrower (excluding taxation of the overall
net income of the Lender), or changes the basis of taxation of payments to the Lender in respect of the Loan or other amounts due
it hereunder, or

 

    	- 18 -

    	 

    

 

(b)          imposes,
modifies, or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended by, the Lender (other than reserves and assessments taken into
account in determining the interest rate applicable to Libor Loans), or

 

(c)          imposes
any other condition the result of which is to increase the cost to the Lender of making, funding or maintaining advances or reduces
any amount receivable by the Lender in connection with advances, or requires the Lender to make any payment calculated by reference
to the amount of advances held or interest received by it, by an amount deemed material by the Lender, or

 

(d)          affects
the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and the Lender
determines the amount of capital required is increased by or based upon the existence of this Agreement or its obligation to make
the Loan hereunder or of commitments of this type,

 

then, within three
(3) Business Days of demand by the Lender, the Borrower agrees to pay the Lender that portion of such increased expense incurred
(including, in the case of clause (d), any reduction in the rate of return on capital to an amount below that which it could
have achieved but for such law, rule, regulation, policy, guideline or directive and after taking into account the Lender’s
policies as to capital adequacy) or reduction in an amount received which the Lender determines is attributable to making, funding
and maintaining the Loan.

 

3.2           Availability
of Rate Options. If the Lender determines that maintenance of any of its Libor Loans would violate any applicable law, rule,
regulation or directive of any government or any division, agency, body or department thereof, whether or not having the force
of law, the Lender shall suspend the availability of the Libor Rate option and require any Libor Loans outstanding to be promptly
converted to a Base Rate Loan subject to the Borrower’s compliance with Section 3.4 hereof; or if the Lender determines
that (i) deposits of a type or maturity appropriate to match fund Libor Loans are not available, the Lender shall suspend the availability
of the Libor Rate after the date of any such determination, or (ii) the Libor Rate does not accurately reflect the cost of making
a Libor Loan, then, if for any reason whatsoever the provisions of Section 3.1 hereof are inapplicable, the Lender shall,
at its option, suspend the availability of the Libor Rate after the date of any such determination or permit (solely in the case
of clause (ii)) the Borrower to pay the Lender for any increased cost it may incur.

 

3.3           Taxes.
All payments by the Borrower under this Agreement shall be made free and clear of, and without deduction for, any present or future
income, excise, stamp or other taxes, fees, levies, duties, withholdings or other charges of any nature whatsoever, now or hereafter
imposed by any taxing authority, other than franchise taxes and taxes imposed on or measured by the Lender’s net income or
receipts (such non-excluded items being called “Taxes”). If any withholding or deduction from any payment to
be made by the Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then
the Borrower shall:

 

(a)          pay
directly to the relevant authority the full amount required to be so withheld or deducted;

 

    	- 19 -

    	 

    

 

(b)          promptly
forward to the Lender an official receipt or other documentation satisfactory to the Lender evidencing such payment to such authority;
and

 

(c)          pay
to the Lender such additional amount or amounts as is necessary to ensure that the net amount actually received by the Lender will
equal the full amount the Lender would have received had no such withholding or deduction been required.

 

Moreover, if any
Taxes are directly asserted against the Lender with respect to any payment received by the Lender hereunder, the Lender may pay
such Taxes and the Borrower agrees to promptly pay such additional amounts (including, without limitation, any penalties, interest
or expenses) as is necessary in order that the net amount received by the Lender after the payment of such Taxes (including, without
limitation, any Taxes on such additional amount) shall equal the amount the Lender would have received had not such Taxes been
asserted. Notwithstanding the foregoing, if the Lender fails to timely pay any such Taxes after the Lender receives prior written
notice of such Taxes being due prior to the date such Taxes are due, then any penalty directly resulting from the failure to timely
pay such Taxes shall not be borne by the Borrower.

 

3.4           Funding
Indemnification. If any payment of a Libor Loan occurs on a date that is not the last day of the applicable Libor Interest
Period, whether because of acceleration, prepayment or otherwise, or a Libor Loan is not made on the date specified by the Borrower,
the Borrower shall indemnify the Lender for any loss or cost incurred by it resulting therefrom, including, without limitation,
any loss or cost in liquidating or employing deposits acquired to fund or maintain the Libor Loan.

 

3.5           Lender
Statements. The Lender shall deliver a written statement to the Borrower as to the amount due, if any, under Sections 3.1,
3.3 or 3.4 hereof. Such written statement shall set forth in reasonable detail the calculations upon which the Lender
determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Unless otherwise
provided herein, the amount specified in the written statement shall be payable within five (5) days after receipt by the Borrower
of the written statement.

 

3.6           Basis
for Determining Interest Rate Inadequate or Unfair. If with respect to any Libor Interest Period: (a) Lender determines (which
determination shall be binding and conclusive on the Borrower) that by reason of circumstances affecting the interlender Libor
Base market adequate and reasonable means do not exist for ascertaining the applicable Libor Base Rate; or (b) Lender determines
that the Libor Base Rate will not adequately and fairly reflect the cost to Lender of maintaining or funding the Loan for such
Libor Interest Period, or that the making or funding of Libor Loans has become impracticable as a result of an event occurring
after the date of this Agreement which in the opinion of Lender adversely affects such Libor Loans, then, in either case, so long
as such circumstances shall continue: (i) Lender shall not be under any obligation to make, convert into or continue Libor Loans
and (ii) on the last day of the then current Libor Interest Period for each Libor Loan, each such Loan shall, unless then repaid
in full, automatically convert to a Base Rate Loan. Lender shall promptly give the Borrower written notice of any determination
made by it under this Section accompanied by a statement setting forth in reasonable detail the basis of such determination.

 

    	- 20 -

    	 

    

 

3.7           Illegality.
If any applicable law or regulation, or any interpretation thereof by any court or any governmental or other regulatory body charged
with the administration thereof, should make it unlawful for Lender or its lending office to make, maintain or fund any Libor Loan,
then the obligation of Lender to make, convert into or continue such Libor Loan shall, upon the effectiveness of such event, be
suspended for the duration of such unlawfulness, and on the last day of the current Libor Interest Period for such Libor Loan (or,
in any event, if Lender so requests, on such earlier date as may be required by the relevant law, regulation or interpretation),
the Libor Loans shall, unless then repaid in full, automatically convert to Base Rate Loans.

 

4.            ATTORNEY-IN-FACT.

 

4.1           Appointment
of the Lender as the Borrower’s Attorney-in-Fact. The Borrower hereby irrevocably designates, makes, constitutes and
appoints the Lender (and all Persons designated by the Lender in writing to the Borrower) as the Borrower’s true and lawful
attorney-in-fact, and authorizes the Lender, in the Borrower’s or the Lender’s name to do all acts and things which
are necessary, in the Lender’s reasonable discretion, to fulfill the Borrower’s obligations under this Agreement. The
Borrower hereby ratifies and approves all acts under such power of attorney and neither Lender nor any other Person acting as Borrower’s
attorney hereunder will be liable for any acts or omissions or for any error of judgment or mistake of fact or law made in good
faith. The appointment of Lender (and any of the Lender’s officers, employees or agents designated by the Lender) as Borrower’s
attorney, and each and every one of Lender’s rights and powers, being coupled with an interest, are irrevocable until all
of the Liabilities have been fully repaid and this Agreement shall have expired or been terminated in accordance with the terms
hereunder.

 

5.            CONDITIONS
OF THE LOAN.

 

The Lender’s
obligation to make the Loan hereunder is subject to the satisfaction of each of the following conditions precedent:

 

(a)          Fees
and Expenses. The Borrower shall have paid all fees owed to the Lender and reimbursed the Lender for all reasonable costs,
disbursements, fees and expenses due and payable hereunder on or before the Closing Date, including, without limitation, the Lender’s
counsel fees provided for in Section 11.2(a) hereof.

 

(b)         Documents.
The Lender shall have received all of the following, each duly executed and delivered and dated the Closing Date, or such earlier
date as shall be satisfactory to the Lender, each in form and substance reasonably satisfactory to the Lender in its sole determination:

 

(1)         Financing
Agreements. This Agreement, the Note, the Mortgage, the Assignment of Rents and Leases, the Environmental Indemnity Agreement,
the Pledge Agreement, the Danby House Assignment of Representations and Warranties and such other Financing Agreements as the Lender
may reasonably require.

 

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(2)         Resolutions;
Incumbency and Signatures. Copies of the resolutions or written consent of the manager of each Credit Party authorizing
or ratifying the execution, delivery and performance by such Credit Party of this Agreement, the Financing Agreements to which
such Credit Party is a party and any other document provided for herein or therein to be executed by such Credit Party, certified
by a Duly Authorized Person of such Credit Party and, in each case, to the extent applicable. A certificate of a Duly Authorized
Person certifying the names of the officers of the Borrower authorized to make a borrowing request on behalf of the Borrower and
sign this Agreement and the Financing Agreements to which the Borrower is a party, together with a sample of the true signature
of each such officer; the Lender may conclusively rely on each such certificate until formally advised by a like certificate of
any changes therein.

 

(3)         Consents.
Certified copies of all documents evidencing any necessary consents and governmental approvals, if any, with respect to this Agreement,
the Financing Agreements, and any other documents provided for herein or therein to be executed by Borrower.

 

(4)         Opinion
of Counsel. An opinion of Hanson Bridgett, LLP and Poyner Spruill the legal counsel to the Credit Parties, in form and substance
reasonably satisfactory to Lender.

 

(5)         Constitutive
Documents. A copy (certified by a Duly Authorized Person) of each Credit Party’s (i) Certificate of Formation, certified
by the Secretary of State of the State of Delaware as of a date acceptable to the Lender, together with a good standing certificate
from such governmental entity or department and, if and to the extent applicable, a good standing certificate (or the equivalent
thereof) from the Secretaries of State (or the equivalent thereof) of each other State in which any Credit Party is required to
be qualified to transact business and (ii) a true, correct and complete copy of the Limited Liability Company Agreement of the
Borrower and the Parent.

 

(6)         UCC
Financing Statements; Termination Statements; UCC Searches. UCC Financing Statements, as requested by the Lender, naming each
Credit Party as debtor and the Lender as secured party with respect to the Collateral, together with such UCC termination statements
necessary to release all Liens (other than Permitted Liens) and other rights in favor of any Person in any of the Collateral except
the Lender, and other documents as the Lender deems necessary or appropriate, shall have been filed in all jurisdictions that the
Lender deems necessary or advisable. UCC tax, lien, pending suit and judgment searches for the Borrower (and, if and to the extent
applicable, under any of its trade or assumed names, if any), each dated a date reasonably near to the Closing Date in all jurisdictions
reasonably deemed necessary by the Lender, the results of which shall be satisfactory to the Lender in its sole and absolute determination.

 

(7)         Insurance
Certificates. Certificates from the Borrower’s insurance carriers evidencing that all insurance coverage required hereunder
and under the Mortgage and other Financing Agreements is in effect, which designate the Lender as “Lender’s Loss Payee”
under the personal property insurance, additional insured under the liability insurance and mortgagee, as applicable.

 

    	- 22 -

    	 

    

 

(8)         Real
Estate Lease. A true, correct and complete copy of the fully-executed Real Estate Lease, and all amendments, assignments, modifications
and other supplements in connection therewith, together with a Subordination, Non-Disturbance and Attornment Agreements, in form
and substance acceptable to Lender.

 

(9)         Reserved.

 

(10)       Environmental
Assessment. A Phase I environmental report of the Real Property prepared by an environmental audit firm reasonably acceptable
to the Lender, the results of which shall be satisfactory to the Lender in its sole and absolute determination.

 

(11)       Title
Insurance. A title insurance policy in the form of ALTA Form Mortgagee Title Insurance Policy shall be issued by an insurer
(acceptable to the Lender) in favor of the Lender for the Real Property, together with copies of all documents of record concerning
the Real Property as identified on the commitment thereof. Each title insurance policy shall contain such endorsements as deemed
appropriate by the Lender.

 

(12)       Survey.
An ALTA plat of survey shall be prepared on the Real Property.

 

(13)       Appraisal.
An appraisal prepared by an independent appraiser of the Real Property, which appraisal shall satisfy the requirements of the Financial
Institutions Reform, Recovery and Enforcement Act, if applicable, and shall evidence compliance with the supervisory loan-to-value
limits set forth in the Federal Deposit Insurance Corporation Improvement Act of 1991 (including a loan-to-value ratio using an
income-approach basis not to exceed 75%). Such appraisal (and the results thereof) shall be satisfactory to the Lender in its sole
and reasonable determination.

 

(14)       Flood
Insurance. A flood insurance policy, if applicable, concerning the Real Property, reasonably satisfactory to the Lender, if
required by the Flood Disaster Protection Act of 1973.

 

(15)       Permits.
Certified copies of all licenses, permits and governmental approvals necessary for the use or operation of the Facility, together
with a certificate of occupancy with respect to the Facility issued in the name of the Operating Company.

 

(16)        Danby
House Purchase Documents. True, correct and complete copies of the fully-executed Danby House Purchase Documents and of the
governmental approvals delivered in connection therewith.

 

(17)       Other.
Such other documents, certificates and instruments as the Lender may reasonably request.

 

(c)          Field
Examination; Site Visit. The Lender shall have completed its site visit and field examinations of the Borrower’s books
and records, assets, and operations which examinations will be satisfactory to the Lender in its sole and absolute discretion.

 

    	- 23 -

    	 

    

 

(d)         No
Material Adverse Change. There shall be no material adverse change in the business, assets, liabilities, properties, condition
(financial or otherwise) or results of operations of the Borrower or Operating Company.

 

(e)         Representations
and Warranties. All representations or warranties of the Credit Parties contained herein or in any Financing Agreement shall
be true and correct as of the Closing Date.

 

(f)          Acknowledgement
of Operating Company. Evidence reasonably acceptable to the Lender that the Operating
Company has acknowledged the obligations of Borrower under Section 8.9 hereof and that the Borrower has notified the Operating
Company that all amounts payable to the Borrower under the Real Estate Lease shall be paid directly to the Lease Deposit Account
and has agreed to comply with such arrangement.

 

(g)         Certificate.
The Lender shall have received a certificate signed by a Duly Authorized Person on behalf of the Borrower and dated the Closing
Date certifying satisfaction of the conditions specified in Sections 5.1 and 5.2 hereof.

 

(h)         Financial
Statements. The Lender shall have received financial
statements of the Operating Company (showing results of the operation of the Facility) for the fiscal year ended December 31, 2012
and such financial statements shall be in form and substance reasonably acceptable to the Lender.

 

(i)          Commitment
Fee. The Borrower shall have paid to Lender the commitment fee referenced in Section 2.13 hereof.

 

6.            COLLATERAL.

 

6.1           Security
Interest. As security for the prompt and complete payment and performance of all of the Liabilities when due or declared due
in accordance with the terms hereof, the Borrower hereby grants, pledges, conveys and transfers to the Lender (in addition to the
security interests, assignments and mortgages on the Real Property as contemplated by the Mortgage and the other Financing Agreements)
a continuing security interest in and to any and all assets and personal property of the Borrower, of any kind or description,
tangible or intangible, wheresoever located and whether now existing or hereafter arising or acquired, including the following
(all of which property, along with the products and proceeds therefrom, are individually and collectively referred to as the “Collateral”):
(a) all of Borrower’s accounts receivable, including, without limitation, Accounts and Health-Care-Insurance Receivables
(each as defined in the Code), (b) all of the Borrower’s General Intangibles, including, without limitation General Intangibles
related to accounts receivable and money; (c) all of Borrower’s Deposit Accounts and other deposit accounts (general or special)
with, and credits and other claims against, the Lender, or any other financial institution with which the Borrower maintains deposits;
(d) all of the Borrower’s contracts, licenses, chattel paper, instruments, notes, letters of credit, bills of lading, warehouse
receipts, shipping documents, contracts, tax refunds, documents and documents of title, and all of the Borrower’s Tangible
Chattel Paper, Documents, Electronic Chattel Paper, Letter-of-Credit Rights, letters of credit, Software, Supporting Obligations,
Payment Intangibles, and Goods (each as defined in the Code); (e) all of the Borrower’s Inventory and Equipment (each as
defined in the Code) and motor vehicles and trucks; (f) all of the Borrower’s monies, and any and all other property and
interests in property of the Borrower, including, without limitation, Investment Property, Instruments, Security Entitlements,
Uncertificated Securities, Certificated Securities, Chattel Paper, and Financial Assets (each as defined in the Code), now or hereafter
coming into the actual possession, custody or control of the Lender or any agent or Affiliate of the Lender in any way or for any
purpose (whether for safekeeping, deposit, custody, pledge, transmission, collection or otherwise), and, independent of and in
addition to the Lender’s rights of setoff, the balance of any account or any amount that may be owing from time to time by
the Lender to the Borrower; (g) all insurance proceeds of or relating to any of the foregoing property and interests in property,
and any key man life insurance policy covering the life of any officer or employee of Borrower; (h) all proceeds and profits derived
from the operation of the Borrower’s business; (i) all of the other assets and personal property of the Borrower; (j) the
Sinking Fund Account and the funds relating thereto; (k) all of the Borrower’s books and records, computer printouts, manuals
and correspondence relating to any of the foregoing and to such Borrower’s business; (k) all cash of the Borrower; and (l)
all accessions, improvements and additions to, substitutions for, and replacements, products, profits and proceeds of any of the
foregoing.

 

    	- 24 -

    	 

    

 

6.2           Preservation
of Collateral and Perfection of Security Interests Therein. The Borrower agrees that it shall execute and deliver to the Lender,
concurrently with the execution of this Agreement, and at any time or times hereafter at the request of the Lender, all financing
statements (and the Borrower shall pay the cost of filing or recording the same in all public offices deemed necessary by the Lender)
or other instruments and documents as the Lender may reasonably request, in a form satisfactory to the Lender, to perfect and keep
perfected the Liens in the Collateral or to otherwise protect and preserve the Collateral and the Lender’s Liens therein.
If the Borrower fails to do so, the Lender is authorized to sign any such financing statements (or, if no signature is required
in the filing jurisdiction, file such financing statements without the Borrower’s signature) as the Borrower’s agent.
The Borrower further agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing
statement is sufficient as a financing statement.

 

6.3           Loss
of Value of Collateral. The Borrower agrees to immediately notify the Lender of any material loss or depreciation of over $50,000
in the value of the Collateral or any portion thereof.

 

6.4           Right
to File Financing Statements. Notwithstanding anything to the contrary contained herein, the Lender may at any time and from
time to time file financing statements, continuation statements and amendments thereto that describe the Collateral in particular,
and which contain any other information required by the Code for the sufficiency or filing office acceptance of any financing statement,
continuation statement or amendment, including whether the Borrower is an organization, the type of organization and any organization
identification number issued to the Borrower. The Borrower agrees to furnish any such information to the Lender promptly upon request.
Any such financing statements, continuation statements or amendments may be signed by the Lender on behalf of the Borrower and
may be filed at any time with or without signature and in any jurisdiction as reasonably determined by the Lender.

 

    	- 25 -

    	 

    

 

6.5           Third
Party Agreements. The Borrower shall at any time and from time to time take such steps as the Lender may reasonably require
for the Lender: (i) to obtain an acknowledgment, in form and substance reasonably satisfactory to the Lender, of any third party
having possession of any of the Collateral that the third party holds for the benefit of the Lender, (ii) to obtain “control”
(as defined in the Code) of any Deposit Accounts, with any agreements establishing control to be in form and substance reasonably
satisfactory to the Lender, and (iii) otherwise to ensure the continued perfection and priority of the Lender’s security
interest in any of the Collateral and of the preservation of its rights therein.

 

6.6           All
Advances One Obligation. Payment of all Liabilities shall be secured by the Collateral and pursuant to certain of the terms
of this Agreement and the Financing Agreements. All loans or advances made to Borrower under this Agreement shall constitute one
Loan, and all of Borrower’s Liabilities shall constitute one general obligation secured by Lender’s Lien on all of
the Collateral and by all other Liens heretofore, now, or at any time or times granted to Lender to secure the Liabilities. Borrower
agrees that all of the rights of Lender set forth in this Agreement shall apply to any amendment, restatement or modification of,
or supplement to, this Agreement, any supplements or exhibits hereto and the Financing Agreements, unless otherwise agreed in writing
by the Lender.

 

6.7           Commercial
Tort Claims. If the Borrower shall at any time hereafter acquire a Commercial Tort Claim (as defined in the Code), the Borrower
shall promptly notify the Lender of same in a writing signed by the Borrower (describing such claim in reasonable detail) and grant
to the Lender in such writing (at the sole cost and expense of the Borrower) a continuing, first-priority security interest therein
and in the proceeds thereof, with such writing to be in form and substance satisfactory to the Lender in its sole and absolute
determination.

 

6.8           Sinking
Fund Account. Prior to the funding of the Term Loan on the Closing Date, the Borrower agrees to establish and hereby grants
the Lender a security interest in a restricted account (the “Sinking Fund Account”) held by the Lender to provide
funds to reimburse the Lender for amounts outstanding under the Term Loan. The Sinking Fund Account established with the Lender
shall be invested in such a manner as shall be mutually agreed upon among the Lender and the Borrower; and, in the event there
shall be no agreement, then as shall be determined by the Lender in its sole discretion. The Lender shall have sole access to the
Sinking Fund Account, provided, however, that the Lender may use such funds solely to repay amounts owed under the Term Loan upon
maturity of the Term Loan and to apply such funds to other Liabilities as and when the same become due and payable. Any and all
interest on the Sinking Fund Account shall be added to the Sinking Fund Account and shall be property of the Borrower subject to
the security interests granted herein and, upon repayment in full of the Liabilities and the termination of this Agreement, such
interest shall be paid to the Borrower; provided, however, that at any time an Event of Default has occurred and continuing, the
Borrower acknowledges and agrees that such interest may be applied to the Liabilities by the Lender. The failure of Borrower to
comply with the provisions of this paragraph shall be considered an Event of Default and immediately entitle the Lender to any
of the remedies provided in this Agreement. Nothing in this Section shall mitigate, limit or otherwise affect any of the Borrower's
obligations under this Agreement.

 

    	- 26 -

    	 

    

 

7.            REPRESENTATIONS
AND WARRANTIES.

 

The Borrower represents
and warrants that as of the date of this Agreement, and continuing as long as any Liabilities remain outstanding, and (even if
there shall be no such Liabilities outstanding) as long as this Agreement remains in effect:

 

7.1           Existence.
The Borrower is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware.
The Borrower is duly qualified and in good standing as a foreign limited liability company authorized to do business in the State
of North Carolina and each jurisdiction where such qualification is required because of the nature of its activities or properties.
The Borrower has all requisite limited liability company power to carry on its business as now being conducted and as proposed
to be conducted.

 

7.2           Authority.
The execution and delivery by the Borrower of this Agreement and all of the other Financing Agreements to which Borrower is a party
and the performance of its obligations hereunder and thereunder: (i) are within its limited liability company powers; (ii) are
duly authorized by the manager of the Borrower and, if applicable, the member of the Borrower; and (iii) are not in contravention
of the terms of its limited liability company agreement, or of any indenture, agreement or undertaking to which it is a party or
by which it or any of its property is bound. The execution and delivery by the Borrower of this Agreement and all of the other
Financing Agreements to which it is a party and the performance of its obligations hereunder and thereunder: (i) do not require
any governmental consent, registration or approval; (ii) do not contravene any contractual or governmental restriction binding
upon it; and (iii) will not, except in favor of Lender, result in the imposition of any Lien upon any property of Borrower under
any existing indenture, mortgage, deed of trust, loan or credit agreement or other material agreement or instrument to which it
is a party or by which it or any of its property may be bound or affected.

 

7.3           Binding
Effect. This Agreement and all of the other Financing Agreements to which any Credit Party is a party are the legal, valid
and binding obligations of such Credit Party and are enforceable against such Credit Party in accordance with their respective
terms, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditor’s
rights and remedies generally.

 

7.4           Financial
Data.

 

(a)          All
income statements, balance sheets, cash flow statements, statements of operations, financial statements, and other financial data
which have been or shall hereafter be furnished to the Lender for the purposes of or in connection with this Agreement do and will
present fairly in all material respects in accordance with GAAP, consistently applied, the financial condition of the Credit Parties
and the Operating Company, as applicable, as of the dates thereof and the results of its operations for the period(s) covered thereby.

 

(b)          Since
December 31, 2011, there has been no Material Adverse Change with respect to any Credit Party or the Operating Company.

 

    	- 27 -

    	 

    

 

7.5           Collateral.
Except for the Permitted Liens, all of the Borrower’s assets and property (including, without limitation, the Collateral
and the Real Property) are and will continue to be owned by Borrower (except for items of inventory disposed of in the ordinary
course of business), have been or will be fully paid for, and are free and clear of all Liens. No financing statement or other
document similar in effect covering all or any part of the Collateral is on file in any recording or filing office, other than
those identifying the Lender as the secured creditor. The organizational number assigned by the State of Delaware upon such Borrower’s
formation is 46-1710608.

 

7.6           Solvency.
Each Credit Party is solvent, is able to pay such Credit Party’s debts as they mature or become due, has capital sufficient
to carry on its business and all businesses in which it is about to engage, and now owns assets and property having a value both
at fair valuation and at present fair saleable value on a going concern basis (as determined in a manner and based upon assumptions
satisfactory to the Lender in its reasonable determination) greater than the amount required to pay all of its debts and liabilities,
including, without limitation, all of the Liabilities. No Credit Party will be rendered insolvent by the execution and delivery
of this Agreement or any Financing Agreement, or by completion of the transactions contemplated hereunder or thereunder.

 

7.7           Principal
Place of Business; State of Formation. The principal place of business and chief executive office of Borrower is located at
1920 Main Street, Suite 400, Irvine California, 92614. The books and records of the Borrower and all records of account are located
at the principal place of business and chief executive office of the Borrower. The Borrower’s state of formation is the State
of Delaware.

 

7.8           Other
Names. The Borrower has not used, and shall not hereafter use, any name (including, without limitation, any tradename, tradestyle,
assumed name, division name or any similar name).

 

7.9           Tax
Liabilities. Each of each Credit Party and, to the Borrower’s knowledge, the Operating Company has filed all federal,
state and local tax reports and returns required by any law or regulation to be filed by it, except for extensions duly obtained
or except as permitted under Section 8.4, and has either duly paid all taxes, duties and charges indicated due on the basis
of such returns and reports, or made adequate provision for the payment thereof, and the assessment of any material amount of additional
taxes in excess of those paid and reported is not reasonably expected.

 

7.10         Loans.
Except as otherwise permitted by Section 9.2 hereof, Borrower is not obligated on any loans or other Indebtedness.

 

7.11         Margin
Securities. No Credit Party owns any margin securities and none of the Loan advanced hereunder will be used for the purpose
of purchasing or carrying any margin securities or for the purpose of reducing or retiring any Indebtedness which was originally
incurred to purchase any margin securities or for any other purpose not permitted by Regulation U of the Board of Governors of
the Federal Reserve System.

 

7.12         Subsidiaries.
The Borrower has no subsidiaries.

 

    	- 28 -

    	 

    

 

7.13         Litigation
and Proceedings. No judgments are outstanding against any Credit Party or, to the knowledge of Borrower, the Operating Company,
nor is there as of any such date pending or, to the Borrower’s knowledge, threatened, any litigation, suit, action, contested
claim, or federal, state or municipal governmental proceeding by or against any Credit Party or the Operating Company or any of
its property, in each case, involving an aggregate amount of Fifty Thousand Dollars ($50,000) or more.

 

7.14         Other
Agreements. Neither any Credit Party, nor, to the Borrower’s knowledge, the Operating Company is in material default
under or in breach of any material agreement, contract, lease, or commitment to which it is a party or by which it is bound. The
Borrower does not know of any dispute regarding any agreement, contract, instrument, lease or commitment which could reasonably
be expected to have a Material Adverse Effect.

 

7.15         Compliance
with Laws and Regulations. The execution and delivery by Borrower of this Agreement and by each Credit Party of all of the
other Financing Agreements to which any Credit Party is a party and the performance of its obligations hereunder and thereunder
are not in contravention of any material law, rule or regulation, including, without limitation, Healthcare Laws. Each Credit Party
and, to the Borrower’s knowledge, the Operating Company has all licenses, authorizations, approvals and permits necessary
in connection with the operation of its business (including, without limitation, all certificates needed for the Operating Company
to participate in the Medicaid program). The Facility is operated as an assisted living and memory care facility and its licensed
bed capacity is as set forth on Schedule 7.15. The licenses, authorizations, permits and other approvals listed on Schedule
7.15 constitute all the licenses, authorizations, permits and other approvals required by the Operating Company to operate
the Facility at such licensed bed capacities. Each Credit Party and, to the Borrower’s knowledge, the Operating Company has
obtained all licenses, authorizations, approvals, licenses and permits necessary in connection with the operation of its business,
including, without limitation, licenses with respect to the Facility issued by the North Carolina Division of Health Service Regulation
Health and Human Services Commission designated as an assisted living facility. All such licenses, authorizations, approvals and
permits are in full force and effect and each Credit Party shall keep such items in full force and effect during the term of this
Agreement. The Real Estate Lease shall at all times during the term of this Agreement require that the Operating Company keep such
licenses, authorizations, approval and permits in full force and effect. Each Credit Party is in compliance with all laws, orders,
rules, regulations and ordinances of all federal, foreign, state and local governmental authorities applicable to it and its business,
operations, property, and assets, except to the extent any such non-compliance could not reasonably be expected to result in a
Material Adverse Effect. The Facility is not subject to any proceeding for revocation, suspension or issuance of a probationary
license or any certificate of need issued by any governmental authority and any Person succeeding to the functions thereof, and
there has not been instituted any Medicaid termination action by such commission. Neither any Credit Party nor, to the Borrower’s
knowledge, the Operating Company has received any notice from any governmental authority that such governmental authority has imposed
or intends to impose any enforcement actions, fines or penalties for any failure or alleged failure to comply with HIPAA.

 

7.16         Intellectual
Property. No Credit Party owns or otherwise possess any registered patents, patent applications, copyrights, trademarks, trademark
applications, trade names, or service marks. To the Borrower’s knowledge, none of any Credit Party’s intellectual property
infringes on the rights of any other Person.

 

    	- 29 -

    	 

    

 

7.17         Environmental
Matters. Neither any Credit Party nor, to the knowledge of the Borrower, the Operating Company, has Managed Hazardous Substances
on or off its Property other than in compliance with Environmental Laws, except to the extent any such non-compliance could not
reasonably be expected to result in a Material Adverse Effect. Each Credit Party and, to the knowledge of Borrower, the Operating
Company, has complied in all material respects with Environmental Laws regarding transfer, construction on and operation of its
business at the Property, including, but not limited to, notifying authorities, observing restrictions on use, transferring, modifying
or obtaining permits, licenses, approvals and registrations, making required notices, certifications and submissions, complying
with financial liability requirements, Managing Hazardous Substances and Responding to the presence or Release of Hazardous Substances
connected with operation of its business or Property. Neither any Credit Party nor, to the knowledge of the Borrower, the Operating
Company, has any contingent liability with respect to the Management of any Hazardous Substance that could reasonably be expected
to result in a Material Adverse Effect. During the term of this Agreement, the Borrower shall not permit (and shall cause the Operating
Company not to permit) others to, Manage, whether on or off Borrower’s Property, Hazardous Substances. The Borrower shall
take prompt action in material compliance with Environmental Laws to Respond to the on-site or off-site Release of Hazardous Substances
connected with operation of its business or Property. Neither any Credit Party nor, to the knowledge of the Borrower, the Operating
Company, has received any Environmental Notice.

 

7.18         Disclosure.
None of the representations or warranties made by any Credit Party herein or in any Financing Agreement to which such Credit Party
is a party and no other written information provided by the Credit Parties or their respective representatives to the Lender contains
any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Borrower has disclosed to the Lender all facts of which the Borrower
has knowledge which at any time hereafter might result in a Material Adverse Effect.

 

7.19         Pension
Related Matters. If applicable, each employee pension plan (other than a multiemployer plan within the meaning of Section 3(37)
of ERISA and to which any Credit Party or any ERISA Affiliate has or had any obligation to contribute (a “Multiemployer
Plan”)) maintained by any Credit Party or any of their respective ERISA Affiliates to which Title IV of ERISA applies,
if any, and (a) which is maintained for employees of any Credit Party or any of their respective ERISA Affiliates or (b) to which
any Credit Party or any of their ERISA Affiliates made, or was required to make, contributions at any time within the preceding
five (5) years (a “Plan”), complies, and is administered in accordance, with its terms and all material applicable
requirements of ERISA and of the Internal Revenue Code of 1986, as amended, and any successor statute thereto (the “Tax
Code”), and with all material applicable rulings and regulations issued under the provisions of ERISA and the Tax Code
setting forth those requirements. No “Reportable Event” or “Prohibited Transaction” (as each is defined
in ERISA) or withdrawal from a Multiemployer Plan caused by any Credit Party has occurred and no funding deficiency described in
Section 302 of ERISA caused by any Credit Party exists with respect to any Plan or Multiemployer Plan which could have a Material
Adverse Effect. If and to the extent applicable, the Credit Parties and each ERISA Affiliate have satisfied all of their respective
funding standards applicable to such Plans and Multiemployer Plans under Section 302 of ERISA and Section 412 of the Tax Code and
the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA (“PBGC”)
has not instituted any proceedings, and there exists no event or condition caused by any Credit Party which would constitute grounds
for the institution of proceedings by PBGC, to terminate any Plan or Multiemployer Plan under Section 4042 of ERISA which could
have a Material Adverse Effect.

