Document:

exv10w7

 

Exhibit 10.7

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (this “Agreement”) is entered into as of April 11, 2008 by and
between CPEX Pharmaceuticals. Inc., a Delaware corporation (the “Employer” or “CPEX”), and Robert
P. Hebert (the “Employee”).

RECITALS

     A. In connection with the proposed transfer to the Employer of a portion of the business of
Bentley Pharmaceuticals, Inc. (“Bentley”), a Delaware corporation, known as “Drug Delivery”, the
shares of CPEX common stock will be distributed to the stockholders of Bentley in a spin-off
transaction (generally, the “Spin-off”) and the Employee’s employment will be transferred to the
Employer.

     B. Upon the distribution of shares of CPEX common stock in the Spin-off (“completion of the
Spin-off”), the Employer desires to employ the Employee, and the Employee desires to be employed by
the Employer, all upon the terms and provisions and subject to the conditions set forth in this
Agreement.

WITNESSETH

     NOW THEREFORE, in consideration of the foregoing premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree to be legally bound as follows:

1. Employment. Subject to completion of the Spin-off, the Employer hereby agrees to employ the
Employee, and the Employee hereby accepts such employment, as Chief Financial Officer of the
Employer, upon the terms and subject to the conditions set forth in this Agreement. The Employee
shall perform such functions as are consistent with these positions under the supervision of the
Chief Executive Officer of the Employer or his designee. The Employee shall, without any
compensation in addition to that which is specifically provided in this Agreement, serve in such
further offices or positions with Employer or any subsidiary or affiliate of Employer
(collectively, the “Employer Group”) as shall from time to time be reasonably requested by the
Employer.

2. Term. Subject to the termination provisions hereinafter contained, the term of this Agreement
shall be for an initial term commencing immediately after the date of completion of the Spin-off
(the “Distribution Date”) and terminating on December 31, 2009. This Agreement shall thereafter be
automatically renewed for successive one (1) year terms, unless the Employee’s employment with the
Employer has been terminated, as hereinafter provided, or unless either party shall have given the
other party notice at least one year before the then applicable date of expiration that this
Agreement will terminate as of its then applicable date of expiration. The initial term of this
Agreement, and any extension thereof pursuant to this paragraph, are referred to as the “Term”.

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3. Compensation, Reimbursement, Etc. Subject to completion of the Spin-off, and commencing on
the Distribution Date, the Employer shall provide the Employee the following compensation and
benefits:

	 	a.	 	Base Salary. The Employer shall pay to the Employee as compensation for all
services rendered by the Employee a base salary of $15,416.67 per month (the “Monthly
Base Salary”), payable in accordance with the Employer’s regular payroll practices,
plus annual bonuses on a calendar year basis as determined by the Compensation
Committee of the Employer’s Board of Directors (the “Compensation Committee”), subject
to Sections 3(d) and 3(e). If an increase in Monthly Base Salary is determined for a
calendar year after January 1 and before May 31 of that year, the increase shall be
retroactive to the beginning of that year. Annual review of the Employee’s Monthly
Base Salary will be on a calendar year basis, and the results of such review will be
provided to the Employee no later than May of the following year.
	 
	 	b.	 	Expense Reimbursement. The Employer shall reimburse the Employee on a
semi-monthly basis for all reasonable expenses incurred by the Employee in the
performance of his duties under this Agreement; provided however, that the Employee
shall have previously furnished to the Employer an itemized account, satisfactory to
the Employer, in substantiation of such expenditures.
	 
	 	c.	 	Benefits. The Employee shall be entitled to health and other benefits on the
same terms and conditions as the Employer has made available to other senior executives
of Employer, including without limitation participation in the Employer’s health plans.
If the Employee elects not to participate in the Employer’s health plans, Employee
shall be entitled to reimbursement for the premiums paid for an alternate plan in
amounts not to exceed the premiums that would have been paid on behalf of the Employee
for Employer’s health plan. The Employer agrees to maintain life insurance and
disability coverage on the Employee in an amount equivalent to 24 times Monthly Base
Salary, which insurance will be payable to the Employee’s estate or beneficiaries (as
the Employee may designate) upon the Employee’s death or to the Employee in the event
of disability as provided in Section 7(b) hereof.
	 
	 	d.	 	Bonuses. The Employee shall be eligible for a bonus each year of the Term,
payable in cash, common stock and/or other equity awards, as determined by the
Compensation Committee. Such annual bonus will be awarded for each year as soon as
practicable after March 15, but in no event later than June 30, of the following year.
	 
	 	e.	 	Annual Review. The Employee shall be reviewed on an annual (calendar year)
basis.

