Document:

ies_lsaamd111215.htm

Exhibit 10.1

 

 

AMENDMENT TO LOAN AND SECURITY AGREEMENT 

 

    THIS AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “Amendment”) is made and entered into on December 15, 2011, by and among BANK OF AMERICA, N.A., a national banking association (“BA”), in its
capacity as collateral and administrative agent for the Lenders under the Loan Agreement (as hereinafter defined) (BA, in such capacity, the “Agent”), BA, as Lender under the Loan Agreement (BA, together with the various financial institutions listed on the signature pages hereof, in such capacity, the “Lenders”), the Lenders, INTEGRATED ELECTRICAL SERVICES, INC., a Delaware corporation (“Parent”), each of the
Subsidiaries of Parent listed on Annex I attached hereto (Parent and such  Subsidiaries of Parent being herein referred to collectively as the “Borrowers”), and the Subsidiaries of Parent listed on Annex II attached hereto (such Subsidiaries being referred to herein as the “Guarantors”, and Borrowers and Guarantors being referred to herein as the “Credit Parties”).

 

RECITALS

 

A. Agent, Lenders and Credit Parties have entered into that certain Loan and Security Agreement, dated as of May 12, 2006 (as amended to date and as it may be further amended, restated, extended, supplemented or otherwise modified from time to time, the “Loan Agreement”).

 

B. Credit Parties, Agent and Lenders desire to amend the Loan Agreement as hereinafter set forth, subject to the terms and conditions hereinafter set forth.

 

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

 

AGREEMENT

 

ARTICLE I

Definitions

 

1.01 Capitalized terms used in this Amendment are defined in the Loan Agreement, as amended hereby, unless otherwise stated.

 

ARTICLE II

Amendments

 

Effective as of the Effective Date (as defined below), the Loan Agreement is hereby amended as follows:

 

2.01 Amendment to Section 1.1.1.  Section 1.1 of the Loan Agreement is hereby amended and restated in its entirety to provide as follows:

 

“1.1.1           Revolver Loans.  Each Lender agrees, severally and not jointly with the other Lenders, upon the terms and subject to the conditions set forth herein, to make Revolver Loans to Borrowers on any Business Day during the period from the date hereof through the Business Day before the last day of the Extended Period, not to exceed in aggregate principal amount outstanding at any time such Lender’s Commitment at such time, which Revolver Loans may be repaid and reborrowed in accordance with the provisions of this
Agreement; provided, however, that Lenders shall have no obligation to Borrowers whatsoever to make any Revolver Loan on or after the Commitment Termination Date or if at the time of the proposed funding thereof the aggregate principal amount of all of the Revolver Loans and Pending Revolver Loans then outstanding exceeds, or would exceed after the funding of such Revolver Loan, the Borrowing Base; provided, further, that it shall
be a condition precedent to the Lenders’ obligation to make any Revolver Loan during the Extended Period, that Borrowers shall deliver to Agent at the times set forth below a Compliance Certificate demonstrating compliance with the financial covenants set forth in Section 9.3.8.  The compliance certificates required in the immediately preceding sentence shall be delivered on the 22nd day after the end of the relevant period set forth in Section 9.3.8. Each Borrowing of Revolver Loans shall be funded by Lenders on a Pro Rata basis in accordance with their respective Commitments (except for Bank with respect to Settlement Loans).  The Revolver Loans shall bear
interest as set forth in Section 2.1 hereof.  Each Revolver Loan shall, at the option of Borrowers, be made or continued as, or converted into, part of one or more Borrowings that, unless specifically provided herein, shall consist entirely of Base Rate Loans or LIBOR Loans.”