 

    	- 30 -

    	 

    

 

7.20         Perfected
Security Interests. The Lien in favor of the Lender provided pursuant to Section 6.1 hereof
is a valid and, when properly perfected by the timely filings, deliveries, notations and other actions contemplated by the Financing
Agreements in the appropriate jurisdictions, will constitute the first priority security interest in the Collateral (subject only
to the Permitted Liens).

 

7.21         Real
Estate. As of the Closing Date, the Borrower owns or leases no Property other than the Real Property. The Borrower owns
good and marketable fee simple title to all of the Real Property. The Borrower has delivered true, correct
and complete copies of the fully-executed Real Estate Lease and all material instruments, agreements and documents entered into
in connection therewith (including all Exhibits and Schedules thereto) to the Lender on the Closing Date.

 

7.22         Ownership;
Consideration. Schedule 7.22 sets forth the correct legal name, jurisdiction of organization and, if applicable,
the organizational identification number assigned by the applicable jurisdiction of organization of the Credit Parties. The authorized
Capital Securities of each of the Credit Parties is as set forth on Schedule 7.22. All issued and outstanding Capital
Securities of each of the Credit Parties is duly authorized and validly issued, and if the Capital Securities of a corporate entity,
fully paid, nonassessable, and in each case is free and clear of all Liens other than those in favor of the Lender, and such Capital
Securities were issued in compliance with all applicable laws. The identity of the holders of the Capital Securities of each of
the Credit Parties and the percentage of their fully diluted ownership of the Capital Securities of each of the Credit Parties
as of the Closing Date is set forth on Schedule 7.22. As of the Closing Date there are no preemptive or other outstanding
rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from any Credit
Party of any Capital Securities of any such entity.

 

7.23         Broker’s
Fees. No Credit Party has any obligation to any Person in respect of any finder’s, brokers or similar fee in connection
with the Loan or this Agreement.

 

7.24         Investment
Company Act. No Credit Party is an “investment company” or a company “controlled” by an “investment
company”, within the meaning of the Investment Company Act of 1940, as amended.

 

7.25         Business
of Borrower. The sole business of the Borrower is to own the Real Property leased to the Operating Company. The Borrower is
not a party to any management agreement or similar type of management contract, other than the Real Estate Lease.

 

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7.26         Offenses
and Penalties Under the Medicaid Program. Neither any Credit Party nor, to the Borrower’s knowledge, the Operating Company
and/or officers of such Credit Party or, to the Borrower’s knowledge, the Operating Company is currently under investigation
or prosecution for, nor has any Credit Party, or to the Borrower’s knowledge, the Operating Company or any Affiliate or officer
of such Person been convicted of: (a) any offense related to the delivery of an item or service under the Medicaid program; (b)
a criminal offense related to neglect or abuse of patients in connection with the delivery of a health care item or service; (c)
fraud, theft, embezzlement or other financial misconduct; (d) the obstruction of an investigation of any crime referred to in subsections
(a) through (c) of this Section; or (e) unlawful manufacture, distribution, prescription, or dispensing of a controlled substance.
Neither any Credit Party nor, to the Borrower’s knowledge, the Operating Company and/or officers of such Credit Party or
Operating Company have been required to pay any civil money penalty under applicable laws regarding false, fraudulent or impermissible
claims or payments to induce a reduction or limitation of health care services to beneficiaries of any state or federal health
care program, nor, is any such Credit Party, Operating Company or and/or officer of such Person currently the subject of any investigation
or proceeding that may result in such payment. Neither any Credit Party nor the Operating Company and/or officers of such Credit
Party or Operating Company have been excluded from participation in the Medicaid program or any program funded under the “Block
grants” to States for Social Services (Title XX) Program.

 

7.27         Medicaid/Medicare.
Neither any Credit Party nor, to the Borrower’s knowledge, the Operating Company nor any officer or director of such Person
has engaged in any of the following: (a) knowingly and willfully making or causing to be made a false statement or representation
of a material fact in any application for any benefit or payment under Medicaid; (b) knowingly and willfully making or causing
to be made any false statement or representation of a material fact for use in determining rights to any benefit or payment under
Medicaid; (c) failing to disclose knowledge by a claimant of the occurrence of any event affecting the initial or continued right
to any benefit or payment under Medicaid on its own behalf or on behalf of another, with intent to secure such benefit or payment
fraudulently; (d) knowingly and willfully soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly
or indirectly, overtly or covertly, in cash or in kind or offering to pay such remuneration: (i) in return for referring any individual
to a Person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or
in part by Medicaid; or (ii) in return for purchasing, leasing or ordering or arranging for or recommending the purchasing, leasing
or ordering of any good, facility, service or item for which payment may be made in whole in part by Medicaid. Neither any Credit
Party nor the Operating Company has participated a Medicare reimbursement program for any reason in connection with the operation
of the Facility.

 

7.28         Absence
of Foreign or Enemy Status. Neither any Credit Party nor any Affiliate of such Credit Party is an "enemy" or an "ally
of the enemy" within the meaning of Section 2 of the Trading with the Enemy Act (50 U.S.C. App. §§ 1 et seq.), as
amended. Neither any Credit Party nor any Affiliate of such Credit Party is in violation of, nor will the use of the Loan violate,
the Trading with the Enemy Act, as amended, or any executive orders, proclamations or regulations issued pursuant thereto, including,
without limitation, regulations administered by the Office of Foreign Asset Control of the Department of the Treasury (31 C.F.R.
Subtitle B, Chapter V).

 

    	- 32 -

    	 

    

 

7.29         Labor
Matters. There are no strikes or other labor disputes pending or, to the knowledge of Borrower,
threatened against any Credit Party. All payments due from any Credit Party on account of wages and employee and retiree health
and welfare insurance and other benefits have been paid or accrued as a liability on its books.

 

7.30         USA
Patriot Act. Borrower represents and warrants to Lender that neither any Credit Party nor any of their Affiliates is identified
in any list of known or suspected terrorists published by any United States government agency (collectively, as such lists may
be amended or supplemented from time to time, referred to as the "Blocked Persons Lists") including, without limitation,
(a) the annex to Executive Order 13224 issued on September 23, 2001, and (b) the Specially Designated Nationals List published
by the Office of Foreign Assets Control.

 

7.31         Danby
House Purchase.

 

(a)          The
Danby House Purchase shall have been consummated contemporaneously with the execution and delivery of this Agreement in accordance
with the terms of the Danby House Purchase Agreement, subject to such modifications, supplements and waivers as the Lender shall
have approved.

 

(b)          No
party to the Danby House Purchase Agreement has waived, without the consent of the Lender, any condition precedent to its obligations
to close as set forth in the Danby House Purchase Agreement.

 

(c)          The
aggregate consideration payable under the Danby House Purchase Agreement shall be equal to $9,700,000.00.

 

(d)          True
and complete copies of all of the Danby House Purchase Documents have been delivered to the Lender, together with a true and complete
copy of each document to be delivered at the closing of the Danby House Purchase.

 

(e)          Except
as set forth in the Danby House Purchase Documents delivered to the Lender prior to the date hereof, there are no other agreements,
oral or written, with respect to which any Credit Party thereof has any obligation or liability with respect to the Danby House
Purchase.

 

(f)          No
Credit Party nor, to the knowledge of Borrower, any other Person party to the Danby House Purchase Agreement is in default in the
performance or compliance with any provisions thereof.

 

(g)          The
Danby House Purchase Agreement complies with, and the Danby House Purchase has been consummated in accordance with, all applicable
laws, including, without limitation, all Healthcare Laws.

 

(h)          The
Danby House Purchase Agreement is in full force and effect as of the date hereof and has not been terminated, rescinded or withdrawn.

 

    	- 33 -

    	 

    

 

(i)          All
material requisite approvals by governmental authorities having jurisdiction over the Danby House Seller, the Credit Parties and
other Persons referenced therein with respect to the transactions contemplated by the Danby House Purchase Agreement have been
obtained, and no such approvals impose any conditions to the consummation of the transactions contemplated by the Danby House Purchase
Agreement or to the conduct by any Credit Party of its business thereafter which have not been satisfied within the time periods
specified therein.

 

(j)          To
the knowledge of the Borrower, none of the Danby House Seller’s respective representations or warranties in the Danby House
Purchase Agreement contains any untrue statement of a material fact or omits any material fact necessary to make the statements
therein made, in the context in which made, not misleading.

 

8.            AFFIRMATIVE
COVENANTS.

 

The Borrower covenants and agrees that,
as long as any Liabilities remain outstanding, and (even if there shall be no such Liabilities outstanding) as long as this Agreement
remains in effect:

 

8.1           Reports,
Certificates and Other Information. The Borrower shall deliver or cause to be delivered to the Lender:

 

(a)          Credit
Party Annual Financial Statements. On or before the one hundred twentieth (120th) day after each Fiscal Year of
the Borrower, a copy of the annual consolidated and consolidating audited financial statements for the Borrower, prepared by an
independent certified public accountants selected by the Credit Parties (and reasonably approved by the Lender), together with,
at least, balance sheets and statements of income and cash flow for such period, prepared in conformity with GAAP.

 

(b)          Operating
Company Annual Financial Statements. On or before the one hundred twentieth (120th) day after each fiscal year of
the Operating Company commencing with the Fiscal Year ending December 31, 2012, a copy of the annual audited financial statements
for the Operating Company, prepared by independent certified public accountants selected by the Borrower (and reasonably approved
by the Lender), together with, at least, balance sheets and statements of income and cash flow for such period, prepared in conformity
with GAAP.

 

(c)          Quarterly
Reports. On or before the forty-fifth (45th) day after the end of each Fiscal Quarter (1) a copy of internally prepared
financial statements of the Borrower prepared in accordance with GAAP and in a manner substantially consistent with the financial
statements referred to in Section 8.1(a) hereof, signed on behalf of the Borrower by a Duly Authorized Person and consisting
of, at least, an income statement, a balance sheet, and statement of cash flow as at the close of such Fiscal Quarter and statements
of earnings for such Fiscal Quarter and for the period from the beginning of such Fiscal Year to the close of such Fiscal Quarter
and (2) a copy of internally prepared financial statements of the Operating Company prepared in accordance with GAAP and in a manner
substantially consistent with the financial statements referred to in Section 8.1(b) hereof but specific to the operations
of Operating Company at the Facility consisting of, at least, an income statement, a balance sheet, and statement of cash flow
as at the close of such Fiscal Quarter and statements of earnings for such Fiscal Quarter and for the period from the beginning
of such Fiscal Year to the close of such Fiscal Quarter.

 

    	- 34 -

    	 

    

 

(d)          Monthly
Reports. On or before the thirtieth (30th) day after the end of
each month, copies of all financial statements for the Facility for the preceding calendar month specific to the operations of
Operating Company at the Facility as such financial statements are required under to be prepared and delivered pursuant to the
Real Estate Lease.

 

(e)          Certificates.
Contemporaneously with the furnishing of each annual financial statement and within forty-five (45) calendar days of each Fiscal
Quarter, a duly completed compliance certificate with appropriate insertions, in form and substance reasonably satisfactory to
the Lender (a “Compliance Certificate”), dated the date of such annual financial statement or such Fiscal Quarter
and signed on behalf of the Borrower by a Duly Authorized Person, which Compliance Certificate shall state that no Default or Event
of Default has occurred and is continuing, or, if there is any such event, describes it and the steps, if any, being taken to cure
it. In addition, each Compliance Certificate shall contain a computation of, and show compliance with, the financial ratios and
restrictions set forth in Section 9.12 hereof. The computation and calculation of the financial ratios in each Compliance
Certificate shall be in form and substance reasonably acceptable to the Lender.

 

(f)          Real
Estate Taxes. As paid, evidence of timely payment of real estate taxes owed on the Real Property.

 

(g)          Tax
Returns. As soon as available, but not later than ten (10) days after the filing of any Credit Party’s or the Operating
Company’s annual tax returns each year, a copy of the annual tax returns for such Person for such tax year, all in reasonable
detail as requested by Lender.

 

(h)          Notice
of Default, Regulatory Matters, Litigation Matters or Adverse Change in Business. Promptly upon learning of the occurrence
of any of the following, written notice thereof which describes the same and the steps being taken by the Borrower with respect
thereto: (i) the occurrence of a Default or an Event of Default; (ii) except for actions described in clause (iv) below,
the institution or threatened institution of, or any adverse determination in, any litigation, arbitration proceeding or governmental
proceeding in which any injunctive relief is sought or in which money damages in excess of Fifty Thousand Dollars ($50,000) in
the aggregate are sought; (iii) the receipt of any written notice from any governmental agency concerning any material violation
or potential material violation of any regulations, rules or laws applicable to Borrower; (iv) the occurrence of any personal injury
or other action that is not covered by insurance (or if presumably covered by insurance, the applicable insurance company has not
confirmed coverage or liability for payment in writing) that could reasonably be expected to give rise to a tort claim against
the Borrower for an amount equal to or in excess of Fifty Thousand Dollars ($50,000); or (v) any Material Adverse Change.

 

(i)          Insurance
Reports. (i) At any time after a Default and upon the request of the Lender, a certificate signed by a Duly Authorized
Person that summarizes the property, casualty, liability and malpractice insurance policies carried by the Borrower and that certifies
that the Lender is the named additional insured and lender’s loss payee of all property and casualty insurance policies (such
certificate to be in form and substance satisfactory to the Lender), and (ii) written notification of any material change
in any such insurance by the Borrower within five (5) Business Days after receipt of any notice (whether formal or informal) of
such change by any of its insurers.

 

    	- 35 -

    	 

    

 

(j)          Interim
Reports. Promptly upon receipt thereof, copies of any management letters and interim and supplemental reports submitted to
any Credit Party by the independent accountants in connection with any interim audit of the books of Borrower and copies of each
management control letter provided to Borrower by independent accountants.

 

(k)          Affiliate
Transactions. Upon the Lender’s request from time to time, a reasonably detailed description of each of the transactions
between the Borrower and any of its Affiliates during the time period requested by the Lender, which shall include, without limitation,
the amount of money either paid or received, as applicable, by the Borrower in such transactions.

 

(j)          Annual
Budgets. As soon as available following the end of each Fiscal Year, but in any event not later than thirty (30) days after
the end of such Fiscal Year, an annual operating plan for the Facility for the following Fiscal Year, which (i) includes a statement
of all of the material assumptions on which such plan is based, (ii) includes monthly balance sheets, income statements and statements
of cash flows for the following year, (iii) integrates sales, gross profits, operating expenses, operating profit and cash flow
projections, and (iv) includes a description of estimated restructuring expenses to be incurred for the following year, all prepared
on the same basis and in similar detail as that on which operating results are reported (and in the case of cash flow projections,
representing management’s good faith estimates of future financial performance based on historical performance), and including
plans for Capital Expenditures.

 

(k)          Lease
Reports. Promptly upon receipt, copies of any material reports or notifications required to be delivered by the Operating Company
to the Borrower pursuant to the terms of the Real Estate Lease.

 

(l)          Other
Information. Such other information, certificates, schedules, exhibits or documents (financial or otherwise) concerning the
Facility, the Credit Parties, the Operating Company and their respective operations, business, properties, condition or otherwise
as the Lender may reasonably request from time to time.

 

8.2           Inspection;
Audit Fees. Borrower will keep proper books of record and account in accordance with GAAP in which full, true and correct entries
shall be made of all dealings and transactions in relation to its business and activities. The Lender, or any Person designated
by the Lender in writing from time to time, shall have the right: (a) from time to time hereafter (but no more than two (2) times
per calendar year prior to an Event of Default), to call and visit at the Borrower's place or places of business (or any other
place where the Collateral or any information relating thereto is kept or located) during ordinary business hours and, prior to
any Event of Default, upon reasonable advance notice (and after any Event of Default, at any time during normal business hours
without the requirement of any advance notice), (i) to inspect, audit, check and make copies of and extracts from the Borrower's
books, records, journals, orders, receipts and any correspondence and other data relating to its business or to any transactions
between the parties hereto, and (ii) to discuss the affairs, finances and business of the Credit Parties with any of the Duly Authorized
Persons, and (b) to make such verification concerning the Collateral as the Lender may consider reasonable under the circumstances.
The Borrower agrees to pay on demand all costs, expenses and reasonable fees incurred by Lender in connection with any inspections
or audits of the Borrower performed by the Lender under this Section. All such amounts incurred by the Lender hereunder shall bear
interest hereunder and shall be additional Liabilities of the Borrower to the Lender, secured by the Collateral, if not promptly
paid upon the request of the Lender.

 

    	- 36 -

    	 

    

 

8.3           Conduct
of Business. The Borrower shall maintain its limited liability company existence, shall maintain in full force and effect all
licenses, permits, authorizations, bonds, franchises, leases, patents, trademarks and other intellectual property, contracts and
other rights necessary to the conduct of its business, shall continue in, and limit its operations to, the same general line of
business as that currently conducted and shall comply with all applicable laws, orders, regulations and ordinances of all federal,
foreign, state and local governmental authorities, including, without limitation, Healthcare Laws, except to the extent any such
non-compliance could reasonably be expected to result in a Material Adverse Effect. The Borrower shall keep proper books of record
and account in which full and true entries will be made of all dealings or transactions of or in relation to the business and affairs
of the Borrower, in accordance with GAAP, consistently applied.

 

8.4           Claims
and Taxes. The Borrower agrees to indemnify and hold the Lender harmless from and against any and all claims, demands, liabilities,
losses, damages, penalties, costs and expenses (including, without limitation, reasonable attorneys’ fees) relating to or
in any way arising out of the possession, use, operation or control of the Borrower’s property and assets, including, without
limitation, the Collateral. The Borrower agrees to pay or cause to be paid all license fees, bonding premiums and related taxes
and charges and shall pay or cause to be paid all of the Borrower’s real and personal property taxes, including taxes with
respect to the Real Property, assessments and charges and all of the Borrower’s franchise, income, unemployment, use, excise,
old age benefit, withholding, sales and other taxes and other governmental charges assessed against the Borrower, or payable by
the Borrower, at such times and in such manner as to prevent any penalty from accruing or any Lien from attaching to its property,
provided that the Borrower shall have the right to contest in good faith, by an appropriate proceeding promptly initiated and diligently
conducted, the validity, amount or imposition of any such tax, assessment or charge, and upon such good faith contest to delay
or refuse payment thereof, if (a) the Borrower establishes adequate reserves to cover such contested taxes, assessments or charges,
and (b) such contest could not be expected to result in a Material Adverse Effect.

 

8.5           State
of Formation. The State of Delaware shall remain the Borrower’s State of formation, unless: (a) the Borrower provides
the Lender with at least thirty (30) days prior written notice of any proposed change, (b) no Event of Default then exists or will
exist immediately after such proposed change, and (c) the Borrower provides the Lender with, at Borrower’s sole cost and
expense, such financing statements, and if applicable, landlord waivers, bailee letters and processor letters, and such other agreements
and documents as the Lender shall reasonably request in connection therewith.

 

    	- 37 -

    	 

    

 

8.6           Liability
Insurance. The Borrower shall maintain or cause the Operating Company to maintain, at its expense, general liability insurance
and environmental liability insurance in such amounts and with such deductibles as are acceptable to the Lender in its reasonable
determination and shall deliver to the Lender the original (or a certified) copy of each policy of insurance and evidence of the
payment of all premiums therefor. In addition, the Borrower shall maintain, or cause the Operating Company to maintain, at its
expense, business interruption insurance in such amounts and with such deductibles as are acceptable to the Lender in its reasonable
determination and shall deliver to the Lender the original (or a certified) copy of each policy of insurance and evidence of the
payment of all premiums therefor. Such policies of insurance shall contain an endorsement showing the Lender as additional insured
thereunder and providing that the insurance company will give the Lender at least thirty (30) days prior written notice before
any such policy or policies of insurance shall be altered or canceled.

 

8.7           Property
Insurance. The Borrower shall, or shall cause the Operating Company, at its expense, to keep and maintain its assets insured
against loss or damage by fire, theft, explosion, spoilage, and all other hazards and risks ordinarily insured against by other
owners or users of such properties in similar businesses in an amount at least equal to the full insurable value of all such property.
All such policies of insurance shall be in form and substance reasonably satisfactory to the Lender. The Borrower shall deliver
to the Lender the original (or a certified) copy of each policy of insurance and evidence of payment of all premiums therefor.
Such policies of insurance shall contain an endorsement, in form and substance satisfactory to the Lender, showing the Lender as
“Lender’s Loss Payee” and all loss payable to the Lender, as its interests may appear, as provided in this Section
8.7. Such endorsement shall provide that such insurance company will give the Lender at least thirty (30) days prior written
notice before any such policy or policies of insurance shall be altered or canceled and that no act or default of the Borrower
or any other Person shall affect the right of the Lender to recover under such policy or policies of insurance in case of loss
or damage. The Borrower hereby directs all insurers under such policies of insurance to pay all proceeds of insurance policies
directly to the Lender and the Lender shall absent an Event of Default permit the Borrower to use such proceeds to restore or rebuild
the damaged property as the Borrower shall determine in its reasonable and good faith determination. Upon the occurrence and during
the continuance of an Event of Default, the Borrower irrevocably makes, constitutes and appoints the Lender (and all officers,
employees or agents designated by the Lender in writing to the Borrower) as the Borrower’s true and lawful attorney-in-fact
for the purpose of making, settling and adjusting claims under all such policies of insurance, endorsing the name of the Borrower
on any check, draft, instrument or other item of payment received by the Borrower or the Lender pursuant to any such policies of
insurance and for making all determinations and decisions with respect to such policies of insurance.

 

    	- 38 -

    	 

    

 

UNLESS THE BORROWER
PROVIDES THE LENDER WITH EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT WITHIN FIVE BUSINESS DAYS FOLLOWING LENDER’S
WRITTEN REQUEST, THE LENDER MAY PURCHASE INSURANCE AT THE BORROWER’S EXPENSE TO PROTECT THE LENDER’S INTERESTS IN THE
COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT THE INTERESTS IN THE COLLATERAL. THE COVERAGE PURCHASED BY THE LENDER MAY
NOT PAY ANY CLAIMS THAT THE BORROWER MAKES OR ANY CLAIM THAT IS MADE AGAINST THE BORROWER IN CONNECTION WITH THE COLLATERAL. THE
BORROWER MAY LATER CANCEL ANY SUCH INSURANCE PURCHASED BY THE LENDER, BUT ONLY AFTER PROVIDING THE LENDER WITH EVIDENCE THAT THE
BORROWER HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF THE LENDER PURCHASES INSURANCE FOR THE COLLATERAL, THE BORROWER
WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST AND ANY OTHER CHARGES THAT THE LENDER MAY IMPOSE IN CONNECTION
WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF
THE INSURANCE MAY BE ADDED TO THE OBLIGATIONS SECURED HEREBY. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF INSURANCE
THE BORROWER MAY BE ABLE TO OBTAIN ON ITS OWN.

 

8.8           Environmental.
The Borrower shall promptly notify and furnish Lender with a copy of any and all Environmental Notices which are received by it
or any Credit Party in connection with the Property. The Borrower shall or shall cause the Operating Company to take prompt and
appropriate action in response to any and all such Environmental Notices and shall promptly furnish Lender with a description of
the Borrower’s or such Credit Party’s Response thereto. The Borrower shall (a) obtain and maintain all permits required
under all applicable federal, state, and local Environmental Laws, except as to which the failure to obtain or maintain would not
have a Material Adverse Effect; and (b) keep and maintain the Property and each portion thereof in compliance with, and not cause
or permit the Property or any portion thereof to be in violation of, any Environmental Law, except as to which the failure to comply
with or the violation of which, would not have a Material Adverse Effect.

 

8.9           Banking
Relationship. Commencing as reasonably practicable as possible hereafter (but in no event later than thirty (30) calendar days
of the Closing Date), the Borrower shall at all times thereafter maintain all of its primary deposit and operating accounts and
all other banking accounts (other than payroll, tax and trust accounts) with the Lender and the Borrower shall cause all rent and
other payments owed to it by the Operating Company under the Real Estate Lease to be paid by the Operating Company directly into
a designated lease deposit account maintained with the Lender (the “Lease Deposit Account”). The Borrower shall
use the Lender as the primary cash management bank for all of its cash management activities (other than payroll, tax and trust
accounts), including, without limitation, the Lender acting as the principal depository and remittance agent for the Borrower.

 

8.10         Intellectual
Property. If after the Closing Date the Borrower shall own or otherwise possess any registered patents, copyrights, trademarks,
trade names, or service marks (or file an application to attempt to register any of the foregoing), the Borrower shall promptly
notify the Lender in writing of same and execute and deliver any documents or instruments (at the Borrower’s sole cost and
expense) reasonably required by Lender to perfect a security interest in and lien on any such federally registered intellectual
property in favor of the Lender and assist in the filing of such documents or instruments with the United States Patent and Trademark
Office and/or United States Copyright Office/Library of Congress or other applicable registrar.

 

    	- 39 -

    	 

    

 

8.11         Change
of Location; Etc. No Collateral may be moved to another location within the continental United States unless: (a) the Borrower
provides the Lender with at least thirty (30) days prior written notice, (b) no Event of Default then exists, and (c) the Borrower
provides the Lender with, at Borrower’s sole cost and expense, such financing statements, landlord waivers, bailee and processor
letters and other such agreements and documents as the Lender shall reasonably request. The Borrower shall or shall cause the Operating
Company to defend and protect the Collateral against and from all claims and demands of all Persons (other than the holders of
Permitted Liens) at any time claiming any interest therein adverse to the Lender. If the Borrower desires to change its principal
place of business and chief executive office, the Borrower shall notify the Lender thereof in writing no later than thirty (30)
days prior to such change and the Borrower shall provide the Lender with, at Borrower’s sole cost and expense, such financing
statements and other documents as the Lender shall reasonably request in connection with such change. If the Borrower shall decide
to change the location where its books and records are maintained, the Borrower shall notify the Lender thereof in writing no later
than thirty (30) days prior to such change.

 

8.12         Health
Care Related Matters. The Operating Company shall continue to be duly licensed by the State of North Carolina to operate the
Facility and shall otherwise maintain Medicaid provider status. The Borrower shall cause the Operating Company to maintain all
licenses, permits, certificates of need, reimbursement contracts and programs, and any other agreements necessary for the use and
operation of the Facility or as may be necessary for participation of the Operating Company in Medicaid and other applicable reimbursement
programs, to remain in full force and effect at all times. The Operating Company shall at all times maintain in full force and
effect a Medicaid certification and a Medicaid provider agreement. Each Credit Party and the Operating Company shall at all times
be in material compliance with all rules and regulations of the CMS and shall take all necessary steps to protect personally identifiable
health information for each patient substantially in accordance with the CMS laws and regulations.

 

8.13         US
Patriot Act. Borrower covenants to Lender that if Borrower becomes aware that any Credit Party or their respective Affiliates
is identified on any Blocked Persons List (as identified in Section 7.30 hereof), Borrower shall immediately notify Lender
in writing of such information. Borrower further agrees that in the event that it or any Affiliate is at any time identified on
any Blocked Persons List, such event shall be an Event of Default, and shall entitle Lender to exercise any and all remedies provided
in any Financing Agreements or otherwise permitted by law. In addition, in response to any such notice Lender may immediately contact
the Office of Foreign Assets Control and any other government agency Lender deems appropriate in order to comply with its obligations
under any law, regulation, order or decree regulating or relating to terrorism and international money laundering.

 

8.14         Further
Assurances. The Borrower will, at its own cost and expense, cause to be promptly and duly taken, executed, acknowledged and
delivered all such further acts, documents and assurances as may from time to time be necessary or as the Lender may from time
to time reasonably request in order to carry out the intent and purposes of this Agreement and the other the Financing Agreements
and the transactions contemplated thereby, including all such actions to establish, create, preserve, protect and perfect a first-priority
Lien in favor of the Lender on the Collateral (including Collateral acquired after the date hereof), subject to Permitted Liens,
including, as set forth in Section 8.16 of this Agreement.

 

    	- 40 -

    	 

    

 

8.15         Single
Purpose Entity Provisions. The business and purposes of the Borrower is and will continue to be limited to the following:

 

(i)            to
acquire, own, hold, lease, operate, manage, maintain, develop and/or improve the Real Property;

 

(ii)           to
enter into and perform its obligations under the Financing Agreements;

 

(iii)          to
sell, transfer, service, convey, dispose of, pledge, assign, borrow money against, finance or otherwise deal with the Real Property
to the extent permitted hereunder and under the Financing Agreements;

 

(iv)          to
lease the Real Property to the Operating Company; and

 

(v)           to
engage in any lawful act or activity and to exercise any powers permitted to entities of its type pursuant to the laws of its state
of organization that are related or incidental to and necessary, convenient or advisable for the accomplishment of the above mentioned
purposes.

 

The Borrower agrees
and covenants that it shall:

 

(i)            not
own any asset or property other than (A) a fee interest in the Real Property, and (B) incidental personal property necessary for
the ownership or operation of the Property;

 

(ii)           remain
solvent and pay its debts and liabilities (including, as applicable, shared personnel and overhead expenses) from its assets, to
the extent of its assets, as the same shall become due;

 

(iii)          do
or cause to be done all things necessary or desirable to observe organizational formalities of the Borrower and preserve its existence;
and

 

(iv)          to
the extent of cash flow available from operations, maintain adequate capital for the normal obligations reasonably foreseeable
in a business of its size and character and in light of its contemplated business operations.

 

9.            NEGATIVE
COVENANTS.

 

The Borrower covenants
and agrees that as long as any (other than contingent indemnification obligations) remain outstanding, and (even if there shall
be no such Liabilities outstanding) as long as this Agreement remains in effect (unless the Lender shall give its prior written
consent thereto):

 

    	- 41 -

    	 

    

 

9.1           Encumbrances.
The Borrower shall not create, incur, assume or suffer to exist any Lien of any nature whatsoever on any of its assets or property,
including, without limitation, the Collateral, other than the following (“Permitted Liens”):
(a) Liens securing the payment of taxes, either not yet due or the validity of which is being contested in good faith by appropriate
proceedings, and as to which the Borrower shall, if appropriate under GAAP, has set aside on its books and records adequate reserves,
provided, that such contest does not have a Material Adverse Effect; (b) deposits under
workmen’s compensation, unemployment insurance, social security and other similar laws; (c) Liens in favor of the Lender;
(d) liens imposed by law, such as mechanics’, materialmen’s, landlord’s, warehousemen’s, carriers’
and other similar liens, securing obligations incurred in the ordinary course of business that are not past due for more than ten
(10) Business Days or that are being contested in good faith by appropriate proceedings and for which appropriate reserves have
been established or that are not yet due and payable; and (e) purchase money security interests upon or in any property acquired
or held by the Borrower in the ordinary course of business to secure the purchase price of such property so long as: (i) the aggregate
indebtedness relating to such purchase money security interests and Capitalized Lease Obligations does not at any time exceed Fifty
Thousand Dollars ($50,000) in the aggregate at any time, (ii) each such lien shall only attach to the property to be acquired;
and (iii) the indebtedness incurred shall not exceed one hundred percent (100%) of the purchase price of the item or items purchased.

 

9.2           Indebtedness.
Borrower shall not incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any Indebtedness,
except (a) the Liabilities, and (b) the indebtedness not to at any time exceed Fifty Thousand Dollars ($50,000) relating to the
purchase money security interests and Capitalized Lease Obligations permitted pursuant to Section 9.1(e) hereof.

 

9.3           Consolidations,
Mergers or Acquisitions. Without the prior written consent of the Lender, the Borrower shall not be a party to any merger,
consolidation, or exchange of stock or other equity, or purchase or otherwise acquire all or substantially all of the assets or
stock of any class of, or any other evidence of an equity interest in, or any partnership, limited liability company, or joint
venture interest in, any other Person, or sell, transfer, convey or lease all or any substantial part of its assets or property,
or sell or assign, with or without recourse, any receivables. The Borrower shall not form or establish any subsidiary without the
Lender’s prior written consent.

