exv10w18



 





Exhibit 10.18




LOAN AGREEMENT




Between




ZIONS FIRST NATIONAL BANK

Lender




and




ZARS, INC.

Borrower




Effective Date: June 28, 2007




 









 






TABLE OF CONTENTS




	 	 	 	 	 
	 	 	 	Page
	1. Definitions
	 	 	1	 
	1.1 Definitions
	 	 	1	 
	2. Loan Description
	 	 	5	 
	2.1 Amount of Loan
	 	 	5	 
	2.2 Nature and Duration of Loan
	 	 	5	 
	2.3 Promissory Notes
	 	 	5	 
	2.4 Loan Fee
	 	 	5	 
	2.5 Rights of Set Off
	 	 	5	 
	3. Security for Loan
	 	 	6	 
	3.1 Collateral
	 	 	6	 
	3.2 Release of Lender as Condition to Lien Termination
	 	 	6	 
	4. Conditions to Loan Disbursements
	 	 	6	 
	4.1 Conditions to Loan Disbursements
	 	 	6	 
	4.2 Additional Condition to Subsequent Loan Disbursements
	 	 	7	 
	4.3 No Default, Adverse Change, False or Misleading Statement
	 	 	7	 
	5. Representations and Warranties
	 	 	8	 
	5.1 Organization and Qualification
	 	 	8	 
	5.2 Authorization
	 	 	8	 
	5.3 No Governmental Approval Necessary
	 	 	8	 
	5.4 Accuracy of Financial Statements
	 	 	8	 
	5.5 No Pending or Threatened Litigation
	 	 	9	 
	5.6 Full and Accurate Disclosure
	 	 	9	 
	5.7 Compliance with ERISA
	 	 	9	 
	5.8 Compliance with USA Patriot Act
	 	 	10	 
	5.9 Compliance with All Other Applicable Law
	 	 	10	 
	5.10 Environmental Representations and Warranties
	 	 	10	 
	5.11 Operation of Business
	 	 	11	 
	5.12 Payment of Taxes
	 	 	11	 
	5.13 Absence of Negative Pledge
	 	 	11	 
	6. Borrower’s Covenants
	 	 	11	 






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TABLE OF CONTENTS
(continued)



	 	 	 	 	 
	 	 	 	Page
	6.1 Use of Proceeds
	 	 	11	 
	6.2 Continued Compliance with ERISA
	 	 	11	 
	6.3 Compliance with USA Patriot Act
	 	 	12	 
	6.4 Continued Compliance with Applicable Law
	 	 	12	 
	6.5 Prior Consent for Amendment or Change
	 	 	12	 
	6.6 Payment of Taxes and Obligations
	 	 	12	 
	6.7 Financial Statements and Reports
	 	 	12	 
	6.8 Insurance
	 	 	13	 
	6.9 Inspection
	 	 	13	 
	6.10 Operation of Business
	 	 	14	 
	6.11 Maintenance of Records and Properties
	 	 	14	 
	6.12 Notice of Claims
	 	 	14	 
	6.13 Environmental Covenants
	 	 	14	 
	6.14 Financial Covenants
	 	 	15	 
	6.15 Negative Pledge
	 	 	15	 
	6.16 Restriction on Debt
	 	 	16	 
	6.17 Mergers, Consolidations, and Purchase and Sale of Assets
	 	 	16	 
	6.18 Dividends and Loans
	 	 	17	 
	7. Default
	 	 	17	 
	7.1 Events of Default
	 	 	17	 
	7.2 No Waiver of Event of Default
	 	 	18	 
	8. Remedies
	 	 	18	 
	8.1 Remedies upon Event of Default
	 	 	18	 
	8.2 Rights and Remedies Cumulative
	 	 	19	 
	8.3 No Waiver of Rights
	 	 	19	 
	9. General Provisions
	 	 	19	 
	9.1 Governing Agreement
	 	 	19	 
	9.2 Borrower’s Obligations Cumulative
	 	 	19	 
	9.3 Payment of Expenses and Attorney’s Fees
	 	 	19	 
	9.4 Right to Perform for Borrower
	 	 	20	 






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TABLE OF CONTENTS
(continued)



	 	 	 	 	 
	 	 	 	Page
	9.5 Assignability
	 	 	20	 
	9.6 Third Party Beneficiaries
	 	 	20	 
	9.7 Governing Law
	 	 	20	 
	9.8 Severability of Invalid Provisions
	 	 	20	 
	9.9 Interpretation of Loan Agreement
	 	 	20	 
	9.10 Survival and Binding Effect of Representations, Warranties, and Covenants
	 	 	21	 
	9.11 Indemnification
	 	 	21	 
	9.12 Environmental Indemnification
	 	 	21	 
	9.13 Interest on Expenses and Indemnification, Collateral, Order of Application
	 	 	22	 
	9.14 Limitation of Consequential Damages
	 	 	22	 
	9.15 Waiver and Release of Claims
	 	 	22	 
	9.16 Revival Clause
	 	 	22	 
	9.17 Arbitration
	 	 	23	 
	9.18 Consent to Utah Jurisdiction, Exclusive Jurisdiction of Utah Courts, and Jury Waiver
	 	 	25	 
	9.19 Notices 
	 	 	26	 
	9.20 Duplicate Originals; Counterpart Execution 
	 	 	26	 
	9.21 Disclosure of Financial and Other Information 
	 	 	27	 
	9.22 Confidentiality 
	 	 	27	 
	9.23
Integrated Agreement and Subsequent Amendment
	 	 	27	 






EXHIBITS



Exhibit A — Term Loan A Note



Exhibit B — Term Loan B Note





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LOAN AGREEMENT




     This Loan Agreement is made and entered into by and between Zions First National Bank and
ZARS, Inc.



     For good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:



1. Definitions




     1.1 Definitions



     Terms defined in the singular shall have the same meaning when used in the plural and vice
versa. As used herein, the term:



     “Accounting Standards” means (i) in the case of financial statements and reports, conformity
with generally accepted accounting principles and fully and fairly representing the financial
condition as of the date thereof and the results of operations for the period or periods covered
thereby, consistent with other financial statements of that company previously delivered to Lender,
and (ii) in the case of calculations, definitions, and covenants, generally accepted accounting
principles consistent with those used in the preparation of financial statements of Borrower
previously delivered to Lender.



     “Banking Business Day” means any day not a Saturday, Sunday, legal holiday in the State of
Utah, or day on which national banks in the State of Utah are authorized to close.



     “Borrower” means ZARS, Inc., a corporation organized and existing under the laws of the State
of Utah, its successors, and, if permitted, assigns.



     “Capital Expenditures” means expenditures for fixed or capital assets as determined in
accordance with Accounting Standards.



     “Collateral” shall have the meaning set forth in Section 3.1 Collateral.



     “Effective Date” shall mean the date the parties intend this Loan Agreement to become binding
and enforceable, which is the date stated at the conclusion of this Loan Agreement.



     “Environmental Condition” shall mean any condition involving or relating to Hazardous
Materials and/or the environment affecting the Real Property, whether or not yet discovered, which
could or does result in any damage, loss, cost, expense, claim, demand, order, or liability to or
against Borrower or Lender by any third party (including, without limitation, any government
entity), including, without limitation, any condition resulting from the operation of Borrower’s
business and/or operations in the vicinity of the Real Property and/or any activity or operation
formerly conducted by any person or entity on or off the Real Property.



     “Environmental Health and Safety Law” shall mean any legal requirement that requires or
relates to:



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     a. advising appropriate authorities, employees, or the public of intended or actual
releases of Hazardous Materials, violations of discharge limits or other prohibitions, and
of the commencement of activities, such as resource extraction or construction, that do or
could have significant impact on the environment;




     b. preventing or reducing to acceptable levels the release of Hazardous Materials;




     c. reducing the quantities, preventing the release, or minimizing the hazardous
characteristics of wastes that are generated;




     d. assuring that products are designed, formulated, packaged, and used so that they do
not present unreasonable risks to human health or the environment when used or disposed of;




     e. protecting resources, species, or ecological amenities;




     f. use, storage, transportation, sale, or transfer of Hazardous Materials or other
potentially harmful substances;




     g. cleaning up Hazardous Materials that have been released, preventing the threat of
release, and/or paying the costs of such clean up or prevention; or




     h. making responsible parties pay for damages done to the health of others or the
environment or permitting self-appointed representatives of the public interest to recover
for injuries done to public assets.



     “Event of Default” shall have the meaning set forth in Section 7.1 Events of Default.



     “Hazardous Materials” means (i) “hazardous waste” as defined by the Solid Waste Disposal Act,
as amended by the Resource Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901 et. seq.),
including any future amendments thereto, and regulations promulgated thereunder, and as the term
may be defined by any contemporary state counterpart to such act; (ii) “hazardous substance” as
defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42
U.S.C. Section 9601 et. seq.), including any future amendments thereto, and regulations promulgated
thereunder, and as the term may be defined by any contemporary state counterpart of such act; (iii)
asbestos; (iv) polychlorinated biphenyls; (v) underground or above ground storage tanks, whether
empty or filled or partially filled with any substance; (vi) any substance the presence of which is
or becomes prohibited by any federal, state, or local law, ordinance, rule, or regulation; and
(vii) any substance which under any federal, state, or local law, ordinance, rule or regulation
requires special handling or notification in its collection, storage, treatment, transportation,
use or disposal.



     “Intellectual Property” means:




     a. All right, title and interest of Borrower in and to patent applications and patents,
including, without limitation, all proceeds thereof (such as, by way of example, license
royalties and proceeds of infringement suits), the right to sue for past, present and



2









 







future infringements, all rights corresponding thereto throughout the world, and all
reissues, divisions, continuations, renewals, extensions, and continuations-in-part thereof;




     b. All right, title and interest of Borrower in and to trademark applications and
trademarks, including, without limitation, all renewals thereof, all proceeds thereof (such
as, by way of example, license royalties and proceeds of infringement suits), the right to
sue for past, present and future infringements, and all rights corresponding thereto
throughout the world (collectively, the “Trademarks”), and the good will of the business to
which each of the Trademarks relates;




     c. All copyrights of Borrower and all rights and interests of every kind of Borrower in
copyrights and works protectible by copyright, and all renewals and extensions thereof, and
in and to the copyrights and rights and interests of every kind or nature in and to all
works based upon, incorporated in, derived from, incorporating or relating to any of the
foregoing or from which any of the foregoing is derived, and all proceeds thereof (such as,
by way of example, license royalties and proceeds of infringement suits), the right to sue
for past, present and future infringements, and all rights corresponding thereto throughout
the world;




     d. All of Borrower’s trade secrets and other proprietary information, and all proceeds
thereof ;




     e. All right, title, and interest of Borrower in, to and under license agreements and
contracts concerning Patents, Trademarks, Copyrights, and Trade Secrets, all amendments,
modifications, and replacements thereof, all royalties and other amounts owing thereunder,
and all proceeds thereof; and




     f. All internet domain names and addresses of Borrower and all proceeds thereof.



     “Lender” means Zions First National Bank, its successors, and assigns.



     “Loan” means collectively, the Term Loan A and the Term Loan B.



     “Loan Agreement” means this agreement, together with any exhibits, amendments, addendums, and
modifications.



     “Loan Documents” means the Loan Agreement, Promissory Notes, Security Documents, all other
agreements and documents contemplated by any of the aforesaid documents, and all amendments,
modifications, addendums, and replacements, whether presently existing or created in the future.



     “Material Adverse Effect” means a material adverse effect on Borrower’s financial condition,
conduct of its business, or ability to perform its obligations under the Loan Documents.



     “Negative Pledge” means any agreement or covenant to not create, incur, assume or suffer to
exist any mortgage, deed of trust, pledge, lien, security interest, hypothecation,



3









 







assignment, deposit arrangement, or other preferential arrangement, charge, or encumbrance
(including, without limitation, any conditional sale, other title retention agreement, or finance
lease) of any nature, upon or with respect to any of its properties or assets, now owned or
hereafter acquired, or sign or file, under the Uniform Commercial Code of any jurisdiction, a
financing statement under which Borrower appears as debtor, or sign any security agreement
authorizing any secured party thereunder to file such financing statement.