 

2.02 Amendment to Section 1.2.7.  Section 1.2.7 of the Loan Agreement is hereby amended and restated in its entirety to provide as follows:

 

“1.2.7  Cash Collateral Account.  If any LC Outstandings, whether or not then due or payable, shall for any reason be outstanding at any time, then Borrowers shall forthwith deposit with Agent, in cash, an amount equal to 100% of the aggregate amount of LC Outstandings.  Borrowers’ failure to make any such deposit on the first Business Day following the date on which such LC Outstandings arise shall constitute an immediate Event of Default.  Such cash (together with any interest accrued thereon) shall be held by Agent in the Cash Collateral Account and
may be invested, in Agent's discretion, in Cash Equivalents.  Each Borrower hereby pledges to Agent and grants to Agent a security interest in, for the benefit of Agent in such capacity and for the Pro Rata benefit of Lenders, all Cash Collateral held in the Cash Collateral Account from time to time and all proceeds thereof, as security for the payment of all Obligations, whether or not then due or payable.  At any time when (i) there has not occurred and is continuing an Event of Default and (ii) Cash Collateral in the Cash Collateral Account exceeds the LC Outstandings, Agent shall, within one (1) Business Day of the written request from Borrower, release such excess Cash Collateral form the liens granted in this Section 1.2.7 and return such excess Cash Collateral to the Borrower.  From time to time after cash is deposited in the Cash Collateral Account,
Agent may, after the occurrence and during the continuance of an Event of Default, apply Cash Collateral then held in the Cash Collateral Account to the payment of any amounts, in such order as Agent may elect, as shall be or shall become due and payable by Borrowers to Agent or any Lender with respect to the LC Outstandings that may be then outstanding.  Neither any Borrower nor any other Person claiming by, through or under or on behalf of any Borrower shall have any right to withdraw any of the Cash Collateral held in the Cash Collateral Account, including any accrued interest, provided that upon termination or expiration of all Letters of Credit and the payment and satisfaction of all of the LC Outstandings, any Cash Collateral remaining in the Cash Collateral Account shall be returned to Borrowers unless an Event of Default then exists (in which event Agent may apply such
Cash Collateral to the payment of any other Obligations outstanding, with any surplus to be turned over to Borrowers).”

 

2.03 Amendment to Section 5.1.  Section 5.1 of the Loan Agreement is hereby amended and restated in its entirety to provide as follows:

 

“5.1  Term of Commitments. Subject to each Lender’s right to cease making Loans and other extensions of credit to Borrowers when any Default or Event of Default exists or upon termination of the Commitments as provided in Section 5.2 hereof, the Commitments shall be in effect through the close of business on November 12, 2012 (the “Termination Date”).”

 

2.04 Amendment to Section 5.2.1.  Section 5.2.1 of the Loan Agreement is hereby amended and restated in its entirety to provide as follows:

 

“5.2.1  Termination by Agent.  The Commitments shall automatically terminate as of the Termination Date, unless extended in writing by Agent and all Lenders.  In addition, Agent may (and upon the direction of the Required Lenders, shall) terminate the Commitments without notice upon or after the occurrence and during the continuation of an Event of Default; provided, however, that the Commitments shall automatically terminate as provided in Section 11.2
hereof.”

 

2.05 Amendment to Section 5.2.3.  Section 5.2.3 of the Loan Agreement is hereby amended and restated in its entirety to provide as follows:

 

“5.2.3  [INTENTIONALLY OMITTED]”.

 

2.06 Amendment to Section 9.2.7.  Section 9.2.7 of the Loan Agreement is hereby amended and restated in its entirety to provide as follows:

 

“9.2.7  Distributions.  Declare or make any Distributions on or after the December Amendment Date.”

 

2.07 Amendment to Section 9.2.20.  Section 9.2.20 of the Loan Agreement is hereby amended and restated in its entirety to provide as follows:

 

“9.2.20  Payments on Subordinated Debt.  Make any payment of principal, interest or premiums on any Subordinated Debt on or after the December Amendment Date; provided, however, that the Credit Parties may make scheduled payments of interest on the Tontine Subordinated Debt so long as no Default or Event of Default has occurred and is
continuing.”