 

9.4           Investments
or Loans. The Borrower shall not make, incur, assume or permit to exist any loans or advances, or any investments in or to
any other Person, except (a) investments in short-term direct obligations of the United States Government, (b) investments in negotiable
certificates of deposit issued by the Lender or by any other bank satisfactory to the Lender, payable to the order of the Borrower
or to bearer, and (c) investments in commercial paper rated at least A-1 by Standard & Poor’s Corporation or P-1 by Moody’s
Investors Service, Inc., or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating
agencies cease publishing ratings of investments.

 

9.5           Guarantees.
The Borrower shall not guarantee, endorse or otherwise in any way become or be responsible for obligations of any other Person,
whether by agreement to purchase the Indebtedness of any other Person or through the purchase of goods, supplies or services, or
maintenance of working capital or other balance sheet covenants or conditions, or by way of stock purchase, capital contribution,
advance or loan for the purpose of paying or discharging any Indebtedness or obligation of such other Person or otherwise, except
endorsements of negotiable instruments for collection in the ordinary course of business.

 

    	- 42 -

    	 

    

 

9.6           Disposal
of Property. The Borrower shall not sell, assign, lease, transfer or otherwise dispose of any of its properties, assets and
rights to any Person except (i) sales of Inventory in the ordinary course of business, and (ii) sales of obsolete Equipment being
replaced in the ordinary course of business with other Equipment with a fair market value and orderly liquidation value equal to
or greater than the Equipment being replaced.

 

9.7           Use
of Proceeds. The Borrower shall not use the proceeds of the Loan and the Loan for any purpose other than to pay a portion of
the purchase price under the Danby House Purchase Agreement.

 

9.8           Loans
to Officers; No Consulting and Management Fees. The Borrower shall not make any loans to its members, managers, officers, employees,
Affiliates, or to any other Person, and the Borrower shall not declare, make or pay any consulting, management fees, investment
banking fees, or similar fees or payments to its members, managers, officers, employees, agents, or Affiliates or any other Person,
whether for services rendered to the Borrower or otherwise.

 

9.9           Distributions
and Equity Redemptions. The Borrower shall not (i) declare, make or pay any dividend or other distribution (whether in cash,
property or rights or obligations) to or for the benefit of any officer, manager, member, Affiliate or any other Person or (ii)
purchase or redeem any of the membership interests or units of the Borrower or any options or warrants with respect thereto, or
set aside any funds for any such purpose; provided, however, that the Borrower may make (y) during each Fiscal Quarter, distributions
in cash to Parent in an amount estimated by the manager of the Borrower to equal the amount necessary for the respective
members of Parent to pay their actual state and United States federal income tax liabilities in respect of income earned by the
Borrower (the “Tax Liability Amount”); provided, however, that any such distributions shall be net of
any prior year loss carry-forward; provided, further that any distributions made to Parent as permitted under this Section 9.9(y)
during any Fiscal Year which exceed the actual Tax Liability Amount of the members of Parent as calculated at the end of such Fiscal
Year shall be contributed back to the Borrower by the Parent promptly, but in any event, within thirty (30) days after the end
of such Fiscal Year; and (z) distributions to Parent within forty-five (45) days after the end of each Fiscal Quarter; provided
that immediately before and after giving effect to any such distributions (1) no Default or Event of Default has occurred and is
continuing and (2) financial statements necessary to determine current compliance with the financial covenants set forth in Section
9.12 of this Agreement have been delivered to Lender along with a true, correct and complete copy of the Compliance Certificate
required to be delivered for such Fiscal Quarter not less than ten (10) days prior to any such distributions.

 

9.10         Payments
in Respect of Subordinated Debt. The Borrower shall not make any payment in respect of any Indebtedness for borrowed money
that is subordinated to the Liabilities (including, without limitation, the Subordinated Debt, unless otherwise permitted expressly
under the terms of a subordination agreement in form and substance acceptable to the Lender).

 

9.11         Transactions
with Affiliates. Subject to the proviso contained in Sections 9.8 and 9.9 hereof, the Borrower shall not transfer
any cash or property to any Affiliate or enter into any transaction, including, without limitation, the purchase, lease, sale or
exchange of property or the rendering of any service to any Affiliate; provided, however, that the Borrower may enter
into transactions with Affiliates for fair value in the ordinary course of business pursuant to terms that are no less favorable
to the Borrower than the terms upon which such transfers or transactions would have been made had such transfers or transactions
been made to or with a Person that is not an Affiliate.

 

    	- 43 -

    	 

    

 

9.12         Financial
Ratios.

 

(a)          Minimum
EBITDAR to Rent Expense Ratio. The Borrower shall not permit the ratio of EBITDAR to Rent Expense to be less than 1.10 to 1.00,
measured as of the last day of each Fiscal Quarter, for the prior four fiscal quarters, provided,
however, that (i) with respect to the calculation for the Fiscal Quarter ended March 31, 2013, the ratio set forth in
this Section 9.12(a) will be calculated for the three (3) month period then ended, (ii) with respect to the calculation for the
Fiscal Quarter ended June 30, 2013, the ratio set forth in this Section 9.12(a) will be calculated for the six (6) month period
then ended, (iii) with respect to the calculation for the Fiscal Quarter ended September 30, 2013, the ratio set forth in this
Section 9.12(a) will be calculated for the nine (9) month period then ended and (iv) with respect to the calculation for the Fiscal
Quarter ended December 31, 2013 and for the calculation as of each Fiscal Quarter thereafter, the ratio set forth in this Section
9.12(a) will be calculated for the twelve (12) month period then ended

 

(b)          Minimum
Fixed Charge Coverage Ratio. The Borrower shall not permit the Fixed Charge Coverage Ratio to be less than 1.10 to 1.00, measured
as of the last day of each Fiscal Quarter for the prior four fiscal quarters.

 

(c)          Acknowledgement.
The Borrower acknowledges and agrees that the calculation and computation of the foregoing financial ratios and covenants shall
be pursuant to and in accordance with Section 8.1(d) hereof.

 

9.13         Change
in Nature of Business. The Borrower shall not make any change in the nature of Borrower’s business carried on as of the
Closing Date. Without the prior written consent of the Lender, which may be granted or withheld in the Lender’ sole discretion,
the Borrower shall not permit any Person other than the Operating Company and the Management Company to operate or control the
Facility, whether by management agreement, joint venture agreement or otherwise.

 

9.14         Other
Agreements. The Borrower shall not enter into any agreement containing any provision which would be violated or breached by
the performance of its obligations hereunder or under any Financing Agreement to which Borrower is a party or which would violate
or breach any provision hereof or thereof, or that would or could reasonably be expected to adversely affect the Lender’s
interests or rights under this Agreement and the other Financing Agreements to which Borrower is a party or the likelihood that
the Liabilities will be paid in full when due, nor shall the Borrower’s limited liability company agreement be amended or
modified in any way that would violate or breach any provision hereof or of any Financing Agreement, or that would or could reasonably
be expected to adversely affect the Lender’s interests or rights under this Agreement and the other Financing Agreements
or the likelihood that the Liabilities will be paid in full when due; provided, prior to any amendment or modification of the Borrower’s
limited liability company agreement, the Borrower shall furnish a true, correct and complete copy of any such proposed amendment
or modification to the Lender.

 

    	- 44 -

    	 

    

 

9.15         Lock
Box Accounts. The Borrower shall not establish or open any lockbox or blocked account with any Person (other than the Lender)
after the Closing Date.

 

9.16         State
of Formation and Name. Except in accordance with Section 8.5 hereof, the Borrower shall not change its state of formation
from that of the State of Delaware or its name as identified in the Preamble hereto.

 

9.17         Environmental.
The Borrower shall not permit, or shall cause the Operating Company not to permit, any Property (including the Real Property) or
any portion thereof to be involved in the use, generation, manufacture, storage, disposal or transportation of Hazardous Substances
except in compliance with all Environmental Laws.

 

9.18         Real
Estate Lease and Management Agreement. The Borrower shall not amend, modify or supplement the Real Estate Lease or the Management
Agreement in any manner that would or could be expected to adversely affect the Lender’s interests under this Agreement or
the other Financing Agreements, or the likelihood that the Liabilities will be paid in full when due, without the Lender’s
prior written consent. In any event, the Borrower shall provide the Lender with fifteen (15) days’ written notice prior to
entering into any non-adverse amendment, modification or supplement to the Real Estate Lease or the Management Agreement allowed
under this Section 9.18, which such notice shall indicate a reasonably detailed description of such non-adverse amendment, modification
or supplement.

 

9.19         Fiscal
Year. The Borrower shall not change its Fiscal Year.

 

9.20         Tax
Election. The Borrower shall not be permitted to change its tax election with the Internal Revenue Service without the prior
written consent of the Lender.

 

9.21         Amendments
or Waivers. Without the prior written consent of the Lender, Borrower shall not permit its organizational documents (e.g.,
charter, certificate or limited partnership agreement, or other similar organizational documents) to be amended or any provision
thereof waived, the effect of which amendment or waiver could reasonably be expected to have a Material Adverse Effect or otherwise
be materially adverse to the to the rights and interests of the Lender.

 

10.          DEFAULT,
RIGHTS AND REMEDIES OF THE LENDER.

 

10.1         Event
of Default. Any one or more of the following shall constitute an “Event of Default” under this Agreement:

 

(a)          the
Borrower fails to pay (i) any principal or interest payable hereunder or under the Note on the date due, declared due or demanded
in accordance with the terms hereof, or (ii) any other cost, expense, fee or other amount payable to the Lender under this Agreement
or under any other Financing Agreement (including, without limitation, the Note) within three (3) calendar days after the date
when any such payment is due, declared due or demanded in accordance with the terms hereof;

 

    	- 45 -

    	 

    

 

(b)          the
Borrower fails or neglects to perform, keep or observe any of the covenants, conditions or agreements set forth in Sections
2.2, 8.1, 8.5, 8.6, 8.7, 8.9, 8.11, 8.12 or 8.l5 hereof, or any of the Sections of Article 9 hereof;

 

(c)          any
Credit Party fails or neglects to perform, keep or observe any of the covenants, conditions, promises or agreements contained in
this Agreement (other than those specified in Section 10.1(b) hereof) or in any Financing Agreement to which it is a party
and such failure or neglect shall continue for a period of twenty (20) calendar days;

 

(d)          any
representation or warranty heretofore, now or hereafter made by any Credit Party in this Agreement or any of the other Financing
Agreements is untrue, misleading or incorrect in any material respect, or any schedule, certificate, statement, report, financial
data, notice, or writing furnished at any time by any Credit Party to the Lender is untrue, misleading or incorrect in any material
respect, on the date as of which the facts set forth therein are stated or certified;

 

(e)          a
judgment, decree or order requiring payment in excess of One Hundred Thousand Dollars ($100,000) shall be rendered against any
Credit Party and such judgment or order shall remain unsatisfied or undischarged and in effect for thirty (30) consecutive days
without a stay of enforcement or execution, provided that this clause (e) shall not apply to any judgment for which such
Credit Party is fully insured and with respect to which the insurer has admitted liability;

 

(f)          a
notice of Lien, levy or assessment is filed or recorded with respect to any of the assets of any Credit Party (including, without
limitation, the Collateral), by the United States, or any department, agency or instrumentality thereof, or by any state, county,
municipality or other governmental agency or any taxes or debts owing at any time or times hereafter to any one or more of them
become a Lien, upon any of the assets of any Credit Party (including, without limitation, the Collateral), provided that this clause
(f) shall not apply to any Liens, levies, or assessments which a Credit Party is contesting in good faith (provided the Borrower
has complied with the provisions of clauses (a) and (b) of Section 8.4 hereof) or which relate to current
taxes not yet due and payable;

 

(g)          any
material portion of the Collateral or any portion of the Real Property is attached, seized, subjected to a writ or distress warrant,
or is levied upon, or comes within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors;

 

(h)          a
proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute
is filed against any Credit Party, and any such proceeding is not dismissed within forty-five (45) days of the date of its filing,
or a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law
or statute is filed by any Credit Party, or any Credit Party makes an assignment for the benefit of creditors, or any Credit Party
takes any action to authorize any of the foregoing;

 

(i)          any
Credit Party voluntarily or involuntarily dissolves or is dissolved, or its existence terminates or is terminated;

 

    	- 46 -

    	 

    

 

(j)           any
Credit Party becomes insolvent or fails generally to pay its debts as they become due;

 

(k)          any
Credit Party is enjoined, restrained, or in any way prevented by the order of any court or any administrative or regulatory agency
from conducting all or any material part of its business affairs;

 

(l)           a
breach by any Credit Party shall occur under any material agreement, document or instrument (other than an agreement, document
or instrument evidencing the lending of money), whether heretofore, now or hereafter existing between the Borrower and any other
Person and the effect of such breach will or is could reasonably be expected to have or create a Material Adverse Effect;

 

(m)          any
Credit Party shall fail to make any payment due on any other obligation for borrowed money or shall be in breach of any agreement
evidencing the lending of money and the effect of such failure or breach would result in the acceleration of any obligation, liability
or indebtedness in excess of Fifty Thousand Dollars ($50,000); provided that the Credit Parties shall have fifteen (15) days to
contest in good faith such breach or purported breach as long as the Credit Parties have established an adequate reserve to cover
such amount and such contest is not reasonably likely to have or cause a Material Adverse Effect;

 

(n)           there
shall be instituted in any court criminal proceedings against any Credit Party, the Operating Company or their respective Affiliates,
or any Credit Party, the Operating Company or their respective Affiliates shall be indicted for any crime, in either case for which
forfeiture of a material amount of its property is a potential penalty, or any governmental enforcement action involving any criminal
penalties or exclusion from any federal or state health care program shall have been imposed against any such Persons;

 

(o)           a
Change of Control shall occur other than a Change of Control with respect to which the Lender has provided prior written consent,
such consent to be provided in the Lender’s sole discretion;

 

(p)          any
Lien securing the Liabilities shall, in whole or in part, cease to be a perfected first priority Lien (subject only to the Permitted
Liens); this Agreement, any of the Financing Agreements, shall (except in accordance with its terms), in whole or in part, terminate,
cease to be effective or cease to be the legally valid, binding and enforceable obligations of any Credit Party party thereto;
or any Credit Party shall directly or indirectly, contest in any manner such effectiveness, validity, binding nature or enforceability;

 

(q)          any
material breach of, noncompliance with or default under any Financing Agreement by any party thereto (other than by the Lender)
after expiration of any applicable notice and cure period;

 

(r)            institution
by the PBGC, a Credit Party or any ERISA Affiliate of steps to terminate any Plan or to organize, withdraw from or terminate a
Multiemployer Plan if as a result of such reorganization, withdrawal or termination, any Credit Party or any ERISA Affiliate could
be required to make a contribution to such Plan or Multiemployer Plan, or could incur a liability or obligation to such Plan or
Multiemployer Plan, in excess of One Hundred Thousand Dollars ($100,000), or (ii) a contribution failure occurs with respect to
any Plan sufficient to give rise to a lien under ERISA;

 

    	- 47 -

    	 

    

 

(s)          an
“event of default” shall occur under the Real Estate Lease or the Management Agreement after the expiration of any
applicable notice and cure period therein, if any, or the Real Estate Lease or the Management Agreement shall terminate, or the
Borrower shall cease to own the Real Property, or a state or federal regulatory agency shall have revoked a Medicaid qualification
or any other license, permit or certificate that is material to the operation of the Facility or the Real Property as currently
conducted, regardless of whether such license, permit, certificate or qualification was held by or originally issued for the benefit
of the Borrower, a lessor or any other Person, including the Operating Company;

 

(t)          except
as may be permitted under Section 9.13 hereof, the Management Agreement shall be terminated or assigned by the Management Company
or the Management Company (or its subsidiaries or affiliates) shall cease to actively manage the Facility;

 

(u)         a
Material Adverse Change shall occur; and/or

 

(v)         there
shall occur with respect to the Facility any Medicaid survey deficiencies at Level I, J, K, L or worse (i) which deficiencies are
not cured within the amount of time permitted by the applicable reviewing agency; (ii) which result in the imposition by any Government
Authority or the applicable state survey agency of sanctions in the form of either a program termination, temporary management,
denial of payment for new admission (which continues for thirty (30) days or more) and/or closure of the Facility and (iii) which
sanctions could have a Material Adverse Effect as determined by Lender in its reasonable discretion.

 

10.2         Acceleration.
Upon the occurrence of any Event of Default described in Sections 10.1(h), (i), or (j), the Commitment (if they have not
theretofore terminated) shall automatically and immediately terminate and all of the Liabilities shall immediately and automatically,
without presentment, demand, protest or notice of any kind (all of which are hereby expressly waived), be immediately due and payable;
and upon the occurrence and during the continuance of any other Event of Default, the Lender may at its sole option declare the
Commitment (if they have not theretofore terminated) to be terminated and any or all of the Liabilities may, at the sole option
of the Lender, and without presentment, demand, protest or notice of any kind (all of which are hereby expressly waived), be declared,
and thereupon shall become, immediately due and payable, whereupon the Commitment shall immediately terminate.

 

    	- 48 -

    	 

    

 

10.3         Rights
and Remedies Generally. Upon the occurrence and during the continuance of any Event of Default, the Lender shall have, in addition
to any other rights and remedies contained in this Agreement and in any of the other Financing Agreements, all of the rights and
remedies of a secured party under the Code or other applicable laws, all of which rights and remedies shall be cumulative, and
non-exclusive, to the extent permitted by law, including, without limitation, the right of Lender to sell, assign, or lease any
or all of the Collateral or the Real Property. Upon notice to Borrower after an Event of Default and during the continuance thereof,
Borrower at its own expense shall assemble all or any part of the Collateral as determined by Lender and make it available to Lender
at any location designated by Lender. In such event, Borrower shall, at its sole cost and expense, store and keep any Collateral
so assembled at such location pending further action by Lender and provide such security guards and maintenance services as shall
be necessary to protect and preserve such Collateral. In addition to all such rights and remedies, the sale, lease or other disposition
of the Collateral, or any part thereof, by the Lender after an Event of Default and during the continuance thereof may be for cash,
credit or any combination thereof, and the Lender may purchase all or any part of the Collateral at public or, if permitted by
law, private sale, and in lieu of actual payment of such purchase price, may set-off
the amount of such purchase price against the Liabilities of the Borrower then owing. Any sales of such Collateral may be adjourned
from time to time with or without notice. The Lender may, in its sole discretion, cause the Collateral to remain on the Borrower’s
premises, at the Borrower’s expense, pending sale or other disposition of such Collateral. The Lender shall have the right
after an Event of Default and during the continuance thereof to conduct such sales on the Borrower’s premises, at the Borrower’s
expense, or elsewhere, on such occasion or occasions as the Lender may see fit.

 

10.4         Entry
Upon Premises and Access to Information. Upon the occurrence and during the continuance of any Event of Default, the Lender
shall have the right to enter upon the premises of the Borrower where the Collateral is located without any obligation to pay rent
to the Borrower, or any other place or places where such Collateral is believed to be located and kept, and remove such Collateral
therefrom to the premises of the Lender or any agent of the Lender, for such time as the Lender may desire, in order to effectively
collect or liquidate such Collateral. Upon the occurrence and during the continuance of any Event of Default, the Lender shall
have the right to obtain access to the Borrower’s data processing equipment, computer hardware and software relating to the
Collateral and to use all of the foregoing and the information contained therein in any manner the Lender deems appropriate. Upon
the occurrence and during the continuance of any Event of Default, the Lender shall have the right to notify post office authorities
to change the address for delivery of the Borrower’s mail to an address designated by the Lender and to receive, open and
process all mail addressed to the Borrower to the extent such mail is in connection with accounts receivable collections
provided that such action does not violate any of the Operating Company’s residents’ rights to privacy under applicable
law.

 

10.5         Sale
or Other Disposition of Collateral by the Lender. Any notice required to be given by the Lender of a sale, lease or other disposition
or other intended action by the Lender, with respect to any of the Collateral or the Real Property, which is deposited in the United
States mails, postage prepaid and duly addressed to the Borrower at the address specified in Section 11.12 hereof, at least
ten (10) calendar days prior to such proposed action shall constitute fair and reasonable notice to the Borrower of any such action.
The net proceeds realized by the Lender upon any such sale or other disposition, after deduction for the expense of retaking, holding,
preparing for sale, selling or the like and the attorneys’ and paralegal’ fees and legal expenses incurred by the Lender
in connection therewith, shall be applied as provided herein toward satisfaction of the Liabilities, including, without limitation,
such Liabilities described in Sections 8.2 and 11.2 hereof. The Lender shall account to the Borrower for any surplus
realized upon such sale or other disposition, and the Borrower shall remain liable for any deficiency. The commencement of any
action, legal or equitable, or the rendering of any judgment or decree for any deficiency shall not affect the Lender’s Liens
in the Collateral until the Liabilities are fully paid. The Borrower agrees that the Lender has no obligation to preserve rights
to the Collateral against any other Person. If and to the extent applicable, the Lender is hereby granted a license or other right
to use, without charge, the Borrower’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names,
tradestyles, trademarks, service marks and advertising matter or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale and selling any such Collateral or the Real Property, and the Borrower’s
rights and benefits under all licenses and franchise agreements, if any, shall inure to the Lender’s benefit until the Liabilities
of the Borrower are paid in full.

 

    	- 49 -

    	 

    

 

10.6         Waiver
of Demand. Demand, presentment, protest and notice of nonpayment are hereby waived by the Borrower. The Borrower also waives
the benefit of all valuation, appraisal and exemption laws.

 

10.7         Waiver
of Notice. TO THE FULLEST EXTENT PERMITTED BY LAW, UPON THE OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT, THE
BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY THE LENDER OF ITS RIGHTS TO REPOSSESS
THE COLLATERAL WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.

 

11.         MISCELLANEOUS.

 

11.1         Waiver.
The Lender’s failure, at any time or times hereafter, to require strict performance by any Credit Party of any provision
of this Agreement or the Financing Agreements shall not waive, affect or diminish any right of the Lender thereafter to demand
strict compliance and performance therewith. Any suspension or waiver by the Lender of an Event of Default under this Agreement
or a default under any of the other Financing Agreements shall not suspend, waive or affect any other Event of Default under this
Agreement or any other default under any of the other Financing Agreements, whether the same is prior or subsequent thereto and
whether of the same or of a different kind or character. None of the undertakings, agreements, warranties, covenants and representations
of the Borrower contained in this Agreement or any of the other Financing Agreements and no Event of Default under this Agreement
or default under any of the other Financing Agreements shall be deemed to have been suspended or waived by the Lender unless such
suspension or waiver is in writing signed by an officer of the Lender, and directed to the Borrower specifying such suspension
or waiver.

 

11.2         Costs
and Attorneys’ Fees.

 

(a)          The
Borrower agrees to pay on demand all of the costs and expenses of the Lender (including, without limitation, the reasonable fees
and expenses of the Lender’s counsel, and all UCC filing and lien search fees, and, if applicable, real estate appraisal
fees, survey fees, recording, field examination (with such field examination being subject to Section 8.2) and title insurance
costs, and any environmental report or analysis) in connection with the structuring, preparation, negotiation, execution, and delivery
of: (i) this Agreement, the Financing Agreements and all other instruments, agreements, certificates or documents provided for
herein or delivered or to be delivered hereunder, and (ii) any and all amendments, modifications, supplements and waivers executed
and delivered pursuant hereto or any Financing Agreement or in connection herewith or therewith. The Borrower further agrees that
the Lender, in its sole discretion, may deduct all such unpaid amounts from the aggregate proceeds of the Loan or debit such amounts
from the operating accounts of the Borrower maintained with the Lender.

 

    	- 50 -

    	 

    

 

(b)          The
costs and expenses that the Lender incurs in any manner or way with respect to the following shall be part of the Liabilities,
payable by the Borrower on demand if at any time after the date of this Agreement the Lender: (i) employs counsel in good faith
for advice or other representation (A) with respect to the amendment, modification or enforcement of this Agreement or the
Financing Agreements, or with respect to any Collateral securing the Liabilities hereunder, (B) to represent the Lender in
any work-out or any type of restructuring of the Liabilities, or any litigation, contest, dispute, suit or proceeding or to commence,
defend or intervene or to take any other action in or with respect to any litigation, contest, dispute, suit or proceeding (whether
instituted by the Lender, the Borrower or any other Person) in any way or respect relating to this Agreement, the Financing Agreements,
the Borrower’s affairs or any Collateral hereunder or (C) to enforce any of the rights of the Lender with respect to
the Borrower provided in this Agreement, under any of the Financing Agreements, or otherwise (whether at law or in equity); (ii)
takes any action to protect, preserve, store, ship, appraise, prepare for sale, collect, sell, liquidate or otherwise dispose of
any Collateral in accordance with the terms hereunder; and/or (iii) seeks to enforce or enforces any of the rights and remedies
of the Lender with respect to the Borrower or any guarantor of the Liabilities. Without limiting the generality of the foregoing,
such expenses, costs, charges and fees include: reasonable fees, costs and expenses of attorneys, accountants and consultants;
court costs and expenses; court reporter fees, costs and expenses; long distance telephone charges; reasonable travel costs; and
courier and telecopier charges.

 

(c)          The
Borrower further agrees to pay, and to save the Lender harmless from all liability for, any documentary stamp tax, intangible tax,
or other stamp tax or taxes of any kind which may be payable in connection with or related to the execution or delivery of this
Agreement, the Financing Agreements, the borrowings hereunder, the issuance of the Note or of any other instruments, agreements,
certificates or documents provided for herein or delivered or to be delivered hereunder or in connection herewith, provided that
the Borrower shall not be liable for Lender’s income tax liabilities.

 

(d)          All
of the Borrower’s obligations provided for in this Section 11.2 shall be Liabilities secured by the Collateral and
the Real Property and shall survive repayment of the Loan or any termination of this Agreement or any Financing Agreements.

 

11.3         Expenditures
by the Lender. In the event the Borrower shall fail to pay taxes, insurance, audit fees and expenses, filing, recording and
search fees, assessments, fees, costs or expenses which the Borrower is, under any of the terms hereof or of any of the other Financing
Agreements, required to pay, or fails to keep the Collateral free from other Liens, except as permitted herein, the Lender may,
in its sole discretion, pay or make expenditures for any or all of such purposes, and the amounts so expended, together with interest
thereon at the Default Rate (from the date the obligation or liability of Borrower is charged or incurred until actually paid in
full to Lender) and shall be part of the Liabilities of the Borrower, payable on demand and secured by the Collateral.

 

    	- 51 -

    	 

    

 

11.4         Custody
and Preservation of Collateral. The Lender shall be deemed to have exercised reasonable care in the custody and preservation
of any of the Collateral in its possession if it takes such action for that purpose as the Borrower shall request in writing, but
failure by the Lender to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and
no failure by the Lender to preserve or protect any right with respect to such Collateral against prior parties, or to do any act
with respect to the preservation of such Collateral not so requested by a Borrower, shall of itself be deemed a failure to exercise
reasonable care in the custody or preservation of such Collateral.

 

11.5         Reliance
by the Lender. The Borrower acknowledges that the Lender, in entering into this Agreement and agreeing to make the Loan and
otherwise extend credit to the Borrower hereunder, has relied upon the accuracy of the covenants, agreements, representations and
warranties made herein by the Borrower and the information delivered by the Borrower to the Lender in connection herewith (including,
without limitation, all financial information and data).

 

11.6         Assignability;
Parties. This Agreement (including, without limitation, any and all of the Borrower’s rights, obligations and liabilities
hereunder) may not be assigned by the Borrower without the prior written consent of the Lender. Whenever in this Agreement there
is reference made to any of the parties hereto, such reference shall be deemed to include, wherever applicable, a reference to
the successors and permitted assigns of the Borrower and the successors and assigns of the Lender.

 

11.7         Severability;
Construction. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Agreement. The parties hereto have participated jointly in the negotiation and drafting
of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party
by virtue of the authorship of any of the provisions of this Agreement.

 

11.8         Application
of Payments. Notwithstanding any contrary provision contained in this Agreement or in any of the other Financing Agreements,
after the occurrence and during the continuance of an Event of Default the Borrower irrevocably waives the right to direct the
application of any and all payments at any time or times hereafter received by the Lender from the Borrower or with respect to
any of the Collateral, and the Borrower does hereby irrevocably agree that the Lender shall have the continuing exclusive right
to apply and reapply any and all payments received at any time or times hereafter, whether with respect to the Collateral or otherwise:
(i) first, to the payment and satisfaction of all sums paid and costs and expenses incurred by the Lender hereunder or otherwise
in connection herewith, including such monies paid or incurred in connection with protecting, preserving or realizing upon the
Collateral or enforcing any of the terms hereof, including reasonable attorneys’ fees and court costs, together with any
interest thereon (but without preference or priority of principal over interest or of interest over principal); (ii) second, to
the payment and satisfaction of the remaining Liabilities, whether or not then due (in whatever order the Lender elects), both
for interest and principal; and (iii) last, the balance, if any, after all of the Liabilities have been indefeasibly paid in full,
to the Borrower or as otherwise required by applicable law.

 

    	- 52 -

    	 

    

 

11.9         Marshalling;
Payments Set Aside. The Lender shall be under no obligation to marshall any assets in favor of the Borrower or any other Person
or against or in payment of any or all of the Liabilities. To the extent that the Borrower makes a payment or payments to the Lender
or the Lender enforces its Liens or exercises its rights of setoff, and such payment or payments or the proceeds of such enforcement
or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required
to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable
cause, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall automatically
be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

 

11.10       Sections
and Titles; UCC Termination Statements. The sections and titles contained in this Agreement shall be without substantive meaning
or content of any kind whatsoever and are not a part of the agreement between the parties hereto. At such time as all of the Liabilities
shall have been indefeasibly paid in full and this Agreement shall terminate in accordance with its terms, the Lender will, upon
Borrower’s written request and at the Borrower’s cost and expense, authorize the filing of all UCC termination statements
required by the Borrower to evidence the termination of the Liens in the Collateral in favor of the Lender and the Lender will
sign a customary payoff letter that evidences the termination of the grant of the security interest in its favor by the Borrower
as provided pursuant to Section 6.1 hereof.

 

11.11       Continuing
Effect; Inconsistency. This Agreement, the Lender’s Liens in the Collateral, and all of the other Financing Agreements
shall continue in full force and effect so long as any Liabilities shall be owed to the Lender, and (even if there shall be no
such Liabilities outstanding) so long as this Agreement has not been terminated as provided in Section 2.8 hereof. To the
extent any terms or provisions contained in any Financing Agreement are inconsistent or conflict with the terms and provisions
of this Agreement, the terms and provisions of this Agreement shall control and govern.

 

11.12       Notices.
Except as otherwise expressly provided herein, any notice required or desired to be served, given or delivered hereunder shall
be in writing, and shall be deemed to have been validly served, given or delivered upon the earlier of (a) personal delivery to
the address set forth below, (b) in the case of facsimile transmission, when transmitted and (c) in the case of mailed notice,
five (5) days after deposit in the United States mails, with proper postage for certified mail, return receipt requested, prepaid,
or in the case of notice by Federal Express or other reputable overnight courier service, one (1) Business Day after delivery to
such courier service; provided, however, that if any notice is tendered to an addressee and delivery thereof is refused by such
addressee, such notice shall be effective upon such tender unless expressly set forth in such notice. Notices to be provided pursuant
to this Agreement shall be as follows: (i) If to the Lender at: The PrivateBank and Trust Company, 120 S. LaSalle St., Chicago,
Illinois 60603; Attention: Adam D. Panos; Telephone No. (312) 564-1278; Facsimile No. (312) 564-6889; with a copy to: c/o Ungaretti
& Harris LLP, 70 W. Madison, Suite 3500, Chicago, Illinois, 60602; Attention: James Broeking, Esq.; Telephone No. (312) 977-4109;
Facsimile No. (312) 977-4405; (ii) If to the Borrower at: c/o Cornerstone Real Estate Funds, 1920 Main Street, Suite 400, Irvine
California, 92614, Attn: Kent Eikanas, Telephone No. (949) 812-4335; Facsimile No. (949) 250-0592; with a copy to: Hanson Bridgett,
LLP, 425 Market Street, 26th Floor, San Francisco, California, 94105, Attention: Jennifer Berland, Telephone No. (415)
995-5837; Facsimile No. (415) 995-3409; or to such other address as each party designates to the other in the manner herein prescribed.

 

    	- 53 -

    	 

    

 

11.13       Equitable
Relief. The Borrower recognizes that, in the event the Borrower fails to perform, observe or discharge any of its obligations
or liabilities under this Agreement, any remedy at law may prove to be inadequate relief to the Lender; therefore, the Borrower
agrees that the Lender, if the Lender so requests, shall be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving actual damages.

 

11.14   
   Entire Agreement. This Agreement, together with the Financing Agreements executed in connection
herewith, constitutes the entire agreement among the parties with respect to the subject matter hereof, and supersedes all
prior written or oral understandings, discussions and agreements with respect thereto (including, without limitation, any
term sheet or commitment letter). This Agreement may be amended or modified only by mutual agreement of the parties evidenced
in writing and signed by the party to be charged therewith. Time is of the essence hereof with respect to the
Borrower’s obligations hereunder. The Recitals hereto are hereby incorporated into this Agreement by this reference
thereto.