     “Organizational Documents” means, in the case of a corporation, its Articles of Incorporation
and By-Laws; in the case of a general partnership, its Articles of Partnership; in the case of a
limited partnership, its Articles of Limited Partnership; in the case of a limited liability
company, its Articles of Organization and Operating Agreement or Regulations, if any; in the case
of a limited liability partnership, its Articles of Limited Liability Partnership; and all
amendments, modifications, and changes to any of the foregoing which are currently in effect.



     “Promissory Notes” means the Term Loan A Note and the Term Loan B Note.



     “Real Property” means any and all real property or improvements thereon owned or leased by
Borrower or in which Borrower has any other interest of any nature whatsoever.



     “Security Documents” means all security agreements, assignments, pledges, financing
statements, deeds of trust, mortgages, and other documents which create or evidence any security
interest, assignment, lien or other encumbrance in favor of Lender to secure any or all of the
obligations created or contemplated by any of the Loan Documents, and all amendments,
modifications, addendums, and replacements, whether presently existing or created in the future.



     “Subordinated Debt” means debt (i) approved by Lender and (ii) where the holder’s right to
payment of such debt, the priority of any lien securing the same, and the rights of the holder
thereof to enforce remedies against Borrower following default have been made subordinate to the
liens of Lender and to the prior payment to Lender of the obligations secured by the Collateral,
pursuant to a written subordination agreement approved by Lender in its sole but reasonable
discretion.



     “Term Loan A means the amortizing term loan in the original principal amount of eight million
dollars ($8,000,000.00) to be made pursuant to Section 2 Loan Description.



     “Term Loan A Note” means the Promissory Note in the original principal amount of eight million
dollars ($8,000,000.00) to be executed by Borrower pursuant to Section 2.3 Promissory Notes
in the form of Exhibit A hereto, which is incorporated herein by reference, and any and all
renewals, extensions, modifications, and replacements thereof.



     “Term Loan B” means the amortizing term loan in the original principal amount of two million
five hundred thousand dollars ($2,500,000.00) to be made pursuant to Section 2 Loan
Description.



     “Term Loan B Note” means the Promissory Note in the original principal amount of two million
five hundred thousand dollars ($2,500,000.00) to be executed by Borrower pursuant to Section 2.3
Promissory Notes in the form of Exhibit B hereto, which is incorporated herein by
reference, and any and all renewals, extensions, modifications, and replacements thereof.



4









 





     “Warrant to Purchase Stock” means that certain Warrant of even date herewith executed by
Borrower in favor of Lender granting Lender the right to purchase the stock of Borrower upon the
terms provided therein.



     “ZARS Pharma Merger” means the merger of Borrower into ZARS Pharma, Inc., a Delaware
corporation.



     In addition, terms defined in the Security Documents shall have the same meanings when used
herein.



2. Loan Description




     2.1 Amount of Loan



     Upon fulfillment of all conditions precedent set forth in this Loan Agreement, and so long as
no Event of Default exists, and no other breach has occurred under the Loan Documents, Lender
agrees to loan Borrower ten million five hundred thousand dollars ($10,500,000.00) consisting of
the Term Loan A in the amount of eight million dollars ($8,000,000.00) and the Term Loan B in the
amount of two million five hundred thousand dollars ($2,500,000.00).



     2.2 Nature and Duration of Loan




     a. Term Loan A: Term Loan A shall be an amortizing term loan payable in full
upon the date and upon the terms and conditions provided in the Term Loan A Note.




     b. Term Loan B: Term Loan B shall be an amortizing term loan payable in full
upon the date and upon the terms and conditions provided in the Term Loan B Note.



     2.3 Promissory Notes



     The Loan shall be evidenced by the Promissory Notes. The Promissory Notes shall be executed
and delivered to Lender upon execution and delivery of this Loan Agreement. Proceeds of the
Promissory Notes may be disbursed by Lender by wire transfer.



     2.4 Loan Fee



     Upon execution and delivery of this Loan Agreement, Borrower shall pay Lender a loan fee of
one hundred and five thousand dollars ($105,000.00). No portion of such fee shall be refunded in
the event of early termination of this Loan Agreement or any termination or reduction of the right
of Borrower to request advances under this Loan Agreement. Lender is authorized and directed, upon
execution of this Loan Agreement and fulfillment of all conditions precedent hereunder, to disburse
a sufficient amount of the Loan proceeds to pay the loan fee in full.



     2.5 Rights of Set Off



     So long as no Event of Default or event which, with the passage of time or the giving of
notice or both, would constitute an Event of Default, has occurred and is continuing, upon the



5









 







completion of an initial public offering of Borrower that results in the net cash proceeds to
Borrower of at least fifty million dollars ($50,000,000.00) (“Qualified Public Offering”), Lender
shall waive all rights of set off of Borrower’s depository accounts with Lender against the Loan.



3. Security for Loan




     3.1 Collateral



     The Loan, Promissory Notes, and all obligations of Borrower under the Loan Documents shall be
secured by such collateral as is provided in the Security Documents (the “Collateral”), which shall
include, without limitation, all cash, receivables, inventories, equipment, leasehold improvements,
real and personal property, and other fixed assets.



     3.2 Release of Lender as Condition to Lien Termination



     In recognition of Lender’s right to have all its attorneys fees and expenses incurred in
connection with this Loan Agreement secured by the Collateral, notwithstanding payment in full of
the Loan and all other obligations secured by the Collateral, Lender shall not be required to
release, reconvey, or terminate any Security Document unless and until Borrower has executed and
delivered to Lender general releases in form and substance satisfactory to Lender.



4. Conditions to Loan Disbursements




     4.1 Conditions to Loan Disbursements



     Lender’s obligation to disburse any of the Loan is expressly subject to, and shall not arise
until all of the conditions set forth below have been satisfied. All of the documents referred to
below must be in a form and substance acceptable to Lender.




     a. All of the Loan Documents and all other documents contemplated to be delivered to
Lender prior to funding have been fully executed and delivered to Lender.




     b. All of the documents contemplated by the Loan Documents which require filing or
recording have been properly filed and recorded so that all of the liens and security
interests granted to Lender in connection with the Loan will be properly created and
perfected and will have a priority acceptable to Lender.




     c. All other conditions precedent provided in or contemplated by the Loan Documents or
any other agreement or document have been performed.




     d. As of the date of disbursement of all or any portion of the Loan, the following
shall be true and correct: (i) all representations and warranties made by Borrower in the
Loan Documents are true and correct in all material respects as of the date of such
disbursement; and (ii) no Event of Default has occurred and no conditions exist and no event
has occurred, which, with the passage of time or the giving of notice, or both, would
constitute an Event of Default.




     e. Execution and delivery of a the Warrant to Purchase Stock.



6









 






     f. Execution and delivery of an Authorization to File UCC Financing Statement executed
by ZARS Pharma, Inc., a Delaware corporation, for the benefit of Lender.




     g. Borrower shall have provided evidence satisfactory to Lender that Borrower has
repaid and discharged all obligations owing to Silicon Valley Bank.



     All conditions precedent set forth in this Loan Agreement and any of the Loan Documents are
for the sole benefit of Lender and may be waived unilaterally by Lender.



     4.2 Additional Condition to Subsequent Loan Disbursements



     In addition to the foregoing conditions to loan disbursements:




     a. Not later than fourteen (14) days after the Effective Date, Borrower shall deliver
to Lender a fully executed Landlord waiver and consent in a form reasonably acceptable to
Lender from JL Ventures LLC, Harkonnen Acquisitions, L Metro LLC, and Bello LLC, all known
as MBP Co-Tenancy, with respect to the real property leased by Borrower located at 1455
West 2200 South, West Valley City, Utah 84119;




     b. Not later than fourteen (14) days after the Effective Date, Borrower shall deliver
to Lender a fully executed Landlord waiver and consent in a form reasonably acceptable to
Lender from First Industrial, L.P., with respect to the real property leased by Borrower
located at 1142 West 2320 South, Suite A, West Valley City, Utah 84119; and




     c. Not later than fourteen (14) days after the Effective Date, Borrower shall provide
evidence satisfactory to Lender that Silicon Valley Bank’s security interest in Borrower,
evidenced by that certain financing statement filed with the Utah Department of Commerce,
Division of Corporations and Commercial Code, on October 12, 2005, File No. 280510200528,
has been terminated.



     The foregoing conditions are for the sole benefit of Lender and may be waived unilaterally by
Lender.



     4.3 No Default, Adverse Change, False or Misleading Statement



     Lender’s obligation to advance any funds at any time pursuant to this Loan Agreement and the
Promissory Notes shall, at Lender’s sole discretion, terminate upon the occurrence of any Event of
Default, any event which could have a Material Adverse Effect, or upon the determination by Lender
that any of Borrower’s representations made in any of the Loan Documents were false or materially
misleading when made. Upon the exercise of such discretion, Lender shall be relieved of all
further obligations under the Loan Documents.



7









 





5. Representations and Warranties




     5.1 Organization and Qualification



     Borrower represents and warrants that it is a corporation duly organized and existing in good
standing under the laws of the State of Utah. Lender acknowledges and agrees that Borrower intends
to complete the ZARS Pharma Merger as authorized herein.



     Borrower represents and warrants that it is duly qualified to do business in each jurisdiction
where the conduct of its business requires qualification.



     Borrower represents and warrants that it has the full power and authority to own its property
and to conduct the business in which it engages and to enter into and perform its obligations under
the Loan Documents.



     Borrower represents and warrants that it has delivered to Lender or Lender’s counsel accurate
and complete copies of Borrower’s Organizational Documents which are operative and in effect as of
the Effective Date.



     5.2 Authorization



     Borrower represents and warrants that the execution, delivery, and performance by Borrower of
the Loan Documents has been duly authorized by all necessary action on the part of Borrower and are
not inconsistent with Borrower’s Organizational Documents or any resolution of the board of
Directors of Borrower, do not and will not contravene any provision of, or constitute a default
under, any indenture, mortgage, contract, or other instrument to which Borrower is a party or by
which it is bound, and that upon execution and delivery thereof, the Loan Documents will constitute
legal, valid, and binding agreements and obligations of Borrower, enforceable in accordance with
their respective terms.



     5.3 No Governmental Approval Necessary



     Borrower represents and warrants that no consent by, approval of, giving of notice to,
registration with, or taking of any other action with respect to or by any federal, state, or local
governmental authority or organization is required for Borrower’s execution, delivery, or
performance of the Loan Documents.



     5.4 Accuracy of Financial Statements



     Borrower represents and warrants that all of its audited financial statements heretofore
delivered to Lender have been prepared in accordance with Accounting Standards.



     Borrower represents and warrants that all of its unaudited financial statements heretofore
delivered to Lender fully and fairly represent Borrower’s financial condition as of the date
thereof and the results of Borrower’s operations for the period or periods covered thereby and are
consistent with other financial statements previously delivered to Lender.



8









 





     Borrower represents and warrants that since the dates of the most recent audited and unaudited
financial statements delivered to Lender, there has been no event which would have a Material
Adverse Effect on its financial condition.



     Borrower represents and warrants that its most recent pro forma financial statements
heretofore delivered to Lender have been prepared consistently with Borrower’s actual financial
statements and fully and fairly represent Borrower’s anticipated financial condition and the
anticipated results of Borrower’s operation for the period or periods covered thereby.



     5.5 No Pending or Threatened Litigation



     Borrower represents and warrants that there are no actions, suits, or proceedings pending or,
to Borrower’s knowledge, threatened against or affecting Borrower in any court or before any
governmental commission, board, or authority which, if adversely determined, would have a Material
Adverse Effect.