 

2.08 Amendment to Section 9.3.8.  Section 9.3.8 of the Loan Agreement is hereby amended and restated in its entirety to provide as follows:

 

“9.3.8  Extended Period Financial Covenants.  During the Extended Period, if there are any Loans then outstanding, maintain (a) a Consolidated EBITDA of more than negative $2,500,000 for the period beginning October 1, 2011, and ending March 31, 2012, and (b) a Fixed Charge Coverage Ratio, on a Consolidated basis, of not less than 1.00:1.00 (i) for the fiscal month ending April 30, 2012, with respect to the one-month period then ending, (ii) for the fiscal month ending May 31, 2012, with respect to the two-month period then ending, (iii) for
the fiscal month ending June 30, 2012, with respect to the three-month period then ending, (iv) for the fiscal month ending July 31, 2012, with respect to the four-month period then ending, (v) for the fiscal month ending August 31, 2012, with respect to the five-month period then ending, (vi) for the fiscal month ending September 30, 2012, with respect to the six-month period then ending, and (vii) for the fiscal month ending October 31, 2012, with respect to the seven-month period then ending.”

 

2.09 Amendment to Section 11.1.3.  Section 11.1.3 of the Loan Agreement is hereby amended and restated in its entirety to provide as follows:

 

“11.1.3   Breach of Specific Covenants.  Any Credit Party or any other Obligor shall fail or neglect to perform, keep or observe any covenant contained in Sections 1.2.7, 6.5, 7.1.1, 7.2.4, 7.2.5, 7.2.6, 7.5, 9.1.1, 9.1.3, 9.2 or
9.3 hereof on the date that such Credit Party or any other Obligor is required to perform, keep or observe such covenant.”

 

2.10 Amendment to Appendix A - Amended Definitions.  Effective as of the date hereof, Appendix A of the Loan Agreement is hereby amended by amending and restating the following definitions in their respective entireties:

 

“Applicable Margin – from the December Amendment Date going forward, the Applicable Margin for LIBOR Loans shall be equal to 4.00% and the Applicable Margin for Base Rate Loans shall be equal to 2.00%.”

 

“Availability Reserve – on any date of determination thereof, an amount equal to the sum of the following (without duplication):  (i) a reserve for general inventory shrinkage, whether as a result of theft or otherwise, that is determined by Agent from time to time in its reasonable credit judgment based upon Borrower’s historical losses due to such shrinkage; (ii) all amounts of past due rent, fees  or other charges owing at such time by any Obligor to any landlord of any premises where any of the Collateral is located or to any processor, repairman,
mechanic or other Person who is in possession of any Collateral or has asserted any Lien or claim thereto; (iii) an amount equal to three months rent as to any location where any tangible Collateral (in excess of $50,000 for each such location), any Eligible Collateral other than motor vehicles (without regard to amount), and/or any books and records is located if Agent does not have in its possession a duly executed Landlord’s Waiver in form and substance satisfactory to Agent; (iv) any amounts which any Obligor is obligated to pay pursuant to the provisions of any of the Loan Documents that Agent or any Lender elects to pay for the account of such Obligor in accordance with authority contained in any of the Loan Documents; (v) aggregate amount of Bank Product Reserves; (vi) all customer deposits or other prepayments held by a Borrower; (vii) a general
reserve of $5,000,000; (viii) a reserve for sales taxes; and (ix) such additional reserves as Agent in its sole and absolute discretion may elect to impose from time to time.”

 

“Commitment – at any date for any Lender, the obligation of such Lender to make Revolver Loans and to purchase participations in LC Outstandings pursuant to the terms and conditions of the Agreement, which shall not exceed the principal amount set forth opposite such Lender’s name under the heading “Commitment” on the signature pages of the Agreement or the signature page of the Assignment and Acceptance by which it became a Lender, as modified from time to time pursuant to the terms of the Agreement or to give effect to any applicable Assignment and Acceptance; and
“Commitments” means the aggregate principal amount of the Commitments of all Lenders, the maximum amount of which shall be $40,000,000.”

 

“Commitment Termination Date – the date that is the earliest to occur of (i) the Termination Date, unless extended in writing by Agent and Lenders; (ii) the date on which either a Borrower or Agent terminates the Commitments pursuant to Section 5.2 of the Agreement; or (iii) the date on which the Commitments are automatically terminated pursuant to Section 11.2 of the Agreement.”

 

“Original Term – the period beginning on the Closing Date and ending at the close of business on May 12, 2012.”

 

2.11 Amendment to Appendix A – New Definition.  Appendix A of the Loan Agreement is hereby amended by adding the following defined term in appropriate alphabetical order:

 

“December Amendment Date – December __, 2011.”