 

11.15       Participations
and Assignments. The Lender shall have the right, without the consent of the Borrower, to sell participations in, or assignments
of, all or any portion of its rights and interest under this Agreement, the Liabilities and any of the Financing Agreements. The
Lender may furnish any information concerning the Borrower in the possession of the Lender from time to time to participants (including
prospective participants) provided that such Person agrees to comply with Section 11.21. In addition and without limiting
the foregoing, Lender may at any time pledge or assign a security interest in all or any portion of
its rights under this Agreement to secure obligations of Lender, including any pledge or assignment to secure obligations to a
Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest.

 

11.16       Indemnity.
The Borrower agrees to defend, protect, indemnify and hold harmless the Lender and each and all of its officers, directors, employees,
attorneys, affiliates, and agents (“Indemnified Parties”) from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements of counsel for the Indemnified Parties in connection with
any investigative, administrative or judicial proceeding, whether or not the Indemnified Parties shall be designated by a party
thereto, or otherwise), which may be imposed on, incurred by, or asserted against any Indemnified Party (whether direct, indirect
or consequential, and whether based on any federal or state laws or other statutory regulations, including, without limitation,
securities, environmental and commercial laws and regulations, under common law or at equitable cause, or on contract or otherwise)
in any manner relating to or arising out of this Agreement or the other Financing Agreements, or any act, event or transaction
related or attendant thereto, the making and the management of the Loan (including, without limitation, any liability under federal,
state or local environmental laws or regulations) or the use or intended use of the proceeds of the Loan hereunder; provided,
that the Borrower shall not have any obligation to any Indemnified Party hereunder with respect to matters caused by or resulting
from the willful misconduct or gross negligence of such Indemnified Party. To the extent that the undertaking to indemnify, pay
and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy,
the Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment
and satisfaction of all matters incurred by the Indemnified Parties. Any liability, obligation, loss, damage, penalty, cost or
expense incurred by the Indemnified Parties shall be paid to the Indemnified Parties on demand, together with interest thereon
at the Default Rate from the date incurred by the Indemnified Parties until paid by the Borrower, be added to the Liabilities,
and be secured by the Collateral and the Real Property. The provisions of and undertakings and indemnifications set out in this
Section 11.16 shall survive the satisfaction and payment of the Liabilities of the Borrower and the termination of this
Agreement.

 

    	- 54 -

    	 

    

 

11.17       Representations
and Warranties. Notwithstanding anything to the contrary contained herein, each representation or warranty contained in this
Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and the other Financing
Agreements and the making of the Loan and the repayment of the Liabilities hereunder.

 

11.18       Counterparts;
Faxes. This Agreement and any amendment or supplement hereto or any waiver granted in connection herewith may be executed in
any number of counterparts and by the different parties on separate counterparts and each such counterpart shall be deemed to be
an original, but all such counterparts shall together constitute but one and the same Agreement. A signature hereto sent or delivered
by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes.

 

11.19       Limitation
of Liability of Lender. It is hereby expressly agreed that:

 

(a)          Lender
may conclusively rely and shall be protected in acting or refraining from acting upon any document, instrument, certificate, instruction
or signature believed to be genuine and may assume and shall be protected in assuming that any Person purporting to give any notice
or instructions in connection with any transaction to which this Agreement relates has been duly authorized to do so. Lender shall
not be obligated to make any inquiry as to the authority, capacity, existence or identity of any Person purporting to have executed
any such document or instrument or have made any such signature or purporting to give any such notice or instructions;

 

(b)          Lender
shall not be liable for any acts, omissions, errors of judgment or mistakes of fact or law, including, without limitation, acts,
omissions, errors or mistakes with respect to the Collateral, except for those arising out of or in connection with Lender’s
gross negligence or willful misconduct. Without limiting the generality of the foregoing, except as required by applicable law,
Lender shall be under no obligation to take any steps necessary to preserve rights in the Collateral against any other parties,
but may do so at its option, and all expenses incurred in connection therewith shall be payable by Borrower; and

 

    	- 55 -

    	 

    

 

(c)          Lender
shall not be liable for any action taken in good faith and believed to be authorized or within the rights or powers conferred by
this Agreement and the other Financing Agreements.

 

11.20       Borrower
Authorizing Accounting Firm. Borrower shall authorize its accounting firm and/or service bureaus to provide Lender with such
information as is requested by Lender in accordance with this Agreement. Borrower authorizes Lender
upon prior written notice to the Borrower to, at any time while a Default or Event of Default exists or, if a Default or Event
of Default does not exist, upon prior written consent of the Borrower, contact directly any such accounting firm and/or service
bureaus to obtain such information.

 

11.21       Confidentiality.
Lender shall hold all non-public information regarding the Borrower and obtained by Lender pursuant hereto confidential and shall
not disclose any such information, except that disclosure of such information may be made (i) to Lender’s agents, employees,
subsidiaries, Affiliates, attorneys, auditors, professional consultants, rating agencies, insurance industry associations and portfolio
management services, (ii) to prospective transferees or purchasers of any interest in the Loan or Liabilities, and to prospective
contractual counterparties (or the professional advisors thereto) in any Interest Rate Protection Agreement permitted hereby, provided
that any such Persons shall have agreed to be bound by the provisions of this Section 11.21, (iii) as required by law, subpoena,
judicial order or similar order and in connection with any litigation, investigation or proceeding, (iv) as may be required in
connection with the examination, audit or similar investigation of such Person and (v) to a Person that is a trustee, investment
advisor, collateral manager, servicer, noteholder or secured party in a Securitization (as hereinafter defined) in connection with
the administration, servicing and reporting on the assets serving as collateral for such Securitization. For the purposes of this
Section, “Securitization” shall mean a public or private offering by Lender or any of its Affiliates or their respective
successors and assigns, of securities which represent an interest in, or which are collateralized, in whole or in party, by the
Loan. Confidential information shall not include information that either: (i) is in the public domain, or becomes part of the public
domain after disclosure to such Person through no fault of such Person, or (ii) is disclosed to such Person by a Person other than
the Borrower or an Affiliate of Borrower (or Borrower’s accountants, attorneys or other advisors or agents), provided Lender
does not have actual knowledge that such Person is prohibited from disclosing such information. The obligations of Lender under
this Section 11.21 shall supersede and replace the obligations of Lender under any confidentiality agreement in respect
of this financing executed and delivered by Lender prior to the date hereof.

 

11.22       Customer
Identification - USA Patriot Act Notice. The Lender hereby notifies the Borrower that pursuant to the requirements of the USA
Patriot Act (Title III of Pub. L. 107-56, signed into law October 26, 2001) (the “Patriot Act”), and the Lender’s
policies and practices, the Lender is required to obtain, verify and record certain information and documentation that identifies
the Borrower, which information includes the name and address of the Borrower and such other information that will allow the Lender
to identify the Borrower in accordance with the Patriot Act.

 

11.23       SUBMISSION
TO JURISDICTION; WAIVER OF VENUE. THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY:

 

    	- 56 -

    	 

    

 

 

(a)          SUBMITS
FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER FINANCING AGREEMENTS TO
WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION
OF THE COURTS OF THE STATE OF ILLINOIS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS AND APPELLATE
COURTS FROM ANY THEREOF;

 

(b)          CONSENTS
THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW IN CONNECTION
WITH ANY SUCH ACTION OR PROCEEDING (i) ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING
IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;
AND

 

(c)          AGREES
THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY CERTIFIED MAIL (OR ANY SUBSTANTIALLY
SIMILAR FORM OF MAIL), POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO THE BORROWER AT ITS ADDRESS SET FORTH ABOVE OR AT SUCH OTHER
ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. THE BORROWER AGREES THAT SUCH SERVICE, TO THE FULLEST EXTENT
PERMITTED BY LAW (i) SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE BORROWER IN ANY SUIT, ACTION OR PROCEEDING,
AND (ii) SHALL BE TAKEN AND HELD TO BE VALID PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO THE BORROWER. SOLELY TO THE EXTENT
PROVIDED BY APPLICABLE LAW, SHOULD THE BORROWER, AFTER BEING SERVED, FAIL TO APPEAR OR ANSWER TO ANY SUMMONS, COMPLAINT, PROCESS
OR PAPERS SO SERVED WITHIN THE NUMBER OF DAYS PRESCRIBED BY LAW AFTER THE DELIVERY OR MAILING THEREOF, THE BORROWER SHALL BE DEEMED
IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED BY THE COURT AGAINST THE BORROWER AS DEMANDED OR PRAYED FOR IN SUCH SUMMONS,
COMPLAINT, PROCESS OR PAPERS. NOTHING HEREIN SHALL AFFECT THE LENDER’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED
BY LAW, OR LIMIT THE LENDER’S RIGHT TO BRING PROCEEDINGS AGAINST THE BORROWER OR ITS PROPERTY IN ANY COURT OR ANY OTHER JURISDICTION.

 

11.24       GOVERNING
LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ALL RESPECTS IN ACCORDANCE WITH, AND ENFORCED AND GOVERNED BY THE INTERNAL LAWS OF
THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

 

    	- 57 -

    	 

    

 

11.25       JURY
TRIAL. THE BORROWER AND THE LENDER HEREBY IRREVOCABLY AND KNOWINGLY WAIVE (TO THE FULLEST EXTENT PERMITTED BY LAW) ANY RIGHT
TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING, WITHOUT LIMITATION, ANY COUNTERCLAIM) ARISING OUT OF THIS AGREEMENT,
THE FINANCING AGREEMENTS OR ANY OTHER AGREEMENTS OR TRANSACTIONS RELATED HERETO OR THERETO, INCLUDING, WITHOUT LIMITATION, ANY
ACTION OR PROCEEDING (A) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY INSTRUMENT, DOCUMENT
OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (B) ARISING FROM ANY DISPUTE OR CONTROVERSY
IN CONNECTION WITH OR RELATED TO THIS AGREEMENT AND THE FINANCING AGREEMENTS. THE LENDER AND THE BORROWER AGREE THAT ANY SUCH ACTION
OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY.

 

[Signature Page Follows]

 

    	- 58 -

    	 

    

 

IN WITNESS WHEREOF, this Term Loan
and Security Agreement has been duly executed as of the day and year first above written.

 

	 	BORROWER:
	 	 
	 	HP
    WINSTON-SALEM LLC
	 	 
	 	By: Cornerstone Core Properties REIT, Inc., a Maryland corporation, its Manager
	 	 	 	 	 
	 	 	By:	 	
	 	 	Name:	Kent Eikanas
	 	 	Title:	President
	 	 	 	 
	 	LENDER:
	 	 
	 	THE PRIVATEBANK AND TRUST COMPANY
	 	 	 	 
	 	By:	 	 
	 	 	Name:	 	 
	 	 	Title:	 	 

 

Term Loan and Security Agreementa50553536ex10_1.htm

EXHIBIT 10.1

 

Option and License Agreement

 

  

  

  

 

Confidential Treatment Requested.  Confidential portions of this document have been redacted and have been separately filed with the Commission.

 

 

 

 

 

OPTION AND LICENSE AGREEMENT

 

Dated February 4, 2013

 

By and Between

 

Opexa Therapeutics, Inc.

 

and

 

Ares Trading SA

  

  

  

 

 

TABLE OF CONTENTS

	 	 	
Page

	 	 	 
	
ARTICLE 1

	
DEFINITIONS

	
1

 

	
ARTICLE 2

	
OPTION AND ABILI-T TRIAL

	
13

 

	
2.1

	
Option

	
13

 

	
2.2

	
Continued Performance of Abili-T Trial

	
13

 

	
2.3

	
Abili-T Trial-related Reporting

	
14

 

	
ARTICLE 3

	
GOVERNANCE

	
14

 

	
3.1

	
Joint Steering Committee

	
14

 

	
3.2

	
Joint Steering Committee Membership

	
14

 

	
3.3

	
Joint Steering Committee Meetings

	
14

 

	
3.4

	
Joint Steering Committee Decisions

	
15

 

	
3.5

	
Alliance Managers

	
15

 

	
ARTICLE 4

	
LICENSES AND OTHER RIGHTS

	
15

 

	
4.1

	
Grant of License to Merck

	
15

 

	
4.2

	
Grant of Sublicense by Merck

	
16

 

	
4.3

	
Exclusivity

	
16

 

	
4.4

	
Japan Development and Right of First Negotiation

	
17

 

	
ARTICLE 5

	
DEVELOPMENT AND COMMERCIALIZATION OF PRODUCT POST OPTION EXERCISE DATE

	
18

 

	
5.1

	
Development of Product by Merck

	
18

 

	
5.2

	
Licensor Support in Development

	
18

 

	
5.3

	
Development Funding Option

	
18

 

	
5.4

	
Commercialization

	
19

 

	
5.5

	
Diligence by Merck

	
20

 

	
5.6

	
Right to Subcontract of Merck

	
20

 

	
5.7

	
Trade Marks

	
20

 

	
5.8

	
Reporting

	
20

 

	
5.9

	
Procedures for Technology Transfer

	
21

 

	
ARTICLE 6

	
REGULATORY MATTERS

	
21

 

	
6.1

	
Regulatory Filings

	
21

 

	
6.2

	
Communications with Authorities

	
21

 

 

 

  

-i-

  

 

TABLE OF CONTENTS

(CONTINUED)

 

Page

 

	
6.3

	
Licensor Support in Regulatory Matters

	
22

 

	
6.4

	
Recalls

	
22

 

	
6.5

	
Pharmacovigilance Agreement

	
22

 

	
ARTICLE 7

	
MANUFACTURING

	
23

 

	
7.1

	
Supply Agreement

	
23

 

	
7.2

	
Merck Manufacturing

	
23

 

	
7.3

	
Manufacturing Technology Transfer

	
23

 

	
ARTICLE 8

	
FINANCIAL PROVISIONS

	
24

 

	
8.1

	
Initial Fee

	
24

 

	
8.2

	
Option Exercise Fee

	
24

 

	
8.3

	
Milestone Payments

	
25

 

	
8.4

	
Commercial Event Payments

	
26

 

	
8.5

	
Royalty Payments for Product

	
27

 

	
8.6

	
Compulsory License

	
28

 

	
8.7

	
Reductions, Deductions and Reimbursements

	
28

 

	
8.8

	
Timing of Payment

	
29

 

	
8.9

	
Mode of Payment and Currency; Invoices

	
29

 

	
8.10

	
Royalty Reports and Records Retention

	
30

 

	
8.11

	
Legal Restrictions

	
30

 

	
8.12

	
Late Payments

	
30

 

	
8.13

	
Audits

	
31

 

	
8.14

	
Taxes

	
31

 

	
ARTICLE 9

	
INVENTIONS AND PATENTS

	
32

 

	
9.1

	
Patent Listing under Public Health Services Act

	
32

 

	
9.2

	
Further Assurances

	
32

 

	
9.3

	
Ownership of Inventions

	
32

 

	
9.4

	
Patent Prosecution and Maintenance

	
32

 

	
9.5

	
Enforcement of Patents and Know-How

	
35

 

	
9.6

	
Third Party Actions Claiming Infringement

	
36

 

 

 

  

-ii-

  

 

TABLE OF CONTENTS

(CONTINUED)

 

Page

 

	
ARTICLE 10

	
CONFIDENTIALITY

	
38

 

	
10.1

	
Confidentiality Obligations

	
38

 

	
10.2

	
Use

	
38

 

	
10.3

	
Required Disclosure

	
39

 

	
10.4

	
Publications

	
39

 

	
10.5

	
Press Releases and Disclosure

	
39

 

	
10.6

	
Agreement Filing

	
40

 

	
ARTICLE 11

	
REPRESENTATIONS, WARRANTIES AND COVENANTS

	
41

 

	
11.1

	
Representations and Warranties

	
41

 

	
11.2

	
Additional Representations and Warranties of Licensor

	
41

 

	
11.3

	
Licensor Covenants

	
45

 

	
ARTICLE 12

	
INDEMNIFICATION AND INSURANCE

	
45

 

	
12.1

	
Indemnification by Merck

	
45

 

	
12.2

	
Indemnification by Licensor

	
45

 

	
12.3

	
No Consequential Damages

	
45

 

	
12.4

	
Notification of Claims; Conditions to Indemnification Obligations

	
46

 

	
12.5

	
Insurance

	
46

 

	
ARTICLE 13

	
TERM AND TERMINATION

	
46

 

	
13.1

	
Term and Expiration

	
46

 

	
13.2

	
Termination of the Agreement for Convenience

	
47

 

	
13.3

	
Termination upon Material Breach

	
47

 

	
13.4

	
Effects of Expiration or Termination

	
47

 

	
13.5

	
Termination on Bankruptcy or Insolvency; Right of First Negotiation

	
50

 

	
13.6

	
Other Remedies

	
51

 

	
ARTICLE 14

	
DISPUTE RESOLUTION

	
51

 

	
14.1

	
Disputes

	
51

 

	
14.2

	
JSC Discussion Disputes

	
51

 

	
14.3

	
Injunctive Relief

	
51

 

	
ARTICLE 15

	
MISCELLANEOUS PROVISIONS

	
51

 

	
15.1

	
Relationship of the Parties

	
51

 

 

 

  

-iii-

  

 

TABLE OF CONTENTS

(CONTINUED)

 

Page

 

	
15.2

	
Assignment

	
51

 

	
15.3

	
Performance and Exercise by Affiliates

	
53

 

	
15.4

	
Change of Control

	
53

 

	
15.5

	
Further Actions

	
54

 

	
15.6

	
Accounting Procedures

	
54

 

	
15.7

	
Force Majeure

	
54

 

	
15.8

	
No Trademark Rights

	
54

 

	
15.9

	
Entire Agreement of the Parties; Amendments

	
54

 

	
15.10

	
Captions

	
54

 

	
15.11

	
Governing Law

	
55

 

	
15.12

	
Non-Solicitation of Employees

	
55

 

	
15.13

	
Notices and Deliveries

	
55

 

	
15.14

	
Waiver

	
56

 

	
15.15

	
Severability

	
56

 

	
15.16

	
No Implied License

	
56

 

	
15.17

	
Interpretation

	
56

 

	
15.18

	
Counterparts

	
56

  

-iv-

  

 

OPTION AND LICENSE AGREEMENT

 

THIS OPTION AND LICENSE AGREEMENT (the “Agreement”) is dated as of February 4, 2013 (the “Effective Date”) by and between Opexa Therapeutics, Inc., a corporation organized under the laws of Texas having a place of business at 2635 Technology Forest Boulevard, The Woodlands, TX 77381 (“Licensor”), and Ares Trading SA, a Swiss corporation having a place of business at Zone industrielle de l’Ouriettaz, 1170 Aubonne, Switzerland, which is a solely owned subsidiary of Merck Serono S.A., which is a solely owned subsidiary of Merck KGaA (“Merck”). Licensor and Merck may be referred to herein as a “Party” or, collectively, as “Parties.”

 

RECITALS:

 

Whereas, Licensor is a pharmaceutical company dedicated to the development of patient-specific cellular therapies for the treatment of autoimmune diseases;

 

Whereas, Licensor is currently in the process of conducting a Phase IIb clinical study of Product in the Field;

 

Whereas, Merck is engaged in the research, development, manufacturing and commercialization of pharmaceutical products and is interested in potentially developing, manufacturing and commercializing Product in the Field; and

 

Whereas, Merck desires to obtain an exclusive option to, and to potentially exercise such option to obtain, an exclusive license from Licensor, and Licensor wishes to grant such exclusive option to license, and upon exercise of such option to license to Merck, on an exclusive basis, the right to develop, manufacture and commercialize Product in the Field in the Territory, all on the terms and subject to the conditions set forth herein.

 

Now, Therefore, in consideration of the various promises and undertakings set forth herein, the Parties agree as follows:

 

ARTICLE 1

DEFINITIONS

 

Unless otherwise specifically provided herein, the following terms shall have the following meanings:

 

	
1.1

	
“Abili-T Trial” means that certain Phase IIb clinical study of Product being conducted by Licensor as of the Effective Date for treatment of SPMS that has the ClinicalTrials.gov Identifier NCT01684761.

 

 

  

1

  

 

 

	
1.2

	
“Adverse Event” means any serious untoward medical occurrence in a patient or subject who is administered Product, but only if and to the extent that such serious untoward medical occurrence is required under Laws to be reported to applicable Regulatory Authorities.

 

	
1.3

	
“Affiliate” means a Person that controls, is controlled by or is under common control with a Party, but only for so long as such control exists.  For the purposes of this Section 1.3, the word “control” (including, with correlative meaning, the terms “controlled by” or “under the common control with”) means the actual power, either directly or indirectly through one or more intermediaries, to direct the management and policies of such Person or entity, whether by the ownership of more than fifty percent (50%) of the voting stock of such entity, or by contract or otherwise. 

 

	
1.4

	
“Calendar Quarter” means each three (3) month period commencing January 1, April 1, July 1 or October 1 of any year; provided, however, that: (a) the first Calendar Quarter of the Term shall extend from the Effective Date to the end of the first full Calendar Quarter thereafter; and (b) the last Calendar Quarter of the Term shall end upon the expiration or termination of this Agreement.

 

	
1.5

	
“Calendar Year” means the period beginning on the 1st of January and ending on the 31st of December of the same year; provided, however, that (a) the first Calendar Year of the Term shall commence on the Effective Date and end on December 31 of the same year, and (b) the last Calendar Year of the Term shall commence on January 1 of the Calendar Year in which this Agreement terminates or expires and end on the date of termination or expiration of this Agreement.

 

	
1.6

	
“CDA” means that certain non-disclosure agreement by and between Licensor and Merck Serono S.A. dated February 15, 2011.

 

	
1.7

	
“cGCP” means the current standards, practices and procedures set forth in the International Conference on Harmonization (ICH) guidelines entitled “Guidance for Industry E6 Good Clinical Practice: Consolidated Guidance” including related requirements imposed by the FDA, and equivalent non-US regulations or standards, as applicable, as such standards, practices, procedures, requirements and regulations may be amended from time to time.

 

	
1.8

	
“cGLP” means the current good laboratory practice regulations promulgated by the FDA, published at 21 US C.F.R. § 58, and equivalent non-US regulations or standards, as applicable, as such current laboratory practices, regulations and equivalent non-US regulations or standards may be amended from time to time.

 

	
1.9

	
“cGMP” means those current practices, as amended from time to time, related to the manufacture of pharmaceutical products and any precursors thereto promulgated in guidelines and regulations of standard compilations including the GMP Rules of the World Health Organization, the US Code of Federal Regulations, the Guide to Inspection of Bulk Pharmaceutical Chemicals (established by the US Department of Health and Human Services), the Pharmaceutical Inspection Convention, and the European Community Guide to Good Manufacturing Practice in the production of pharmaceutical products.

 

 

  

2

  

 

 

	
1.10

	
“Change of Control” means, with respect to a Person: (a) a transaction or series of related transactions that results in the sale or other disposition of all or substantially all of such Person’s assets; or (b) a merger or consolidation in which such Person is not the surviving corporation or in which, if such Person is the surviving corporation, the shareholders of such Person immediately prior to the consummation of such merger or consolidation do not, immediately after consummation of such merger or consolidation, possess, directly or indirectly through one or more intermediaries, a majority of the voting power of all of the surviving entity’s outstanding stock and other securities and the power to elect a majority of the members of such Person’s board of directors; or (c) a transaction or series of related transactions (which may include a tender offer for such Person’s stock or the issuance, sale or exchange of stock of such Person) if the shareholders of such Person immediately prior to the initial such transaction do not, immediately after consummation of such transaction or any of such related transactions, own, directly or indirectly through one or more intermediaries, stock or other securities of the entity that possess a majority of the voting power of all of such Person’s outstanding stock and other securities and the power to elect a majority of the members of such Person’s board of directors.

 

	
1.11

	
“Clinical Trial” means a clinical trial in human subjects that has been approved by a Regulatory Authority and Institutional Review Board or Ethics Committee, and is designed to measure the safety and/or efficacy of Product.  Clinical Trials shall include Phase II Trials and Phase III Trials.

 

	
1.12

	
“Combination Product” means Product that: (a) includes one or more distinct pharmaceutically active ingredients that is/are the subject of its/their own separate MAAs (in addition to the MAA associated with Product); or (b) is combined with one or more products, devices, pieces of equipment or components that are proprietary (i.e., not “off-the-shelf”) and provide more than de minimis value to such Combination Product.

 

	
1.13

	
“Commercialization” or “Commercialize” means any and all activities undertaken before and after Regulatory Approval of a MAA for Product and that relate to the marketing, promoting, distributing, importing or exporting for sale, offering for sale, and selling of Product, and interacting with Regulatory Authorities regarding the foregoing.

 

	
1.14

	
“Commercially Reasonable Efforts” means: (a) with respect to the efforts to be expended by a Party with respect to any objective, such reasonable, diligent, and good faith efforts as such Party would normally use to accomplish a similar objective under similar circumstances; and (b) with respect to any objective relating to Development or Commercialization of Product by a Party, the application by such Party, consistent with the exercise of its prudent scientific and business judgment, of diligent efforts and resources to fulfill the obligation in issue, consistent with the level of efforts such Party would devote to a product at a similar stage in its product life as Product and having profit potential and strategic value comparable to that of Product, taking into account, without limitation, commercial, legal and regulatory factors, target product profiles, product labeling, past performance, the regulatory environment and competitive market conditions in the therapeutic area, safety and efficacy of Product, the strength of its proprietary position and such other factors as such Party may reasonably consider, all based on conditions then prevailing.  For clarity, Commercially Reasonable Efforts, (i) with respect to a given task or objective, will not mean that a Party guarantees that it will actually accomplish such task or objective or (ii) prior to receipt of Regulatory Approval, with respect to Development of Product in the Field in the Territory generally, will not mean that a Party is permitted to permanently stop all attempts to Develop Product for purposes of obtaining Regulatory Approval.

 

 

  

3

  

*** Confidential material redacted and filed separately with the Commission.

 

 

	
1.15

	
“Competing Product” means any ***, *** product in any dosage form, formulation, presentation or package configuration which exhibits activity *** by means of ***.

 

	
1.16

	
“Compulsory License” means a compulsory license under Licensor Technology obtained by a Third Party through the order, decree, or grant of a competent Governmental Body or court, authorizing such Third Party to develop, make, have made, use, sell, offer to sell or import a Competing Product or Product in the Field in any country in the Territory.

 

	
1.17

	
“Confidential Information” of a Party, means information relating to the business, operations or products of a Party or any of its Affiliates, including any Know-How, not known or generally available to the public, that such Party previously disclosed to the other Party under the CDA, discloses to the other Party under this Agreement, or otherwise becomes known to the other Party by virtue of this Agreement or the CDA.

 

	
1.18

	
“Controlled” means, with respect to (a) Patent Rights, (b) Know-How or (c) biological, chemical or physical material, that a Person or one of its Affiliates owns or has a license or sublicense to such Patent Rights, Know-How or material (or in the case of material, has the right to physical possession of such material) and has the ability to grant a license or sublicense to, or assign its right, title and interest in and to, such Patent Rights, Know-How or material as provided for in this Agreement, or as is otherwise applicable, without violating the terms of any agreement or other arrangement with any Third Party.

 

	
1.19

	
“Cover”, “Covering” or “Covered” means, with respect to Product, that the making, using, selling, or offering for sale of Product would, but for a license granted in this Agreement under the Licensor Patent Rights, infringe a Valid Claim of the Licensor Patent Rights in the country in which the activity occurs.

 

	
1.20

	
“Development” or “Develop” means, with respect to Product, the performance of all pre-clinical and clinical development (including toxicology, pharmacology, test method development and stability testing, process development, formulation development, quality control development, statistical analysis), Clinical Trials, and regulatory activities that are required to obtain Regulatory Approval of Product.

 

	
1.21

	
“EMA” means the European Medicines Agency or a successor agency thereto.

 

 

  

4

  

*** Confidential material redacted and filed separately with the Commission.

 

 

	
1.22

	
“European Commission” means the authority within the European Union that has the legal authority to grant Regulatory Approvals in the European Union based on input received from the EMA or other competent Regulatory Authorities.

 

	
1.23

	
“European Union” or “EU” means the European Union, as may be redefined from time to time.

 

	
1.24

	
“Executive Officers” means, together, a member of the senior management of the pharmaceutical division of Merck and the Chief Executive Officer of Licensor.

 

	
1.25

	
“Existing Third Party Agreement(s)” means the agreement(s) set forth on Schedule 1.25.

 

	
1.26

	
“FDA” means the United States Food and Drug Administration or a successor federal agency thereto.

 

	
1.27

	
“Field” means any prophylactic, palliative or therapeutic treatment, or diagnosis, of Multiple Sclerosis (“MS”), including Primary Progressive Multiple Sclerosis (otherwise known as PPMS), Secondary Progressive Multiple Sclerosis (“SPMS”) and Relapsing Remitting Multiple Sclerosis (“RRMS”).

 

	
1.28

	
“First Commercial Sale” means, on a country-by-country basis, the first commercial transfer or disposition for value of Product in the Field in such country to a Third Party by Merck, or any of its Affiliates or Sublicensees, in each case, after all Regulatory Approvals necessary for such sale or disposition  have been obtained in such country.

 

	
1.29

	
“FTE” means a full time equivalent person year, comprising *** hours per year, of scientific or technical work spent on, or directly related to, Development Support, Regulatory Support or Manufacturing Support, as applicable.

 

	
1.30

	
“FTE Rate” means the annual rate of $*** USD per FTE.

 

	
1.31

	
“Governmental Body” means any: (a) nation, principality, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, unit, body or entity and any court or other tribunal); (d) multi-national or supranational organization or body; or (e) individual, entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature.

 

	
1.32

	
“IFRS” means the International Financial Reporting Standards, the set of accounting standards and interpretations and the framework in force on the Effective Date and adopted by the European Union as issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC), as such accounting standards may be amended from time to time.

 

 

  

5

  

 

	
1.33

	
“Indication” means a generally acknowledged disease or condition, a significant manifestation of a disease or condition, or symptoms associated with a disease or condition or a risk for a disease or condition for which a MAA may be obtained.

 

	
1.34

	
“IND” means an investigational new drug application submitted to applicable Regulatory Authorities for approval to commence Clinical Trials in a given jurisdiction.

 

	
1.35

	
“Know-How” means any: (a) scientific or technical information, results and data of any type whatsoever, in any tangible or intangible form whatsoever, that is not in the public domain or otherwise publicly known, including discoveries, inventions, trade secrets, devices, databases, practices, protocols, regulatory filings, methods, processes (including manufacturing processes, specifications and techniques), techniques, concepts, ideas, specifications, formulations, formulae, data (including pharmacological, biological, chemical, toxicological, clinical and analytical information, quality control, trial and stability data), case reports forms, medical records, data analyses, reports, studies and procedures, designs for experiments and tests and results of experimentation and testing (including results of research or development), summaries and information contained in submissions to and information from ethical committees, or Regulatory Authorities, and manufacturing process and development information, results and data, whether or not patentable, all to the extent not claimed or disclosed in a patent or patent application; and (b) compositions of matter, cells, cell lines, assays, animal models and physical, biological or chemical material, including drug substance samples, intermediates of drug substance samples, drug product samples and intermediates of drug product samples, and proprietary equipment, procedures or methodologies relating to the manufacturing of Product. The fact that an item is known to the public shall not be taken to exclude the possibility that a compilation including the item, and/or a development relating to the item, is (and remains) not known to the public.  “Know-How” includes any rights, including copyright, database or design rights, protecting such Know-How.  “Know-How” excludes Patent Rights.

 

	
1.36

	
“Knowledge” means, with respect to a matter that is the subject of a given representation, or warranty of Licensor, the knowledge of any officer or director of Licensor, or such other employee of Licensor who would reasonably be expected to have knowledge of the matter in question, has, or should reasonably be expected to have, after making reasonable inquiry into the relevant subject matter; provided, however, that any officer, director or employee of Licensor shall be deemed to have knowledge of a Third Party’s Patent Right only if such officer, director or employee has actual knowledge of such Third Party’s Patent Right or would be found to be on notice of such Third Party’s Patent Right as determined by reference to United States patent laws.  “Knowingly” means with Knowledge.

 

	
1.37

	
“Law” or “Laws” means all applicable laws, statutes, rules, regulations, ordinances and other pronouncements having the binding effect of law of any Governmental Body.