     5.6 Full and Accurate Disclosure



     Borrower represents and warrants that this Loan Agreement, the financial statements referred
to herein, any loan application submitted to Lender, and all other statements furnished by Borrower
to Lender in connection herewith contain no untrue statement of a material fact and omit no
material fact necessary to make the statements contained therein or herein not misleading.
Borrower represents and warrants that it has not failed to disclose in writing to Lender any fact
that would have a Material Adverse Effect.



     5.7 Compliance with ERISA



     Borrower represents and warrants that Borrower is in compliance in all material respects with
all applicable provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), as
amended, and the regulations and published interpretations thereunder. Neither a Reportable Event
as set forth in Section 4043 of ERISA or the regulations thereunder (“Reportable Event”) nor a
prohibited transaction as set forth in Section 406 of ERISA or Section 4975 of the Internal Revenue
Code of 1986, as amended, has occurred and is continuing with respect to any employee benefit plan
established, maintained, or to which contributions have been made by Borrower or any trade or
business (whether or not incorporated) which together with Borrower would be treated as a single
employer under Section 4001 of ERISA (“ERISA Affiliate”) for its employees which is covered by
Title I or Title IV of ERISA (“Plan”); no notice of intent to terminate a Plan has been filed nor
has any Plan been terminated which is subject to Title IV of ERISA; no circumstances exist that
constitute grounds under Section 4042 of ERISA entitling the Pension Benefit Guaranty Corporation
(“PBGC”) to institute proceedings to terminate, or appoint a trustee to administer a Plan, nor has
the PBGC instituted any such proceedings; neither Borrower nor any ERISA Affiliate has completely
or partially withdrawn under Section 4201 or 4204 of ERISA from any Plan described in Section
4001(a)(3) of ERISA which covers employees of Borrower or any ERISA Affiliate (“Multi-employer
Plan”); Borrower and each ERISA Affiliate has met its minimum funding requirements under ERISA with
respect to all of its Plans and the present fair market value of all Plan assets equals or exceeds
the present value of all vested benefits under or all claims reasonably anticipated against



9









 







each Plan, as determined on the most recent valuation date of the Plan and in accordance with
the provisions of ERISA and the regulations thereunder and the applicable statements of the
Financial Accounting Standards Board (“FASB”) for calculating the potential liability of Borrower
or any ERISA Affiliate under any Plan; neither Borrower nor any ERISA Affiliate has incurred any
liability to the PBGC (except payment of premiums, which is current) under ERISA.



     Borrower, each ERISA Affiliate and each group health plan (as defined in ERISA Section 733)
sponsored by Borrower and each ERISA Affiliate, or in which Borrower or any ERISA Affiliate is a
participating employer, are in compliance with, have satisfied and continue to satisfy (to the
extent applicable) all requirements for continuation of group health coverage under Section 4980B
of the Internal Revenue Code and Sections 601 et seq. of ERISA, and are in compliance with, have
satisfied and continue to satisfy Part 7 of ERISA and all corresponding and similar state laws
relating to portability, access and renewability of group health benefits and other requirements
included in Part 7.



     5.8 Compliance with USA Patriot Act



     Borrower represents and warrants that it is not subject to any law, regulation, or list of any
government agency (including, without limitation, the U.S. Office of Foreign Asset Control list)
that prohibits or limits Lender from making any advance or extension of credit to Borrower or from
otherwise conducting business with Borrower.



     5.9 Compliance with All Other Applicable Law



     Borrower represents and warrants that it has complied in all material respects with all
applicable statutes, rules, regulations, orders, and restrictions of any domestic or foreign
government, or any instrumentality or agency thereof having jurisdiction over the conduct of
Borrower’s business or the ownership of its properties, which may have a Material Adverse Effect.



     5.10 Environmental Representations and Warranties



     Borrower represents and warrants that, except as Lender has been otherwise previously advised
by Borrower, to Borrower’s knowledge after due inquiry and investigation, no Hazardous Materials
are now located on, in, or under the Real Property, nor, to Borrower’s knowledge after due inquiry
and investigation, is there any Environmental Condition on, in, or under the Real Property and
neither Borrower nor, to Borrower’s knowledge, after due inquiry and investigation, any other
person has ever caused or permitted any Hazardous Materials to be placed, held, used, stored,
released, generated, located or disposed of on, in or under the Real Property, or any part thereof,
nor caused or allowed an Environmental Condition to exist on, in or under the Real Property, except
in the ordinary course of Borrower’s business under conditions that are generally recognized to be
appropriate and safe and that are in compliance with all applicable Environmental Health and Safety
Laws. Borrower further represents and warrants that, to Borrower’s knowledge after due inquiry and
investigation, no investigation, administrative order, consent order and agreement, litigation or
settlement with respect to



10









 







Hazardous Materials and/or an Environmental Condition is proposed, threatened, anticipated or
in existence with respect to the Real Property.



     5.11 Operation of Business



     Borrower represents and warrants that Borrower possesses all licenses, permits, franchises,
patents, copyrights, trademarks, and trade names, or rights thereto, to conduct its business
substantially as now conducted and as presently proposed to be conducted, and Borrower is not in
violation of any valid rights of others with respect to any of the foregoing.



     5.12 Payment of Taxes



     Borrower represents and warrants that Borrower has filed all tax returns (federal, state, and
local) required to be filed, or has filed a timely extension, and has paid all taxes, assessments,
and governmental charges and levies, including interest and penalties, on Borrower’s assets,
business and income, except such as are being contested in good faith by proper proceedings and as
to which adequate reserves are maintained.



     5.13 Absence of Negative Pledge



     Borrower represents and warrants that there is no Negative Pledge by Borrower which is
currently in force and effect, except as provided in the Loan Documents and except for
anti-assignment provisions included in any Account, Chattel Paper, General Intangible or promissory
note in which Borrower has any right, title or interest.



6. Borrower’s Covenants




     Borrower makes the following agreements and covenants, which shall continue so long as this
Loan Agreement is in effect and so long as Borrower is indebted to Lender for obligations arising
out of, identified in, or contemplated by this Loan Agreement.



     6.1 Use of Proceeds



     Borrower shall use the proceeds of the Loan solely for the purposes identified to Lender in
applying for the Loan.



     Borrower shall not, directly or indirectly, use any of the proceeds of the Loan for the
purpose of purchasing or carrying any margin stock within the meaning of Regulation U of the Board
of Governors of the Federal Reserve System, or to extend credit to any person or entity for the
purpose of purchasing or carrying any such margin stock or for any purpose which violates, or is
inconsistent with, Regulation X of said Board of Governors, or for any other purpose not permitted
by Section 7 of the Securities Exchange Act of 1934, as amended, or by any of the rules and
regulations respecting the extension of credit promulgated thereunder.



     6.2 Continued Compliance with ERISA



     Borrower covenants that, with respect to all Plans (as defined in Section 5.7 Compliance
with ERISA) which Borrower or any ERISA Affiliate currently maintains or to which Borrower



11









 







or any ERISA Affiliate is a sponsoring or participating employer, fiduciary, party in interest
or disqualified person or which Borrower or any ERISA Affiliate may hereafter adopt, Borrower and
each ERISA Affiliate shall continue to comply with all applicable provisions of the Internal
Revenue Code and ERISA and with all representations made in Section 5.7 Compliance with
ERISA, including, without limitation, conformance with all notice and reporting requirements,
funding standards, prohibited transaction rules, multi-employer plan rules, necessary reserve
requirements, and health care continuation, coverage and portability requirements.



     6.3 Compliance with USA Patriot Act



     Borrower shall (a) not be or become subject at any time to any law, regulation, or list of any
government agency (including, without limitation, the U.S. Office of Foreign Asset Control list)
that prohibits or limits Lender from making any advance or extension of credit to Borrower or from
otherwise conducting business with Borrower, and (b) provide documentary and other evidence of
Borrower’s identity as may be requested by Lender at any time to enable Lender to verify Borrower’s
identity or to comply with any applicable law or regulation, including, without limitation, Section
326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318.



     6.4 Continued Compliance with Applicable Law



     Borrower shall conduct its business in a lawful manner and in material compliance with all
applicable federal, state, and local laws, ordinances, rules, regulations, and orders; shall
maintain in good standing all licenses and organizational or other qualifications reasonably
necessary to its business and existence; and shall not engage in any business not authorized by and
not in accordance with its Organizational Documents and other governing documents.



     6.5 Prior Consent for Amendment or Change



     Except in connection with (i) the ZARS Pharma Merger as authorized herein, and (ii) the share
exchange described under the heading “Description of capital Stock—Preferred Stock” in the
Borrower’s Registration Statement on From S-1 filed on June 8, 2007, Borrower shall not modify,
amend, waive, or otherwise alter, or fail to enforce, its Organizational Documents or other
governing documents without Lender’s prior written consent.



     6.6 Payment of Taxes and Obligations



     Borrower shall pay when due all taxes, assessments, and governmental charges and levies on
Borrower’s assets, business, and income, and all material obligations of Borrower of whatever
nature, except such as are being contested in good faith by proper proceedings and as to which
adequate reserves are maintained.



     6.7 Financial Statements and Reports



     Borrower shall provide Lender with such financial statements and reports as Lender may
reasonably request. Audited financial statements and reports shall be prepared in accordance with
Accounting Standards. Unaudited financial statements and reports shall fully and fairly represent
Borrower’s financial condition as of the date thereof and the results of Borrower’s



12









 







operations for the period or periods covered thereby and shall be consistent with other
financial statements previously delivered to Lender.



     Until requested otherwise by Lender, Borrower shall provide the following financial statements
and reports to Lender:




     a. Annual audited financial statements with an unqualified opinion for each fiscal year
of Borrower from an independent accounting firm and in a form acceptable to Lender, to be
delivered to Lender within one hundred twenty (120) days of the end of the fiscal year.
Borrower shall also submit to Lender copies of any management letters or other reports
submitted to Borrower by independent certified public accountants in connection with
examination of the financial statements of Borrower made by such accountants.




     b. Monthly financial statements for each calendar month in a form acceptable to Lender,
to be delivered to Lender within thirty (30) days of the end of the month. The monthly
financial statements shall include a certification by the chief financial officer or chief
executive of Borrower that the monthly financial statements fully and fairly represent
Borrower’s financial condition as of the date thereof and the results of operations for the
period covered thereby and are consistent with other financial statements previously
delivered to Lender. After a Qualified Public Offering, the foregoing interim financial
statements shall be delivered no later than forty-five (45) days after each fiscal quarter
and for the quarter-annual fiscal period then ended.




     c. Borrower shall submit to Lender with its annual and monthly financial statements (or
quarterly financial statements if a Qualified Public Offering has occurred) a compliance
certificate in a form acceptable to Lender certifying that Borrower is in compliance with
all terms and conditions of this Loan Agreement, including compliance with the financial
covenants provided in Section 6.14 Financial Covenants. The compliance certificate
shall include the data and calculations supporting all financial covenants, whether in
compliance or not, and shall be signed by the chief executive officer or chief financial
officer of Borrower



     6.8 Insurance



     Borrower shall maintain insurance with financially sound and reputable insurance companies or
associations in such amounts and covering such risks as are usually carried by companies engaged in
the same or a similar business and similarly situated, which insurance may provide for reasonable
deductibility from coverage thereof.



     6.9 Inspection



     Borrower shall at any reasonable time and from time to time permit Lender or any
representative of Lender to examine and make copies of and abstracts from the records and books of
account of, and visit and inspect the properties and assets of, Borrower, and to discuss the
affairs, finances, and accounts of Borrower with any of Borrower’s officers and directors and with
Borrower’s independent accountants.



13









 





     6.10 Operation of Business



     Borrower shall maintain all licenses, permits, franchises, patents, copyrights, trademarks,
and trade names, or rights thereto, necessary or advisable to conduct its business and Borrower
shall not violate any valid rights of others with respect to any of the foregoing. Borrower shall
continue to engage in a business of the same general type as now conducted.