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	 	f.	 	Equity Awards. So long as the Employee continues to be employed as an
executive officer of the Employer, the Employee will be eligible for periodic equity
awards (“Equity Awards”) under the Employer’s 2008 Equity Incentive Plan or another
plan as determined by the Compensation Committee (collectively, the “Plan”). All
Equity Awards shall be subject to substantially the same terms and conditions (and, if
more than one type of award is granted, in the same proportions) as the annual equity
awards made generally to the other executive officers of the Employer, as determined in
good faith by the Compensation Committee, which awards shall be made on the same date
as when annual equity awards are made generally to the other executive officers of the
Employer.
	 
	 	 	 	In addition, after completion of the Spin-off, the Employee will receive an option
to purchase shares of CPEX common stock under a new equity plan of CPEX, which
option shall be at an exercise price and for a number of shares to be determined by
the Compensation Committee.

4. Duties. Subject to the condition that Bentley completes the Spin-off (which is in the
discretion of the Bentley Board of Directors), the Employee will become the Chief Financial Officer
of the Employer upon completion of the Spin-off.

5. Extent of Services. During the Term, the Employee shall devote his full time, energy and
attention to the benefit and business of the Employer and its affiliates and shall not be employed
by another entity, either directly or as a consultant to or in any other capacity, except as
approved in advance by the Employer’s Board of Directors; provided, however, that no such approval
shall be required to serve as a director, officer or trustee of any trade association or of any
civic or charitable organization so long as such service does not significantly interfere with the
Employee’s performance of his duties at the Employer.

6. Vacation. The Employee may take a maximum of four weeks of paid vacation each calendar year, at
times to be determined in a manner most convenient to the business of the Employer. A maximum of
one week of unused vacation may be carried over from one calendar year to the next.

7. Termination Following Death or Incapacity.

	 	a.	 	Death. All rights of the Employee under this Agreement shall terminate upon
death (other than rights accrued prior thereto). All Equity Awards shall be
exercisable for a period of twelve (12) months from death, in accordance with the Plan.
The Employer shall pay to the estate of the Employee any unpaid salary and other
benefits due as well as reimbursable expenses accrued and owing to the Employee at the
time of his death. The Employer shall have no additional financial obligation under
this Agreement to the Employee or his estate beyond the term-life insurance benefit
described in Section 3(c) above.

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	 	b.	 	Disability.

	 	i.	 	During any period of disability, illness or incapacity during
the Term which renders the Employee at least temporarily unable to perform the
services required under this Agreement, the Employee shall receive his salary
payable under Section 3 of this Agreement, less any benefits received by him
under any insurance carried by or provided by the Employer; provided however,
all rights of the Employee under this Agreement (other than rights already
accrued) shall terminate as provided below upon the Employee’s permanent
disability (as defined below).
	 
	 	ii.	 	The term “permanent disability” as used in this Agreement shall
mean the inability of the Employee, as determined by the Board of Directors of
the Employer, by reason of physical or mental disability to perform the duties
required of him under this Agreement after a period of: (a) 120 consecutive
days of such disability; or (b) disability for at least six months during any
twelve month period. Upon such determination, the Board of Directors may
terminate the Employee’s employment under this Agreement upon ten (10) days
prior written notice. In the event of permanent disability all Equity Awards
shall vest, and be exercisable for a period of time, in accordance with their
respective terms and the terms of the Plan.
	 
	 	iii.	 	If any determination of the Board of Directors with respect to
permanent disability is disputed by the Employee, the parties hereto agree to
abide by the decision of a panel of three physicians. The Employee and
Employer shall each appoint one member, and the third member of the panel shall
be appointed by the other two physicians. If the physicians appointed by the
parties have not agreed upon the third physician within fifteen (15) days,
either party may petition the New Hampshire Medical Society to appoint a third
physician. The Employee agrees to make himself available for and to submit to
reasonable examinations by such physicians as may be directed by the Employer.
Failure to submit to any such exam shall constitute a material breach of this
Agreement. In the event such a panel is convened, the party whose position is
not sustained will bear all the associated costs.