 

 

  

6

  

*** Confidential material redacted and filed separately with the Commission.

 

 

	
1.38

	
“Licensor Bankruptcy Event” means: (a) voluntary or involuntary proceedings by or against Licensor are instituted in bankruptcy under any insolvency Law, which proceedings, if involuntary, shall not have been dismissed within ninety (90) days (or sixty (60) days if during the Option Period) after the date of filing; (b) a receiver or custodian is appointed for Licensor; (c) proceedings are instituted by or against Licensor for corporate reorganization, dissolution, liquidation or winding-up of Licensor, which proceedings, if involuntary, shall not have been dismissed within ninety (90) days (or sixty (60) days if during the Option Period) after the date of filing; (d) substantially all of the assets of Licensor are seized or attached and not released within sixty (60) days thereafter; or (e) the deterioration of Licensor’s financial position during the Term such that Merck’s rights under this Agreement are reasonably likely to be adversely affected (as such deterioration is determined in Merck’s good faith discretion, following prior notice to Licensor and an opportunity of five (5) days for Licensor to provide a written objection to such determination setting forth in reasonable detail Licensor’s good faith basis for such objection).

 

	
1.39

	
“Licensor Know-How” means all Know-How that is Controlled by Licensor or, subject to Section 15.2(f), any of its Affiliates, as of the Effective Date or at any time thereafter during the Term, and that is: (a) *** for the Development, manufacture or Commercialization of Product; or (b) *** in the Development, manufacture or Commercialization of Product; or (c) for Know-How Controlled by Licensor or its Affiliates as of ***, *** for the (1) Development or manufacture of Product anywhere in the world for purposes of Commercializing Product in the Territory in the Field or (2) Commercialization of Product in the Territory; or (d) for Know-How *** Controlled by Licensor or its Affiliates after ***, *** for the (1) Development or manufacture of Product anywhere in the world for purposes of Commercializing Product in the Territory in the Field or (2) Commercialization of Product in the Territory.

 

	
1.40

	
“Licensor Patents” means all Patent Rights that are Controlled by Licensor or, subject to Section 15.2(f), any of its Affiliates, as of the Effective Date or at any time thereafter during the Term, and that are: (a) *** for the Development, manufacture or Commercialization of Product; or (b) *** in the Development, manufacture or Commercialization of Product; or (c) for Patent Rights Controlled by Licensor or its Affiliates as of ***, *** for the (1) Development or manufacture of Product anywhere in the world for purposes of Commercializing Product in the Territory in the Field or (2) Commercialization of Product in the Territory; or (d) for Patent Rights *** Controlled by Licensor or its Affiliates after ***, *** for the (1) Development or manufacture of Product anywhere in the world for purposes of Commercializing Product in the Territory in the Field or (2) Commercialization of Product in the Territory.  Listed on Schedule 1.40 are all Licensor Patents existing as of the Effective Date; provided, that Licensor shall update Schedule 1.40 from time-to-time to include any new Licensor Patents.

 

	
1.41

	
“Licensor Technology” means the Licensor Patents and Licensor Know-How.  For the avoidance of doubt, the Licensor Technology includes any Licensor Patents and/or Licensor Know-How Controlled by Licensor pursuant to any Existing Third Party Agreement or any Third Party License Agreement.  For clarity, “Licensor Technology” includes:  (a) the *** by *** are *** and *** in order to *** ***, which *** is *** to by ***, as of the Effective Date, as ***; and (b) any improvements to Product that Licensor may make on or following the Effective Date, including improvements to the *** by *** are ***, *** and *** or by *** are *** ***.

 

 

  

7

  

*** Confidential material redacted and filed separately with the Commission.

 

 

	
1.42

	
“Licensor Trademarks” means those trademarks set forth on Schedule 1.42 and any other trademarks that Licensor may have registered, or uses, in connection with (x) the Licensor Technology in the Field in the Territory, or (y) the Product in the Territory.

 

	
1.43

	
“MAA” means: (a) a Marketing Authorization Application, or a New Drug Application (NDA), submitted pursuant to the requirements of the FDA, as more fully defined in 21 U.S. C.F.R.§ 314.3 et seq; (b) a Biologics License Application submitted pursuant to the requirements of the FDA, as more fully defined in 21 U.S. C.F.R. § 601; and (c) any equivalent application submitted in any country in the Territory, including a European Marketing Authorization Application, together, in each case, with all additions, deletions or supplements thereto, and as any and all such requirements may be amended, or supplanted, at any time.

 

	
1.44

	
“Major EU Market” means any of Germany, the United Kingdom, France, Spain or Italy.

 

	
1.45

	
“Merck Competitor” means any company that (itself or through an Affiliate) is developing or commercializing a product in the Field.

 

	
1.46

	
“Net Sales” means the gross amounts invoiced by Merck or any of its Affiliates or Sublicensees for sales of Product to independent or unaffiliated Third Party purchasers of such Product, less the following deductions to the extent allocable thereto:  (a) ***or *** or ***; (b) *** or *** or ***, ***, regardless of ***; (c) *** or ***; (d) *** in the *** for *** and any other ***relating to *** or *** of Product; (e) *** and *** and *** *** in connection with *** or *** of Product ***; (f) *** and *** or *** made to *** or ***, or any Third *** or ***; and (g) *** related to *** of Product paid to Third Parties (specifically excluding any commissions paid to sales personnel, sales representatives and sales agents who are employees or consultants of (or members of a contract sales force engaged by or on behalf of) Merck or its Affiliates or any Sublicensees).  For clarity, sale of Product by Merck or any of its Affiliates or Sublicensees to another of these entities for resale by such entity to a Third Party shall not be deemed a sale for purposes of this definition of “Net Sales”.

 

If a Product under this Agreement is sold in the form of a Combination Product, then Net Sales for such Combination Product shall be determined on a country-by-country basis by mutual agreement of the Parties in good faith taking into account the perceived relative value contributions of Product and the other pharmaceutically active ingredient subject to its own separate MAA or proprietary (i.e. not off-the-shelf) component providing more than de minimis value in the Combination Product, as reflected in their respective market prices. In case of disagreement, an independent expert agreed upon by both Parties or, failing such agreement, designated by the International Chamber of Commerce, shall determine such relative value contributions and such determination shall be final and binding upon the Parties.

 

 

  

8

  

 

In the event Product is “bundled” for sale together with one or more other products in a country (a “Product Bundle”), then Net Sales for such Product sold under such arrangement shall be determined on a country-by-country basis by mutual agreement of the Parties in good faith taking into account the relative value contributions of the Product and the other products in the Product Bundle, as reflected in their individual sales prices. In case of disagreement, an independent expert agreed upon by both Parties or, failing such agreement, the International Chamber of Commerce shall determine such relative value contributions and such determination shall be final and binding upon the Parties.

 

	
1.47

	
“Out-of-Pocket Expenses” means expenses actually paid by a Party or its Affiliate to any Third Party; provided, that “Out-of-Pocket Expenses” shall not include expenses paid to any consultants (or service providers of like kind), except for travel expenses associated with a consultant (or service provider of like kind).

 

	
1.48

	
“Patent Rights” means: (a) an issued or granted patent, including any extension, supplemental protection certificate, registration, confirmation, reissue, reexamination or renewal thereof; (b) a pending patent application, including any continuation, divisional, continuation-in-part, substitute or provisional application thereof; and (c) all counterparts or foreign equivalents of any of the foregoing issued by or filed in any country or other jurisdiction.

 

	
1.49

	
“Person” means any natural person, corporation, firm, business trust, joint venture, association, organization, company, partnership or other business entity, or any government or agency or political subdivision thereof.

 

	
1.50

	
“Phase II Trial” means a clinical trial of Product in human patients, the principal purposes of which are to make a preliminary determination that Product is safe for its intended use, to determine its optimal dose, and to obtain sufficient information about Product’s efficacy to permit the design of Phase III Trials, and which is consistent with 21 US CFR § 312.21(b).

 

	
1.51

	
“Phase III Trial” means a clinical trial of Product in human patients, which trial is  designed to (a) establish that Product is safe and efficacious for its intended use and (b) (i) define warnings, precautions and adverse reactions that are associated with Product in the dosage range to be prescribed; (ii) be conducted as a pivotal trial for purposes of filing a MAA for Product; (iii) be either by itself or together with one or more other Clinical Trials having a comparable design and size, the final human Clinical Trial in support of Regulatory Approval of a MAA of Product; and (iv) be consistent with 21 US CFR § 312.21(c).

 

	
1.52

	
“Price Approvals” means, in those countries in the Territory where Regulatory Authorities may approve or determine pricing and/or pricing reimbursement for pharmaceutical products, such pricing and/or pricing reimbursement approval or determination.

 

	
1.53

	
“Product” means a preparation of autologous myelin-reactive T-cells manufactured using (i) Licensor Technology or (ii) a derivative of Licensor Technology).  As of the Effective Date, Product is referred to by Licensor as “Tcelna”.

 

 

  

9

  

*** Confidential material redacted and filed separately with the Commission.

 

 

	
1.54

	
“Regulatory Authority” means: (a) in the US, the FDA; (b) in the EU, the EMA or the European Commission; or (c) in any other jurisdiction anywhere in the world, any regulatory body with similar regulatory authority over pharmaceutical or biotechnology products.

 

	
1.55

	
“Regulatory Approval” means any and all approvals, licenses, registrations, or authorizations of the relevant Regulatory Authority, including Price Approvals, necessary for the Development, manufacture, use, storage, import, transport or Commercialization of Product in a particular country or jurisdiction. For the avoidance of doubt, Regulatory Approval to Commercialize Product shall include Price Approval.

 

	
1.56

	
“Representatives” means employees, consultants, contractors, advisors and agents of a Party.

 

	
1.57

	
“Royalty Term” means, on a country-by-country basis, the period from the First Commercial Sale of Product in such country until the later of: (a) ***; or (b) *** years after such First Commercial Sale of Product in such country.

 

	
1.58

	
“Sublicensee” means a Person other than an Affiliate of Merck to which Merck (or its Affiliate) has, pursuant to Section 4.2, granted sublicense rights under any of the license rights granted under Section 4.1; provided, that “Sublicensee” shall exclude distributors.

 

	
1.59

	
“Tax” or “Taxes” means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not.

 

	
1.60

	
“Territory” means all the countries of the world except Japan.

 

	
1.61

	
“Third Party” means any Person other than Licensor, Merck or any of their respective Affiliates.

 

	
1.62

	
“Third Party Action” means any Action made by a Third Party against either Party that claims that Product, or Product’s use, Development, manufacture or sale in the Territory infringes or misappropriates such Third Party’s intellectual property rights.

 

	
1.63

	
“Third Party License Agreement” means any agreement entered into by a Party or its Affiliate with a Third Party, or any amendment or supplement thereto, in each case following the Effective Date, whereby royalties, fees or other payments are to be made by a Party or its Affiliate to such Third Party in connection with the grant of rights under intellectual property rights Controlled by such Third Party, which rights are *** to research, Develop, manufacture, have made, import, export, use or Commercialize Product in the Field in the Territory.  Notwithstanding the foregoing, an agreement entered into by Merck or its Affiliate with a Third Party, or any amendment or supplement thereto, in each case following the Effective Date, whereby royalties, fees or other payments are to be made by Merck or its Affiliate to such Third Party in connection with the grant of rights under intellectual property rights Controlled by such Third Party, which rights have the *** effect of ***, will not be considered a Third Party License Agreement hereunder.

 

 

  

10

  

 

 

	
1.64

	
“United States” or “US” means the United States of America, its territories and possessions.

 

	
1.65

	
“USD” or “$” means the lawful currency of the United States.

 

	
1.66

	
“Valid Claim” means a claim of any issued Patent Right which has not expired, lapsed or been revoked, abandoned or held unenforceable or invalid by a final decision of a court or governmental or supra-governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and which has not been disclaimed, denied or admitted to be invalid or unenforceable through reissue, reexamination or disclaimer or otherwise.

 

	
1.67

	
Other Terms.  The definition of each of the following terms is set forth in the section of the Agreement indicated below:

 

	
Defined Term

	
Section

	
“Abili-T Trial Report”

	
2.3

	
“Action”

	
9.5(b)

	
“Agreement”

	
Preamble

	
“Alliance Manager”

	
3.5

	
“Basic Transfer Activities”

	
7.3

	
“Budget”

	
5.3(a)

	
“Certain Commercial License”

	
8.7(d)

	
“CM&C Know-How”

	
7.3

	
“Co-Funding Commitment”

	
5.3(b)

	
“Co-Funding Option”

	
5.3(a)

	
“Co-Funding Option Period”

	
5.3(a)

	
“Common Interest Agreement”

	
9.5(a)(i)

	
“Controlling Party”

	
9.6(c)

	
“Development Support”

	
5.2

	
“Effective Date”

	
Preamble

	
“Final Update”

	
2.1

	
“Initial Update”

	
2.1

	
“Intent to Exercise Notice”

	
2.1

	
“Joint Inventions”

	
9.3

	
“Joint Patents”

	
9.4(c)

	
“Joint Steering Committee” and “JSC”

	
3.1

	
“JSC Discussion Disputes

	
3.4

	
“Licensor”

	
Preamble

	
“Licensor Indemnitees”

	
12.1

	
“***”

	
8.7(c)

 

 

  

11

  

*** Confidential material redacted and filed separately with the Commission.

 

 

	
“Manufacturing Support”

	
7.3

	
“Manufacturing Technology Transfer”

	
7.3

	
“Manufacturing Technology Transfer Plan”

	
7.3

	
“Merck”

	
Preamble

	
“Merck Indemnitees”

	
12.2

	
“Merck Patent”

	
9.4(f)

	
“MS”

	
1.27

	
“Non-Escalable Dispute”

	
14.1

	
“Option”

	
2.1

	
“Option Exercise Date”

	
2.1

	
“Option Fee”

	
8.2

	
“Option Period”

	
2.1

	
“Party” and “Parties”

	
Preamble

	
“Product Bundle”

	
1.46

	
“Regulatory Support”

	
6.3

	
“Right of First Refusal”

	
13.5(c)

	
“Right of First Refusal Notice Period”

	
13.5(c)(ii)

	
“RRMS”

	
1.27

	
“Sole Inventions”

	
9.3

	
“SPMS”

	
1.27

	
“Supplemental Data”

	
2.3

	
“Supplemental Data Update”

	
2.1

	
“Supply Agreement”

	
7.1

	
“Term”

	
13.1

ARTICLE 2

OPTION AND ABILI-T TRIAL

 

	
2.1

	
Option.  Licensor hereby grants to Merck an exclusive option (the “Option”) to obtain the licenses set forth in Section 4.1.  Merck may indicate its intent to exercise the Option, at any time beginning on the Effective Date and ending at 11:59 PM ET on the date that is *** days after the date of the receipt by Merck of (i) the Abili-T Trial Report and, if applicable, the Supplemental Data and (ii) an update to Schedule 11.2 reflecting changes to such schedule arising between the Effective Date and the date of submission of such updated Schedule 11.2 (“Initial Update”), and, if applicable, the Supplemental Data Update (such *** day period, the “Option Period”), by providing written notice to Licensor (the “Intent to Exercise Notice”).  The Initial Update shall be provided by Licensor contemporaneously with the Abili-T Trial Report.  In the event that Merck requests Supplemental Data in accordance with Section 2.3, Licensor shall, contemporaneously with providing the Supplemental Data, provide to Merck a further updated Schedule 11.2 reflecting changes to such schedule arising between the date of submission of the Initial Update and the date of submission of such further updated Schedule 11.2 (“Supplemental Data Update”).  Upon Licensor’s receipt of the Intent to Exercise Notice, Licensor shall provide to Merck a further updated Schedule 11.2 reflecting changes to such schedule arising between the later of the date of submission of the Initial Update, or, if applicable, the date of submission of the Supplemental Data Update, and the date of submission of such further updated Schedule 11.2 (the “Final Update”).  Merck shall have *** days from the date of its receipt of the Final Update to reject in writing the Intent to Exercise Option Notice.  In the event that Merck does not reject the Intent to Exercise Notice within *** days from the date of its receipt of the Final Update, then the eleventh business day from the date of its receipt of the Final Update shall be deemed the “Option Exercise Date”.  If Merck (a) does not submit the Intent to Exercise Notice prior to the end of the Option Period, or (b) rejects the Intent to Exercise Notice within *** days from the date of its receipt of the Final Update, then the Option will expire, the Option Exercise Date will not have occurred and Merck will have no remaining rights with respect to Licensor Technology or the Product.  Notwithstanding the foregoing, the Initial Update, the Supplemental Data Update and the Final Update shall not be deemed to cure any breach of any given representation or warranty as may exist as of the Effective Date.

 

 

  

12

  

*** Confidential material redacted and filed separately with the Commission.

 

 

	
2.2

	
Continued Performance of Abili-T Trial.  Licensor is responsible at its own cost, either by itself or via subcontractors, for executing the Abili-T Trial.  Licensor is responsible at its own cost for all supply of material for the Abili-T Trial.  Licensor will use Commercially Reasonable Efforts to complete the Abili-T Trial in accordance with the timeline and budget attached hereto as Schedule 2.2, and will use sound and ethical business and scientific practices, in compliance in all material respects with all Laws (including, to the extent applicable, cGCP, cGLP, and cGMP,) in conducting the Abili-T Trial.  Licensor shall update Merck with summary reports of the progress of the Abili-T Trial, from time to time upon Merck’s request; provided, that Merck shall have no financial or other obligations with respect to the performance of the Abili-T Trial.  Licensor shall keep and maintain separate and complete books and records of account relating to the Abili-T Trial.

 

	
2.3

	
Abili-T Trial-related Reporting.  Within *** days of Licensor’s completion of the Abili-T Trial, Licensor shall deliver to Merck a detailed and complete written description and analysis of the results of the Abili-T Trial (the “Abili-T Trial Report”).  Within *** days of Merck’s receipt of the Abili-T Trial Report, Merck may request additional data and information as is reasonably available to Licensor relating to the Abili-T Trial (“Supplemental Data”).  If Merck requests any Supplemental Data, then Licensor shall deliver to Merck such Supplemental Data within *** days of Merck’s request.

 

ARTICLE 3

GOVERNANCE

 

	
3.1

	
Joint Steering Committee.  The Parties agree to establish, promptly after the Effective Date, a joint committee (“Joint Steering Committee” or “JSC”) for:  (a) prior to the Option Exercise Date, the purpose of sharing information with no decision-making authority; and (b) from and after the Option Exercise Date, the overall oversight of the Parties’ activities with respect to the Development and Manufacture of Product in the Field with decision-making authority with respect thereto and, subject to ARTICLE 14, to resolve disputes between the Parties. 

 

 

  

13

  

 

 

	
3.2

	
Joint Steering Committee Membership. Licensor and Merck shall each designate three (3) Representatives to serve on the Joint Steering Committee by written notices to the other Party, which Representatives shall represent development, regulatory and manufacturing functions from each Party.  Either Party may designate substitutes for its Representatives if one (1) or more of such Party’s designated Representatives are unable to be present at a meeting.  From time to time, each Party may replace its Representatives by written notice to the other Party specifying the prior Representative(s) and their replacement(s).  Prior to the Option Exercise Date, Licensor shall designate one (1) of its Representatives as the chairperson of the JSC and, after the Option Exercise Date, Merck shall designate one (1) of its Representatives as the chairperson of the JSC.  The chairperson shall be responsible for (a) calling meetings, (b) preparing and issuing minutes of each such meeting within thirty (30) days thereafter and (c) preparing and circulating an agenda for the upcoming meeting, but shall have no special authority over the other members of the Joint Steering Committee, and shall have no additional voting rights or powers beyond those held by the other JSC members.

 

	
3.3

	
Joint Steering Committee Meetings. The Joint Steering Committee shall hold at least one (1) meeting per year, at such times as it elects to do so, until Merck’s receipt of the first Regulatory Approval of the Product at which time the Joint Steering Committee shall disband.  Meetings of the Joint Steering Committee shall be effective only if at least one (1) Representative of each Party is present or participating.  The Joint Steering Committee may meet either: (a) in person at either Party’s facilities or at such locations as the Parties may otherwise agree; or (b) by audio or video teleconference.  Each Party may invite non-members to participate in the discussions and meetings of the Joint Steering Committee; provided, that such participants shall have no voting rights or powers and shall be subject to the confidentiality provisions set forth in ‎ARTICLE 10.  Additional meetings of the Joint Steering Committee may also be held with the consent of each Party, or as required under this Agreement, and neither Party shall unreasonably withhold or delay its consent to hold such an additional meeting.  Each Party shall be responsible for all of its own expenses incurred in connection with participating in the Joint Steering Committee.

 

	
3.4

	
Joint Steering Committee Decisions.  Actions to be taken by the Joint Steering Committee shall be taken only following a unanimous vote, with each Party having one (1) vote.  If, following the Option Exercise Date, the Joint Steering Committee fails to reach unanimous agreement on a matter before it for decision for a period in excess of fifteen (15) days, then Merck shall have decision-making authority regarding such matter; provided, that (i) such decisions must conform to the requirements of this Agreement and shall not impose additional obligations or expense on Licensor, and (ii) Merck shall not have decision-making authority with respect to a dispute regarding (1) the initial Manufacturing Technology Transfer Plan to be agreed by the Parties in accordance with Section 7.3(a), (2) the interpretation of this Agreement, (3) whether a breach of this Agreement has occurred, or (4) any amendment to this Agreement, any agreements contemplated hereunder or the Parties’ rights or obligations hereunder or under any such contemplated agreement (collectively, (1) through (4), inclusive, “JSC Discussion Disputes”).  JSC Discussion Disputes shall be subject to resolution in accordance with Section 14.2.

 

 

  

14

  

*** Confidential material redacted and filed separately with the Commission.

 

 

	
3.5

	
Alliance Managers.  Promptly following the Effective Date, each Party shall designate an individual to serve as the main point of contact for such Party to exchange information, facilitate communication and coordination of the Parties’ activities under this Agreement relating to Product, and provide day-to-day support to the JSC (each, an “Alliance Manager”).  Each Alliance Manager shall be experienced in project management, shall have appropriate experience in the pharmaceutical industry, and may serve as a representative of its respective Party on the JSC.  The Alliance Managers may attend all meetings between the Parties, including committee meetings, and shall also work together to facilitate the resolution of any potential disputes between the Parties.  Each Party may change its designated Alliance Manager from time to time upon written notice to the other Party.

 

ARTICLE 4

LICENSES AND OTHER RIGHTS

 

	
4.1

	
Grant of License to Merck.  Subject to the terms and conditions of this Agreement, upon the Option Exercise Date, Licensor hereby grants to Merck and its Affiliates an exclusive (even as to Licensor), royalty-bearing right and license (with the right to sublicense, subject to the provisions of Section 4.2) under the Licensor Technology to (a) research, have researched, Develop, have Developed, manufacture, have manufactured, use and have used Product anywhere in the world in the Field for purposes of Commercializing Product in the Territory in the Field and (b) Commercialize or have Commercialized Product in the Territory in the Field.  In addition, subject to the terms and conditions of this Agreement, upon the Option Exercise Date, Licensor hereby grants to Merck and its Affiliates an exclusive (even as to Licensor), right and license (with the right to sublicense, subject to the provisions of Section 4.2) to use and reproduce the Licensor Trademarks in connection with the exercise of their other rights under this Section 4.1.  Merck *** and *** that it ***.

 

	
4.2

	
Grant of Sublicense by Merck.  Merck shall have the right, in its sole discretion, to grant sublicenses, in whole or in part, under the licenses granted in Section 4.1.  Any sublicense granted or entered into by Merck as contemplated by this Section 4.2 (x) shall not relieve Merck from any of its obligations under this Agreement and (y) shall impose upon the sublicensee’s exercise of such license rights obligations of confidentiality and non-use substantially similar to those contained in ARTICLE 10.

 

	
4.3

	
Exclusivity.

 

(a)           Competing Products.  Licensor and, subject to the final sentence of Section 15.2(f), its Affiliates shall not, during the Term, develop, have developed, manufacture, have manufactured, use, sell, have sold, offer for sale, import or export a Competing Product in the Field in the Territory nor enter into any relationship with any Third Party with respect thereto.  Such restriction shall remain in effect in the event of a Change of Control of Licensor and shall apply to the successor or assignee of Licensor.  In the event that Licensor enters into such activities, it shall be deemed to be in material breach of this Agreement and Merck shall have the right to terminate this Agreement in accordance with 13.3(a); provided that such remedy shall not be exhaustive with respect to breach by Licensor of this Section 4.3.

 

 

  

15

  

*** Confidential material redacted and filed separately with the Commission.

 

 

(b)           Protection of the Field.  Licensor covenants and agrees that neither it nor its Affiliates (nor any permitted Third Party under Section 4.4(c)) shall, either directly or indirectly, market, distribute or sell any Competing Product that uses, or is manufactured using, or is derived from, Licensor Technology for Indications in the Field in the Territory.  As to Indications in the Field in the Territory, Licensor shall: (i) not engage in any advertising activities relating to any Competing Product for Indications in the Field in the Territory; and (ii) not solicit orders from any prospective purchaser of Competing Product (or Product) for Indications in the Field in the Territory.  If Licensor receives any order from a prospective purchaser of a Competing Product for Indications in the Field in the Territory, Licensor shall immediately refer such order to Merck and not accept such order or deliver (or cause to be delivered) any such Competing Product under such order.  If Licensor has a reasonable basis to conclude that its customer, sublicensee or distributor is engaged in the sale or distribution of any Competing Product in the Field in the Territory that uses, or is manufactured using, or is derived from, Licensor Technology, then Licensor shall take all reasonable steps (including cessation of sales to such customer) necessary to limit such sale or distribution in the Field in the Territory.  Without limitation of the foregoing, Licensor further covenants and agrees that neither it nor its Affiliates (nor any permitted Third Party under Section 4.4(c)) shall, either directly or indirectly, market, distribute or sell any Competing Product that uses, or is manufactured using, Licensor Technology for use outside of the Field in the Territory (to the extent permitted under this Agreement) in a formulation or product presentation that is susceptible for use in the Field.  Furthermore, Licensor covenants and agrees that neither it nor its Affiliates (nor any permitted Third Party under Section 4.4(c)) shall, either directly or indirectly, develop, market, distribute or sell Product (1) in the Field in the Territory (except by Merck under this Agreement) or (2) outside the Field in the Territory in a formulation or other manner that is susceptible to use in the Field.

 

	
4.4

	
Japan Development and Right of First Negotiation.

 

(a)           Development of Product in Japan.  If Licensor or its Affiliate, or, subject to the remainder of this Section 4.4, its licensee or assignee pursues the Development or Commercialization of Product in Japan or any country removed from the Territory pursuant to Section 13.2, then the Parties shall share data and information regarding Development, Commercialization and reporting of Adverse Events with respect to Product as may be necessary for or otherwise required by applicable Governmental Bodies with respect to securing or maintaining Regulatory Approval for Product in Japan (and other countries outside the Territory) or the Territory as applicable.  For clarity, in the event that Japan is added to the Territory hereunder in accordance with the remainder of this Section 4.4, then this Section 4.4(a) shall be of no further force or effect.

 

(b)           Japan-Related Notice.  If Licensor intends to grant, or is considering granting, to any Third Party the right to Develop or Commercialize Product in the Field in Japan, then Merck shall have the right of first negotiation with respect to such rights, which shall obligate Licensor to negotiate exclusively with Merck for inclusion of Japan in the Territory for the time periods and subject to the terms of this Section 4.4.  Licensor shall notify Merck in writing in the event Licensor intends to grant, or is considering granting, to any Third Party the right to Develop or Commercialize Product in the Field in Japan and Merck shall notify Licensor in writing within *** days after receipt of such notice from Licensor whether Merck desires to exercise its right of first negotiation set forth in this Section 4.4(a).

 

 

  

16

  

*** Confidential material redacted and filed separately with the Commission.

 

 

(c)           Right of First Negotiation.  If Merck exercises such right of first negotiation, then (i) Licensor shall promptly provide Merck with an appropriately detailed data/diligence package of information then available to Licensor in order to enable Merck to assess the opportunity, and (ii) the Parties shall negotiate in good faith the terms of an appropriate amendment to this Agreement to include Japan in the Territory.  If Licensor and Merck are unable to enter into an appropriate amendment with respect to such transaction within *** days after Licensor receives notice of Merck’s election (or such longer period as may be mutually agreed upon by the Parties), despite each Party’s reasonable efforts to do so, then Licensor shall be permitted to grant such Development or Commercialization rights in the Field in Japan to a Third Party within *** following the termination of negotiations with Merck; provided, that Licensor may only grant such rights to a Third Party on material terms in the aggregate more favorable to Licensor than the last set of terms offered by Merck (it being understood that the evaluation and comparison of such terms shall take into account the relative capabilities of Merck and such Third Party to effectively Develop or Commercialize Product in the Field in Japan).  In the event that Licensor does not enter into a definitive agreement with a Third Party for the right to Develop or Commercialize Product in the Field in Japan within such *** period, then Licensor shall be subject to the terms of this Section 4.4 in the event that it subsequently proposes to grant to any Third Party the right to Develop or Commercialize the Product in the Field in Japan.

 

ARTICLE 5

DEVELOPMENT AND COMMERCIALIZATION OF PRODUCT

POST OPTION EXERCISE DATE

 

	
5.1

	
Development of Product by Merck.  From and after the Option Exercise Date, Merck shall have the exclusive right, and sole responsibility and decision-making authority, to research and Develop Product in the Field for the Territory and to conduct (either itself or through its Affiliates, agents, subcontractors and/or Sublicensees) all Clinical Trials and non-clinical studies Merck believes appropriate to obtain Regulatory Approval for Product in the Field in the Territory.  For clarity, Licensor shall remain responsible for Developing the Product in the Field for Regulatory Approval outside of the Territory.  Licensor acknowledges and agrees that Merck may conduct Clinical Trials (or other Development activities) outside of the Territory but solely for the purpose of Developing Product for Commercialization in the Territory.

 

	
5.2

	
Licensor Support in Development.  As soon as reasonably practicable after the Option Exercise Date, but in no event later than *** days following the Option Exercise Date, Licensor will transfer to Merck, at Licensor’s cost and expense, all Licensor Know-How (except for Licensor Know-How relating to the manufacture of Product, which is the subject of Section 7.3).  Without limitation of the foregoing, from and after the Option Exercise Date, Licensor shall make its Representatives that are knowledgeable regarding the Licensor Technology or Product (including the properties and functions thereof) available to Merck for scientific and technical explanations, advice and on-site support that may reasonably be required by Merck relating to the Development of Product (the “Development Support”).  The Development Support shall be provided by Licensor free-of-charge; provided, that, (i) Merck shall reimburse Licensor for the travel expenses reasonably incurred (in accordance with Merck’s travel policies, which will be provided to Licensor upon request) by all employees and consultants of Licensor in the performance of Development Support on-site at facilities of Merck, its Affiliates or Third Parties specified by Merck or its Affiliates; and (ii) from and after the date that is *** after the date that Merck has received all Licensor Know-How (except for Licensor Know-How relating to the manufacture of Product, which is the subject of Section 7.3), Merck shall pay Licensor the FTE Rate for each FTE providing Development Support to Merck.

 

 

  

17

  

*** Confidential material redacted and filed separately with the Commission.

 

 

	
5.3

	
Development Funding Option.

 

(a)           Co-Funding Option.  Merck hereby grants Licensor an option (the “Co-Funding Option”) to increase the royalty rates payable under Section 8.5(a) in consideration for Licensor co-funding, with Merck, the Development of Product for the first Indication in the Field that Merck chooses to pursue.  Prior to Merck’s start of the first Phase III Trial for Product, Merck shall deliver to Licensor a reasonably detailed budget for all of the activities then estimated in good faith by Merck to be (or have been) conducted for the Development of Product for the first Indication (the “Budget”); provided, that (i) Licensor shall make appropriate representatives available to discuss with Merck any concerns Merck may have regarding Licensor’s ability to cover the Co-Funding Commitment for the following *** period, including concerns arising from Merck’s review of publicly available financial information (and, in the case such concerns exist, Licensor shall provide reasonable evidence that Licensor has immediate access to committed funds (e.g. cash on hand, loans, etc.) as required to cover the Co-Funding Commitment for the following *** period) and (ii) in addition, in the event that Licensor is no longer a publicly traded company, such written notice shall contain reasonable evidence that Licensor has immediate access to committed funds (e.g. cash on hand, loans, etc.) as required to cover the Co-Funding Commitment for the following *** period.  Licensor may exercise the Co-Funding Option by providing written notice to Merck of such exercise at any time prior to *** days following Merck’s delivery to Licensor of the Budget and satisfaction of the procedures contemplated by the foregoing proviso (the “Co-Funding Option Period”).  In the event Licensor exercises the Co-Funding Option, Licensor shall continue to comply with the foregoing proviso upon Merck’s request from time-to-time.  If Licensor does not provide the aforementioned evidence within *** days of Merck’s request, when applicable, or fails to make appropriate representatives available and/or is unable to reasonably address Merck’s concerns, then Section 8.5(c) shall have no further force or effect.