     6.11 Maintenance of Records and Properties



     Borrower shall keep adequate records and books of account in which complete entries will be
made in accordance with Accounting Standards. Borrower shall maintain, keep and preserve all of
its properties (tangible and intangible) necessary or useful in the proper conduct of its business
in good working order and condition, ordinary wear and tear excepted.



     6.12 Notice of Claims



     Borrower shall promptly notify Lender in writing of all actions, suits or proceedings filed or
threatened against or affecting Borrower in any court or before any governmental commission, board,
or authority which, if adversely determined, would have a Material Adverse Effect.



     6.13 Environmental Covenants



     Borrower covenants that it will:




     a. Not permit the presence, use, disposal, storage or release of any Hazardous
Materials on, in, or under the Real Property, except in the ordinary course of Borrower’s
business under conditions that are generally recognized to be appropriate and safe and that
are in compliance with all applicable Environmental Health and Safety Laws.




     b. Not permit any substance, activity or Environmental Condition on, in, under or
affecting the Real Property which is in violation of any Environmental Health and Safety
Laws.




     c. Comply in all material respects with the provisions of all Environmental Health and
Safety Laws.




     d. Notify Lender promptly of any discharge of Hazardous Materials, Environmental
Condition, or environmental complaint or notice received from any governmental agency or any
other party.




     e. Upon any discharge of Hazardous Materials or upon the occurrence of any
Environmental Condition, immediately contain and remediate the same in compliance with all
Environmental Health and Safety Laws, promptly pay any fine or penalty assessed in
connection therewith, and immediately notify Lender of such events.




     f. Permit Lender at any reasonable time and upon reasonable notice to inspect the Real
Property for Hazardous Materials and Environmental Conditions, to



14









 







conduct tests thereon, and to inspect all books, correspondence, and records pertaining
thereto.




     g. From time to time upon Lender’s request, and at Borrower’s expense, provide a report
(including all validated and unvalidated data generated for such reports) of a qualified
independent environmental engineer acceptable to Lender, satisfactory to Lender in scope,
form, and content, and provide to Lender such other and further assurances reasonably
satisfactory to Lender, that Borrower is in compliance with these covenants concerning
Hazardous Materials and Environmental Conditions, and that any past violation thereof has
been corrected in compliance with all applicable Environmental Health and Safety Laws.




     h. Immediately advise Lender of any additional, supplemental, new, or other information
concerning any Hazardous Materials or Environmental Conditions relating to the Real
Property.



     6.14 Financial Covenants



     Except as otherwise provided herein, each of the accounting terms used in this Section 6.14
shall have the meanings used in accordance with Accounting Standards.




     a. Maximum Capital Expenditures. Prior to a Qualified Public Offering,
Borrower will not make any Capital Expenditures if, after giving effect thereto, the
aggregate of all Capital Expenditures made by Borrower would exceed three million five
hundred thousand dollars ($3,500,000.00) in any year.




     b. Minimum Liquidity Position. Borrower will at all times maintain (i) cash on
hand or on deposit in banks, (ii) readily marketable securities issued by the United States,
(iii) readily marketable commercial paper rated “A-1” by Standard & Poor’s Corporation (or
similar rating by any similar organization which rates commercial paper), and (iv)
certificates of deposit or banker’s acceptances issued by commercial banks or recognized
standing operating in the United States, in the aggregate amount of not less than five
million dollars ($5,000,000.00).



     6.15 Negative Pledge




     a. Borrower will not create, incur, assume, or suffer to exist any Negative Pledge,
except (a) those contemplated by this Loan Agreement; (b) anti-assignment provisions
included in any Account, Chattel Paper, General Intangible or promissory note in which
Borrower has any right, title or interest.




     b. Borrower will not grant or agree to any Negative Pledge concerning Borrower’s
Intellectual Property, except to Lender as provided in the Loan Documents and the
anti-assignment provisions included in any Account, Chattel Paper, General Intangible or
promissory note in which Borrower has any right, title or interest.



15









 





     6.16 Restriction on Debt



     Borrower shall not create, incur, assume, or suffer to exist any debt except as permitted by
this Section 6.16. Debt means (i) indebtedness or liability for borrowed money; (ii) obligations
evidenced by bonds, debentures, notes, or other similar instruments; (iii) obligations for the
deferred purchase price of property or services (including trade obligations); (iv) obligations as
lessee under capital leases; (v) current liabilities in respect of unfunded vested benefits under
Plans covered by ERISA; (vi) obligations under letters of credit; (vii) obligations under
acceptance facilities; (viii) all guarantees, endorsements (other than for collection or deposit in
the ordinary course of business), and other contingent obligations to purchase, to provide funds
for payment, to supply funds to invest in any person or entity, or otherwise to assure a creditor
against loss; and (ix) obligations secured by any mortgage, deed of trust, lien, pledge, or
security interest or other charge or encumbrance on property, whether or not the obligations have
been assumed.



     Permitted exceptions to this covenant are: (i) debt contemplated by this Loan Agreement; (ii)
accounts payable to trade creditors for goods or services which are not aged more than ninety (90)
days from the billing date and current operating liabilities (other than for borrowed money) which
are not more than ninety (90) days past due, in each case incurred in the ordinary course of
business, as presently conducted, and paid within the specified time, unless contested in good
faith and by appropriate proceedings, (iii) Subordinated Debt; (iv) debt existing on the Effective
Date and set forth on Schedule 6.16 hereof; (v) debt secured by liens described in clause (f) of
the definition of Permitted Encumbrances; (vi) other unsecured debt not exceeding one hundred
thousand dollars ($100,000.00) in the aggregate outstanding at any time; provided, however,
that, at the time such debt is incurred, no Event of Default has occurred, is continuing or would
result from such debt; and (vii) extensions, refinancings, modifications, amendments and
restatements of any items of the foregoing clauses, provided that the principal amount thereof is
not increased and the terms thereof are not modified or impose more burdensome terms upon Borrower.



     6.17 Mergers, Consolidations, and Purchase and Sale of Assets



     Except as otherwise provided in this Section 6.17 and except in connection with Borrower’s out
licenses of Intellectual Property entered into in the ordinary course, Borrower shall not wind up,
liquidate, or dissolve itself, reorganize, merge, or consolidate with or into, or convey, sell,
assign, transfer, lease, or otherwise dispose of (whether in one transaction or a series of
transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to
any person or entity, or acquire all or substantially all of the assets or the business of any
person or entity provided that, Borrower may enter into any such transaction so long as: (i) the
entity that results from such transaction (the “Surviving Entity”) shall have executed and
delivered to Lender an agreement in form and substance reasonably satisfactory to Lender,
containing an assumption by the Surviving Entity of the due and punctual payment and performance of
all obligations secured by the Collateral and performance and observance of each covenant and
condition of Borrower in the Loan Documents; (ii) all such obligations of the Surviving Entity to
Lender shall be guaranteed by any entity that directly or indirectly owns or controls more than 50%
of the voting stock of the Surviving Entity; (iii) immediately after giving effect to such
transaction, no Event of Default or, event which with the lapse of time or giving of notice or
both, would result



16









 







in an Event of Default shall have occurred and be continuing; and (iv) such transaction, in
the sole discretion of Lender, is acceptable to Lender.



     Lender hereby consents and authorizes the ZARS Pharma Merger; provided that such merger occur
on or before July 31, 2007, and subject to the terms and conditions provided in the Warrant to
Purchase Stock.



     6.18 Dividends and Loans



     Except after a Qualified Public Offering, Borrower shall not (i) declare or pay any dividends,
(ii) purchase, redeem, retire or otherwise acquire for value any of its capital stock or equity
interests now or hereafter outstanding, (iii) make any distribution of assets to its stockholders,
investors, or equity holders, whether in cash, assets, or in obligations of Borrower, (iv) allocate
or otherwise set apart any sum for the payment of any dividend or distribution on, or for the
purchase, redemption, or retirement of any shares of its capital stock or equity interests, or (v)
make any other distribution by reduction of capital or otherwise in respect of any shares of its
capital stock or equity interests.



     Borrower shall not make any loans or pay any advances of any nature whatsoever to any person
or entity, except (i) advances in the ordinary course of business to vendors, suppliers, and
contractors, and (ii) travel advances, employee relocation loans and other employee loans and
advances in the ordinary course of business not to exceed one hundred thousand dollars
($100,000.00) in the aggregate amount outstanding at any time.



7. Default




     7.1 Events of Default



     Time is of the essence of this Loan Agreement. The occurrence of any of the following events
shall constitute a default under this Loan Agreement and under the Loan Documents and shall be
termed an “Event of Default”:




     a. Borrower fails in the payment or performance of any obligation, covenant, agreement,
or liability created by any of the Loan Documents.




     b. Any representation, warranty, or financial statement made by or on behalf of
Borrower in any of the Loan Documents, or any document contemplated by the Loan Documents,
is materially false or materially misleading.




     c. Default occurs or Borrower fails to comply with (i) any term in any of this Loan
Agreement or (ii) any term in any of the Loan Documents, and such breach is not cured within
fourteen (14) days after the sooner to occur of Borrower’s receipt of notice of such breach
from Lender or the date on which such breach first becomes known to any officer of Borrower.




     d. Any indebtedness of Borrower under any note, indenture, contract, agreement, or
undertaking involving the borrowing of money, the purchase of property,



17









 







the advance of credit or any other monetary liability of any kind to any third party in
an amount in excess of one hundred thousand dollars ($100,000.00) is accelerated.




     e. Default or an event which, with the passage of time or the giving of notice or both,
would constitute a default beyond any applicable cure period, by Borrower, occurs on any
note, indenture, contract, agreement, or undertaking involving the borrowing of money, the
purchase of property, the advance of credit or any other monetary liability of any kind to
any third party in an amount in excess of one hundred thousand dollars ($100,000.00).




     f. Borrower is dissolved or substantially ceases business operations, except in
connection with the ZARS Pharma Merger as authorized herein.




     g. A receiver, trustee, or custodian is appointed for any part of Borrower’s property,
or any part of Borrower’s property is assigned for the benefit of creditors.




     h. Any proceeding is commenced or petition filed under any bankruptcy or insolvency law
by or against Borrower.




     i. Any judgment or regulatory fine is entered against Borrower which may materially
affect Borrower.




     j. Borrower becomes insolvent or fails to pay its debts as they mature.



     7.2 No Waiver of Event of Default



     No course of dealing or delay or failure to assert any Event of Default shall constitute a
waiver of that Event of Default or of any prior or subsequent Event of Default.



8. Remedies




     8.1 Remedies upon Event of Default



     Upon the occurrence of an Event of Default and during the continuance thereof, and at any time
thereafter, all or any portion of the obligations due or to become due from Borrower to Lender,
whether arising under this Loan Agreement, the Promissory Notes, the Security Documents or
otherwise, at the option of Lender and without notice to Borrower of the exercise of such option,
shall accelerate and become at once due and payable in full, and Lender shall have all rights and
remedies created by or arising from the Loan Documents, and all other rights and remedies existing
at law, in equity, or by statute.



     Additionally, subject to Section 2.5 Rights of Set Off, Lender shall have the right,
immediately and without prior notice or demand, to set off against Borrower’s obligations to
Lender, whether or not due, all money and other amounts owed by Lender in any capacity to Borrower,
including, without limitation, checking accounts, savings accounts, and other depository accounts,
and Lender shall be deemed to have exercised such right of setoff and to have made a charge against
any such money or amounts immediately upon occurrence of an Event of Default, even though such
charge is entered on Lender’s books subsequently thereto.



18









 





     8.2 Rights and Remedies Cumulative



     The rights and remedies herein conferred are cumulative and not exclusive of any other rights
or remedies and shall be in addition to every other right, power, and remedy that Lender may have,
whether specifically granted herein or hereafter existing at law, in equity, or by statute. Any
and all such rights and remedies may be exercised from time to time and as often and in such order
as Lender may deem expedient.



     8.3 No Waiver of Rights



     No delay or omission in the exercise or pursuance by Lender of any right, power, or remedy
shall impair any such right, power, or remedy or shall be construed to be a waiver thereof.