8. Other Terminations.

	 	a.	 	Without Cause.

	 	i.	 	Either the Employee or the Employer may terminate the
Employee’s employment hereunder at any time upon written notice.
	 
	 	ii.	 	If the Employee gives written notice pursuant to paragraph (i)
above, the Employer shall have the right to either (a) relieve the Employee, in
whole or in part, of his duties under this Agreement or (b) to accelerate the
date of termination of employment to coincide with the date on which the
written notice is received.

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	 	iii.	 	Notwithstanding any provisions hereof to the contrary, the
Employer may terminate Employee’s employment hereunder without cause at any
time. If the Employer terminates the Employee’s Employment pursuant to the
provisions of this Section 8(a), it shall pay to the Employee as a severance
benefit, in cash, an amount equal to (a) twelve months of the Employee’s
Monthly Base Salary plus (b) the higher of the bonus target for the current
year or the bonus paid for the prior year, which amount shall be due and
payable in a lump sum within not more than ten (10) days after such termination
or such later date on which the revocation period for the release contemplated
by Section 18 expires; provided, however, that this obligation shall terminate
if the release has not been delivered and the revocation period has not expired
within sixty 60 days after such termination. Additionally, the vesting of
Equity Awards shall be accelerated on a pro rata basis determined by the number
of completed months of service during the then current annual vesting period,
the vested portions of such Equity Awards shall be exercisable for the period
of time indicated in the terms of the Equity Award, and all other vesting of
Equity Awards shall cease unless otherwise determined by the Compensation
Committee.

	 	b.	 	For Cause.

	 	i.	 	The Employer may terminate the Employee’s employment hereunder
without notice (a) upon the Employee’s breach of any material provision of this
Agreement, or (b) for other “good cause” (as defined below).
	 
	 	ii.	 	The term “good cause” as used in this Agreement shall mean:
(a) any breach by Employee of any of Employee’s fiduciary duties to Employer or
material obligations under this Agreement (other than as a result of incapacity
due to physical or mental illness), in each case if such breach is not cured
within ten (10) days after written notice thereof to Employee by Employer, (b)
conviction of a felony or a crime involving moral turpitude or other commission
of any act or omission of Employee involving, fraud, embezzlement, theft,
substance abuse or sexual misconduct with respect to the Employer or any of its
subsidiaries or any of their employees, vendors, suppliers or customers, (c)
Employee’s substantial neglect of duties or failure to follow an explicit,
lawful directive of the Chief Executive Officer of Employer or his designee,
provided that such act of neglect or failure is not cured within ten (10) days
after written notice thereof to Employee by Employer, (d) the Employee’s
willful, knowing or deliberate misappropriation of funds or assets of Employer
or one of its subsidiaries for personal use, or (e) the Employee’s willful,
knowing or deliberate misconduct in the performance of Employee’s duties.
	 
	 	iii.	 	If the Employee’s employment is terminated pursuant to Section
8(b), the Employer shall pay to the Employee any unpaid salary and other
benefits and reimbursable expenses accrued and owing to the Employee in

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	 	 	 	accordance with law, but in any event within not more than ten (10) days
after such termination. Such payment shall be in full and complete
discharge of any and all liabilities or obligations of the Employer to the
employee hereunder. The Employee shall be entitled to no further benefits
under this Agreement other than extension of health benefits as required by
law, at the Employee’s expense. All Equity Awards shall cease vesting in
accordance with the terms thereof and the Plan.

	 	c.	 	Whenever the Employee’s employment is terminated under this Agreement, the
Employee shall immediately resign, in a signed writing in such form as the Employer may
reasonably request, from all offices and any other positions he shall hold with the
Employer or any parent corporation and any subsidiaries or divisions of the Employer or
any such parent corporation. If Employee fails to deliver any such resignation
immediately, Employee may be removed from any such office or position without further
cause.