 

 

  

18

  

*** Confidential material redacted and filed separately with the Commission.

 

 

(b)           Co-Funding Commitment.  Upon exercise of the Co-Funding Option, Licensor shall become responsible for *** percent (***%) of the costs incurred by Merck and associated with the Development of Product for the first Indication in the Field that Merck chooses to pursue, including costs incurred by Merck on or prior to the date of Licensor’s exercise of its Co-Funding Commitment (the “Co-Funding Commitment”).  Merck shall invoice Licensor on a Calendar Quarter basis for Licensor’s Co-Funding Commitment, which invoices shall identify the amounts invoiced with reference to the amounts set forth in the Budget.  Licensor shall pay such invoices within *** days of receipt; provided, that, in the event that Licensor does not pay a given invoice by its due date, Merck shall have the right to offset the amount of such invoice against amounts due from Merck to Licensor.  In the event that Licensor exercises the Co-Funding Option, Licensor shall have audit rights as set forth in Section 8.13 mutatis mutandis with respect to any invoices submitted to Licensor for payment.

 

(c)           Licensor Development Activities.  Unless otherwise agreed by the Parties in a separate written agreement (including a properly executed amendment to this Agreement), from and after the Option Exercise Date, the exercise by Licensor of the Co-Funding Option shall not entitle Licensor to be involved in the Development of Product in the Field for the Territory on an operational basis.

 

	
5.4

	
Commercialization.  From and after the Option Exercise Date, Merck shall have the exclusive right, and sole responsibility and decision-making authority, to Commercialize Product in the Field in the Territory itself or through one or more Affiliates or Sublicensees or other Third Parties selected by Merck and shall have the sole decision-making authority and responsibility in all matters relating to the Commercialization of Product in the Field in the Territory.

 

	
5.5

	
Diligence by Merck.  Subject to Licensor’s fulfillment of its obligations under this Agreement, Merck shall, from and after the Option Exercise Date, use Commercially Reasonable Efforts to Develop and Commercialize Product in the Field in ***; provided, that such Development and Commercialization obligations shall be expressly conditioned on the continuing absence of any material adverse condition or event relating to the safety or efficacy of the Product, legal impediments, or Third Party intellectual property rights, and Merck’s obligation to Develop and Commercialize Product in Field in the Territory shall be delayed or suspended so long as, in Merck’s reasonable opinion, any such material condition or event exists. Merck shall have the exclusive right to determine, in its sole discretion, the launch strategy for Product in the Field in the Territory, subject to its exercise of Commercially Reasonable Efforts and the availability of any necessary Third Party licenses or other rights. Activities by Merck’s Affiliates and Sublicensees will be considered as Merck’s activities under this Agreement for purposes of determining whether Merck has complied with its obligation to use Commercially Reasonably Efforts.  For clarity, Merck shall have no obligation to Develop or Commercialize Product in any particular country or countries, except as expressly provided in this Section 5.5.  Merck shall be relieved of its diligence obligations under this Section 5.5 starting from the date on which Merck provides Licensor with a termination notice pursuant to Section 13.2 or 13.3.

 

 

  

19

  

*** Confidential material redacted and filed separately with the Commission.

 

 

	
5.6

	
Right to Subcontract of Merck.  Merck may exercise any of its rights, or perform any of its obligations, under this Agreement (including any of the rights licensed in Section 4.1) by subcontracting the exercise or performance of all or any portion of such rights and obligations on Merck’s behalf.  Any subcontract granted or entered into by Merck as contemplated by this Section 5.6 of the exercise or performance of all or any portion of the rights or obligations that Merck may have under this Agreement shall not relieve Merck from any of its obligations under this Agreement.

 

 

	
5.7

	
Trade Marks.  As between Licensor and Merck, from and after the Option Exercise Date, Merck shall have the sole authority to select trademarks for Product in the Field in the Territory and shall own all such trademarks; provided, that Licensor shall retain ownership of all Licensor Trademarks.  Licensor shall maintain the Licensor Trademarks for the duration of the Term at its sole cost and expense.  Notwithstanding the foregoing, from and after the Option Exercise Date, upon Merck’s request, Licensor shall assign to Merck ownership in the Territory of any given Licensor Trademarks and following such assignment such Licensor Trademark(s) shall be owned in the Territory by Merck and Merck shall be responsible for the cost and expense of maintaining such assigned Licensor Trademark(s) in the Territory.

 

	
5.8

	
Reporting.  From and after the Option Exercise Date, every six (6) months each Party will provide the other Party with a written report summarizing in reasonable detail its major Development activities conducted, including material data and other information obtained in connection therewith, during the preceding six (6) month period.  All such reports provided to such other Party pursuant to this Section 5.8 shall be for informational purposes only and shall not be interpreted to increase or expand a Party’s obligations under this Agreement and shall be treated as Confidential Information of the providing Party hereunder.  Notwithstanding the foregoing, upon Merck’s receipt of Regulatory Approval for Product, Merck’s obligation to provide reports under this Section 5.8 shall become limited to its Development activities pertaining to the U.S. and the Major EU Markets and shall only be required when Merck has actually conducted Development activities pertaining to the U.S. or the Major EU Markets during any such six (6) month period.

 

	
5.9

	
Procedures for Technology Transfer.  The technology transfers set forth in Section 5.2, Section 6.3 and Section 7.3 shall occur in an orderly fashion and in a manner such that the value, usefulness and confidentiality of the transferred Licensor Know-How and regulatory documentation are preserved in all material respects.  Promptly following the Option Exercise Date, and thereafter during the Term, Licensor shall provide to Merck full and prompt disclosure, but in no event less frequently than ***, of any Licensor Technology (including CM&C Know-How) that becomes Controlled by Licensor or any of its Affiliates after the Effective Date and that is necessary to Merck to conduct its activities or exercise its rights as contemplated hereunder and shall, in the case of any such Licensor Know-How (including CM&C Know-How), promptly following such disclosure, transfer to Merck such Licensor Know-How (including CM&C Know-How).

 

 

  

20

  

*** Confidential material redacted and filed separately with the Commission.

 

 

ARTICLE 6

REGULATORY MATTERS

 

	
6.1

	
Regulatory Filings.  From and after the Option Exercise Date and during the Term (and thereafter if the Term ends pursuant to the expiration of the last to expire of the Royalty Terms), Merck (or one of its Affiliates, Sublicensees or designees) shall own and maintain all regulatory filings and Regulatory Approvals for Product, including all INDs and MAAs, in the Field in the Territory.  For clarity, prior to the Option Exercise Date, Licensor will own, hold and maintain all Regulatory Approvals for Product.

 

	
6.2

	
Communications with Authorities.  From and after the Option Exercise Date and during the Term (and thereafter if the Term ends pursuant to the expiration of the last to expire of the Royalty Terms), Merck (or one of its Affiliates, Sublicensees or designees) shall be responsible, and act as the sole point of contact, for communications with Regulatory Authorities in connection with the Development, Commercialization and manufacturing of Product in the Field for the Territory. Following the Option Exercise Date, Licensor shall not initiate, with respect to Product in the Field for the Territory, any meetings or contact with Regulatory Authorities without Merck’s prior written consent. To the extent Licensor receives any written or oral communication from any Regulatory Authority relating to Product in the Field in the Territory, Licensor shall: (a) refer such Regulatory Authority to Merck; and (b) as soon as reasonably practicable (but in any event within twenty-four (24) hours), notify Merck and provide Merck with a copy of any written communication received by Licensor or, if applicable, complete and accurate minutes of such oral communication. At the request of Merck, Licensor shall make available to Merck a qualified Representative who shall, together with the Representatives of Merck, participate in and contribute to meetings with the Regulatory Authorities with respect to regulatory matters relating to the Licensor Technology or Product; provided, that (i) Merck shall reimburse Licensor for the travel expenses reasonably incurred (in accordance with Merck’s travel policies, which will be provided to Licensor upon its request) by such Representative; and (ii) from and after the date that is three (3) months after the date that Merck has received all applications and filings made by or on behalf of Licensor with any Regulatory Authority with respect to Product in the Field in the Territory, including any IND, MAA or orphan drug designations or any other application for regulatory consultations or consideration, including sponsorship thereof, Merck shall pay Licensor the FTE Rate for each such Representative FTE providing support (for clarity, prior to such date, the support described in this Section 6.2 shall be provided by Licensor free of charge, except for travel expenses as detailed above).

 

	
6.3

	
Licensor Support in Regulatory Matters.  As soon as reasonably practicable after the Option Exercise Date, but in no event later than *** days following the Option Exercise Date, Licensor will (to the extent allowed or consented to by Law), at Licensor’s cost and expense, assign to Merck all applications and filings made by or on behalf of Licensor with any Regulatory Authority with respect to Product in the Field in the Territory, including any IND, MAA or orphan drug designations or any other application for regulatory consultations or consideration, including sponsorship thereof.  Without limitation of the foregoing, from and after the Option Exercise Date, Licensor shall make its Representatives that are knowledgeable regarding the Licensor Technology or Product available to Merck for regulatory explanations, advice and on-site support that may reasonably be required by Merck relating to regulatory matters (including preparation and filing for any INDs and MAAs and obtaining and maintaining Marketing Authorizations) (the “Regulatory Support”); provided, that, except for so long as ***, Licensor shall have no obligation to dedicate more than *** FTEs to provide Regulatory Support more than *** following the date that Merck has received all applications and filings made by or on behalf of Licensor with any Regulatory Authority with respect to Product in the Field in the Territory, including any IND, MAA or orphan drug designations or any other application for regulatory consultations or consideration, including sponsorship thereof.  Merck shall reimburse Licensor for the travel expenses reasonably incurred (in accordance with Merck’s travel policies, which will be provided to Licensor upon its request).  From and after the date that is *** after the date that Merck has received all applications and filings made by or on behalf of Licensor with any Regulatory Authority with respect to Product in the Field in the Territory, including any IND, MAA or orphan drug designations or any other application for regulatory consultations or consideration, including sponsorship thereof, Merck shall pay Licensor the FTE Rate for each FTE providing Regulatory Support to Merck (for clarity, prior to such date, Regulatory Support shall be provided by Licensor free of charge, except for travel expenses as detailed above).

 

 

  

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6.4

	
Recalls.  From and after the Option Exercise Date, Merck shall have the sole right to determine whether and how to implement a recall or other market withdrawal of Product from the Field in the Territory.

 

	
6.5

	
Pharmacovigilance Agreement.  The Parties shall, as soon as practical following the Option Exercise Date, negotiate in good faith and enter into a safety data exchange agreement relating to Product, which shall set forth standard operating procedures governing the collection, investigation, reporting, and exchange of information concerning adverse drug reactions/adverse events sufficient to permit each Party to comply with its regulatory and other legal obligations within applicable timeframes.

 

ARTICLE 7

MANUFACTURING

 

	
7.1

	
Supply Agreement.  From and after the Option Exercise Date, in the event that Licensor can demonstrate, to Merck’s reasonable satisfaction, the requisite quality, capacity and ability to scale up to fully meet Merck’s supply requirements, the Parties will enter into a supply agreement covering Licensor’s supply of *** Product required by Merck for Development (including clinical) and Commercialization purposes in the Field for the US (the “Supply Agreement”).  The Supply Agreement will include customary terms and conditions for a supply agreement, including provisions with respect to pricing, forecasting requirements, warranties, indemnities, recalls, shelf life, safety stock maintenance, supply disruption trigger events and contingency measures, termination and force majeure, as well as provisions covering audits, validation, quality control and complaints.

 

 

  

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7.2

	
Merck Manufacturing.  From and after the Option Exercise Date, and subject to any supply of Product by Licensor to Merck under the Supply Agreement as provided in Section 7.1, Merck shall have the right to manufacture Product (i) for the Field for the Territory outside the United States, and (ii) as a *** source for clinical and commercial supply for the Field in the US, in each case, itself or through one or more Affiliates or Sublicensees or other Third Parties selected by Merck.

 

	
7.3

	
Manufacturing Technology Transfer.

 

(a)           Manufacturing Technology Transfer Generally.  In furtherance of Section 7.2, the Parties shall undertake the technology transfer described in this Section 7.3 (“Manufacturing Technology Transfer”) in accordance with a manufacturing technology transfer plan (the “Manufacturing Technology Transfer Plan”) to be agreed upon by the Parties on or prior to the *** month anniversary of the Option Exercise Date; provided, that, in the event that the Parties are unable to finalize the Manufacturing Technology Transfer Plan on or prior to such date, any items or matters remaining in dispute shall be referred to the JSC for discussion and potential resolution.  The Parties will commence the Manufacturing Technology Transfer promptly upon finalization of the Manufacturing Technology Transfer Plan.  The costs and expenses associated with Licensor’s performance of the Basic Transfer Activities and the Manufacturing Support shall be as set forth in Section 7.3(b) unless the Parties otherwise mutually agree in the Manufacturing Technology Transfer Plan.

 

(b)           Manufacturing Technology Transfer Plan Contents.  The Manufacturing Technology Transfer Plan will: (a) specify goals and estimated time lines for the achievement of the Manufacturing Technology Transfer; (b) identify all Licensor Know-How that relates to the manufacture of Product and all such information as is reasonably anticipated to become a part of the Chemistry, Manufacturing and Controls section of a regulatory submission document included in an MAA, as set forth in 21 C.F.R. § 314.50 (collectively, “CM&C Know-How”) (including all information necessary for successful operation of the transferred process and all biochemical and biophysical analytical assays, in vitro assays and in vivo assays); (c) specify the activities related to implementation of such technology in Merck’s or its designee’s facilities; (d) set forth those obligations assigned to each Party with respect to such technology transfer (such obligations assigned to Licensor being referred to herein as the “Basic Transfer Activities”); and (e) set forth the terms and conditions under which additional Licensor shall make Representatives that are knowledgeable regarding the manufacture of the Product (including Licensor Technology applying thereto) available to Merck for scientific and technical explanations, advice and support beyond the Basic Transfer Activities (the “Manufacturing Support”) provided, that, (i) Merck shall reimburse Licensor for the travel expenses reasonably incurred (in accordance with Merck’s travel policies, which will be provided to Licensor upon its request) by all employees and consultants of Licensor in the performance Manufacturing Support (as opposed to Basic Transfer Activities) on-site at facilities of Merck, its Affiliates or Third Parties specified by Merck or its Affiliates; and (ii) Merck shall pay Licensor the FTE Rate for each FTE providing Manufacturing Support (as opposed to Basic Transfer Activities) to Merck.

 

 

  

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ARTICLE 8

FINANCIAL PROVISIONS

 

	
8.1

	
Initial Fee.  In consideration of Licensor’s grant of the Option to Merck hereunder, Merck shall pay, or cause to be paid, to Licensor a fee of five million USD ($5,000,000), within *** days following the Effective Date. Payment of the initial fee shall be subject to any withholding tax obligations set forth in Section 8.14.

 

	
8.2

	
Option Exercise Fee.  In partial consideration of Licensor’s grant of the rights and licenses to Merck hereunder and Licensor’s performance of its obligations hereunder, Merck shall pay, or cause to be paid, to Licensor a one (1)-time, non-refundable fee (“Option Fee”) of twenty five million USD ($25,000,000), within *** days following the Option Exercise Date; provided, that if Merck is unable to advance directly into performing a Phase III Trial for Product for SPMS without a further Phase II Trial (as determined by Merck in its sole discretion), then the Option Fee shall be fifteen million USD ($15,000,000); provided, further, that if, subsequent to Merck’s initial determination that it is unable to advance directly into performing a Phase III Trial without a further Phase II Trial and payment of the lower Option Fee, Merck does advance directly into performing a Phase III Trial for Product for SPMS without conducting such a further Phase II Trial, then Merck shall pay to Opexa an additional ten million USD ($10,000,000) within *** days following commencement of such Phase III Trial.  Payment of the Option Fee shall be subject to any withholding tax obligations set forth in Section 8.14.

 

	
8.3

	
Milestone Payments.

 

(a)           Development, Regulatory and First Commercial Sale Milestones. As further partial consideration for Licensor’s grant of the rights and licenses to Merck hereunder and Licensor’s performance of its obligations hereunder, following the Option Exercise Date, Merck shall pay, or cause to be paid, to Licensor the following milestone payments upon the achievement of the milestone events described below.  Merck shall promptly (but in any event within *** days) notify Licensor in writing of the achievement of any such milestone event and Licensor shall issue Merck an invoice for the amount of the corresponding milestone payment, which invoice Merck shall pay within *** days following receipt of such invoice.

 

 

  

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Milestone event

	
Milestone payment

 

	
***

 

 

	
***

	
***

 

 

	
***

	
***

 

 

	
***

	
***

 

 

	
***

	
***

 

	
***

 

 

	
***

	
***

 

 

	
Total regulatory and first commercial sale milestones (US) (Exclusive of RRMS

 

Total regulatory (EU) and first commercial sale (up to three major EU countries) milestones (Exclusive of RRMS)

 

Total first commercial sale milestone ex-US and EU (Exclusive of RRMS)

 

Total regulatory and first commercial sale milestones in SPMS (Exclusive of RRMS)

 

Total development, regulatory and first commercial sale milestones (Solely for RRMS)

 

Total milestones

	
$35,000,000

 

$30,000,000

 

$5,000,000

 

$70,000,000

 

$40,000,000

 

$110,000,000

 

(b)           Frequency of Milestone Payments.  With respect to each milestone, the milestone payments to be made under this Agreement shall be due and payable, subject to Section 8.3(c), no more than twice, regardless of the number of Products Developed or Commercialized, or the number of Indications pursued or approved or whether a Product is discontinued after a milestone payment has been made; provided, that the milestone payments may be made *** only in the event that Merck pursues *** and another Indication in the Field.

 

(c)           ***

 

	
8.4

	
Commercial Event Payments.  Following the Option Exercise Date, as further partial consideration for Licensor’s grant of rights and licenses to Merck hereunder and Licensor’s performance of its obligations hereunder, Merck shall pay Licensor the following non-refundable amounts for the first achievement of the following commercial event milestones calculated on the basis of total Net Sales in the Field in the Territory:

 

(i)           $*** for the first Calendar Year in which the aggregate annual Net Sales of Product in the Field in the Territory, determined in accordance with Section 8.5(b), exceed $***;

 

(ii)           $*** for the first Calendar Year in which the aggregate annual Net Sales of Product in the Field in the Territory, determined in accordance with Section 8.5(b), exceed $***;

 

 

  

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(iii)           $*** for the first Calendar Year in which the aggregate annual Net Sales of Product in the Field in the Territory, determined in accordance with Section 8.5(b), exceed $***;

 

(iv)           $*** for the first Calendar Year in which the aggregate annual Net Sales of Product in the Field in the Territory, determined in accordance with Section 8.5(b), exceed $***;

 

Merck shall deliver written notice to Licensor within *** days of the end of the Calendar Year in which a commercial event milestone occurs and Licensor shall issue Merck an invoice for the amount of the corresponding commercial event milestone payment, which invoice Merck shall pay within *** days following receipt of such invoice.

 

For the avoidance of doubt, each aforementioned commercial event milestone payment shall be made only once, regardless of the number of Products achieving the commercial event milestones, or the number of Calendar Years in which a Product achieves such commercial event milestone. For example, if for a Calendar Year, aggregate annual worldwide Net Sales in all Indications for a particular Product are $600,000,000, then the total commercial event milestone payments earned shall be $***, and the commercial event milestone payments set forth in *** above shall no longer be triggered by any Product in any Calendar Year.

 

For the avoidance of doubt, the total maximum milestones payable under this Section 8.4 shall not exceed $85,000,000, of which milestone payments of $55,000,000 are achievable at annual Net Sales targets in excess of $1,000,000,000.

 

	
8.5

	
Royalty Payments for Product.

 

(a)           Royalty Rate.  As further consideration for Licensor’s grant of the rights and licenses to Merck hereunder and Licensor’s performance of its obligations hereunder, Merck shall, during the Royalty Term, pay to Licensor a royalty on aggregate annual Net Sales of Product in the Field in the Territory for each Calendar Year at the percentage rates set forth below (subject to Sections 8.5(c), 8.6 and 8.7):

 

	
Annual Net Sales of Product in the Field in the Territory per Calendar Year USD

	
Incremental

Royalty Rate

	
For Net Sales of Product from $0 up to and including $500,000,000

	
8%

	
For that portion of Net Sales of Product that are greater than $500,000,000 and less than or equal to $1,000,000,000

	
***%

	
For that portion of Net Sales of Product that are greater than $1,000,000,000 and less than or equal to $2,000,000,000

	
***%

	
For that portion of Net Sales of Product that are greater than $2,000,000,000

	
15%

By way of illustration, assume in a Calendar Year, during the Royalty Term, that (i) aggregate annual Net Sales of a Product total $2,100,000,000 and (ii) no adjustments or deductions to payments under this ARTICLE 8 apply. The total royalties due and payable by Merck to Licensor for such Net Sales would be $***, calculated as follows:

 

  

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$500,000,000 x ***% = $***

 

$500,000,000 x ***% = $***

 

$1,000,000,000 x ***% = $***

 

$100,000,000 x ***% = $***

 

Total Royalty = $***

 

(b)           Net Sales Subject to Royalty Payments.  For purposes of determining whether a royalty threshold or a commercial event milestone described in Section 8.4 has been attained, only Net Sales that are subject to a royalty payment shall be included in the total amount of Net Sales and any Net Sales that are not subject to a royalty payment shall be excluded.  In addition, in no event shall the manufacture of Product give rise to a royalty obligation. For clarity, Merck’s obligation to pay royalties to Licensor under this ARTICLE 8 is imposed only once with respect to the same unit of Product regardless of the number of Licensor Patents pertaining thereto.

 

(c)           Increased Royalty Rates Tied to Co-Funding Commitment.  Following exercise by Licensor of the Co-Funding Option and subject to Section 5.3(a) and Licensor’s continuing satisfaction of its Co-Funding Commitment, the tiered royalty percentages set forth in Section 8.5(a) shall be replaced with 10%, ***%, ***% and 18%.

 

	
8.6

	
Compulsory License.  In the event that Licensor or Merck receives a request for a Compulsory License anywhere in the world, it shall promptly notify the other Party and Merck shall use Commercially Reasonable Efforts to oppose the imposition of such a Compulsory License.  If any Third Party obtains a Compulsory License in any country in the Territory, then Licensor or Merck (whoever has first notice) shall promptly notify the other Party.  Thereafter, as of the date the Third Party obtained such Compulsory License in such country, the royalty rate payable under Section 8.5 to Licensor for Net Sales in such country will be adjusted to equal any lower royalty rate granted to such Third Party for such country with respect to the sales of Product therein.  In addition, should Merck grant a Sublicense to a Third Party in any country of the Territory in a good faith effort to avoid the imposition of such a Compulsory License, the royalty rate payable under Section 8.5 to Licensor for Net Sales in such country shall also be adjusted to match any lower royalty rate payable by such Sublicensee for such country under such Sublicense.

 

	
8.7

	
Reductions, Deductions and Reimbursements.

 

(a)           Know-How Royalty.  The royalty rates set forth in Section 8.5(a) applicable to the Net Sales of a Product in a country will be reduced by *** percent (***%) during any period there exists no Valid Claim of a Licensor Patent in such country that Covers such Product in such country. 

 

 

  

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(b)           Third Party License Agreements.  Subject to the terms and conditions of this Agreement, if Merck or any of its Affiliates or Sublicensees enter into a Third Party License Agreement(s) (other than a Third Party License Agreement(s) referred to in Section 8.7(d)), Merck will be entitled to deduct from any amount payable to Licensor under Section 8.5 (from the amount calculated by consideration of the then applicable royalty rate), an amount equal to *** percent (***%) of any amounts paid by Merck, its Affiliates or Sublicensees pursuant to such Third Party License Agreement(s)***; provided, that such deductions may not reduce the amount of royalties payable by Merck to Licensor for any *** by more than *** percent (***%) of the amount that would otherwise be due.  Excess amounts that Merck is not allowed to deduct pursuant to the foregoing proviso will be carried forward into future ***.

 

(c)           Existing Third Party Agreements.  Licensor shall be responsible for the timely payment of any amounts due under any Existing Third Party Agreement, and in the event that Licensor shall fail to make on a timely basis any payment when due under such Existing Third Party Agreement, Merck shall have the right to make such payment on behalf of Licensor.  In such event, Licensor shall promptly reimburse Merck any such amounts paid by Merck or, at Merck’s election, Merck may offset such amounts paid by Merck against any amounts payable to Licensor hereunder.  In the event that Licensor enters into an agreement with *** (or one of its Affiliates) (“***”) in respect of the use of *** in *** of Product (as contemplated in Schedule 11.2), such agreement shall be deemed an Existing Third Party Agreement.

 

(d)           Certain Commercial License.  Solely with respect to amounts due to *** in connection with any Third Party License Agreement(s) that Merck, its Affiliates or Sublicensees may obtain from Life in respect of the use of *** in *** of Product (as contemplated in Schedule 11.2) (“Certain Commercial License”), Merck may offset commercially reasonable amounts paid by Merck, its Affiliates or Sublicensees pursuant to such Certain Commercial License from any amount payable to Licensor under this ARTICLE 8 (without any limitations on such off-set right). 

 

	
8.8

	
Timing of Payment.  Royalties payable under Section 8.5(a) shall be payable on actual Net Sales and shall accrue at the time the invoice for the sale of Product is delivered. Royalty obligations that have accrued during a particular Calendar Quarter shall be paid, on a Calendar Quarter basis, within *** days after the end of each Calendar Quarter during which the royalty obligation accrued.

 

	
8.9

	
Mode of Payment and Currency; Invoices.

 

(a)           Currency.  All payments to Licensor hereunder shall be made by deposit of USD in the requisite amount to such bank account as Licensor may from time to time designate by written notice to Merck. With respect to sales not denominated in USD, Merck shall convert applicable sales in foreign currency into USD by using the then current and reasonable standard exchange rate methodology applied to its external reporting. Based on the resulting sales in USD, the then applicable royalties shall be calculated.  The Parties may vary the method of payment set forth herein at any time upon mutual written agreement, and any change shall be consistent with the local Law at the place of payment or remittance.

 

 

  

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(b)           Invoices.  Licensor shall address its invoices to:

 

Ares Trading SA

Zone industrielle de l’Ouriettaz

1170 Aubonne

Switzerland

With a copy to:

Merck KGaA

Frankfurter Strasse 250

64293 Darmstadt

Germany

Attn: ***, Alliance Management

	
8.10

	
Royalty Reports and Records Retention.  Within *** days after the end of each Calendar Quarter during which Product has been sold, Merck shall deliver to Licensor, together with the applicable royalty payment due for such Calendar Quarter, a written report of Net Sales on a Product by Product and country by country basis subject to royalty payments for such Calendar Quarter. Such report shall be deemed “Confidential Information” of Merck subject to the obligations of ARTICLE 10 of this Agreement. For *** after each sale of Product occurs, Merck shall, and shall ensure that its Affiliates and Sublicensees, keep complete and accurate records of such sale in sufficient detail to confirm the accuracy of the royalty calculations hereunder.

 

	
8.11

	
Legal Restrictions.  If at any time legal restrictions prevent the remittance by Merck of all or any part of royalties due on Net Sales in any country, Merck shall have the right and option to make such payment either by depositing the amount thereof in local currency to an account in the name of Licensor in a bank or other depository selected by Licensor in such country.

 

	
8.12

	
Late Payments.  All payments under this Agreement shall earn interest from the date due until paid at a per annum rate equal to the lesser of (a) the maximum rate permissible under Law and (b) *** percent (***%) above the monthly Reuters 01 EURIBOR, measured at 2 p.m. Frankfurt/Germany time on the date payment is due.  Interest will be calculated on a 365/360 basis.  An example of the interest rate calculation follows, assuming that the Reuters interest rate is 0.25% and a payment of $10,000,000 is thirty (30) days overdue:

 

Step 1: applicable annual interest rate on a 365/360 basis = ***% + 0.25% = ***%

 

Step 2: applicable interest rate for the period of delay = 30/360 x ***% = ***%

 

Step 3: total interest due = 10,000,000 x ***% = $***

 

 

  

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8.13

	
Audits.

 

(a)           Audits Generally.  During the Royalty Term and for *** thereafter, and not more than once in each Calendar Year, Merck shall permit, and shall cause its Affiliates or Sublicensees to permit, an independent certified public accounting firm of nationally recognized standing selected by Licensor, and reasonably acceptable to Merck or such Affiliate or Sublicensee, to have access to and to review, during normal business hours upon reasonable prior written notice, the applicable records of Merck and its Affiliates or Sublicensees to verify the accuracy of the royalty reports and payments under this ARTICLE 8. Such review may cover the records for sales made in any Calendar Year ending not more than *** prior to the date of such request. The accounting firm shall disclose to Licensor and Merck only whether the royalty reports are correct or incorrect and the specific details concerning any discrepancies. No other information shall be provided to Licensor.

 

(b)           Audit-Based Reconciliation.  If such accounting firm concludes that additional royalties were owed during such period, and Merck agrees with such calculation, Merck shall pay the additional undisputed royalties within *** after the date Licensor delivers to Merck such accounting firm’s written report.  If such accounting firm concludes that an overpayment was made, such overpayment shall be fully creditable against amounts payable in subsequent payment periods or, at Merck’s request, shall be promptly reimbursed to Merck. If Merck disagrees with such calculation, it may retain its own independent certified public accounting firm of recognized standing and reasonably acceptable to Licensor, to conduct a review at Merck’s expense, and if such firm concurs with the other accounting firm, Merck shall make the required payment within *** after the date Merck receives the report of its accounting firm. If Merck’s accounting firm does not concur, Merck and Licensor shall meet and negotiate in good faith a resolution of the discrepancies between the two firms. Licensor shall pay for the cost of any audit requested by Licensor, unless Merck has underpaid Licensor by the greater of (i) *** percent (***%) or more or (ii) *** USD ($***), in which case Merck shall pay for the costs of audit.

 

(c)           Audit Confidentiality.  Each Party shall treat all information that it receives under this Section 8.13 in accordance with the confidentiality provisions of ARTICLE 10, and shall cause its accounting firm to enter into an acceptable confidentiality agreement with the other Party obligating such firm to retain all such financial information in confidence pursuant to such confidentiality agreement, except to the extent necessary for such Party to enforce its rights under this Agreement.

 

	
8.14

	
Taxes.

 

(a)           Withholding Tax.  Licensor shall be responsible for the payment of any and all Taxes levied on account of the royalties and other payments paid to Licensor by Merck or its Affiliates or Sublicensees under this Agreement. If Law requires that Taxes be deducted and withheld from royalties or other payments paid under this Agreement, Merck shall: (i) deduct those Taxes and interests and penalties assessed thereon from the payment or from any other payment owed by Merck hereunder; (ii) pay the Taxes to the proper Governmental Body; (iii) send evidence of the obligation together with proof of Tax payment to Licensor within *** days following such payment; (iv) remit the net amount, after deductions or withholding made under this Section 5.13(a); and (v) cooperate with Licensor in any way reasonably requested by Licensor, to obtain available reductions, credits or refunds of such Taxes; provided, however, that Licensor shall reimburse Merck for Merck’s Out-of-Pocket Expenses incurred in providing such assistance.

 

 

  

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(b)           Value Added Tax.  It is understood and agreed between the Parties that any payments made by Merck under this Agreement are inclusive of any value added or similar Tax imposed upon such payment and that Licensor shall be responsible for the payment of any and all Taxes levied on account of any payments paid to Licensor by Merck. Merck is entitled to receive a proper tax invoice where any Value Added Tax amount is shown separately.

 

ARTICLE 9

INVENTIONS AND PATENTS

 

	
9.1

	
Patent Listing under Public Health Services Act.  Each Party shall immediately give written notice to the other Party of any certification of which they become aware filed pursuant to 42 USC. §262(1)(3) (or any amendment or successor statute thereto) claiming that any Licensor Patents Covering or claiming Product, or the manufacture of Product, are invalid or unenforceable, or that infringement will not arise from the manufacture, use or sale of a product by a Third Party.

 

	
9.2

	
Further Assurances.  Licensor shall require all of its employees, agents, and independent contractors and any Affiliates and Third Parties working on its behalf under this Agreement (and their respective employees, and independent contractors ), to assign to Licensor any Licensor Technology.

 

	
9.3

	
Ownership of Inventions.  Each Party shall own any inventions made solely by its own employees, agents, or independent contractors in the course of conducting its activities under this Agreement, together with all intellectual property rights therein (“Sole Inventions”).  Patent Rights claiming any inventions that are made jointly by employees, agents, or independent contractors of each Party in the course of performing activities under this Agreement, together with all intellectual property rights therein (“Joint Inventions”) shall be jointly owned by the Parties.  Inventorship shall be determined in accordance with U.S. patent laws.

 

	
9.4

	
Patent Prosecution and Maintenance.  The following terms and conditions shall become effective as of the Option Exercise Date:

 

(a)           Licensor Patents.  Licensor shall have the first right to file, prosecute and maintain Licensor Patents in the Territory, and Licensor shall bear the costs and expenses of such activities.  Licensor shall keep Merck informed of the status of the filing and prosecution of Licensor Patents or related proceedings (e.g. interferences, oppositions, reexaminations, reissues, revocations or nullifications) in the Territory in a timely manner, and will take into consideration the advice and recommendations of Merck.  At Licensor’s request, Merck will provide Licensor with reasonable, free-of-charge assistance in prosecuting Licensor Patents to the extent possible, including providing such data in Merck’s Control that is, in Licensor’s reasonable judgment, needed to support the prosecution of a Licensor Patent.