9. General Provisions




     9.1 Governing Agreement



     In the event of conflict or inconsistency between this Loan Agreement and the other Loan
Documents, excluding the Promissory Notes, the terms, provisions and intent of this Loan Agreement
shall govern.



     9.2 Borrower’s Obligations Cumulative



     Every obligation, covenant, condition, provision, warranty, agreement, liability, and
undertaking of Borrower contained in the Loan Documents shall be deemed cumulative and not in
derogation or substitution of any of the other obligations, covenants, conditions, provisions,
warranties, agreements, liabilities, or undertakings of Borrower contained herein or therein.



     9.3 Payment of Expenses and Attorney’s Fees



     Borrower shall pay all reasonable expenses of Lender relating to the negotiation, drafting of
documents, documentation of the Loan, and administration and supervision of the Loan, including,
without limitation, appraisal fees, environmental inspection fees, field examination expenses,
title insurance, recording fees, filing fees, and reasonable attorneys fees and legal expenses,
whether incurred in making the Loan, in future amendments or modifications to the Loan Documents,
or in ongoing administration and supervision of the Loan.



     Upon the occurrence of an Event of Default and during the continuance thereof, Borrower agrees
to pay all costs, and expenses, including reasonable attorney fees and legal expenses, incurred by
Lender in enforcing, or exercising any remedies under, the Loan Documents, and any other rights and
remedies.



     Borrower agrees to pay all expenses, including reasonable attorney fees and legal expenses,
incurred by Lender in any bankruptcy proceedings of any type involving Borrower, the Loan
Documents, or the Collateral, including, without limitation, expenses incurred in modifying or
lifting the automatic stay, determining adequate protection, use of cash collateral or relating to
any plan of reorganization.



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     9.4 Right to Perform for Borrower



     Lender may, in its sole discretion and without any duty to do so, elect to discharge taxes,
tax liens, security interests, or any other encumbrance upon the Collateral or any other property
or asset of Borrower, to pay any filing, recording, or other charges payable by Borrower, or to
perform any other obligation of Borrower under this Loan Agreement or under the Security Documents.



     9.5 Assignability



     Except in connection with the ZARS Pharma Merger as authorized herein, Borrower may not assign
or transfer any of the Loan Documents and any such purported assignment or transfer is void.



     Lender may assign or transfer any of the Loan Documents. Funding of this Loan may be provided
by an affiliate of Lender.



     9.6 Third Party Beneficiaries



     The Loan Documents are made for the sole and exclusive benefit of Borrower and Lender and are
not intended to benefit any other third party. No third party may claim any right or benefit or
seek to enforce any term or provision of the Loan Documents.



     9.7 Governing Law



     The Loan Documents shall be governed by and construed in accordance with the laws of the State
of Utah, except to the extent that any such document expressly provides otherwise.



     9.8 Severability of Invalid Provisions



     Any provision of this Loan Agreement which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction only, be ineffective only to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or thereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable
such provision in any other jurisdiction.



     9.9 Interpretation of Loan Agreement



     The article and section headings in this Loan Agreement are inserted for convenience only and
shall not be considered part of the Loan Agreement nor be used in its interpretation.



     All references in this Loan Agreement to the singular shall be deemed to include the plural
when the context so requires, and vice versa. References in the collective or conjunctive shall
also include the disjunctive unless the context otherwise clearly requires a different
interpretation.



20









 





     9.10 Survival and Binding Effect of Representations, Warranties, and Covenants



     All agreements, representations, warranties, and covenants made herein by Borrower shall
survive the execution and delivery of this Loan Agreement and shall continue in effect so long as
any obligation to Lender contemplated by this Loan Agreement is outstanding and unpaid,
notwithstanding any termination of this Loan Agreement. All agreements, representations,
warranties, and covenants made herein by Borrower shall survive any bankruptcy proceedings
involving Borrower. All agreements, representations, warranties, and covenants in this Loan
Agreement shall bind the party making the same, its successors and, in Lender’s case, assigns, and
all rights and remedies in this Loan Agreement shall inure to the benefit of and be enforceable by
each party for whom made, their respective successors and, in Lender’s case, assigns.



     9.11 Indemnification



     Borrower shall indemnify Lender for any and all claims and liabilities, and for damages which
may be awarded or incurred by Lender, and for all reasonable attorney fees, legal expenses, and
other out-of-pocket expenses incurred in defending such claims, arising from or related in any
manner to the negotiation, execution, or performance by Lender of any of the Loan Documents, but
excluding any such claims based upon breach or default by Lender or gross negligence or willful
misconduct of Lender.



     Lender shall have the sole and complete control of the defense of any such claims. Lender is
hereby authorized to settle or otherwise compromise any such claims as Lender in good faith
determines shall be in its best interests.



     9.12 Environmental Indemnification



     Borrower shall indemnify Lender for any and all claims and liabilities, and for damages which
may be awarded or incurred by Lender, and for all reasonable attorney fees, legal expenses, and
other out-of-pocket expenses arising from or related in any manner, directly or indirectly, to (i)
Hazardous Materials located on, in, or under the Real Property; (ii) any Environmental Condition
on, in, or under the Real Property; (iii) violation of or non compliance with any Environmental
Health and Safety Law; (iv) any breach or violation of Section 5.10 Environmental
Representations and Warranties and/or Section 6.13 Environmental Covenants; and/or (v)
any activity or omission, whether occurring on or off the Real Property, whether prior to or during
the term of the loans secured hereby, and whether by Borrower or any other person or entity,
relating to Hazardous Materials or an Environmental Condition. The indemnification obligations of
Borrower under this Section shall survive any reconveyance, release, or foreclosure of the Real
Property, any transfer in lieu of foreclosure, and satisfaction of the obligations secured hereby.



     Lender shall have the sole and complete control of the defense of any such claims. Lender is
hereby authorized to settle or otherwise compromise any such claims as Lender in good faith
determines shall be in its best interests.



21









 





     9.13 Interest on Expenses and Indemnification, Collateral, Order of Application



     All expenses, out-of-pocket costs, attorneys fees and legal expenses, amounts advanced in
performance of obligations of Borrower, and indemnification amounts owing by Borrower to Lender
under or pursuant to this Loan Agreement, the Promissory Notes, and/or any Security Documents shall
be due and payable upon demand. If not paid upon demand, all such obligations shall bear interest
at the default rate provided in the Promissory Notes from the date of disbursement until paid to
Lender, both before and after judgment. Lender is authorized to disburse funds under the
Promissory Notes for payment of all such obligations.



     Payment of all such obligations shall be secured by the Collateral and by the Security
Documents.



     All payments and recoveries shall be applied to payment of the foregoing obligations, the
Promissory Notes, and all other amounts owing to Lender by Borrower in such order and priority as
determined by Lender. Unless provided otherwise in the Promissory Notes, payments on the
Promissory Notes shall be applied first to accrued interest and the remainder, if any, to
principal.



     9.14 Limitation of Consequential Damages



     Lender and its officers, directors, employees, representatives, agents, and attorneys, shall
not be liable to Borrower for consequential damages arising from or relating to any breach of
contract, tort, or other wrong in connection with the negotiation, documentation, administration or
collection of the Loan.



     9.15 Waiver and Release of Claims



     Borrower (i) represents that it has no defenses to or setoffs against any indebtedness or
other obligations owing to Lender or its affiliates (the “Obligations”), nor claims against Lender
or its affiliates for any matter whatsoever, related or unrelated to the Obligations, and (ii)
releases Lender and its affiliates from all claims, causes of action, and costs, in law or equity,
existing as of the date of this Loan Agreement, which Borrower has or may have by reason of any
matter of any conceivable kind or character whatsoever, related or unrelated to the Obligations,
including the subject matter of this Loan Agreement. This provision shall not apply to claims for
performance of express contractual obligations owing to Borrower by Lender or its affiliates.



     9.16 Revival Clause



     If the incurring of any debt by Borrower or the payment of any money or transfer of property
to Lender by or on behalf of Borrower should for any reason subsequently be determined to be
“voidable” or “avoidable” in whole or in part within the meaning of any state or federal law
(collectively “voidable transfers”), including, without limitation, fraudulent conveyances or
preferential transfers under the United States Bankruptcy Code or any other federal or state law,
and Lender is required to repay or restore any voidable transfers or the amount or any portion
thereof, or upon the advice of Lender’s counsel is advised to do so, then, as to any such amount or
property repaid or restored, including all reasonable costs, expenses, and attorneys fees of Lender
related thereto, the liability of Borrower shall automatically be



22









 







revived, reinstated and restored and shall exist as though the voidable transfers had never
been made.



     9.17 Arbitration



ARBITRATION DISCLOSURES:





	 	1.	 	ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY VERY
LIMITED REVIEW BY A COURT.
	 
	 	2.	 	IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
	 
	 	3.	 	DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.
	 
	 	4.	 	ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING IN
THEIR AWARDS. THE RIGHT TO APPEAL OR TO SEEK MODIFICATION OF ARBITRATORS’ RULINGS IS
VERY LIMITED.
	 
	 	5.	 	A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS AFFILIATED
WITH THE BANKING INDUSTRY.
	 
	 	6.	 	IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE AMERICAN
ARBITRATION ASSOCIATION.






     a. Any claim or controversy (“Dispute”) between or among the parties and their
employees, agents, affiliates, and assigns, including, but not limited to, Disputes arising
out of or relating to the Loan, the Collateral, the Loan Documents, Section 9.7
Governing Law, this arbitration provision (“arbitration clause”), or any related
agreements or instruments relating hereto or delivered in connection herewith (“Related
Agreements”), and including, but not limited to, a Dispute based on or arising from an
alleged tort, shall at the request of any party be resolved by binding arbitration in
accordance with the applicable arbitration rules of the American Arbitration Association
(the “Administrator”). The provisions of this arbitration clause shall survive any
termination, amendment, or expiration of this Loan Agreement or Related Agreements. The
provisions of this arbitration clause shall supersede any prior arbitration agreement
between or among the parties.




     b. The arbitration proceedings shall be conducted in a city mutually agreed by the
parties. Absent such an agreement, arbitration will be conducted in Salt Lake City, Utah or
such other place as may be determined by the Administrator. The Administrator and the
arbitrator(s) shall have the authority to the extent practicable to take any action to
require the arbitration proceeding to be completed and the arbitrator(s)’ award issued
within one hundred fifty (150) days of the filing of the Dispute with the Administrator.
The arbitrator(s) shall have the authority to impose sanctions on any party that fails to
comply with time periods imposed by the Administrator or the arbitrator(s), including the



23









 







sanction of summarily dismissing any Dispute or defense with prejudice. The
arbitrator(s) shall have the authority to resolve any Dispute regarding the terms of this
Loan Agreement, this arbitration clause, or Related Agreements, including any claim or
controversy regarding the arbitrability of any Dispute. All limitations periods applicable
to any Dispute or defense, whether by statute or agreement, shall apply to any arbitration
proceeding hereunder and the arbitrator(s) shall have the authority to decide whether any
Dispute or defense is barred by a limitations period and, if so, to summarily enter an award
dismissing any Dispute or defense on that basis. The doctrines of compulsory counterclaim,
res judicata, and collateral estoppel shall apply to any arbitration proceeding hereunder so
that a party must state as a counterclaim in the arbitration proceeding any claim or
controversy which arises out of the transaction or occurrence that is the subject matter of
the Dispute. The arbitrator(s) may in the arbitrator(s)’ discretion and at the request of
any party: (i) consolidate in a single arbitration proceeding any other claim arising out
of the same transaction involving another party that is substantially related to the Dispute
where that other party to that transaction that is bound by an arbitration clause with
Lender, such as borrowers, guarantors, sureties, and owners of collateral and (ii)
consolidate or administer multiple arbitration claims or controversies as a class action in
accordance with the provisions of Rule 23 of the Federal Rules of Civil Procedure.