 

“Extended Period – the period beginning at the expiration of the Original Term and ending at the close of business on the Termination Date.”

 

“Termination Date – as defined in Section 5.1 of the Agreement.”

 

ARTICLE III

No Waiver

 

3.01 No Waiver.  Nothing in this Amendment shall directly or indirectly whatsoever either:  (i) be construed as a waiver of any covenant or provision of the Loan Agreement, any other Loan Document or any other contract or instrument or (ii) impair, prejudice or otherwise adversely affect any right of Agent or Lender at any time to exercise any
right, privilege or remedy in connection with the Loan Agreement, any other Loan Document or any other contract or instrument, or (iii) constitute any course of dealing or other basis for altering any obligation of Credit Parties or any right, privilege or remedy of Agent or Lenders under the Loan Agreement, any other Loan Document or any other contract or instrument or constitute any consent by Agent or Lenders to any prior, existing or future violations of the Loan Agreement or any other Loan Document.  Credit Parties hereby agree and acknowledge that the Credit Parties are expected to strictly comply with their duties, obligations and agreements under the Loan Agreement and the other Loan Documents.

 

ARTICLE IV

Conditions Precedent

 

4.01 Conditions to Effectiveness.  The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent (the date on which the conditions have been satisfied or waived in writing by Agent being the
“Effective Date”) in a manner satisfactory to Agent:

 

(a) Agent shall have received this Amendment, duly executed by each of the Credit Parties.

 

(b) The representations and warranties contained herein and in the Loan Agreement and the other Loan Documents, as each is amended hereby, shall be true and correct in all material respects as of the date hereof, as if made on the date hereof, except for those representations and warranties specifically made as of an earlier date, which shall be true and correct in all material respects as of such earlier date.

 

(c) No Default or Event of Default shall have occurred and be continuing, unless such Default or Event of Default has been otherwise specifically waived in writing by Agent.

 

(d)           All organizational proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be reasonably satisfactory to Agent and its legal counsel.

 

(e)    Agent shall have received an amendment fee of $60,000.  Such amendment fee shall be (i) deemed fully earned and non-refundable as of the date of execution of this Amendment and (ii) due and payable in full on the date of execution of this Amendment.

 

ARTICLE V

Ratifications, Representations and Warranties

 

5.01 Ratifications.  The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Loan Agreement and the other Loan Documents, and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Loan Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect.  Each Credit Party and Lenders and Agent agree that the Loan Agreement and the other Loan Documents, as amended hereby, shall continue to be legal, valid, binding and enforceable in accordance with their respective terms.

 

5.02 Representations and Warranties.  Each Credit Party hereby represents and warrants to Lenders and Agent that (a) the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and/or delivered in connection herewith
have been authorized by all requisite organizational action on the part of such Credit Party and will not violate the organizational or governing documents of such Credit Party; (b) the representations and warranties contained in the Loan Agreement, as amended hereby, and any other Loan Document are true and correct in all material respects on and as of the date hereof and on and as of the date of execution hereof as though made on and as of each such date, except for those representations and warranties specifically made as of an earlier date, which shall be true and correct in all material respects as of such earlier date; (c) no Default or Event of Default under the Loan Agreement, as amended hereby, has occurred and is continuing, unless such Default or Event of Default has been specifically waived in writing by Agent; (d) each Credit Party is in material compliance
with all covenants and agreements contained in the Loan Agreement and the other Loan Documents, as amended hereby; and (e) no Credit Party has amended its organizational or governing documents since the date of execution of the Loan Agreement other than as has been previously disclosed and delivered to the Agent.

 

ARTICLE VI

Miscellaneous Provisions

 

6.01 Survival of Representations and Warranties.  All representations and warranties made in the Loan Agreement or any other Loan Document, including, without limitation, any document furnished in connection with this Amendment, shall survive the execution and
delivery of this Amendment and the other Loan Documents, and no investigation by Lender or Agent or any closing shall affect the representations and warranties or the right of Lender or Agent to rely upon them.