 

 

  

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*** Confidential material redacted and filed separately with the Commission.

 

 

(b)           Election Not to File and Prosecute Licensor Patents.  If Licensor elects not to file or to continue to prosecute or maintain a Licensor Patent in the Territory, then it shall notify Merck in writing at least *** days before any final deadline applicable to the filing, prosecution or maintenance of such Licensor Patent, as the case may be, or any other date by which an action must be taken to establish or preserve such Licensor Patent in such country or possession.  In such case, Merck shall have the right to pursue the filing or support the continued prosecution or maintenance of such Licensor Patent.  If Merck fails to continue prosecution or maintenance of any of the Licensor Patents, then such abandoned Licensor Patents shall not extend the Royalty Term (i.e., no royalty payments shall be due under this Agreement on account of such abandoned Licensor Patents).  In the event Merck provides written notice expressing its interest in obtaining such Licensor Patent(s), Licensor shall, free-of-charge, assign and transfer to Merck the ownership of, and interest in, such Licensor Patent(s) and Licensor shall cooperate with Merck for assignment and transfer of such Licensor Patent(s).  With respect to any such assigned and transferred Patent Rights(s):  (i) Merck shall bear all costs of preparation, filing, prosecution and maintenance thereof; (ii) such Patent Rights shall cease to be Licensor Patents; (iii) Merck hereby agrees not to exercise rights under such Patent Rights with respect to Product outside of the Field; and (iv) Merck hereby covenants not to sue Licensor or its licensees, successors or assigns (which licensees, successors or assigns are the beneficiaries of a contemporaneous license under, or assignment of, other intellectual property rights Controlled by Licensor) for infringement of such Patent Rights on account of Licensor’s (or such licensees, successors or assigns) activities outside of the Field.

 

(c)           Joint Patents.  Merck shall have the first right and authority to prepare, file, prosecute and maintain Patent Rights (“Joint Patents”) covering or claiming Joint Inventions on a worldwide basis as an equally shared cost and expense of such Patent Rights.  Merck shall keep Licensor informed of the status of the filing and prosecution of Joint Patents or related proceedings (e.g. interferences, oppositions, reexaminations, reissues, revocations or nullifications), and will take into consideration the advice and recommendations of Licensor.  At Merck’s request, Licensor will provide Merck with reasonable free-of-charge assistance in prosecuting Joint Patents to the extent possible, including providing such data in Licensor’s Control that is, in Merck’s reasonable judgment, needed to support the prosecution of a Joint Patent.  Merck shall invoice Licensor from time-to-time for Licensor’s portion of the costs associated with Merck’s preparation, filing, prosecution and maintenance of the Joint Patents, which invoices Licensor shall pay within *** days of receipt; provided, that, if Licensor does not pay such invoices when due, then Merck may offset any amounts due to Licensor against such unpaid invoice(s).

 

 

  

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(d)           Election Not to File and Prosecute Joint Patents or to Share in Joint Patent-Related Costs.

 

(i)           If Merck elects not to file or to continue to prosecute or maintain a Joint Patent in the Territory, then it shall notify Licensor in writing at least *** days before any final deadline applicable to the filing, prosecution or maintenance of such Joint Patent, as the case may be, or any other date by which an action must be taken to establish or preserve such Joint Patent in such country or possession.  In such case, Licensor shall have the right to pursue the filing or support the continued prosecution or maintenance of such Joint Patent at its sole cost and expense and, in the event Licensor provides written notice expressing its interest in obtaining such Joint Patent(s), Merck shall, free-of-charge, assign and transfer to Licensor its ownership of, and interest in, such Joint Patent(s); provided, that, for purposes of this Agreement any such Joint Patent(s) shall not be Licensor Patent(s).

 

(ii)           If Licensor does not desire to share in the expense of prosecuting or maintaining any given Joint Patent(s) it shall so advise Merck in writing and shall, free-of-charge, assign and transfer to Merck its ownership of, and interest in, such Joint Patent(s), and from and after such assignment Merck shall be solely responsible for the cost and expense of maintaining such Patent Rights.

 

(e)           Patent Term Extension.

 

(i)           Licensor shall be responsible for obtaining patent term extensions wherever available for Licensor Patents.

 

(ii)          Merck shall be responsible for obtaining patent term extensions wherever available for Joint Patents.

 

(iii)         The non-obtaining Party shall provide the obtaining Party, free-of-charge, with all relevant information, documentation and assistance as may reasonably be requested by the obtaining Party.  Any such assistance, supply of information and consultation shall be provided promptly and in a manner that will ensure that all patent term extensions for the subject Patents are obtained wherever legally permissible, and to the maximum extent available. In the event that any election with respect to obtaining patent term extensions is to be made, Merck shall have the right to make such elections, and Licensor shall abide by all such elections.

 

(f)           Merck Patents.  Merck shall own any Know-How constituting a Sole Invention developed by Merck or any of its Affiliates or a Third Party on behalf of Merck and shall have the right, but not the obligation, to file, prosecute and maintain Patent Rights covering or claiming any such Know-How (“Merck Patent”).  Merck shall bear all costs and expenses of filing, prosecuting and maintaining Merck Patents and Licensor shall have no particular rights with respect thereto.

 

	
9.5

	
Enforcement of Patents and Know-How.  The following terms and conditions shall become effective as of the Option Exercise Date:

 

 

  

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(a)           Notice.

 

(i)           If either Party believes that an infringement, unauthorized use, misappropriation or ownership claim or threatened infringement or other such activity by a Third Party with respect to any Licensor Technology or Joint Invention, or if a Third Party claims that any Licensor Patent or Joint Patent is invalid or unenforceable, then: (1) the Party possessing such knowledge or belief shall notify the other Party, (2) the Parties (and any relevant Third Party licensees or sublicensees of the Parties) shall promptly execute a common interest agreement for the purpose of maintaining privilege and otherwise specifically addressing the exchange of information under such circumstances (“Common Interest Agreement”), and (3) the Parties shall provide, under such Common Interest Agreement, each other with details of such infringement or claim that are known by such Party.  All exchanges of information under this Section 9.5 shall be conducted under the auspices of the Common Interest Agreement.

 

(ii)           In the event that Licensor believes that a Merck Patent, if any, is being infringed by a Third Party or if a Third Party claims that any Merck Patent is invalid or unenforceable, Licensor shall notify Merck and provide it with details of such infringement or claim.

 

(b)           Right to Bring an Action.  Merck shall have the first right to attempt to resolve any infringement or claim, including by filing an infringement suit, defending against such claim or taking other similar action, with respect to a Licensor Patent or Joint Patent (each, an “Action”) and to compromise or settle any such infringement or claim; provided, that if such Action relates to a product covered by such Licensor Patent outside of the Field and such Action does not relate to, and the outcome of such action is not reasonably likely to adversely affect, the Product in the Field, then, Merck will not have the right to resolve such infringement or claim.  At Merck’s request, Licensor shall immediately provide Merck with all relevant documentation (as may be requested by Merck) evidencing that Merck is validly empowered by Licensor to take such an Action. Licensor is obligated to join Merck in such Action if Merck determines that it is necessary to demonstrate “standing to sue”.  If Merck does not intend to prosecute or defend an Action, Merck shall promptly inform Licensor and Licensor may undertake the prosecution or defense of such Action.

 

(c)           Costs of an Action.  Subject to the respective indemnity obligations of the Parties set forth in ARTICLE 12, *** an Action under 9.5(b) shall pay *** costs associated with such Action, other than *** the expenses of *** if the *** elects to ***.  Each Party shall have the right to join an Action relating to a Licensor Patent***.

 

(d)           Settlement.  Neither Party shall settle or otherwise compromise any Action by admitting that any Licensor Patent or Joint Patent is invalid or unenforceable without the other Party’s prior written consent with such consent not to be unreasonably withheld, conditioned or delayed, and, in the case of Licensor, Licensor may not settle or otherwise compromise an Action in a way that adversely affects or would be reasonably expected to adversely affect Merck’s rights or benefits hereunder, without Merck’s prior written consent with such consent not to be unreasonably withheld, conditioned or delayed.

 

 

  

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(e)           Reasonable Assistance.  The Party not enforcing or defending Licensor Patents or Joint Patents shall provide reasonable assistance to the other Party, including providing access to relevant documents and other evidence and making its employees available, subject to *** of any *** on an *** by the *** or *** in providing such assistance.

 

(f)           Distribution of Amounts Recovered.  Any amounts recovered by the Party taking an Action pursuant to this Section 9.5, whether by settlement or judgment, shall be allocated in the following order: (i) to reimburse the Party taking such Action for any costs incurred; (ii) to reimburse the Party not taking such Action for its costs incurred in such Action, if it joins or is joined in such Action; and (iii) the remaining amount of such recovery shall be (x) ***the ***if ***is the *** and (y) ***to ***and ***for the ***in which the ***is ***and ***to ***a ***on such ***based on the ***if ***is the ***the ***.

 

(g)           Merck Patents.  Merck shall have the sole right and authority, but not the obligation, to enforce Merck Patents against any Third Party infringer; provided, that Licensor shall provide reasonable assistance to Merck with respect thereto, including providing access to relevant documents and other evidence and making its employees available, subject to Merck’s reimbursement of any Out-of-Pocket Expenses incurred on an on-going basis in providing such assistance.

 

	
9.6

	
Third Party Actions Claiming Infringement. The following terms and conditions shall become effective as of the Option Exercise Date:

 

(a)           Notice.  If a Party becomes aware of any Third Party Action, then (1) such Party shall promptly notify the other Party, (2) the Parties shall, if one has not already been entered into, enter into a Common Interest Agreement, and (3) the Parties shall provide, under such Common Interest Agreement, each other all details regarding such claim or action that is reasonably available to such Party.

 

(b)           Right to Defend.  Merck shall have the right, at its sole expense, but not the obligation, to defend a Third Party Action described in Section 9.6(a) and to compromise or settle such Third Party Action to the extent that (i) Merck is a named party in such Third Party Action or (ii) such action relates to ***.  If Merck declines or fails to assert its intention to defend such Third Party Action within *** days of after sending (in the event that Licensor is the notifying Party) or receipt (in the event that Merck is the notifying Party) of notice under Section 9.6(a), then Licensor shall have the right to defend such Third Party Action.  In the event that Merck elects to defend the Third Party Action according to this Section 9.6(b) and such Third Party Action also concerns allegations of infringement or misappropriation outside of the Field or the Territory, Merck shall reasonably cooperate with Licensor regarding the defense of the Third Party Action to the extent that it so concerns allegations of infringement or misappropriation outside of the Field or the Territory.

 

(c)           Consultation.  The Party defending a Third Party Action pursuant to Section 9.6(b) shall be the “Controlling Party.”  The Controlling Party shall consult with the non-Controlling Party on all material aspects of the defense. The non-Controlling Party shall have a reasonable opportunity for meaningful participation in decision-making and formulation of defense strategy.  The Parties shall reasonably cooperate with each other in all such actions or proceedings.  The non-Controlling Party will be entitled to be represented by independent counsel of its own choice at its own expense.

 

 

  

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(d)           Appeal.  In the event that a judgment in a Third Party Action is entered against the Controlling Party and an appeal is available, the Controlling Party shall have the first right, but not the obligation, to file such appeal.  In the event the Controlling Party does not desire to file such an appeal, it will promptly, in a reasonable time period (i.e., with sufficient time for the non-Controlling Party to take whatever action may be necessary) prior to the date on which such right to appeal will lapse or otherwise diminish, permit the non-Controlling Party to pursue such appeal at such non-Controlling Party’s own cost and expense.  If Law requires the other Party’s involvement in an appeal, the other Party shall be a nominal party of the appeal and shall provide reasonable cooperation to such Party at such Party’s expense.

 

(e)           Costs of an Action.  Subject to the respective indemnity obligations of the Parties set forth in ARTICLE 12, the *** shall pay *** costs associated with such Third Party Action other than the expenses ***if the ***elects to ***; provided, that, if Merck is ***, then Merck shall have the right to deduct from any amount payable to Licensor under *** or under *** *** an amount equal to *** percent (***%) of any amounts paid by Merck in connection with such Third Party Action; provided, that such deductions***, may not reduce the amount of *** and *** payable by Merck to Licensor for any *** by more than *** percent (***%) of the amount that would otherwise be due.  Excess amounts that Merck is not allowed to deduct pursuant to the foregoing proviso will be carried forward into future ***.  Each Party shall have the right to join a Third Party Action defended by the other Party, at its own expense.

 

(f)           No Settlement Without Consent.  Neither Party shall settle or otherwise compromise any Third Party Action (i) by admitting that any Licensor Patent or Joint Patent is invalid or unenforceable without the other Party’s prior written consent, or (ii) in a way that adversely affects or would be reasonably expected to adversely affect the other Party’s rights and benefits hereunder, without such other Party’s prior written consent.

 

ARTICLE 10

CONFIDENTIALITY

 

	
10.1

	
Confidentiality Obligations.  Each Party agrees that, for the Term and for *** years thereafter, such Party shall, and shall ensure that its Representatives, hold in confidence all Confidential Information disclosed to it by the other Party pursuant to this Agreement, unless such information:

 

(i)          is or becomes generally available to the public other than as a result of disclosure by the recipient;

 

 

  

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(ii)         is already known by or in the possession of the recipient at the time of disclosure by the disclosing Party;

 

(iii)        is independently developed by recipient without use of or reference to the disclosing Party’s Confidential Information; or

 

(iv)        is obtained by recipient from a Third Party that has not breached any obligations of confidentiality.

 

The recipient shall not disclose any of the Confidential Information, except to Representatives of the recipient who need to know the Confidential Information for the purpose of performing the recipient’s obligations, or exercise its rights, under this Agreement and who are bound by obligations of non-use and non-disclosure substantially similar to those set forth herein.  The recipient shall be responsible for any disclosure or use of the Confidential Information by such Representatives.  The recipient shall protect Confidential Information using not less than the same care with which it treats its own confidential information, but at all times shall use at least reasonable care.  Each Party shall: (a) implement and maintain appropriate security measures to prevent unauthorized access to, or disclosure of, the other Party’s Confidential Information; (b) promptly notify the other Party of any unauthorized access or disclosure of such other Party’s Confidential Information; and (c) cooperate with such other Party in the investigation and remediation of any such unauthorized access or disclosure.

 

	
10.2

	
Use.  Notwithstanding Section 10.1, a Party may use the Confidential Information of the other Party for the purpose of performing its obligations, or exercising its rights, under this Agreement, including for purposes of:

 

(i)           filing or prosecuting patent applications, subject to the terms of ARTICLE 9;

 

(ii)          prosecuting or defending litigation;

 

(iii)         conducting pre-clinical studies or Clinical Trials pursuant to this Agreement;

 

(iv)         seeking or maintaining Regulatory Approval for Product; or

 

(v)          complying with Law, including securities Law and the rules of any securities exchange or market on which a Party’s securities are listed or traded.

 

In addition to the foregoing, Merck may, in furtherance of its rights under this Agreement, disclose Confidential Information of Licensor to any Third Party, provided that such Third Party is bound by obligations of confidentiality at least as stringent as the ones herein.

 

 

  

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In making any disclosures set forth in clauses (i) through (v) above, the disclosing Party shall, where reasonably practicable, give such advance notice to the other Party of such disclosure requirement as is reasonable under the circumstances and will use its reasonable efforts to cooperate with the other Party in order to secure confidential treatment of such Confidential Information required to be disclosed. In addition, in connection with any permitted filing by either Party of this Agreement with any Governmental Body the filing Party shall endeavor to obtain confidential treatment of economic, trade secret information and such other information as may be requested by the other Party, and shall provide the other Party with the proposed confidential treatment request with reasonable time for such other Party to provide comments, and shall include in such confidential treatment request all reasonable comments of the other Party.

 

	
10.3

	
Required Disclosure.  The recipient may disclose the Confidential Information to the extent required by Law or court order; provided, however, that the recipient promptly provides to the disclosing party prior written notice of such disclosure and provides reasonable assistance in obtaining an order or other remedy protecting the Confidential Information from public disclosure.

 

	
10.4

	
Publications.  Following the Option Exercise Date, (i)Licensor shall not publish any information relating to Product without the prior written consent of Merck (which consent may be withheld or given in Merck’s sole discretion), unless such information has already been publicly disclosed either prior to the Effective Date or after the Effective Date through no fault of Licensor or otherwise not in violation of this Agreement; (ii) Merck shall have the right to make such publications as it chooses, in its sole discretion, without the approval of Licensor; and (iii) Licensor shall submit to Merck for Merck’s written approval (which approval be granted or denied in Merck’s sole discretion) any publication or presentation (including in any seminars, symposia or otherwise) of information related directly or indirectly to Product for review and approval at least ninety (90) days prior to submission for the proposed date of publication or presentation.

 

	
10.5

	
Press Releases and Disclosure.

 

(a)           Initial Press Release.  The Parties’ joint public announcement regarding the execution of this Agreement is set forth on Schedule 10.5(a) hereto.

 

(b)           Subsequent Public Disclosures By Licensor.  Licensor may not make any subsequent press release or public announcements or public disclosure regarding this Agreement beyond the scope of the public announcement set forth on Schedule 10.5(a) hereto or, subsequent to the Option Exercise Date, any matter covered by this Agreement, including the Development or Commercialization of Product, without the prior written consent of Merck, except that, in the event that Licensor is, in the opinion of its counsel, required under applicable Laws or stock market listing requirements as a publicly-traded company to make a public announcement or make a particular disclosure in its periodic filings or registration statements filed with the U.S. Securities and Exchange Commission, Licensor may do so but shall provide the text of such planned disclosure to Merck as far in advance as is reasonably practicable (and to the extent possible no less than *** days prior to disclosure) so as to provide a reasonable opportunity to comment thereon and Licensor shall incorporate all reasonable comments of Merck regarding such disclosure.

 

 

  

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(c)           Public Disclosures by Merck.

 

(i)           Prior to the Option Exercise Date:  (i) Merck may not make any subsequent press release or public announcements regarding this Agreement beyond the scope of the public announcement set forth on Schedule 10.5(a) hereto or any matter covered by this Agreement, including the Development or Commercialization of Product, without the prior written consent of Licensor, and (ii) in the event that Merck is, in the opinion of its counsel, required under applicable Laws as a publicly-traded company to make a public announcement or make a particular disclosure to investors or potential investors, Merck shall provide the text of such planned disclosure to Licensor as far in advance as is reasonably practicable (and to the extent possible no less than seven (7) days prior to disclosure) so as to provide a reasonable opportunity to comment thereon and incorporate all reasonable comments of Licensor regarding such disclosure.

 

(ii)           Following the Option Exercise Date, Merck shall have the right to make such press releases or other public announcements as it chooses, in its sole discretion, without the approval of Licensor.

 

	
10.6

	
Agreement Filing.  The Parties acknowledge that Licensor may be obligated to file a copy of this Agreement with the SEC or other applicable entity having regulatory authority over Licensor securities or the exchange thereof.  Licensor shall be entitled to make such a required filing; provided, that it requests confidential treatment of certain commercial terms and sensitive technical terms hereof as agreed to by the Parties pursuant to a separate written agreement (which agreement may be documented by an email exchange confirming the Parties’ agreement regarding the redactions to be sought through such confidential treatment).

 

ARTICLE 11

REPRESENTATIONS, WARRANTIES AND COVENANTS

 

	
11.1

	
Representations and Warranties.  Each Party represents and warrants to the other Party that, as of the Effective Date and the Option Exercise Date:

 

(i)           such Party is duly organized and validly existing under the Laws of the jurisdiction of its incorporation or organization;

 

(ii)          such Party has taken all action necessary to authorize the execution and delivery of this Agreement and the performance of its obligations under this Agreement;

 

(iii)         this Agreement is a legal and valid obligation of such Party, binding upon such Party and enforceable against such Party in accordance with the terms of this Agreement, except as enforcement may be limited by applicable bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights generally and by general equitable principles.  The execution, delivery and performance of this Agreement by such Party does not conflict with, breach or create in any Third Party the right to accelerate, terminate or modify any agreement or instrument to which such Party is a party or by which such Party is bound, and does not violate any Law of any Governmental Body having authority over such Party; and

 

 

  

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(iv)         such Party has all right, power and authority to enter into this Agreement, to perform its obligations under this Agreement.

 

	
11.2

	
Additional Representations and Warranties of Licensor.  Licensor represents and warrants to Merck that, as of the Effective Date, subject to the disclosures on Schedule 11.2, and as of the Option Exercise Date, subject to an updated Schedule 11.2 provided in accordance with, and subject to, Section 2.1:

 

(i)           no consent by any Third Party or Governmental Body is required with respect to the execution and delivery of this Agreement by Licensor or the consummation by Licensor of the transactions contemplated hereby;

 

(ii)           no claims have been asserted, or, to Licensor’s Knowledge, threatened by any Person, nor to Licensor’s Knowledge are there any valid grounds for any claim of any such kind (a) challenging the validity, effectiveness, or ownership of the Licensor Technology, and/or (b) to the effect that the use, reproduction, modification, manufacturing, distribution, licensing, sublicensing, sale or any other exercise of rights in any of the Licensor Technology infringes, will infringe, misappropriates or will misappropriate any intellectual property right of any Person. No such claims have been asserted or, to the Knowledge of Licensor, are threatened;

 

(iii)           to the Knowledge of Licensor, there is no unauthorized use, infringement or misappropriation of any of Licensor Technology by any employee or former employee of Licensor, or any other Third Party;

 

(iv)           the Licensor Patents (a) owned by Licensor are subsisting and are not the subject of any litigation procedure, discovery process, interference, reissue, reexamination, opposition, appeal proceedings or any other legal dispute, and (b) in-licensed by Licensor are subsisting and are not to Licensor’s Knowledge the subject of any litigation procedure, discovery process, interference, reissue, reexamination, opposition, appeal proceedings or any other legal dispute;

 

(v)           the Licensor Patents (a) constitute all Patent Rights owned or Controlled by Licensor as of the Effective Date (and, in conjunction with the exercise of the Option, the Option Exercise Date), that are directly related to, or necessary or useful for, the research, Development, manufacture, use or Commercialization of Product and (b) listed on Schedule 1.40 hereto constitute all Patent Rights that are, to Licensor’s Knowledge, necessary for, the research, Development, manufacture, use or Commercialization of Product as proposed or conducted by Licensor as of the Effective Date (and, in conjunction with the exercise of the Option, the Option Exercise Date);

 

 

  

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(vi)           the Licensor Know-How (a) constitutes all Know-How owned or Controlled by Licensor as of the Effective Date (and, in conjunction with the exercise of the Option, the Option Exercise Date) that is directly related to, or necessary or useful for, the research, Development, manufacture, use or Commercialization of the Product and (b) constitutes all Know-How that is, to Licensor’s Knowledge, necessary for, the research, Development, manufacture, use or Commercialization of Product as proposed or conducted by Licensor as of the Effective Date (and, in conjunction with the exercise of the Option, the Option Exercise Date);

 

(vii)           Licensor has not developed, subcontracted or licensed to a Third Party the right to develop a Competing Product;

 

(viii)           to Licensor’s Knowledge, no Third Party has filed, pursued or maintained or threatened in writing to file, pursue or maintain any claim, lawsuit, charge, complaint or other action alleging that any Licensor Patent is invalid or unenforceable;

 

(ix)           to Licensor’s Knowledge, Merck’s and its Affiliates’ and Sublicensees’ practice and use of the inventions claimed in, or covered by, the Licensor Patents as the Product has been Developed by Licensor prior to the Effective Date (and, in conjunction with the exercise of the Option, the Option Exercise Date), will not infringe any intellectual property rights of any Third Party;

 

(x)           all Representatives of Licensor who have performed any activities on its behalf in connection with research regarding the Product have assigned to Licensor the whole of their rights in any intellectual property made, discovered or developed by them as a result of such research, and no Third Party has any rights to any such intellectual property except as provided in an Existing Third Party Agreement;

 

(xi)           Licensor has all right, title and interest in and to the Licensor Technology and Licensor Technology is free and clear of any liens, charges, encumbrances or rights of others to possession or use, except for those existing liens for secured creditors that are identified on Schedule 11.2;

 

(xii)           Licensor has not previously licensed, assigned, transferred, or otherwise conveyed any right, title or interest in and to the Licensor Technology to any Third Party, including any rights with respect to Product, in conflict with the option or license rights granted herein;

 

(xiii)           the Licensor Technology constitutes all of the intellectual property of Licensor, which, to the Knowledge of Licensor as of the Effective Date (and, in conjunction with the exercise of the Option, the Option Exercise Date) could reasonably be expected to be necessary or useful in the research, Development, manufacture, import, export, use or Commercialization of Product in the Field;

 

(xiv)           Licensor has the right, power and authority to grant to Merck the rights granted to Merck hereunder with respect to the Existing Third Party Agreements. In particular, the grant of such sublicense requires no consent, waiver or other action by any party to the Existing Third Party Agreements and the rights and obligations of Merck set forth in this Agreement do not contravene nor are they inconsistent with or in conflict with the terms of any Existing Third Party Agreement;

 

 

  

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(xv)           The Existing Third Party Agreements constitute all agreements with Third Parties pursuant to which Licensor has in-licensed, or otherwise obtained rights, with respect to the Product.  Licensor has provided to Merck an accurate, true and complete copy of each of the Existing Third Party Agreements, as amended to date and each of the Existing Third Party Agreements is in full force and effect and Licensor is not in breach or default in the performance of its obligations under any of the Existing Third Party Agreements.  Licensor has not received any notice from any Third Party of any breach, default or non-compliance of Licensor under the terms of any of the Existing Third Party Agreements.  There have been no amendments or other modification to any Existing Third Party Agreements, except as have been disclosed to Merck in writing;

 

(xvi)           except as set forth on Schedule 11.2(xvi), Licensor is not aware of any additional Third Party licenses that have to be taken now or in the future to guarantee freedom-to-operate to Develop, manufacture and Commercialize Products without any limitation;

 

(xvii)           all tangible information and data provided by or on behalf of Licensor to Merck on or before, on the Effective Date, the Effective Date, and on the Option Exercise Date, the Option Exercise Date, in contemplation of entering into this Agreement as of the Effective Date (and, in conjunction with the exercise of the Option, the Option Exercise Date) was and is true, accurate and complete in all material respects, and Licensor has not failed to disclose, or cause to be disclosed, any information or data that would cause the information and data that has been disclosed to be misleading in any material respect;

 

(xviii)           Licensor (and its Affiliates) has not employed or otherwise used in any capacity, and will not employ or otherwise use in any capacity, the services of any Person debarred under United States law, including under Section 21 USC 335a or any foreign equivalent thereof, with respect to the Product (including in the context of performing the Abili-T Trial);

 

(xix)           all research and development (including non-clinical studies, Clinical Studies and the Abili-T Trial) related to the Product prior to the Effective Date (and, in conjunction with the exercise of the Option, the Option Exercise Date), has been conducted in accordance with all Laws;

 

(xx)           no Governmental Authority has notified Licensor or its Affiliates, and Licensor is not otherwise aware, that the Development, manufacture, use or Commercialization of Product was or is in violation of any Law or the subject of any investigation;

 

(xxi)           Licensor has not received notice from any Regulatory Authority and is not otherwise aware that there are any circumstances currently existing which would reasonably be expected to lead to:  (1) any loss of or refusal to renew any Regulatory Approvals relating to Product; (2) renewal on terms less advantageous to Licensor or any of its Affiliates, if applicable, or any subsequent holder thereof, than the terms of those Regulatory Approvals currently in force; (iii) recall, withdrawal, suspensions or seizure of Product; or (iv) an action to enjoin production of Product;

 

 

  

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(xxii)           Licensor has delivered to Merck copies of all: (1) reports of FDA Form 483 inspection observations, or any equivalent report by inspectors or officials from any other Regulatory Authority of any situation requiring attention or correction or of conditions or circumstances that are objectionable or otherwise in contrary to Law; (2) FDA Notices of Adverse Findings or any equivalent correspondence, notice or communication from any other Regulatory Authority indicating a failure to comply with Law or other requirements; (3) establishment inspection reports; (4) warning letters or untitled letters; and (v) other documents that assert ongoing lack of compliance in any material respect with any Law or regulatory requirements (including those of the FDA), in each case received by Licensor from the FDA or any other Regulatory Authority relating to Product or arising out of the conduct of Licensor’s business relating to Product; and

 

(xxiii)           Licensor and each of its Affiliates, as applicable, has made all necessary filings and received all necessary approvals and consents for the conduct of all Clinical Trials performed by it or them with respect to Product from the necessary Regulatory Authorities and: (1) Licensor is not aware of any proceedings or actions threatened or taken by any Regulatory Authorities to suspend or terminate any ongoing Clinical Trials for Product; (2) Licensor has not received any notice, charge, subpoena or other request for information, which has not been complied with or withdrawn, by a Regulatory Authority asserting any material breach of the conditions for approval of any ongoing Clinical Trials; and (3)  Licensor and its Affiliates, as applicable, have conducted all Clinical Trials for Product pursuant to valid protocols, and have received no notice or indication, in writing or orally, from any Regulatory Authority to the effect that any such protocol is not sufficient to support approval of Product or any Indications for Product.

 

	
11.3

	
Licensor Covenants.  Licensor covenants to Merck that:

 

(i)           Licensor shall fulfill all of its obligations, including but not limited to its payment obligations, under any Existing Third Party Agreement or any Third Party License Agreement; and

 

(ii)           Licensor shall not amend or waive, or take any action or omit to taking any action that would alter, any of Licensor’s rights under any Existing Third Party Agreement or any Third Party License Agreement in any manner that adversely affects, or would reasonably be expected to adversely affect, Merck’s rights and benefits under this Agreement. Licensor shall promptly notify Merck of any default under, termination or amendment of, any Existing Third Party Agreement or Third Party License Agreement.

 

 

  

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ARTICLE 12

INDEMNIFICATION AND INSURANCE

 

	
12.1

	
Indemnification by Merck.  Merck shall indemnify, defend and hold Licensor and its Affiliates and each of their respective employees, officers, directors and agents (the “Licensor Indemnitees”) harmless from and against any and all liability, damage, loss, cost or expense (including reasonable attorneys’ fees) to the extent arising out of Third Party claims or suits related to: (a) Merck’s negligence or willful misconduct; (b) Merck’s performance of its obligations under this Agreement; (c) Merck’s Development or Commercialization of Product; or (d) breach by Merck of its representations or warranties set forth in ARTICLE 11; provided, however, that Merck’s obligations pursuant to this Section 12.1 shall not apply (i) to the extent such claims or suits result from the negligence or willful misconduct of any of the Licensor Indemnitees, or (ii) with respect to claims or suits arising out of breach by Licensor of its representations, warranties or covenants set forth in ARTICLE 11.

 

	
12.2

	
Indemnification by Licensor.  Licensor shall indemnify, defend and hold Merck and its Affiliates and each of their respective agents, employees, officers and directors (the “Merck Indemnitees”) harmless from and against any and all liability, damage, loss, cost or expense (including reasonable attorney’s fees) to the extent arising out of Third Party claims or suits related to: (a) the Abili-T Trial; (b) Licensor’s negligence or willful misconduct; (c) Licensor’s performance of its obligations under this Agreement; or (d) breach by Licensor of its representations, warranties or covenants set forth in ARTICLE 11; provided, however, that Licensor’s obligations pursuant to this Section 12.2 shall not apply (i) to the extent that such claims or suits result from the negligence or willful misconduct of any of the Merck Indemnitees or (ii) with respect to claims or suits arising out of a breach by Merck of its representations or warranties set forth in ARTICLE 11.

 

	
12.3

	
No Consequential Damages.  EXCEPT WITH RESPECT TO EACH PARTY’S INDEMNIFICATION OBLIGATIONS UNDER SECTION 12.1 OR SECTION 12.2, AS APPLICABLE, IN NO EVENT SHALL EITHER PARTY OR ANY OF ITS AFFILIATES BE LIABLE TO THE OTHER PARTY OR ANY OF ITS AFFILIATES FOR SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING LOSS OF PROFITS, WHETHER IN CONTRACT, WARRANTY, TORT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREIN OR ANY BREACH HEREOF.  ***

 

	
12.4

	
Notification of Claims; Conditions to Indemnification Obligations.  As a condition to a Party’s right to receive indemnification under this ARTICLE 12, it shall: (a) promptly notify the other Party as soon as it becomes aware of a claim or suit for which indemnification may be sought pursuant hereto; (b) cooperate, and cause the individual indemnitees to cooperate, with the indemnifying Party in the defense, settlement or compromise of such claim or suit; and (c) permit the indemnifying Party to control the defense, settlement or compromise of such claim or suit, including the right to select defense counsel.  In no event, however, may the indemnifying Party compromise or settle any claim or suit in a manner which admits fault or negligence on the part of the indemnified Party or any indemnitee without the prior written consent of the indemnified Party.  Each Party shall reasonably cooperate with the other Party and its counsel in the course of the defense of any such suit, claim or demand, such cooperation to include without limitation using reasonable efforts to provide or make available documents, information and witnesses.  The indemnifying Party shall have no liability under this ARTICLE 12 with respect to claims or suits settled or compromised without its prior written consent.