     c. The arbitrator(s) shall be selected in accordance with the rules of the
Administrator from panels maintained by the Administrator. A single arbitrator shall have
expertise in the subject matter of the Dispute. Where three arbitrators conduct an
arbitration proceeding, the Dispute shall be decided by a majority vote of the three
arbitrators, at least one of whom must have expertise in the subject matter of the Dispute
and at least one of whom must be a practicing attorney. The arbitrator(s) shall award to
the prevailing party recovery of all costs and fees (including attorneys’ fees and costs,
arbitration administration fees and costs, and arbitrator(s)’ fees). The arbitrator(s),
either during the pendency of the arbitration proceeding or as part of the arbitration
award, also may grant provisional or ancillary remedies including but not limited to an
award of injunctive relief, foreclosure, sequestration, attachment, replevin, garnishment,
or the appointment of a receiver.




     d. Judgment upon an arbitration award may be entered in any court having jurisdiction,
subject to the following limitation: the arbitration award is binding upon the parties
only if the amount does not exceed four million dollars ($4,000,000.00); if the award
exceeds that limit, any party may demand the right to a court trial. Such a demand must be
filed with the Administrator within thirty (30) days following the date of the arbitration
award; if such a demand is not made within that time period, the amount of the arbitration
award shall be binding. The computation of the total amount of an arbitration award shall
include amounts awarded for attorneys’ fees and costs, arbitration administration fees and
costs, and arbitrator(s)’ fees.




     e. No provision of this arbitration clause, nor the exercise of any rights hereunder,
shall limit the right of any party to: (i) judicially or non-judicially foreclose against
any real or personal property collateral or other security; (ii) exercise self-help
remedies, including but not limited to repossession and setoff rights; or (iii) obtain from
a



24









 







court having jurisdiction thereover any provisional or ancillary remedies including but
not limited to injunctive relief, foreclosure, sequestration, attachment, replevin,
garnishment, or the appointment of a receiver. Such rights can be exercised at any time,
before or after initiation of an arbitration proceeding, except to the extent such action is
contrary to the arbitration award. The exercise of such rights shall not constitute a
waiver of the right to submit any Dispute to arbitration, and any claim or controversy
related to the exercise of such rights shall be a Dispute to be resolved under the
provisions of this arbitration clause. Any party may initiate arbitration with the
Administrator. If any party desires to arbitrate a Dispute asserted against such party in a
complaint, counterclaim, cross-claim, or third-party complaint thereto, or in an answer or
other reply to any such pleading, such party must make an appropriate motion to the trial
court seeking to compel arbitration, which motion must be filed with the court within
forty-five days (45) days of service of the pleading, or amendment thereto, setting forth
such Dispute. If arbitration is compelled after commencement of litigation of a Dispute,
the party obtaining an order compelling arbitration shall commence arbitration and pay the
Administrator’s filing fees and costs within forty-five (45) days of entry of such order.




     f. Notwithstanding the applicability of any other law to this Loan Agreement, the
arbitration clause, or Related Agreements between or among the parties, the Federal
Arbitration Act, 9 U.S.C. § 1 et. seq., shall apply to the construction and interpretation
of this arbitration clause. If any provision of this arbitration clause should be
determined to be unenforceable, all other provisions of this arbitration clause shall remain
in full force and effect.



     9.18 Consent to Utah Jurisdiction, Exclusive Jurisdiction of Utah Courts, and Jury Waiver



     Borrower acknowledges that by execution and delivery of the Loan Documents Borrower has
transacted business in the State of Utah and Borrower voluntarily submits to, consents to, and
waives any defense to the jurisdiction of courts located in the State of Utah as to all matters
relating to or arising from the Loan Documents and/or the transactions contemplated thereby.
EXCEPT AS EXPRESSLY AGREED IN WRITING BY LENDER AND EXCEPT AS PROVIDED IN THE ARBITRATION
PROVISIONS ABOVE, THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF UTAH SHALL HAVE SOLE AND
EXCLUSIVE JURISDICTION OF ANY AND ALL CLAIMS, DISPUTES, AND CONTROVERSIES, ARISING UNDER OR
RELATING TO THE LOAN DOCUMENTS AND/OR THE TRANSACTIONS CONTEMPLATED THEREBY. NO LAWSUIT,
PROCEEDING, OR ANY OTHER ACTION RELATING TO OR ARISING UNDER THE LOAN DOCUMENTS AND/OR THE
TRANSACTIONS CONTEMPLATED THEREBY MAY BE COMMENCED OR PROSECUTED IN ANY OTHER FORUM EXCEPT AS
EXPRESSLY AGREED IN WRITING BY LENDER.



     BORROWER HEREBY IRREVOCABLY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING,
CLAIM OR COUNTERCLAIM, WHETHER IN CONTRACT OR IN TORT AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY
WAY RELATED TO THE LOAN DOCUMENTS.



25









 





     9.19 Notices



     All notices or demands by any party to this Loan Agreement shall, except as otherwise provided
herein, be in writing and may be sent by certified mail, return receipt requested. Notices so
mailed shall be deemed received when deposited in a United States post office box, postage prepaid,
properly addressed to Borrower or Lender at the mailing addresses stated herein or to such other
addresses as Borrower or Lender may from time to time specify in writing. Any notice so addressed
and otherwise delivered shall be deemed to be given when actually received by the addressee.



     Mailing addresses:



     Lender:


Zions First National Bank

Corporate Banking Division

1 South Main, Suite 200

Salt Lake City, Utah 84111

Attention: Thomas C. Etzel, Senior Vice President




     With a copy to:


John A. Beckstead

Holland & Hart LLP

60 East South Temple, Suite 2000

Salt Lake City, Utah 84111




     Borrower:


ZARS, Inc.

1455 West 2200 South, suite 300

Salt Lake City, Utah 84119

Attention: Greg Ayers




     9.20 Duplicate Originals; Counterpart Execution



     Two or more duplicate originals of the Loan Documents may be signed by the parties, each
duplicate of which shall be an original but all of which together shall constitute one and the same
instrument. Any Loan Documents may be executed in several counterparts, without the requirement
that all parties sign each counterpart. Each of such counterparts shall be an original, but all
counterparts together shall constitute one and the same instrument.



26









 





     9.21 Disclosure of Financial and Other Information



     Borrower hereby consents to Lender disclosing to any other lender who may participate in the
Loan any and all information, knowledge, reports, and records, including, without limitation,
financial statements, relating in any manner whatsoever to the Loan and Borrower.



     9.22 Confidentiality



     Both parties agree to maintain the confidentiality of any non-public information thereby
received or received pursuant to this Loan Agreement, except for (i) section 9.21, and (ii) as
required by law, regulations, rule or order, subpoena, judicial or other similar order provided
that Lender provides immediate prior written notice of Lender’s intent to make such disclosure (and
in any event, prior to actual disclosure) to Borrower and takes reasonable and lawful actions to
avoid and/or minimize the extent of such disclosure, including the provision of any reasonable
assistance requested by Borrower in opposing any disclosure so requested or ordered before the
disclosure occurs. Confidential information hereunder shall not include information that either
(i) is in the public domain or in the knowledge or possession of Lender when disclosed to Lender,
or becomes a part of the public domain after disclosure to Lender through no fault of Lender, or
(ii) is disclosed to Lender by a third party, provided Lender does not have actual knowledge that
such third party is prohibited from disclosing such information.



     9.23 Integrated Agreement and Subsequent Amendment



     The Loan Documents constitute the entire agreement between Lender and Borrower, and may not be
altered or amended except by written agreement signed by Lender and Borrower. PURSUANT TO UTAH
CODE SECTION 25-5-4, BORROWER IS NOTIFIED THAT THESE AGREEMENTS ARE A FINAL EXPRESSION OF THE
AGREEMENT BETWEEN LENDER AND BORROWER AND THESE AGREEMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF
ANY ALLEGED ORAL AGREEMENT.



     All prior and contemporaneous agreements, arrangements and understandings between the parties
hereto as to the subject matter hereof are, except as otherwise expressly provided herein,
rescinded.



[Signatures on Following Page]




27









 








Effective Date: June 28, 2007.




	 	 	 	 	 	 	 
	 	 	Lender:	 	 
	 
	 	 	 	 	 	 
	 	 	Zions First National Bank	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Thomas C. Etzel	 	 
	 

	 	 	 	 	 	 
	 	 	Name: Thomas C. Etzel

Title: Senior Vice President	 	 
	 
	 	 	 	 	 	 
	 	 	Borrower:	 	 
	 
	 	 	 	 	 	 
	 	 	ZARS, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Robert Lippert	 	 
	 

	 	 	 	 	 	 
	 	 	Name: Robert Lippert

Title: President	 	 






28









 






EXHIBIT A




Promissory Note

(Term Loan A)




June 28, 2007




Borrower: ZARS, Inc.



Lender: Zions First National Bank




Amount: $8,000,000.00




Maturity: June 28, 2010




     For value received, Borrower promises to pay to the order of Lender at Corporate Banking
Group, 1 South Main, Suite 200, Salt Lake City, Utah 84111, the sum of eight million dollars
($8,000,000.00) or such other principal balance as may be outstanding hereunder in lawful money of
the United States with interest thereon calculated and payable as provided herein.



Definitions




     Terms used in the singular shall have the same meaning when used in the plural and vice versa.
As used in this Promissory Note, the term:



     “Banking Business Day” means any day other than a Saturday, Sunday or other day on which
commercial banks in the State of Utah are authorized or required to close and, when used in
reference to an Interest Period, a day on which dealings in dollar deposits are also carried on in
the London Interbank market and banks are open for business in London.



     “Cash in Zions Money Market Account” means the lowest balance at any time during a calendar
quarter in Money Market Account No. 002406015 of Borrower maintained with Lender.



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



     “Event of Default” shall have the meaning set forth in the Loan Agreement




     “Interest Period” means the period during which interest will accrue based on the LIBOR Rate
or the LIBOR/Swap Rate, commencing on the date selected by Borrower and ending, as Borrower may
select, on the numerically corresponding day in the first calendar year thereafter for an Interest
Period based on the LIBOR Rate, or the second or third calendar year thereafter for an Interest
Period based on the LIBOR/Swap Rate, except that each such Interest Period that commences on the
last Banking Business Day of a calendar year (or on any day for which there is no numerically
corresponding day in the appropriate subsequent calendar year) shall end on



 









 







the last Banking Business Day of the appropriate subsequent calendar year; provided that all
of the foregoing provisions relating to Interest Periods are subject to the following:





	 	a.	 	No Interest Period may extend beyond the termination of the Loan Agreement;
	 
	 	b.	 	No Interest Period may extend beyond the aforesaid Maturity Date or such later
date to which it is extended; and
	 
	 	c.	 	If an Interest Period would end on a day that is not a Banking Business Day,
such Interest Period shall be extended to the next Banking Business Day unless such
Banking Business Day would fall in the next calendar year, in which event such Interest
Period shall end on the immediately preceding Banking Business Day.





     “LIBOR Rate” applicable to any Interest Period equal to one calendar year means the rate per
annum quoted by Lender as its LIBOR Rate based upon quotes from the London Interbank Offered Rate
from the British Bankers Association Interest Settlement Rates as quoted for United States Dollars
by Bloomberg or other comparable services selected by Lender for the applicable Interest Period.
This definition of LIBOR Rate is to be strictly interpreted and is not intended to serve any
purpose other than providing an index to determine the interest rate used herein. The LIBOR Rate
of Lender may not necessarily be the same as the quoted offered side in the Eurodollar time deposit
market quoted by any particular institution or service applicable to any Interest Period. It is
not the lowest rate at which Lender may make loans to any of its customers, either now or in the
future.