 

6.02 Reference to Loan Agreement.  Each of the Loan Agreement and the other Loan Documents, and any and all other Loan Documents, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Loan
Agreement, as amended hereby, are hereby amended so that any reference in the Loan Agreement and such other Loan Documents to the Loan Agreement shall mean a reference to the Loan Agreement, as amended hereby, and any reference in the Loan Agreement and such other Loan Documents to any other Loan Document amended by the provisions of this Amendment shall mean a reference to such other Loan Documents, as amended hereby.

 

6.03 Expenses of Agent.  As provided in the Loan Agreement, each Credit Party agrees to pay on demand all costs and out-of-pocket expenses incurred by Agent in connection with the preparation, negotiation, and execution of this Amendment and the other Loan
Documents executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including, without limitation, the costs and fees of Agent’s legal counsel, and all costs and out-of-pocket expenses incurred by Agent in connection with the enforcement or preservation of any rights under the Loan Agreement, as amended hereby, or any other Loan Documents, including, without, limitation, the costs and fees of Agent’s legal counsel and consultants retained by Agent or retained by Agent’s legal counsel.

 

6.04 Severability.  Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be
invalid or unenforceable.

 

6.05 Successors and Assigns.  This Amendment is binding upon and shall inure to the benefit of Lenders and Agent and each Credit Party and their respective successors and assigns, except that no Credit Party may assign or transfer any of its rights or obligations
hereunder without the prior written consent of Lender and Agent.

 

6.06 Counterparts.  This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument.

 

6.07 Effect of Waiver.  No consent or waiver, express or implied, by Lenders or Agent to or for any breach of or deviation from any covenant or condition by any Credit Party shall be deemed a consent to or waiver of any other breach of the same or any other
covenant, condition or duty.

 

6.08 Headings.  The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment.

 

6.09 Applicable Law.  This Agreement and all other Loan Documents executed pursuant hereto shall be deemed to have been made and to be performable in and shall be governed by and construed in accordance with the laws of the State of Texas.

 

6.10 Final Agreement.  THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS, EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED.  THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS AMENDED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.  NO MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY EACH CREDIT PARTY AND LENDERS AND AGENT.

 

6.11 Release.  EACH CREDIT PARTY HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER
THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS LIABILITY TO REPAY THE “OBLIGATIONS” OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM LENDER OR AGENT.  EACH CREDIT PARTY HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDERS AND AGENT AND ITS RESPECTIVE PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES (INCLUDING ALL STRICT LIABILITIES) WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH ANY CREDIT PARTY MAY NOW OR HEREAFTER HAVE AGAINST LENDERS OR AGENT OR ITS RESPECTIVE PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND
ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY “LOANS,” INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE LOAN AGREEMENT OR OTHER LOAN DOCUMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT.

 

[Signature pages follow.]

  

  

  

  

    IN WITNESS WHEREOF, this Amendment has been executed on the date first written above, to be effective as the respective date set forth above.

 

	 	AGENT:
	 	 
	 	BANK OF AMERICA, N.A., as Agent
	 	 
	 	By:  _     /s/ H. Michael Wills                     ___     
	 	             
H. Michael Wills
	 	              Senior Vice
President 
	 	 

 

	 	LENDERS:
	 	 
	 	BANK OF AMERICA, N.A.
	 	 
	 	By: _      /s/ H. Michael Wills                     ___     
	 	              H. Michael Wills
	 	              Senior Vice
President 
	 	 
	 	Commitment:  $20,000,000
	 	 

 

	 	WELLS FARGO CAPITAL FINANCE, LLC
	 	 
	 	By: _      /s/ David Hill                              ___     
	 	              David Hill
	 	             
Vice
President 
	 	 
	 	Commitment:  $20,000,000

 

	 	CREDIT PARTIES:
	 	 
	 	INTEGRATED ELECTRICAL SERVICES, INC.
	 	 
	 	By:  ____/s/ Terry L. Freeman _           ___     
	 	               Terry L. Freeman
	 	               Senior Vice
President     
	 	 
	 	 
	 	 
	 	ICS HOLDINGS, LLC
	 	IES COMMERCIAL, INC.
	 	