9. Termination of Employment Upon Change in Control.

	 	a.	 	For purposes hereof, a “Change in Control” shall be deemed to have occurred if:

	 	i.	 	there has occurred a “change in control” as such term is used
in Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as in effect as of the date hereof (hereinafter referred
to as the “1934 Act”);
	 
	 	ii.	 	if there has occurred a change in “control” as the term
“control” is defined in Rule 12b-2 promulgated under the 1934 Act;
	 
	 	iii.	 	when any person (as such term is defined in Section 3(a)(9) and
13(d)(3) of the 1934 Act, a “Person”), during the Term, becomes a beneficial
owner, directly or indirectly, of securities of the Employer representing 20%
or more of the Employer’s then outstanding securities having the right to vote
on the election of directors if such person did not have 20% or more of the
Employer’s then outstanding securities at the commencement of the Term; or if a
Person having more than 20% of the Employer’s then outstanding securities
increases his or its holdings by more than 15% of the Employer’s then
outstanding securities during the Term;
	 
	 	iv.	 	if the stockholders of the Employer approve a plan of complete
liquidation or dissolution of the Employer, or a merger or consolidation (a) in
which the voting securities of the Employer outstanding immediately prior
thereto do not represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 50.1% of the combined
voting securities of the Employer or such surviving entity outstanding
immediately after such merger or consolidation or (b) in

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	 	 	 	which no Person acquires 30% or more of the combined voting power of the
Employer’s then outstanding securities; or
	 
	 	v.	 	if during any period of twenty-four (24) consecutive months
(not including any period prior to the date of this Agreement), individuals who
at the beginning of such period constitute the Board and any new director
(other than a director designated by a person who has entered into an agreement
with the Employer to effect a transaction described in paragraphs i, ii or iii
of this section 9(a)) whose election by the Board or nomination for election by
the stockholders of the Employer was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved by the stockholders, cease for any reason to constitute
a majority thereof; provided, however, in no event shall any mere action (other
than sales or purchases of the Employer’s outstanding securities) by Michael
McGovern and the Employer be deemed to be a Change in Control;

	 	 	 	provided, however, that the Spin-off alone shall not be deemed to be a Change in
Control transaction with respect to the Employer or Bentley.
	 
	 	b.	 	The Employee may terminate his employment at any time within 12 months after a
Change in Control if during such 12-month period any of the following events has
occurred:

	 	i.	 	A material diminution of the Employee’s authority, duties, or
responsibilities;
	 
	 	ii.	 	a material breach of Employer’s obligations pursuant to this
Agreement;
	 
	 	iii.	 	the Employer requires Employee to move Employee’s primary place
of employment to a location more than 30 miles from Employer’s primary place of
business before the Change in Control (other than temporary relocation or
business travel in the ordinary course); or
	 
	 	iv.	 	a material diminution in the Employee’s Monthly Base Salary
without the prior written consent of the Employee;

	 	 	 	provided that in the case of clause i. through iv. such event or condition continues
uncured for 30 days after Employee gives Employer notice of such event or condition
within 90 days of its initial existence. For the avoidance of doubt, the parties
hereby confirm that the change in the nature of the business for which Employee is
responsible as a result of becoming Chief Financial Officer of the Employer shall
not be deemed to be a material diminution of the Employee’s authority, duties, or
responsibilities, whether or not he continues for any period of time after the
Spin-off to provide services to Bentley under a transition services agreement
between Bentley and CPEX and whether or not such agreement is terminated or expires
by its terms.

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	 	 	 	An election by the Employee to terminate his employment following a Change in
Control for any of the reasons set forth above shall not be deemed a voluntary
termination of employment by the Employee for the purpose of interpreting the
provisions of this Agreement or any of the Employer’s employee benefit plans and
arrangements. The Employee’s continued employment with the Employer for any period
of time during the Term of this Agreement after a Change in Control shall not be
considered a waiver of any right he may have to terminate his employment to the
extent permitted under this Section 9(b).
	 
	 	 	 	If the Employer terminates the Employee without cause pursuant to Section 8(a)
hereof within twelve (12) months after a Change in Control has occurred, such
termination shall be deemed an election by the Employee to terminate his employment
pursuant to this Section 9(b) and Employee shall have the right to the compensation
set forth in Section 9(c) instead of the compensation set forth in Section 8(a). In
addition, in the event of such termination, the Employee shall continue to have the
obligations provided for in Sections 11 and 12 hereof.
	 