 

 

  

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12.5

	
Insurance.  During the Term, each Party shall obtain and maintain, at its sole cost and expense, insurance (including any self-insured arrangements) in types and amounts, that are reasonable and customary in the United States pharmaceutical and biotechnology industry for companies engaged in comparable activities.  It is understood and agreed that this insurance shall not be construed to limit either Party’s liability with respect to its indemnification obligations hereunder.  Each Party will, except to the extent self insured, provide to the other Party upon request a certificate evidencing the insurance such Party is required to obtain and keep in force under this Section 12.5.

 

ARTICLE 13

TERM AND TERMINATION

 

	
13.1

	
Term and Expiration.  The term of this Agreement (the “Term”) shall commence on the Effective Date and, unless earlier terminated as provided in this ARTICLE 13, shall continue in full force and effect, on a country-by-country basis until the date on which the Royalty Term in such country expires, at which time this Agreement shall expire in its entirety with respect to Product in such country and the terms of Section 13.4(b)(i) shall apply.  Notwithstanding the foregoing, the Term will automatically expire contemporaneously with the expiration of the Option Period if Merck has not exercised the Option.

 

	
13.2

	
Termination of the Agreement for Convenience.  At any time during the Term, Merck may, at its convenience, terminate this Agreement in its entirety, or on a country-by-country basis, upon *** days’ prior written notice to Licensor.  In the event a country is terminated, the Territory shall thereafter exclude such country for all purposes under the Agreement.

 

	
13.3

	
Termination upon Material Breach.

 

(a)           Material Breach.  If a Party breaches any of its material obligations under this Agreement, the Party not in default may give to the breaching Party a written notice specifying the nature of the default, requiring it to cure such breach, and stating its intention to terminate this Agreement if such breach is not cured within *** days. If such breach is not cured within *** days after the receipt of such notice and such breach remains uncured, the Party not in default shall be entitled to terminate this Agreement immediately by written notice to the other Party.  For clarity, such material obligations may apply to the performance of either: (i) this Agreement in its entirety, in which case this provision shall apply to the entire Agreement; or (ii) a specific Product or Product(s), in which case this provision shall apply only to such affected Product or Product(s).  Notwithstanding the foregoing, Licensor shall not have the right to terminate this Agreement under this Section 13.3 as a result of, or in connection with, any breach by Merck of the covenant in Section 4.1.

 

 

  

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(b)           Sole Remedy.  In the event that Merck fails to fulfill its obligations under Section 5.4 (and (1) such failure constitutes a material breach and (2) Merck does not cure such failure as provided in Section 13.3(a)), Licensor’s sole and exclusive remedy shall be to terminate this Agreement as provided in Section 13.3(a) on a Product-by-Product basis.

 

(c)           Material Breach Dispute.  Any dispute regarding an alleged material breach of this Agreement shall be resolved in accordance with ARTICLE 14.

 

	
13.4

	
Effects of Expiration or Termination.

 

(a)           Survival.

 

(i)           Notwithstanding the expiration or termination of this Agreement, the following provisions shall survive:  ARTICLE 1 and Sections 5.7 (only in the case of expiration), 8.12, 8.13 (for the period set forth therein), 8.14, 9.3, 9.4(b) (last sentence), 9.4(d)(i), 10.1 through 10.3 (inclusive; for the period set forth in Section 10.1), 12.1 through 12.4 (inclusive), 13.4 (as applicable), 15.1, 15.3, 15.9 through 15.11 (inclusive), and 15.13 through 15.18 (inclusive).

 

(ii)           Expiration or termination of this Agreement shall not relieve the Parties of any liability that accrued hereunder prior to the effective date of such termination. In addition, except for the termination events addressed in Section 13.3(b), termination of this Agreement shall not preclude either Party from pursuing all rights and remedies it may have hereunder or at Law or in equity with respect to any breach of this Agreement nor prejudice either Party’s right to obtain performance of any obligation.

 

(b)           Licenses.

 

(i)           As of the effective date of expiration of the Royalty Term with respect to a given country, the license from Licensor to Merck under Section 4.1 shall convert to a fully paid, royalty free, irrevocable, perpetual, exclusive, and sublicensable license under the Licensor Technology to research, develop, manufacture, have manufactured, use and Commercialize Product in the Field in such country.

 

(ii)           Upon termination of this Agreement by Merck pursuant to Section 13.2 or by Licensor pursuant to Section 13.3(a), the following terms and conditions shall apply with respect to such Product(s) and country(ies) as are the subject of such termination:

 

(1)           all licenses granted to Merck under Section 4.1 shall terminate;

 

(2)           Merck shall, upon written request by Licensor and subject to Licensor assuming legal responsibility for any Clinical Trials of such Product(s) then ongoing, transfer to Licensor, at *** cost and expense (except in the case of termination by *** pursuant to Section ***, at *** cost and expense), all regulatory documentation and Regulatory Approvals prepared or obtained by or on behalf of Merck prior to the date of such termination, to the extent solely related to such Product(s) and country(ies) and transferable, and Merck shall have the right to retain one copy of such transferred documentation and Regulatory Approvals for record-keeping purposes;

 

 

  

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(3)           Subject to the provisions of Section 13.4(b)(ii) (2), Merck shall, upon written request of Licensor, return to Licensor or, at ***’s option, destroy, at ***’s cost and expense (except in the case of termination by *** pursuant to Section ***, at ***’s cost and expense), all relevant records and materials in its possession or control containing or comprising the Licensor Know-How, or such other Confidential Information of Licensor, to the extent solely related to such Product(s) and country(ies); provided, however, that Merck shall have the right to retain one copy of such Licensor Know-How and such other Confidential Information of Licensor.

 

(4)           Merck shall, at ***’s sole option and discretion (except in the case of termination by *** pursuant to Section ***, at ***’s sole option and discretion), (i) subject to Licensor reimbursing Merck for its costs of good thereof, destroy or retain any and all chemical, biological or physical materials relating to or comprising such Product(s), including clinical supplies of such Product(s), that are Controlled by Merck, or (ii) sell such materials (in whole or in part) to Licensor at a price equal to Merck’s costs of goods (transportation and transfer costs will be Licensor’s cost and expense), plus a *** percent (***%) mark-up.  Any clinical supplies of such Product(s) or other materials purchased by Licensor from Merck shall be purchased on an “as is” basis with no representations or warranties.

 

(5)           To the extent not prohibited by Law, Merck shall wind down any ongoing Clinical Trials with respect to such Product(s), or at Licensor’s option, transfer such Clinical Trials to Licensor at ***’s cost and expense (except in the case of termination by *** pursuant to Section ***, at ***’s cost and expense), in which case Licensor shall purchase from Merck the relevant clinical trial supplies of the Product at Merck’s costs of goods, plus a *** percent (***%) mark-up.

 

(6)           Merck and its Affiliates and Sublicensees shall be entitled, during the *** period following such termination, to sell any commercial inventory of such Product(s) which remains on hand as of the date of the termination, so long as Merck pays to Licensor the royalties applicable to said subsequent sales in accordance with the terms and conditions set forth in this Agreement. Any commercial inventory remaining following *** period shall be offered for sale to Licensor at a price equal to Merck’s costs of goods, plus *** percent (***%).

 

 

  

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(iii)           Upon termination of this Agreement by Merck pursuant to Section 13.3(a), the following terms and conditions shall apply with respect to such Product(s) and country(ies) as are the subject of such termination:

 

(1)           all licenses granted to Merck under Section 4.1 shall terminate;

 

(2)           To the extent not prohibited by Law, Merck shall wind down any ongoing Clinical Trials with respect to such Product(s); and

 

(3)           Merck and its Affiliates and Sublicensees shall be entitled, during the *** period following such termination, to sell any commercial inventory of such Product(s) which remains on hand as of the date of the termination, so long as Merck pays to Licensor the royalties applicable to said subsequent sales in accordance with the terms and conditions set forth in this Agreement.

 

(4)           Upon any termination of this Agreement, at Licensor’s election, either (1) each of Merck’s Sublicensees shall continue to have the rights and licenses set forth in its respective sublicense agreement, which agreements shall be automatically assigned to Licensor, or (2) each of Merck’s Sublicensees shall be offered a right of first negotiation, on commercially reasonable terms and for a commercially reasonable period of time, with respect to the rights and licenses set forth in this Agreement that pertain to the respective sublicense agreement for which such Sublicensee is a party; provided, however, that such Sublicensee is not then in breach of any of its respective material obligations under its sublicense agreement.

 

(5)           Immediately following Merck’s notification of termination to Licensor pursuant to Sections 13.2 or 13.3(a), the diligence obligations in Section 5.5 shall no longer apply and Merck shall have the right to wind-down all then on-going Development, manufacturing and/or Commercialization activities.

 

	
13.5

	
Termination on Bankruptcy or Insolvency; Right of First Negotiation.

 

(a)           Bankruptcy Code.  All rights and licenses granted under or pursuant to this Agreement by Licensor are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, if applicable, licenses of right to “intellectual property” as defined under Section 101 of the U.S. Bankruptcy Code.

 

(b)           Continuing Rights.  The Parties agree that Merck, as licensor of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code.  The Parties further agree that, in the event of Licensor Bankruptcy Event, Merck shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, which, if not already in Merck’s possession, shall be promptly delivered to it (a) following any such commencement of a bankruptcy proceeding upon Merck's written request therefor, unless Licensor elects to continue to perform all of its obligations under this Agreement or (b) if not delivered under clause (a), following the rejection of this Agreement by Licensor  upon written request therefor by Merck.

 

 

  

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(c)           Right of First Refusal.  In addition to the foregoing, in the event of a Licensor Bankruptcy Event, Merck shall, to the extent allowed by Law, have a right of first refusal to purchase all of Licensor’s interest in the Product and the Licensor Technology (the “Right of First Refusal”). The Right of First Refusal shall operate as follows:

 

(i)           Licensor (or other authorized representative of Licensor, including a bankruptcy trustee) shall promptly send to Merck a reasonably detailed written notification of any Licensor Bankruptcy Event.

 

(ii)           Licensor (or other authorized representative of Licensor, including a bankruptcy trustee) shall promptly send to Merck a written notification of any Third Party offer made on the Product or Licensor Technology. For a period of up to *** days after Merck receives such notice (such period, the “Right of First Refusal Notice Period”), it shall notify Licensor of its intention to exercise its Rights of First Refusal. In the event Merck exercises its Right of First Refusal, the terms of the Third Party offer shall become binding upon Merck and Licensor. For the avoidance of doubt, Licensor shall not enter into any agreement with a Third Party relating to Licensor’s interest in the Products or Licensor Technology during the Right of First Refusal Notice Period.

 

	
13.6

	
Other Remedies.  Termination of this Agreement for any reason shall not release either Party from any liability or obligation that already has accrued prior to such termination.  Termination of this Agreement for any reason shall not constitute a waiver or release of, or otherwise be deemed to prejudice or adversely affect or limit, any rights or remedies that otherwise may be available at Law or in equity.

 

ARTICLE 14

DISPUTE RESOLUTION

 

	
14.1

	
Disputes.  The Parties recognize that disputes as to certain matters may from time to time arise during the Term which relate to either Party’s rights and/or obligations hereunder.  It is the objective of the Parties to establish under this ARTICLE 14 procedures to facilitate the resolution of disputes arising under this Agreement in an expedient manner by mutual cooperation and, subject to Section 14.3, unless the dispute resolution provisions provided herein are unsuccessful, without resort to litigation.  All disputes shall be referred to the JSC for discussion and resolution; provided, however, that any JSC Discussion Dispute not resolved at the JSC shall be resolved pursuant to Section 14.2.

 

	
14.2

	
JSC Discussion Disputes.  Either Party may, by written notice to the other Party, request that a JSC Discussion Dispute that remains unresolved by the JSC for a period of ***) days be resolved by the Executive Officers, within *** days after referral of such dispute to them.  If the Executive Officers cannot resolve such dispute within *** days after referral of such dispute to them, then, at any time after such *** day period, either Party may proceed to enforce any and all of its rights with respect to such dispute.

 

 

  

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14.3

	
Injunctive Relief.  Subject to Section 13.3(b), no provision herein shall be construed as precluding a Party from bringing an action for injunctive relief or other equitable relief prior to the initiation or completion of the above procedure.

 

ARTICLE 15

MISCELLANEOUS PROVISIONS

 

	
15.1

	
Relationship of the Parties.  Nothing in this Agreement is intended or shall be deemed, for financial, tax, legal or other purposes, to constitute a partnership, agency, joint venture or employer-employee relationship between the Parties.

 

	
15.2

	
Assignment.

 

(a)          Assignment Generally.  Except as expressly provided herein, neither this Agreement nor any interest hereunder shall be assignable, nor any other obligation delegable, by Licensor without the prior written consent of Merck (not to be unreasonably withheld or delayed), except that no consent of Merck shall be required with respect to a Change of Control of Licensor or the sale to a Third Party of substantially all of the assets of Licensor to which this Agreement relates.

 

(b)          Assignment by Merck.  Merck may assign this Agreement, in whole or in part, to any Affiliate or Third Party without the consent of Licensor. Merck shall give written notice to Licensor promptly following any such assignment.

 

(c)           Continuing Obligations.  No assignment under this Section 15.2 shall relieve the assigning Party of any of its responsibilities or obligations hereunder and, as a condition of such assignment, the assignee shall agree in writing to be bound by all obligations of the assigning Party hereunder. This Agreement shall be binding upon the successors and permitted assigns of the Parties.

 

(d)          Void Assignments.  Any assignment not in accordance with this Section 15.2 shall be void.

 

(e)           Assignment of Licensor Technology.  Licensor shall not assign or transfer any Licensor Technology to any of its Affiliates without the prior written consent of Merck.

 

(f)            Exclusion of Certain Affiliates.  The rights to Know-How and Patent Rights***

 

	
15.3

	
Performance and Exercise by Affiliates.  Merck shall have the right to have any of its obligations hereunder performed, or its rights hereunder exercised, by, any of its Affiliates and the performance of such obligations by any such Affiliate(s) shall be deemed to be performance by Merck; provided, however, that Merck shall be responsible for ensuring the performance of its obligations under this Agreement and that any failure of any Affiliate performing obligations of Merck hereunder shall be deemed to be a failure by Merck to perform such obligations.  For clarity, the foregoing means that Merck may designate an Affiliate to perform its obligations hereunder or to be the recipient of Licensor’s performance obligations hereunder (e.g., with respect to Manufacturing Technology Transfer, Merck may designate an Affiliate to be the recipient of such transfer).

 

 

  

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15.4

	
Change of Control.  In the event of a Change of Control of Licensor in which a Merck Competitor acquires control (as defined in Section 1.3) of Licensor, then, from the later of (a) the date of any public announcement by Opexa of an agreement by Opexa to enter into a Change of Control transaction and (b) the Option Exercise Date:

 

(i)           Merck shall, subject to compliance with any legally required safety reporting requirements of applicable Governmental Bodies, cease to have any reporting or information or data sharing obligations hereunder toward Licensor or its successor entity (other than under Articles 8-10, 12-15) including, but not limited to, the obligations of Merck under Sections 4.4(a) and 5.8;

 

(ii)           the JSC shall be permanently disbanded;

 

(iii)           notwithstanding the provisions of Section 7.1, the determination whether or to what extent the Parties shall enter into (or, if then already entered into, continue to bound by) the Supply Agreement shall be in Merck’s sole discretion.  If the Parties have already entered in to the Supply Agreement prior to the occurrence of the announcement of the potential Change of Control transaction, Merck may, upon *** days’ prior written notice to Licensor, terminate the Supply Agreement.  If Merck notifies Licensor that it does not wish to enter into the Supply Agreement or provides notice of termination of the Supply Agreement, then, as between Licensor and Merck, Merck shall during the Term have the sole right to manufacture the Product for use in the Field in the Territory following the Option Exercise Date; and

 

(iv)           With respect to Licensor Patents that are *** related to Product, Merck shall have the first right to perform the activities delegated to Licensor in Section *** and *** Section ***, with Section *** and *** Section *** thereafter applying mutatis mutandis (i.e., references in parts of Section *** to “Licensor” shall be deemed references to “Merck” and references to “Merck” shall be deemed references to “Licensor”).

 

	
15.5

	
Further Actions.  Each Party agrees to execute, acknowledge and deliver such further instruments and to do all such other acts as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

 

	
15.6

	
Accounting Procedures.  Each Party shall calculate all amounts, and perform other accounting procedures required, under this Agreement and applicable to it in accordance with IFRS.

 

 

  

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15.7

	
Force Majeure.  Neither Party shall be liable to the other Party or be deemed to have breached or defaulted under this Agreement for failure or delay in the performance of any of its obligations under this Agreement for the time and to the extent such failure or delay is caused by or results from acts of God, earthquake, riot, civil commotion, terrorism, war, strikes or other labor disputes, fire, flood, failure or delay of transportation, omissions or delays in acting by a governmental authority, acts of a government or an agency thereof or judicial orders or decrees or restrictions or any other reason which is beyond the control of the respective Party.  The Party affected by force majeure shall provide the other Party with full particulars thereof as soon as it becomes aware of the same (including its best estimate of the likely extent and duration of the interference with its activities), and will use Commercially Reasonable Efforts to overcome the difficulties created thereby and to resume performance of its obligations hereunder as soon as practicable.

 

	
15.8

	
No Trademark Rights.  Except as set forth in Sections 4.1 and 5.7, no right, express or implied, is granted by this Agreement to a Party to use in any manner the name or any other trade name or trademark of the other Party in connection with the performance of this Agreement or otherwise.

 

	
15.9

	
Entire Agreement of the Parties; Amendments.  This Agreement and the Schedules hereto, together with the CDA, constitute and contain the entire understanding and agreement of the Parties respecting the subject matter hereof and cancel and supersede any and all prior negotiations, correspondence, understandings and agreements between the Parties, whether oral or written, regarding such subject matter. No waiver, modification or amendment of any provision of this Agreement shall be valid or effective unless made in a writing referencing this Agreement and signed by a duly authorized officer of each Party.

 

	
15.10

	
Captions.  The captions to this Agreement are for convenience only, and are to be of no force or effect in construing or interpreting any of the provisions of this Agreement.

 

	
15.11

	
Governing Law.  This Agreement shall be governed by and interpreted in accordance with the laws of England, excluding application of any conflict of laws principles that would require application of the Law of a jurisdiction outside of England, and will be subject to the exclusive jurisdiction of the courts of competent jurisdiction located in London, England.

 

	
15.12

	
Non-Solicitation of Employees.  During the Term, each Party agrees that it shall not, directly or indirectly, for itself or any other party, urge, induce, or in any manner whatsoever solicit any employee of the other Party without the prior written consent of the other Party. This provision shall not be construed to prohibit the advertisement of employment opportunities or job openings so long as such advertisements are not customized for, directed at or targeted at specific employees of the other Party.

 

	
15.13

	
Notices and Deliveries.  Any notice, request, approval or consent required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been sufficiently given if delivered in person, transmitted by facsimile (receipt verified) or by express courier service (signature required) to the Party to which it is directed at its address or facsimile number shown below or such other address or facsimile number as such Party shall have last given by notice to the other Party.

 

 

  

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If to Merck, addressed to:

 

Ares Trading SA

Zone industrielle de l’Ouriettaz

1170 Aubonne, Switzerland

Attn: General Manager

Facsimile:

 

With a copy to:

 

Merck KGaA

Frankfurter Strasse 250

64293 Darmstadt

Germany

Attn: General Counsel

Facsimile:  ***

 

With a further copy to:

 

Morgan, Lewis & Bockius LLP

502 Carnegie Center

Princeton, New Jersey, USA 08540

USA

Attn: Randall B. Sunberg

If to Licensor, addressed to:

 

Opexa Therapeutics, Inc.

2635 Technology Forest Boulevard

The Woodlands, TX 77381

USA

Attn:  Chief Executive Officer

Facsimile:

 

With a copy to:

 

Pillsbury Winthrop Shaw Pittman, LLP

12255 El Camino Real, Suite 300

San Diego, CA 92130

USA

Attn: Mike Hird

 

	
15.14

	
Waiver.  A waiver by either Party of any of the terms and conditions of this Agreement in any instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any other term or condition hereof.  All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either Party.

 

 

  

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15.15

	
Severability.  When possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under Law, but if any provision of this Agreement is held to be prohibited by or invalid under Law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.  The Parties shall make a good faith effort to replace the invalid or unenforceable provision with a valid one which in its economic effect is most consistent with the invalid or unenforceable provision.

 

	
15.16

	
No Implied License.  No right or license is granted to Licensor hereunder by implication, estoppel, or otherwise to any know-how, patent or other intellectual property right owned or controlled by Merck or its Affiliates.

 

	
15.17

	
Interpretation.  The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” All references herein to ARTICLES, Sections, and Schedules shall be deemed references to ARTICLES and Sections of, and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with IFRS, as in effect from time to time. Unless the context otherwise requires, countries shall include territories.

 

	
15.18

	
Counterparts.  This Agreement may be executed in counterparts, each of which will be deemed an original, and all of which together will be deemed to be one and the same instrument.  A facsimile or a portable document format (PDF) copy of this Agreement, including the signature pages, will be deemed an original.

 

[SIGNATURE PAGE FOLLOWS]

 

 

  

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In Witness Whereof, the Parties have caused this Agreement to be executed and delivered by their respective duly authorized officers as of the Effective Date.

 

	
OPEXA THERAPEUTICS, INC.

 

 

	
ARES TRADING SA

	
By: /s/ Neil K. Warma                                  

Name:  Neil K. Warma                                 

Title:  President & CEO                               

 

	
By: /s/ Cedric Hyde                                     

Name:  Cedric Hyde                                     

Title:  Authorized Representative             

 

	  	
By: /s/ James B. Singleton                         

Name:  James B. Singleton                         

Title:  Authorized Representative             

 

 

 

 

 

 

SIGNATURE PAGE TO OPTION AND LICENSE AGREEMENT

  

  

  

*** Confidential material redacted and filed separately with the Commission.

 

 

SCHEDULE 1.25

***

 

  

  

  

 

*** Confidential material redacted and filed separately with the Commission.

 

 

SCHEDULE 1.40

Licensor Patents

***

 

 

  

  

  

 

SCHEDULE 1.42

Licensor Trademarks

TcelnaTM

 

  

  

  

 

Schedule 10.5(a)

Joint Public Announcement

  

  

  

  

 

 

	
Company Contact:

	  
	
Opexa Therapeutics, Inc.

	
Vida Strategic Partners

	
Neil K. Warma

	
Tim Brons

	
281.775.0600

	
415-675-7400

	
nwarma@opexatherapeutics.com

	
tbrons@vidasp.com

                                                               

                     

DRAFT – NOT FOR RELEASE – DRAFT – NOT FOR RELEASE

 

Merck Serono and Opexa Therapeutics Enter into Option and License Agreement for Development of TcelnaTM (imilecleucel-T) for Treatment of Multiple Sclerosis

 

Merck Serono granted option for exclusive license from Opexa to develop and commercialize Tcelna (imilecleucel-T), an investigational T-cell therapy for patients suffering from multiple sclerosis (MS)

 

THE WOODLANDS, TEXAS - February _, 2013 – Opexa Therapeutics, Inc. (NASDAQ:OPXA) today announced the execution of an agreement with Merck Serono, a division of Merck, Darmstadt, Germany, for the development and commercialization of TcelnaTM (imilecleucel-T), a potential first-in-class personalized T-cell therapy for patients suffering from multiple sclerosis (MS). Tcelna (imilecleucel-T) is being developed by Opexa and currently is in a Phase IIb clinical trial in patients with Secondary Progressive MS (SPMS).  Potential payments to Opexa from the option and license agreement could total $225 million based upon the successful development and commercialization of Tcelna for MS.

 

Tcelna (imilecleucel-T) is being developed as a personalized therapy specifically tailored to each patient’s individual disease profile and has been evaluated in Phase I and II clinical studies in MS that included SPMS patients. Tcelna (imilecleucel-T) has received Fast Track Designation from the United States Food and Drug Administration as a potential treatment for SPMS.

 

Under the terms of the agreement, Opexa will receive an upfront payment of $5 million for granting an option to Merck Serono for the exclusive license of the Tcelna (imilecleucel-T) program for the treatment of MS. The option may be exercised prior to or upon completion of Opexa’s ongoing Phase IIb clinical trial in patients with SPMS. Upon exercising this licensing option, Merck Serono would pay an upfront license fee of either $25 million or $15 million (depending upon whether certain conditions are met), and in return receive worldwide development and commercial rights to Tcelna (imilecleucel-T) in MS, excluding Japan. After exercising the option Merck Serono would be wholly responsible for funding clinical development, subject to Opexa’s co-funding option, as well as regulatory and commercialization activities for the MS program. Additional financial considerations of the agreement include development and commercial milestone payments to Opexa of up to $195 million and a tiered royalty rate from the high single digits to the mid-teens based on net sales payable to Opexa. The potential payments to Opexa could, therefore, total $225 million excluding royalty payments.

 

Under the agreement, Opexa will have an option right to co-fund development, under which the Company would participate in economic support for future clinical development of the program in exchange for additional royalty consideration.  In addition to retaining all rights outside of MS as well as retaining the ability to commercialize Tcelna (imilecleucel-T) in Japan, Opexa also retains certain manufacturing rights related to the program. Further details of the transaction are included in a Form 8-K that was filed this morning by Opexa with the United States Securities and Exchange Commission.

 

 

  

  

  

“Merck Serono is strongly committed to developing innovative drug candidates like Tcelna (imilecleucel-T), a potential first-in-class personalized cell therapy for patients with multiple sclerosis,” said Susan Herbert, Head of Global Business Development and Strategy at Merck Serono. “This agreement illustrates Merck Serono’s commitment to employ creative ways of accessing external innovation to develop potential next generation multiple sclerosis treatments, especially in secondary progressive multiple sclerosis, an area of high unmet need.”

 

Neil K. Warma, President and Chief Executive Officer of Opexa, commented, “Opexa is pleased to partner with Merck Serono and given Merck Serono’s long-term strategic commitment to, and existing franchise position in the field of multiple sclerosis, we could not ask for a more experienced partner to carry Tcelna (imilecleucel-T)  through development and hopefully to the market and to patients. We also are pleased to retain important rights through this transaction, such as certain manufacturing rights, commercialization rights to the Japanese market and a co-funding of development option, as well as rights for all indications outside of MS, all of which are intended to enhance Opexa shareholder value.”

 

Conference Call

 

The management of Opexa will host a conference call today, ______, February _, 2013, at X:XX a.m. EST to discuss the agreement.  To participate in the live conference call, please dial (XXX) XXX-XXXX (U.S.) or (XXX) XXX-XXXX (International), and provide passcode XXXXXXX. A live webcast of the call will also be available on the investor relations section of the Company's website, www.opexatherapeutics.com.  A replay of the call will be available through XXXXXXXXXX XX, 2013. To access the replay, please dial (XXX) XXX-XXXX (U.S.) or (XXX) XXX-XXXX (International), and provide passcode XXXXXXX. An online archive of the webcast will be available on Opexa’s website for XX days following the call.

 

About Multiple Sclerosis (MS)

 

MS is a chronic, inflammatory condition of the central nervous system and is the most common, non-traumatic, disabling neurological disease in young adults. It is estimated that approximately two million people have MS worldwide.

While symptoms can vary, the most common symptoms of MS include blurred vision, numbness or tingling in the limbs and problems with strength and coordination. The relapsing forms of MS are the most common.

 

About Tcelna

 

Tcelna is a potential personalized therapy that is under development to be specifically tailored to each patient's disease profile. Tcelna is manufactured using ImmPathTM, Opexa's proprietary method for the production of a patient-specific T-cell immunotherapy, which encompasses the collection of blood from the MS patient, isolation of peripheral blood mononuclear cells, generation of an autologous pool of myelin-reactive T-cells (MRTCs) raised against selected peptides from myelin basic protein (MBP), myelin oligodendrocyte glycoprotein (MOG) and proteolipid protein (PLP), and the return of these expanded, irradiated T-cells back to the patient. These attenuated T-cells are reintroduced into the patient via subcutaneous injection to trigger a therapeutic immune system response.

 

Opexa is currently conducting a Phase IIb study of Tcelna. Named Abili-T, the trial is a randomized, double-blind, placebo-controlled clinical study in patients who demonstrate evidence of disease progression without associated relapses. The trial is expected to enroll 180 patients at approximately 30 leading clinical sites in the U.S. and Canada with each patient receiving two annual courses of Tcelna treatment consisting of five subcutaneous injections per year. The trial’s primary efficacy outcome is the percentage of brain volume change (atrophy) at 24 months. Study investigators will also measure several important secondary outcomes commonly associated with MS, including disease progression as measured by the Expanded Disability Status Scale (EDSS), annualized relapse rate and changes in disability as measured by EDSS and the MS Functional Composite.

 

 

  

  

  

 

About Opexa

 

Opexa Therapeutics, Inc. (NASDAQ:OPXA) is dedicated to the development of patient-specific cellular therapies for the treatment of autoimmune diseases such as MS. The Company’s leading therapy candidate, TcelnaTM, is a personalized cellular immunotherapy that is in phase IIb clinical development for MS. Tcelna is derived from T-cells isolated from peripheral blood, expanded ex vivo, and reintroduced into the patients via subcutaneous injections. This process triggers a potent immune response against specific subsets of autoreactive T-cells known to attack myelin.

 

For more information visit the Opexa Therapeutics website at www.opexatherapeutics.com

 

About Merck Serono

 

Merck Serono is the biopharmaceutical division of Merck.. With headquarters in Darmstadt, Germany, Merck Serono offers leading brands in 150 countries to help patients with cancer, multiple sclerosis, infertility, endocrine and metabolic disorders as well as cardiovascular diseases. In the United States and Canada, EMD Serono operates as a separately incorporated subsidiary of Merck Serono.

Merck Serono discovers, develops, manufactures and markets prescription medicines of both chemical and biological origin in specialist indications. We have an enduring commitment to deliver novel therapies in our core focus areas of oncology, neurology and immunology.

 

For more information, please visit www.merckserono.com or www.merckgroup.com

 

About Merck

 

Merck is a global pharmaceutical and chemical company with total revenues of €10.3 billion in 2011, a history that began in 1668, and a future shaped by approx. 40,000 employees in 67 countries. Its success is characterized by innovations from entrepreneurial employees. Merck's operating activities come under the umbrella of Merck KGaA, in which the Merck family holds an approximately 70% interest and free shareholders own the remaining approximately 30%. In 1917 the U.S. subsidiary Merck & Co. was expropriated and has been an independent company ever since.

 

For more information, please visit www.merckserono.com or www.merckgroup.com

 

Cautionary Statement Relating to Forward-Looking Information for the Purpose of "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995

 

This press release contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “expects,” “believes,” “may,” “could,” and similar expressions are intended to identify forward-looking statements. The forward-looking statements in this release do not constitute guarantees of future performance. Investors are cautioned that statements in this press release which are not strictly historical statements, including, without limitation, statements regarding the development of the Company’s product candidate, Tcelna (imilecleucel-T), constitute forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including, without limitation, risks associated with: the success of our clinical trials (including the phase 2b trial for Tcelna (imilecleucel-T) in SPMS which, depending upon results, may determine whether Merck Serono elects to exercise its option pursuant to the option and development agreement), whether Merck Serono exercises its option and, if so, whether the Company receives any development or commercialization milestone payments or royalties from Merck Serono pursuant to the option and development agreement, our dependence (if Merck Serono exercises its option) on the resources and abilities of Merck Serono for the further development of Tcelna (imilecleucel-T), our ability to raise additional capital to continue our development programs (including to undertake and complete any ongoing or further clinical studies for Tcelna (imilecleucel-T)), the efficacy of Tcelna (imilecleucel-T) for any particular indication, such as for relapsing remitting MS or secondary progressive MS, our compliance with all Food and Drug Administration regulations, our ability to obtain, maintain and protect intellectual property rights (including for Tcelna), and other risks detailed in our filings with the Securities and Exchange Commission. These forward-looking statements speak only as of the date made. We assume no obligation or undertaking to update any forward-looking statements to reflect any changes in expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. You should, however, review additional disclosures we make in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2011 and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.

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*** Confidential material redacted and filed separately with the Commission.

 

 

Schedule 11.2

Disclosure Schedule

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