IES CONSOLIDATION, LLC

	 	IES OPERATIONS GROUP, INC.
	 	IES PROPERTIES, INC.
	 	IES PURCHASING & MATERIALS, INC.
	 	IES REINSURANCE, LTD
	 	IES RESIDENTIAL, INC.
	 	IES SHARED SERVICES, INC
	 	IES TANGIBLE PROPERTIES, INC
	 	INTEGRATED ELECTRICAL FINANCE, INC.
	 	KEY ELECTRICAL SUPPLY, INC.
	 	

THOMAS POPP & COMPANY

 

	 	By:  ____/s/ Terry L. Freeman _           ___     
	 	              
Terry L. Freeman
	 	               Senior Vice
President     
	 	 
	 

 

	 	IES MANAGEMENT ROO, LP
	 	 
	 	By:  ICS Holdings, LLC
	 	Its General Partner

 

	 	By:  ____/s/ Terry L. Freeman _           ___     
	 	               Terry L. Freeman
	 	               Senior Vice
President                  
	 	 
	 

 

	 	IES MANAGEMENT , LP
	 	 
	 	By:  Integrated Electrical Services, Inc.
	 	Its General Partner

 

	 	By:  ____/s/ Terry L. Freeman _           ___     
	 	               Terry L. Freeman
	 	               Senior Vice
PresidentExhibit 10.1 Secured Line of Credit Letter Agreement

Exhibit 10.1

November 21, 2011

Transdel Pharmaceuticals, Inc.

610-C East Palomar Street

Chula Vista, CA 91911

Attn:  Terry Nida, Interim Chief Executive Officer

Re:

Secured Line of Credit

Ladies and Gentlemen:

We advise you that DermaStar International, LLC (“Lender”) is prepared to make a secured line of credit available to Transdel Pharmaceuticals, Inc., a Delaware corporation (“Borrower”), with aggregate advances (each an “Advance” and collectively, the “Loan”) thereunder up to (but not exceeding) an aggregate principal amount of $750,000.  The terms and conditions of the line of credit are as follows:

Availability:

The Loan may be drawn down under this line of credit during the period beginning on the date of the Final Dismissal Order through November 21, 2012, subject to prior receipt of any required documentation specified herein and satisfaction of any other conditions.  Advances shall be in a minimum of $50,000 and in multiples thereof.  This is not a revolving line of credit, and any amount of the Loan repaid may not be reborrowed.

“Final Dismissal Order” shall mean an order entered by the U.S. Bankruptcy Court for the Southern District of California dismissing Borrower’s voluntary petition for reorganization relief under Chapter 11 of the United States Bankruptcy Code, Case No. 11-10497-11, and for which no appeal has been timely filed, or if a timely appeal or a request for extension of time within which to file such an appeal has been filed, no stay of enforcement or effectiveness of such order has been entered within the initial period to timely file such appeal.

Repayment:

The outstanding principal of the Loan will be due and payable on the earlier of (a) November 21, 2012 or (b) upon the occurrence of an Event of Default.  

Optional 

Prepayment:

Borrower may prepay the Loan, together with accrued interest, in full or in part at any time without any prepayment penalty or premium.  Borrower shall indicate which Advances are being prepaid in connection with any partial prepayment.

Interest:

The Loan will bear interest at the rate of 10% per annum.  Borrower agrees to pay interest on the Loan on the date of any prepayment, on the last Business Day of each calendar quarter, and at maturity.  If any principal or other amount payable by Borrower under this letter agreement (this “Agreement”) or under any other Loan Document (as defined below) is not paid in full when due (whether at stated maturity, by acceleration or otherwise), Borrower agrees to pay interest on such unpaid amount, from the date such amount becomes due until the date such amount is paid in full, on demand of Lender, at a rate per annum which is 2% higher than the rate of interest set forth in the first sentence above (the “Default Rate”).  Additionally, upon the occurrence and during the continuation of any Event of Default (as defined in the Notes referred to below), the interest rate hereunder will be increased to the Default Rate.  All interest will be computed on the basis of a 365-day (or 366-day) year and the actual number of days elapsed.  Payment of any such interest at the Default Rate will not constitute a waiver of any Event of Default and will be without prejudice to the right of Lender to exercise any of its rights and remedies under the Loan Documents.  In no event will Borrower be obligated to pay Lender interest, charges or fees at a rate in excess of the highest rate permitted by applicable law.  (As used herein, “Loan Documents” means this Agreement, the Notes, the Collateral Documents referred to below, any guaranty, any subordination or intercreditor agreements, and all other certificates, documents, agreements and instruments delivered by Borrower or any other person or entity (“Person”) to Lender under or in connection with this Agreement).