     “LIBOR Rate Applicable Margin” means:



	 	 	 
	Cash in Zions Money Market Account	 	LIBOR Rate Applicable Margin
	Equal to or less than $5,000,000
	 	3.75%
	 
	Greater than $5,000,000, but equal to or less than $10,000,000
	 	3.00%
	 
	Greater than $10,000,000, but equal to or less than $15,000,000
	 	2.25%
	 
	Greater than $15,000,000
	 	1.75%






     “LIBOR/Swap Rate” applicable to any Interest Period equal to two or three calendar years means
the rate per annum quoted by Lender as Lender’s two year or three year LIBOR/Swap Rate based upon
the LIBOR/Swap rate as quoted for U.S. Dollars by Bloomberg or other comparable pricing services
selected by Lender. This definition of LIBOR/Swap Rate is to be strictly interpreted and is not
intended to serve any other purpose other than providing an index to determine the interest rate
used herein. Lender’s LIBOR/Swap Rate may not necessarily be the same as the quoted offer side in
the Eurodollar time deposit market by any particular institution or service applicable to any
interest period. It is not the lowest rate at which Lender may make loans to any of its customers,
either now or in the future.



 









 





     “Loan Agreement” means the Loan Agreement dated June 28, 2007, between Zions First National
Bank as Lender and ZARS, Inc., as Borrower, together with any exhibits, amendments, addenda, and
modifications.



     “Prime Rate” means an index which is determined daily by the published commercial loan
variable rate index held by any two of the following banks: J. P. Morgan Chase & Co., Wells Fargo
Bank, National Association, and Bank of America N.A. In the event no two of the above banks have
the same published rate, the bank having the median rate will establish the Prime Rate. If, for
any reason beyond the control of Lender, any of the aforementioned banks becomes unacceptable as a
reference for the purpose of determining the Prime Rate used herein, Lender may, five days after
posting notice in Lender’s bank offices, substitute another comparable bank for the one determined
unacceptable. As used in this paragraph, “comparable bank” shall mean one of the ten largest
commercial banks headquartered in the United States of America. This definition of Prime Rate is
to be strictly interpreted and is not intended to serve any purpose other than providing an index
to determine the variable interest rate used herein. It is not the lowest rate at which Lender may
make loans to any of its customers, either now or in the future.



     “Prime Rate Applicable Margin” means:



	 	 	 
	Cash in Zions Money Market Account	 	Prime Rate Applicable Margin
	Equal to or less than $5,000,000
	 	1.00%
	 
	Greater than $5,000,000, but equal to or less than $10,000,000
	 	0.25%
	 
	Greater than $10,000,000, but equal to or less than $15,000,000
	 	-0.50%
	 
	Greater than $15,000,000
	 	-1.00%






Payment Terms




     Interest shall be payable as follows: Interest accrued based on the Prime Rate, the LIBOR
Rate, or the LIBOR/Swap Rate is to be paid in arrears commencing August 1, 2007, and on the same
day of each month thereafter.



     Principal shall be payable in thirty (30) installments of two hundred sixty six thousand six
hundred sixty six dollars and sixty seven cents ($266,666.67) per month commencing January 1, 2008,
and on the same day of each month thereafter through June 1, 2010. All remaining principal and
unpaid interest shall be paid in full on June 1, 2010.



LIBOR Rate and LIBOR/Swap Rate Election




     This Promissory Note shall initially bear interest based on the Prime Rate.



 









 





     Provided no Event of Default has occurred, and is continuing, Borrower may elect from time to
time to convert or continue the interest rate to the LIBOR Rate or the LIBOR/Swap Rate by giving
Lender two (2) Banking Business Days written notice of such election specifying the Interest Period
selected. Such election shall apply to the entire outstanding principal balance. An elected
Interest Period may not be changed without consent of Lender until expiration of the elected
Interest Period.



Interest Based on Prime Rate




     Interest based on the Prime Rate shall be at a variable rate computed on the basis of a three
hundred sixty (360) day year as follows: The Prime Rate from time to time in effect, adjusted as
of the date of any change in the Prime Rate, plus or minus the Prime Rate Applicable Margin. The
Prime Rate Applicable Margin shall be adjusted as of the first day of each calendar quarter based
on the Cash in Zions Money Market Account for the preceding calendar quarter.



Interest Based on LIBOR Rate or LIBOR/Swap Rate




     Interest based on the LIBOR Rate and LIBOR/Swap Rate shall be calculated as follows:




	 	1.	 	Interest shall be at a rate computed on the basis of a three hundred sixty
(360) day year at a rate equal to the LIBOR Rate or LIBOR/Swap Rate, as applicable, for
the applicable Interest Period plus the LIBOR Rate Applicable Margin. The LIBOR Rate
Applicable Margin shall be adjusted as of the first day of each calendar quarter based
on the Cash in Zions Money Market Account for the preceding calendar quarter.
	 
	 	2.	 	Notwithstanding any other provision in this Promissory Note, if the adoption of
any applicable law, rule, or regulation, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central bank,
or comparable agency charged with the interpretation or administration thereof, or
compliance by Lender with any request or directive (whether or not having the force of
law) of any such authority, central bank, or comparable agency, shall make it unlawful
or impossible for Lender to maintain balances based on the LIBOR Rate or the LIBOR/Swap
Rate, then upon notice to Borrower by Lender the outstanding principal amount of the
balances based on the LIBOR Rate or the LIBOR/Swap Rate, together with interest accrued
thereon, shall be repaid immediately upon demand of Lender if such change or compliance
with such request, in the judgment of Lender, requires immediate repayment or, if such
repayment is not required, at the election of Borrower shall be converted to a balance
based on Prime Rate or repaid at the expiration of the last Interest Period to expire
before the effective date of any such change or request.
	 
	 	3.	 	Notwithstanding anything to the contrary herein, if Lender determines (which
determination shall be conclusive) that (a) quotations of interest rates are not being
provided for purposes of determining the LIBOR Rate or the LIBOR/Swap Rate, or (b) the
LIBOR Rate or the LIBOR/Swap Rate does not accurately cover the cost to Lender of
making or maintaining advances based on such rate, then




 









 






	 	 	 	Lender may give notice thereof to Borrower, whereupon until Lender notifies Borrower
that the circumstances giving rise to such suspension no longer exist, then (1) the
right of Borrower to request interest pricing based on the LIBOR Rate or the
LIBOR/Swap Rate shall be suspended; and (2) Borrower shall repay in full the then
outstanding principal amount based on LIBOR Rate or the LIBOR/Swap Rate together
with accrued interest thereon, on the last day of the then current Interest Period
applicable to such balance, or, at Borrower’ option, convert the outstanding
principal balances based on the LIBOR Rate or the LIBOR/Swap Rate to balances based
on Prime Rate on the last day of the then current Interest Period applicable to such
balances.





General




     Borrower may prepay all or any portion of all Prime Rate based balances at any time without
penalty. Borrower may not prepay in full or in part any LIBOR Rate or LIBOR/Swap Rate based
balances. Notwithstanding the foregoing, in the event of any voluntary or involuntary prepayment
of any LIBOR Rate or LIBOR/Swap Rate based balance, Borrower shall make Lender whole and Borrower
shall pay to Lender all costs incurred by Lender in connection with such prepayment and compensate
Lender for any loss and any breakage costs arising from the re-employment of funds at rates lower
than the rate provided by this Promissory Note, cost to Lender of such funds, any interest or fees
payable by Lender to lenders of funds obtained by them in order to make or maintain the loan
evidenced by this Promissory Note and any related costs.



     Any prepayment received by Lender after 2:00 p.m. Mountain Time shall be deemed received on
the following Banking Business Day.



     Any prepayments shall reduce or excuse the last installment payments owing. All scheduled
installment payments shall remain due and owing as scheduled until all outstanding principal has
been paid in full.



     Upon default in payment of any principal or interest when due, whether due at stated maturity,
by acceleration, or otherwise, and until such default is cured or waived, (i) all outstanding
principal shall bear interest at a default rate from the date when due until paid, both before and
after judgment, which default rate shall be three percent (3%) per annum above the foregoing rates
and (ii) upon maturity of the applicable Interest Period the balance bearing interest based on the
LIBOR Rate or the LIBOR/Swap Rate shall be converted to a balance bearing interest based on the
Prime Rate.



     This Promissory Note is made in accordance with the Loan Agreement and is secured by the
collateral identified in and contemplated by the Loan Agreement.



     If an Event of Default occurs and is continuing, time being the essence hereof, then the
entire unpaid balance, with interest as aforesaid, shall, at the election of the holder hereof and
without notice of such election, become immediately due and payable in full.



 









 





     If an Event of Default occurs and is continuing, Borrower agrees to pay to the holder hereof
all collection costs, including reasonable attorney fees and legal expenses, in addition to all
other sums due hereunder.



     This Promissory Note shall be governed by and construed in accordance with the laws of the
State of Utah.



     Borrower acknowledges that by execution and delivery of this Promissory Note Borrower has
transacted business in the State of Utah and Borrower voluntarily submits to, consents to, and
waives any defense to the jurisdiction of courts located in the State of Utah as to all matters
relating to or arising from this Promissory Note. EXCEPT AS EXPRESSLY AGREED IN WRITING BY LENDER
AND EXCEPT AS PROVIDED IN THE ARBITRATION PROVISIONS IN THE LOAN AGREEMENT, THE STATE AND FEDERAL
COURTS LOCATED IN THE STATE OF UTAH SHALL HAVE SOLE AND EXCLUSIVE JURISDICTION OF ANY AND ALL
CLAIMS, DISPUTES, AND CONTROVERSIES, ARISING UNDER OR RELATING TO THIS PROMISSORY NOTE. NO
LAWSUIT, PROCEEDING, OR ANY OTHER ACTION RELATING TO OR ARISING UNDER THIS PROMISSORY NOTE MAY BE
COMMENCED OR PROSECUTED IN ANY OTHER FORUM EXCEPT AS EXPRESSLY AGREED IN WRITING BY LENDER.



     Borrower and all endorsers, sureties and guarantors hereof hereby jointly and severally waive
presentment for payment, demand, protest, notice of protest, notice of protest and of non-payment
and of dishonor, and consent to extensions of time, renewal, waivers or modifications without
notice and further consent to the release of any collateral or any part thereof with or without
substitution.



	 	 	 	 	 	 	 
	 	 	Borrower:	 	 
	 
	 	 	 	 	 	 
	 	 	ZARS, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Robert Lippert
	 	 
	 

	 	 	 	 	 	 
	 	 	Name: Robert Lippert

Title: President	 	 







 









 








EXHIBIT B




Promissory Note

(Term Loan B)




June 28, 2007




Borrower: ZARS, Inc.




Lender: Zions First National Bank




Amount: $2,500,000.00




Maturity: June 28, 2010




     For value received, Borrower promises to pay to the order of Lender at Corporate Banking
Group, 1 South Main, Suite 200, Salt Lake City, Utah 84111, the sum of two million five hundred
thousand dollars ($2,500,000.00) or such other principal balance as may be outstanding hereunder in
lawful money of the United States with interest thereon calculated and payable as provided herein.



Definitions




     Terms used in the singular shall have the same meaning when used in the plural and vice versa.
As used in this Promissory Note, the term:



     “Banking Business Day” means any day other than a Saturday, Sunday or other day on which
commercial banks in the State of Utah are authorized or required to close and, when used in
reference to an Interest Period, a day on which dealings in dollar deposits are also carried on in
the London Interbank market and banks are open for business in London.



     “Cash in Zions Money Market Account” means the lowest balance at any time during a calendar
quarter in Money Market Account No. 002406015 of Borrower maintained with Lender.