	 	c.	 	If the Employee’s employment with the Employer is terminated under Section 9(b)
hereof,

	 	i.	 	the Employee shall be paid in a lump sum, in cash, within
thirty (30) days after termination of employment or such later date on which
the revocation period for the release contemplated by Section 18 expires,
severance pay in an amount equal to two (2) times (A) the average of his
aggregate annual compensation paid by his current Employer during the two prior
calendar years (including base salary and bonuses, if any) or (B) if he has not
been so employed for two full prior calendar years, twelve (12) times his
Monthly Base Salary immediately before the Change in Control plus the greater
of (X) his most recent bonus, if any, paid by his current Employer before the
Change in Control and (Y) his target bonus most recently determined by his
current Employer before the Change in Control; provided, however, that the
obligations in this clause (i) shall terminate if such release has not been
delivered within sixty (60) days after such termination;
	 
	 	ii.	 	all stock options and other Equity Awards under the Plan held
by the Employee immediately prior to the effective date of the Change in
Control shall immediately vest and become fully exercisable for the period of
time indicated in the terms of the option or other Equity Award;
	 
	 	iii.	 	health benefits as provided in Section 3(c) shall continue for
up to two years from the date of termination, including reimbursement of COBRA
payments to the extent no longer covered under the Employer’s plans; provided,
however, that any such reimbursements under this clause (iii) shall be made
within 10 business days of payment by the Employee and such benefits will be
subject to mitigation to the extent of comparable benefits at a new job; and

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	 	iv.	 	life insurance benefits may be continued for up to two years
from the date of termination at the option of the Employee and at the
Employer’s expense;

	 	 	 	The lump sum severance payment described in clause (i) of this Section 9(c) is
hereinafter referred to as the “Termination Compensation.” The amount of the
Termination Compensation shall be determined, at the expense of the Employer, by its
regular outside certified public accountants. Upon payment of the Termination
Compensation and any other accrued compensation, this Agreement shall terminate
(except for the Employee’s obligations pursuant to Sections 10, 11, 12, 13 and 14
hereof and the continuing obligations to provide the benefits set forth in clauses
(ii) — (iv) of this Section 9(c) in accordance with the terms thereof) and be of no
further force or effect.
	 
	 	d.	 	After a Change in Control has occurred, the Employer shall honor the Employee’s
exercise of the Employee’s outstanding stock options and any other Equity Awards in
accordance with the terms thereof and this Employment Agreement. After a Change in
Control has occurred and the Employee’s employment is terminated as a result thereof,
the Employee (or his designated beneficiary or personal representative(s) shall also
receive, except to the extent already paid pursuant to Section 9(c)(i) hereof or
otherwise, the sums the Employee would otherwise have received (whether under this
Agreement, by law or otherwise) by reason of termination of employment as if a Change
in Control had not occurred.
	 
	 	e.	 	The Employee shall not be required to mitigate the payment of the Termination
Compensation or other benefits or payments by seeking other employment. To the extent
that the Employee shall, after the Term of this Agreement, receive compensation from
any other employment, the payment of Termination Compensation or other benefits or
payments shall not be adjusted (except as set forth in Section 9(c)(iii)).
	 
	 	f.	 	Notwithstanding any provision in this Agreement to the contrary, if the payment
of any compensation or benefit hereunder (including, without limitation, any severance
benefit) would be subject to additional taxes and interest under Section 409A of the
Internal Revenue Code of 1986, as amended (the “Code”) because the timing of such
payment is not delayed as provided in Section 409A(a)(2)(B) of the Code, then any such
payment or benefit that the Employee would otherwise be entitled to during the first
six months following the date of the Employee’s termination of employment shall be
accumulated and paid or provided, as applicable, on the date that is six months and one
day after the date of the Employee’s termination of employment (or if such date does
not fall on a business day of the Employer, the next following business day of the
Employer), or such earlier date upon which such amount can be paid or provided under
Section 409A of the Code without being subject to such additional taxes and interest.
The preceding sentence shall apply only to the extent required to avoid the Employee’s
incurrence of any additional tax or interest under 

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	 	 	 	Section 409A of the Code or the
regulations or Treasury guidance promulgated thereunder.

