Contingent Payments (a) In addition to the Purchase Price to be paid at Closing, upon satisfaction of the conditions set forth in this Section 5, Buyer will make payments ("Contingent Payments") to Seller based upon 10% of the gross receipts as accrued by Buyer that exceed $7,500,000 during an Earnout Period (the "Annual Threshold") as a result of the sale of products and services that use or are based, in whole or in part, on the intellectual property transferred by Seller to Buyer (the "Ongoing Business"). An "Earnout Period" is a 12-month period. The first Earnout Period will commence on the first day of the calendar month following the Closing Date. The Contingent Payment may be payable for up to five Earnout Periods. The maximum amount of Contingent Payment payable by Buyer to Seller, during all Earnout Periods together, is $2,200,000.
(b) Subject to the credit described in the last sentence of this Section 5(b) and the aggregate maximum amount described in Section 5(a), the Contingent Payments following the Closing Date, will be made in cash on a quarterly basis during the first three quarters of each Earnout Period using $1,875,000 as the quarterly threshold gross revenue target. The amount of the final quarterly payment will be determined using the Annual Threshold and the actual annual gross revenues during such Earnout Period and will subtract any quarterly payments previously made for such year. If at the end of each Earnout Period (other than the first Earnout Period) it is determined that the sum of the quarterly payments for such Earnout Period exceeds the actual payment due as determined on an annual basis ("Excess Payments"), such Excess Payments may be retained by the Seller, but will be credited against amounts due in future Earnout Periods.
(c) The Contingent Payment, if any, due to Seller for the first quarterly period of the first Earnout Period shall be paid to Seller. The first $200,000 of Contingent Payments due to Seller for the second and subsequent quarterly periods (the "Holdback Amount") will be held by Buyer in a segregated interest bearing account and may be unconditionally released, upon five (5) days advanced written notice to Seller describing such liabilities, to compensate Buyer for any liabilities of Seller to Buyer under this Agreement and to compensate Buyer for any Excess Payments made during the first Earnout Period. The amount, if any, of the Holdback Amount remaining at the end of the ninth earnout quarter will be paid to Seller on such date.
(d) In the event the net working capital as of the Closing Date of the Ongoing Business is less than $(658,000) (the "Target Number"), then Buyer shall be entitled to offset the amount of the difference against any Contingent Payments payable in accordance with this Section 5, thereby reducing the Contingent Payments payable and the maximum amount of Contingent Payments payable by the difference. In the event the net working capital as of the Closing Date is more than the Target Number, then Seller shall be entitled to an increase in the amount of the Contingent Payments payable at the end of the first Earnout Period in accordance with this Section 5 equal to the amount in excess of the Target Number, thereby increasing the maximum amount of Contingent Payments payable by the difference. Net working capital shall be the sum of accounts receivable and inventory minus accounts payable, accrued liabilities, and unearned revenue.
(e) Any amounts paid by Buyer to Seller hereunder shall be used first to satisfy any claims for payment made by any third party against Seller.