Transdel Pharmaceuticals, Inc.

November 21, 2011

Page 2

Use of Proceeds:

Borrower agrees to use the proceeds of the Loan only for the following purposes:

(a)

with respect to the first three Advances:

(1)

payment of administrative claims in connection with the Dismissal and the Chapter 11 Case; 

(2)

payment of priority claims to the following creditors of Borrower in connection with the Dismissal, conditioned upon receipt by Lender of a Mutual General Release of Claims executed by each such creditor, in a form acceptable to Lender:  Schupp, $8,852.02; Bonfliglio, $11,725; Lomoro, $11,725; Nida, $11,725; Fernando, $3,995.42; 

(3)

payment of taxes and other charges and assessments to the U.S. Internal Revenue Service, including the reservation of $32,482.04 for payment of such taxes which are being contested in good faith; and

(4)

(i) payment of legal and accounting fees and expenses of Lender as provided in “Expenses” below and as provided in Section 5.2 of that certain Securities Purchaser Agreement by and between Borrower and Lender dated of even date herewith, and (ii) payment of legal and accounting fees and expenses of Borrower in connection with the preparation, review and audit of Borrower’s financial statements and the preparation and filing of any reports, forms, schedules, statements and other documents required by be filed by Borrower under U.S. federal and state securities laws and regulations; and

(b)

with respect to each subsequent Advance, for other working capital and general business purposes, as approved in advance by Lender.

Requests for 

Advances 

Each Advance request must be in writing and received by Lender by 12:00 noon Pacific time at least three Business Days prior to the Business Day of the requested Advance.  Lender will have the right to request that Borrower furnish Lender with such additional information and documentation with respect to the Advance as Lender requests.  Upon fulfillment of the applicable conditions set forth herein, Lender will make the requested Advance available to Borrower in accordance with the payment instructions provided to Lender, provided that Lender reserves the right to make direct payment to any intended recipient of proceeds of the Advances.  (As used herein, a “Business Day” is a day other than a Saturday or a Sunday on which banks are open for business in California.)

Conditions to First 

Advance:

Before Lender is required to make the first Advance to Borrower hereunder, Lender must have received, the items below, in form and substance satisfactory to Lender:

(a)

the following documents duly exected by Borrower (together with any other agreement pursuant to which Borrower or any other Person provides a lien on its assets in favor of Lender (or any collateral agent on its behalf), and all filings, documents and agreements made or delivered pursuant thereto, the “Collateral Documents”): (i) a security agreement (the “Security Agreement”) under which Borrower grants to Lender (or any collateral agent on its behalf) a blanket security interest in its property; and (ii) an intellectual property security agreement (the “Intellectual Property Security Agreement”) under which Borrower grants to Lender a security interest in its copyright registrations, copyright applications, patents, patent applications, trademarks and trademark applications;

2

Transdel Pharmaceuticals, Inc.

November 21, 2011

Page 3

(b)

(i) confirmation that all UCC-1 financing statements necessary or appropriate in the opinion of Lender to perfect the lien of Lender (or any collateral agent on its behalf) in the collateral have been accepted for filing; (ii) such lien searches as Lender has requested; (iii) evidence that all other actions necessary or appropriate in the opinion of Lender to perfect and protect its liens on the collateral have been taken (including any account control agreements requested by Lender); and (iv) evidence of satisfactory insurance coverage, together with evidence that Lender (or any collateral agent on its behalf) has been named as loss payee under all policies of property insurance and as additional insured under all policies of liability insurance;

(c)

a certificate of the Secretary or other appropriate officer of Borrower, certifying (i) copies of the certificate or articles of incorporation and bylaws, or other applicable organizational documents, of Borrower and the resolutions adopted by Borrower and other actions taken or adopted by Borrower (or any shareholders of Borrower) authorizing the Loan Documents to which it is a party, and (ii) the incumbency, authority and signatures of each officer of Borrower authorized to execute and deliver the Loan Documents and act with respect thereto; 

(d)

a certificate of status or good standing of Borrower as of a date acceptable to Lender from the jurisdiction of Borrower’s organization and the jurisdiction in which its chief executive office or principal place of business is situated (if different from its jurisdiction of organization); 

(e)

evidence that all approvals or consents of any other Person required in connection with the Loan Documents have been obtained; and

(f)

evidence of the Final Dismissal Order.