10. Disclosure, Proprietary Rights. The Employee agrees that during the Term of his employment by
the Employer, he will disclose only to the Employer all ideas, methods, plans, formulas, processes,
trade secrets, developments, or improvements known by him which relate directly or indirectly to
the business of the Employer, including any lines of business, acquired by the Employee during his
employment by the Employer; provided, that nothing in this Section 10 shall be construed as
requiring any such communication where the idea, plan, method or development is lawfully protected
from disclosure, including but not limited to trade secrets of third parties. For purposes of the
Agreement, the term “the business of the Employer” shall include, without limitation, the
following: the design, development, obtaining regulatory approval, production, manufacturing,
marketing, and licensing of prescription and non-prescription drugs, medical devices, and methods
for the diagnosis, evaluation, treatment or correction of any disease, injury, illness or other
medical or health condition and such other lines of business as the Employer shall engage in during
the Term hereof. The parties further agree that any inventions, formulas, trade secrets, ideas, or
secret processes which shall arise from any disclosure made by the Employee pursuant to this
paragraph, whether or not patentable, shall be and remain the sole property of the Employer.

11. Confidentiality. As a condition to Employee’s employment by the Employer, Employee shall
execute and deliver to the Employer the Employer’s Confidentiality Agreement in the form attached
hereto as Exhibit A (the “Employee Agreement”), which sets forth, among other things, Employee’s
obligations with respect to the Employer’s confidential and proprietary information.

12. Non-Competition. If the Employee is terminated for good cause the Employee covenants that he
will not engage, directly or indirectly, alone or in conjunction with others, as an agent,
employee, investor, director, shareholder or partner in any business which provides products,
information and/or services to the public which are competitive with those provided by the Employer
Group; provided, however, that the ownership by the Employee of 5% or less of the issued and
outstanding shares of any class of securities which is traded on a national securities exchange or,
in the over the counter market shall not constitute a breach of the provisions of this section.
The Employee will not on his own behalf or on behalf of any other business enterprise, directly or
indirectly, solicit or induce any creditor, customer, client, supplier, officer, employee or agent
of the Employer Group to sever his/her or its relationship with or leave the employ of the Employer
Group. The covenants in this Section 12 shall continue in full force and effect throughout the
Term hereof and for a one year period subsequent to the termination hereof.

13. Conflict of Interest and Other Policies. The Employee shall devote his full time, energy and
attention to the benefit and business of the employer and its affiliates and shall not be employed
by another entity, except as permitted in Section 5. It is understood by and between the parties
hereto that the foregoing restrictive covenants set forth in Sections 10, 11, 12, 13 and 14 are
essential elements of this Agreement, and that but for the agreement of the Employee to comply with
such covenants, the Employer would not have entered into this Agreement. Notwithstanding anything
to the contrary in this Agreement, the terms and provisions of Sections 11, 12, 13 and 14 of this
Agreement, together with any definitions used in such terms and

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provisions, shall survive the
termination or expiration of this Agreement. The existence of any claim or cause of action of the
Employee against the Employer, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Employer of
such covenants. The Employee shall be subject to the Employer’s policies applicable to its
executives generally.

14. Specific Performance. The Employee agrees that damages at law will be insufficient remedy to
the Employer if the employee violates the terms of Sections 10, 11, 12 or 13 of this Agreement and
that the Employer shall be entitled, upon application to a court of competent jurisdiction, to
obtain injunctive relief to enforce the provisions of such Sections, which injunctive or other
equitable relief shall be in addition to any other rights or remedies available to the Employer,
and the Employee agrees that he will not raise and hereby waives any objection or defense that
there is an adequate remedy at law.

15. Compliance with Other Agreements. The Employee represents and warrants that the execution of
this Agreement by him and his performance of his obligation hereunder will not conflict with,
result in the breach of any provision of, terminate, or constitute a default under any agreement to
which the Employee is or may be bound.

16. Waiver of Breach. The waiver by the Employer of a breach of any of the provisions of this
Agreement by the Employee shall not be construed as a waiver of any subsequent breach by the
Employee.

17. D&O Insurance; Indemnification. The Employer hereby agrees to maintain in full force and
effect for the duration of this Agreement, Director’s and Officer’s Liability Insurance of at least
$5,000,000 and to indemnify and hold harmless the Employee to the full extent permitted by law for
acts performed by him in carrying out his duties and responsibilities in accordance with this
Agreement.

18. Release. In the event of the termination of the Employee’s employment with the Employer, the
Employee shall execute a release that is substantially in the form attached hereto as Exhibit B
(the “Release”) or that is the standard form of release that the Employer is using for these
purposes at the time of such termination. If the Employee declines or refuses to execute the
Release at such time, the Employer shall have no obligation to make any future payments to the
Employee which would otherwise be owed to the Employee under the terms of this Agreement; and the
Employer may delay any such future payment until after expiration of the period during which the
Employee may revoke the Release in accordance with its terms.