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



     “Event
 of Default” shall have the meaning set forth in the Loan Agreement




     “Interest Period” means the period during which interest will accrue based on the LIBOR Rate
or the LIBOR/Swap Rate, commencing on the date selected by Borrower and ending, as Borrower may
select, on the numerically corresponding day in the first calendar year thereafter for an Interest
Period based on the LIBOR Rate, or the second or third calendar year thereafter for an Interest
Period based on the LIBOR/Swap Rate, except that each such Interest Period that commences on the
last Banking Business Day of a calendar year (or on any day for which there is no numerically
corresponding day in the appropriate subsequent calendar year) shall end on



 









 








the last Banking Business Day of the appropriate subsequent calendar year; provided that all
of the foregoing provisions relating to Interest Periods are subject to the following:




	 	a.	 	No Interest Period may extend beyond the termination of the Loan Agreement;
	 
	 	b.	 	No Interest Period may extend beyond the aforesaid Maturity Date or such later
date to which it is extended; and
	 
	 	c.	 	If an Interest Period would end on a day that is not a Banking Business Day,
such Interest Period shall be extended to the next Banking Business Day unless such
Banking Business Day would fall in the next calendar year, in which event such Interest
Period shall end on the immediately preceding Banking Business Day.





     “LIBOR Rate” applicable to any Interest Period equal to one calendar year means the rate per
annum quoted by Lender as its LIBOR Rate based upon quotes from the London Interbank Offered Rate
from the British Bankers Association Interest Settlement Rates as quoted for United States Dollars
by Bloomberg or other comparable services selected by Lender for the applicable Interest Period.
This definition of LIBOR Rate is to be strictly interpreted and is not intended to serve any
purpose other than providing an index to determine the interest rate used herein. The LIBOR Rate
of Lender may not necessarily be the same as the quoted offered side in the Eurodollar time deposit
market quoted by any particular institution or service applicable to any Interest Period. It is
not the lowest rate at which Lender may make loans to any of its customers, either now or in the
future.



     “LIBOR Rate Applicable Margin” means:



	 	 	 
	Cash in Zions Money Market Account	 	LIBOR Rate Applicable Margin
	Equal to or less than $5,000,000
	 	3.75%
	 
	Greater than $5,000,000, but equal to or less than $10,000,000
	 	3.00%
	 
	Greater than $10,000,000, but equal to or less than $15,000,000
	 	2.25%
	 
	Greater than $15,000,000
	 	1.75%






     “LIBOR/Swap Rate” applicable to any Interest Period equal to two or three calendar years means
the rate per annum quoted by Lender as Lender’s two year or three year LIBOR/Swap Rate based upon
the LIBOR/Swap rate as quoted for U.S. Dollars by Bloomberg or other comparable pricing services
selected by Lender. This definition of LIBOR/Swap Rate is to be strictly interpreted and is not
intended to serve any other purpose other than providing an index to determine the interest rate
used herein. Lender’s LIBOR/Swap Rate may not necessarily be the same as the quoted offer side in
the Eurodollar time deposit market by any particular institution or service applicable to any
interest period. It is not the lowest rate at which Lender may make loans to any of its customers,
either now or in the future.



 









 





     “Loan Agreement” means the Loan Agreement dated June 28, 2007, between Zions First National
Bank as Lender and ZARS, Inc., as Borrower, together with any exhibits, amendments, addenda, and
modifications.



     “Prime Rate” means an index which is determined daily by the published commercial loan
variable rate index held by any two of the following banks: J. P. Morgan Chase & Co., Wells Fargo
Bank, National Association, and Bank of America N.A. In the event no two of the above banks have
the same published rate, the bank having the median rate will establish the Prime Rate. If, for
any reason beyond the control of Lender, any of the aforementioned banks becomes unacceptable as a
reference for the purpose of determining the Prime Rate used herein, Lender may, five days after
posting notice in Lender’s bank offices, substitute another comparable bank for the one determined
unacceptable. As used in this paragraph, “comparable bank” shall mean one of the ten largest
commercial banks headquartered in the United States of America. This definition of Prime Rate is
to be strictly interpreted and is not intended to serve any purpose other than providing an index
to determine the variable interest rate used herein. It is not the lowest rate at which Lender may
make loans to any of its customers, either now or in the future.



     “Prime Rate Applicable Margin” means:



	 	 	 
	Cash in Zions Money Market Account	 	Prime Rate Applicable Margin
	Equal to or less than $5,000,000
	 	1.00%
	 
	Greater than $5,000,000, but equal to or less than $10,000,000
	 	0.25%
	 
	Greater than $10,000,000, but equal to or less than $15,000,000
	 	-0.50%
	 
	Greater than $15,000,000
	 	-1.00%






Payment Terms




     Interest shall be payable as follows: Interest accrued based on the Prime Rate, the LIBOR
Rate, or the LIBOR/Swap Rate is to be paid in arrears commencing August 1, 2007, and on the same
day of each month thereafter.



     Principal shall be payable in thirty (30) installments of eighty-three thousand three hundred
thirty-three dollars and thirty-three cents ($83,333.33) per month commencing January 1, 2008, and
on the same day of each month thereafter through June 1, 2010. All remaining principal and unpaid
interest shall be paid in full on June 1, 2010.



LIBOR Rate and LIBOR/Swap Rate Election




     This Promissory Note shall initially bear interest based on the Prime Rate.



 









 





     Provided no Event of Default has occurred, and is continuing, Borrower may elect from time to
time to convert or continue the interest rate to the LIBOR Rate or the LIBOR/Swap Rate by giving
Lender two (2) Banking Business Days written notice of such election specifying the Interest Period
selected. Such election shall apply to the entire outstanding principal balance. An elected
Interest Period may not be changed without consent of Lender until expiration of the elected
Interest Period.



Interest Based on Prime Rate




     Interest based on the Prime Rate shall be at a variable rate computed on the basis of a three
hundred sixty (360) day year as follows: The Prime Rate from time to time in effect, adjusted as
of the date of any change in the Prime Rate, plus or minus the Prime Rate Applicable Margin. The
Prime Rate Applicable Margin shall be adjusted as of the first day of each calendar quarter based
on the Cash in Zions Money Market Account for the preceding calendar quarter.



Interest Based on LIBOR Rate or LIBOR/Swap Rate




     Interest based on the LIBOR Rate and LIBOR/Swap Rate shall be calculated as follows:




	 	1.	 	Interest shall be at a rate computed on the basis of a three hundred sixty
(360) day year at a rate equal to the LIBOR Rate or LIBOR/Swap Rate, as applicable, for
the applicable Interest Period plus the LIBOR Rate Applicable Margin. The LIBOR Rate
Applicable Margin shall be adjusted as of the first day of each calendar quarter based
on the Cash in Zions Money Market Account for the preceding calendar quarter.
	 
	 	2.	 	Notwithstanding any other provision in this Promissory Note, if the adoption of
any applicable law, rule, or regulation, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central bank,
or comparable agency charged with the interpretation or administration thereof, or
compliance by Lender with any request or directive (whether or not having the force of
law) of any such authority, central bank, or comparable agency, shall make it unlawful
or impossible for Lender to maintain balances based on the LIBOR Rate or the LIBOR/Swap
Rate, then upon notice to Borrower by Lender the outstanding principal amount of the
balances based on the LIBOR Rate or the LIBOR/Swap Rate, together with interest accrued
thereon, shall be repaid immediately upon demand of Lender if such change or compliance
with such request, in the judgment of Lender, requires immediate repayment or, if such
repayment is not required, at the election of Borrower shall be converted to a balance
based on Prime Rate or repaid at the expiration of the last Interest Period to expire
before the effective date of any such change or request.
	 
	 	3.	 	Notwithstanding anything to the contrary herein, if Lender determines (which
determination shall be conclusive) that (a) quotations of interest rates are not being
provided for purposes of determining the LIBOR Rate or the LIBOR/Swap Rate, or (b) the
LIBOR Rate or the LIBOR/Swap Rate does not accurately cover the cost to Lender of
making or maintaining advances based on such rate, then




 









 






	 	 	 	Lender may give notice thereof to Borrower, whereupon until Lender notifies Borrower
that the circumstances giving rise to such suspension no longer exist, then (1) the
right of Borrower to request interest pricing based on the LIBOR Rate or the
LIBOR/Swap Rate shall be suspended; and (2) Borrower shall repay in full the then
outstanding principal amount based on LIBOR Rate or the LIBOR/Swap Rate together
with accrued interest thereon, on the last day of the then current Interest Period
applicable to such balance, or, at Borrower’ option, convert the outstanding
principal balances based on the LIBOR Rate or the LIBOR/Swap Rate to balances based
on Prime Rate on the last day of the then current Interest Period applicable to such
balances.





General




     Borrower may prepay all or any portion of all Prime Rate based balances at any time without
penalty. Borrower may not prepay in full or in part any LIBOR Rate or LIBOR/Swap Rate based
balances. Notwithstanding the foregoing, in the event of any voluntary or involuntary prepayment
of any LIBOR Rate or LIBOR/Swap Rate based balance, Borrower shall make Lender whole and Borrower
shall pay to Lender all costs incurred by Lender in connection with such prepayment and compensate
Lender for any loss and any breakage costs arising from the re-employment of funds at rates lower
than the rate provided by this Promissory Note, cost to Lender of such funds, any interest or fees
payable by Lender to lenders of funds obtained by them in order to make or maintain the loan
evidenced by this Promissory Note and any related costs.



     Any prepayment received by Lender after 2:00 p.m. Mountain Time shall be deemed received on
the following Banking Business Day.



     Any prepayments shall reduce or excuse the last installment payments owing. All scheduled
installment payments shall remain due and owing as scheduled until all outstanding principal has
been paid in full.



     Upon default in payment of any principal or interest when due, whether due at stated maturity,
by acceleration, or otherwise, and until such default is cured or waived, (i) all outstanding
principal shall bear interest at a default rate from the date when due until paid, both before and
after judgment, which default rate shall be three percent (3%) per annum above the foregoing rates
and (ii) upon maturity of the applicable Interest Period the balance bearing interest based on the
LIBOR Rate or the LIBOR/Swap Rate shall be converted to a balance bearing interest based on the
Prime Rate.



     This Promissory Note is made in accordance with the Loan Agreement and is secured by the
collateral identified in and contemplated by the Loan Agreement.



     If an Event of Default occurs and is continuing, time being the essence hereof, then the
entire unpaid balance, with interest as aforesaid, shall, at the election of the holder hereof and
without notice of such election, become immediately due and payable in full.



 









 





     If an Event of Default occurs and is continuing, Borrower agrees to pay to the holder hereof
all collection costs, including reasonable attorney fees and legal expenses, in addition to all
other sums due hereunder.



     This Promissory Note shall be governed by and construed in accordance with the laws of the
State of Utah.



     Borrower acknowledges that by execution and delivery of this Promissory Note Borrower has
transacted business in the State of Utah and Borrower voluntarily submits to, consents to, and
waives any defense to the jurisdiction of courts located in the State of Utah as to all matters
relating to or arising from this Promissory Note. EXCEPT AS EXPRESSLY AGREED IN WRITING BY LENDER
AND EXCEPT AS PROVIDED IN THE ARBITRATION PROVISIONS IN THE LOAN AGREEMENT, THE STATE AND FEDERAL
COURTS LOCATED IN THE STATE OF UTAH SHALL HAVE SOLE AND EXCLUSIVE JURISDICTION OF ANY AND ALL
CLAIMS, DISPUTES, AND CONTROVERSIES, ARISING UNDER OR RELATING TO THIS PROMISSORY NOTE. NO
LAWSUIT, PROCEEDING, OR ANY OTHER ACTION RELATING TO OR ARISING UNDER THIS PROMISSORY NOTE MAY BE
COMMENCED OR PROSECUTED IN ANY OTHER FORUM EXCEPT AS EXPRESSLY AGREED IN WRITING BY LENDER.



     Borrower and all endorsers, sureties and guarantors hereof hereby jointly and severally waive
presentment for payment, demand, protest, notice of protest, notice of protest and of non-payment
and of dishonor, and consent to extensions of time, renewal, waivers or modifications without
notice and further consent to the release of any collateral or any part thereof with or without
substitution.



	 	 	 	 	 	 	 
	 	 	Borrower:	 	 
	 
	 	 	 	 	 	 
	 	 	ZARS, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Robert Lippert	 	 
	 

	 	 	 	 

	 	 
	 	 	Name: Robert Lippert

Title: President