19. Binding Effect, Assignment. The rights and obligations of the Employer under this Agreement
shall inure to the benefit of and shall be binding upon the successors and assigns of the Employer.
This Agreement is a personal employment contract and the rights, obligations and interests of the
Employee hereunder may not be sold or assigned or hypothecated. Whenever in this Agreement
reference is made to any party, such reference shall be deemed to include the successors, assigns,
heirs, and legal representatives of such party, and without limiting the generality of the
foregoing, all representations, warranties, covenants and other agreements made by or on behalf of
the Employee in this Agreement shall inure to the benefit of the successors and assigns of the
Employer; provided, however, that nothing herein shall be deemed to

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authorize or permit the
Employee to assign any of his rights or obligations under this Agreement to any other person
(whether or not a family member or other affiliate of the Employee, other
than as specifically provided in this Agreement), and the Employee covenants and agrees that he
shall not make any such assignments.

20. Modification, Amendment, Etc. Each and every modification and amendment of this Agreement
shall be in writing and signed by all of the parties hereto, and each and every waiver of, or
consent to any departure from, any representation, warranty, covenant or other term or provision of
this Agreement shall be in writing and signed by each affected party hereto.

21. Notice. Any notice required or permitted to be given under this Agreement shall be sufficient
if in writing and if sent by certified or registered mail, first class, return receipt requested,
to the Employer, at its executive offices as set forth in its filings with the Securities and
Exchange Commission and, to the Employee, at his address as set forth on the current employment
records of the Employer.

22. Severability. It is agreed by the Employer and Employee that if any portion of the provisions
set forth in this Agreement are held to be unreasonable, arbitrary or against public policy, then
that portion of such covenants shall be considered divisible both as to time and geographical area.
The Employer and Employee agree that if any court of competent jurisdiction determines the
specific time period or the specified geographical area applicable to this Agreement to be
unreasonable, arbitrary or against public policy, then a lesser time period or geographical area
which is determined to be reasonable, non-arbitrary and not against public policy may be enforced
against the Employee. The Employer and Employee agree that the foregoing covenants are appropriate
and reasonable when considered in light of the nature and extent of the business conducted by the
Employer.

23. Entire Agreement. This Agreement contains the entire agreement between the Employer and the
Employee and supersedes all prior agreements and understandings, oral or written, with respect to
the subject matter hereof.

24. Headings. The headings contained in this agreement are for reference purposes only and shall
not affect the meaning or interpretation of the Agreement.

25. Governing Law; Forum. This Agreement shall be construed and enforced in accordance with the
laws of the State of New Hampshire. Any action brought pursuant to this Agreement or in relation
to its breach may be heard by any court of competent jurisdiction having jurisdiction thereof.
The parties hereby expressly consent to the personal jurisdiction of the state and federal courts
located in New Hampshire for any lawsuit filed arising from or relating to this Agreement and
expressly waive any and all objections to venue, including, without limitation, the inconvenience
of such forum.

26. Counterparts. This Agreement may be executed in two counterpart copies of the entire document
or of signature pages to the document, each of which may be executed by one or more of the parties
hereto, but all of which when taken together, shall constitute a single agreement binding upon all
of the parties hereto.

12

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and
year first written above.

	 	 	 	 	 	 	 	 	 	 	 
	Employer:	 	 	 	Employee:	 	 
	CPEX PHARMACEUTICALS, INC.	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	By:

	 	/s/  James R. Murphy	 	 	 	 	 	/s/  Robert P. Hebert	 	 
	 

	 	 
	 	 	 	 	 	 	 	 
	 

	 	James R. Murphy
	 	 	 	 	 	Robert P. Hebert, individually	 	 
	 

	 	Chairman	 	 	 	 	 	 	 	 

13exv10w38

 

EXHIBIT 10.38

THIRD
AMENDMENT TO CONSTRUCTION LOAN AGREEMENT

This Third Amendment to Construction Loan Agreement is dated as of the 15th day of
November, 2007, and is by and between RED TRAIL ENERGY, LLC, a North Dakota limited
liability company (“BORROWER”), and FIRST NATIONAL BANK
OF OMAHA
(“BANK”), a national banking association established at
Omaha, Nebraska.

WHEREAS, the BANK, and BORROWER executed a written Construction Loan Agreement dated as of December
16, 2005 (“AGREEMENT”).

Now,
Therefore, in consideration of the AGREEMENT, and, their  mutual promises made herein, BANK
and BORROWER agree as follows:

	 	1.	 	Terms which are typed herein as all capitalized words and are not defined herein
shall have same meanings as when described in the AGREEMENT.
	 
	 	2.	 	Effective immediately, Section 6.23 of the AGREEMENT is amended to read:
	 
	 	 	 	6.2.3 The BORROWER shall determine, at each fiscal year end following
COMPLETION DATE, the amount of its EXCESS CASH FLOW for said fiscal
year, and at the time of delivery of the audited financial statements required by
6.1.1 of this AGREEMENT, pay to BANK, the lesser of (i) twenty percent (20%)
of such sum, or (ii) $4,000,000.00, to be applied to the outstanding principal
amount of VARIABLE RATE NOTE, and after VARIABLE RATE NOTE is
repaid, to LONG TERM REVOLVING NOTE to reduce the principal balance, if
any, and after LONG REVOLVING NOTE is repaid, BORROWER’s
payment to BANK of EXCESS CASH FLOW shall no longer be required. Such annual
payment shall not release BORROWER from making any payment of principal or
interest otherwise required by this AGREEMENT. No payment of EXCESS CASH FLOW
shall be the cause of a payment to BANK for interest rate breakage fees or
otherwise result in any prepayment fee.
	 
	 	3.	 	BORROWER certifies by its execution hereof that the representations and
warranties set forth in Section 5 of the AGREEMENT are true as of this date, and that no
EVENT OF DEFAULT under the AGREEMENT, and no event winch, with the giving of notice
or passage of time or both, would become such an EVENT OF DEFAULT, has occurred as of
this date.
	 
	 	4.	 	Except as amended hereby the parties ratify and confirm as
binding upon them all
of the terms of the AGREEMENT.

(remainder of page left intentionally blank)

Page 1 of 2

 

     IN WITNESS whereof the parties set their hands as of the date first written above.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	First National Bank
of Omaha	 	 	 	Red Trail Energy,
LLC
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	By:

	 	Chris Reiner
 

Chris Reiner
	 	 	 	By:

Name:
	 	/s/ Mike Appert
 

Mike Appert
	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Commercial Loan Officer
	 	 	 	Title:
	 	Chairman	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	And	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	By:
	 	/s/ Roger Berglund	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Name:	 	Roger Berglund	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Title:
	 	Treasurer	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 

	 	 	 	 	 
	STATE OF NORTH DAKOTA

	)
	 	 
	 

	 	)ss.	 	 
	COUNTY OF STARK

	 	)	 	 

On this 29 day of November, 2007, before me, the undersigned Notary Public, personally
appeared Chairman, the Mike Appert of Red Trail Energy, LLC
on behalf of said entity, and each acknowledged that he executed the foregoing
Amendment to Loan Agreement as his voluntary act and deed and that of Red Trail Energy, LLC,

	 	 	 	 	 	 	 
	 

	 	 	 	/s/ Deell Hoff	 	 
	 

	 	 	 	 	 	 
	STATE OF NORTH DAKOTA

	 	)
	 	Notary Public
	 	 
	 

	 	    )ss.
	 	DEELL HOFF	 	 
	COUNTY OF STARK

	 	)
	 	Notary Public	 	 
	 

	 	 	 	State of North Dakota	 	 
	 

	 	 	 	My Commission Expires Oct. 21, 2011	 	 

On this 29 day of November, 2007, before me, the undersigned Notary Public, personally
appeared Roger Berglund the Treasurer of Red Trail Energy, LLC
on behalf of said entity, and each acknowledged that he executed the foregoing
Amendment to Loan Agreement as his voluntary act and deed and that of
Red Trail Energy, LLC.

	 	 	 	 	 
	 

	 	/s/ Deell Hoff	 	 
	 

	 	 	 	 
	 

	 	Notary Public
	 	 
	 

	 	DEELL HOFF	 	 
	 

	 	Notary Public	 	 
	 

	 	State of North Dakota	 	 
	 

	 	My Commission Expires Oct. 21, 2011	 	 

Page 2 of 2

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