Additional 

Conditions for 

Each Advance

In addition, prior to making any Advance hereunder (including the first Advance): 

(a)

the Borrower must have executed and delivered to Lender any other documents and information (including financial information with respect to Borrower), in form and substance satisfactory to Lender, as it may require;

 

(b)

the Borrower shall have executed and delivered to Lender a Note in form of Exhibit A hereto evidencing such Advance;

(c)

each representation and warranty set forth in such Note and each existing Note (if any) must be true and correct as if made on the date of such Advance; 

(d)

no Event of Default (as defined in such Note and each existing Note (if any) and the Collateral Documents), or event or condition which with notice or lapse of time or both would constitute an Event of Default, exists on the date of such Advance; 

(e)

no event has occurred that has had or could reasonably be expected to have a Material Adverse Effect (as defined in such Note, each existing Note (if any)); 

(f)

Borrower shall not have been named as a defendant in any legal action brought by (i) any current or former employee, executive officer or director of Borrower or (ii) any third party with whom Borrower had entered into any agreement or contract (including any oral contract) prior to the date of the Final Dismissal Order; 

(g)

Borrower shall have requested the Advance in compliance with the heading “Requests for Advance”; and

(h)

Borrower shall have delivered such other documents (including legal opinions) as Lender may request.

3

Transdel Pharmaceuticals, Inc.

November 21, 2011

Page 4

Notices:

All notices and other communications provided for hereunder and under the other Loan Documents must, unless otherwise stated herein or therein, be in writing (including by facsimile transmission and by electronic mail) and mailed (by certified or registered mail), sent or delivered to the respective parties hereto at or to their respective addresses, facsimile numbers or email addresses set forth below their names on the signature pages hereof, or at or to such other address, facsimile number or email address as shall be designated by any party in a written notice to the other party hereto.  All such notices and communications shall be effective (i) if delivered by hand, sent by certified or registered mail or sent by an overnight courier service, when received; and (ii) if sent by facsimile transmission or electronic mail, when sent; provided, however, that any notices and communications from Borrower to Lender requesting any Advance will not be effective until received.  Electronic mail may be used only for routine communications, such as financial statements and other information documents, and to distribute Loan Documents for execution by the parties thereto, and may not be used for any other purpose.

Expenses:

Borrower agrees to pay on demand:  (i) the reasonable out-of-pocket costs and expenses of Lender, and the reasonable fees and disbursements of its legal counsel, in connection with the formation of Lender, the negotiation, preparation, execution and delivery of the Loan Documents, and any amendments, modifications or waivers of the Loan Documents; (ii) all audits, appraisals, consultants, search, recording, filing and similar costs, fees and expenses of Lender in connection with the Loan Documents; and (iii) all costs and expenses of Lender, and fees and disbursements of its legal counsel, in connection with (A) any Events of Default, (B) the enforcement or attempted enforcement of, and preservation of any rights or interests under, the Loan Documents, (C) any out-of-court workout or other refinancing or restructuring or any bankruptcy or insolvency case or proceeding, and (D) the preservation of and realization upon any collateral.  Lender may withhold any reasonable fees and expenses described above from any Advance proceeds and may make direct payment of such fees and expenses to any intended recipient of such Advance proceeds.

Governing Law:

This Agreement will be governed by, and construed in accordance with, California law.

Amendments:

No amendment or waiver of any provision of this Agreement, nor any consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by Lender and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.  

Entire Agreement;

No Assignment:

The Loan Documents reflect the entire agreement between Borrower and Lender with respect to the matters set forth therein and supersede any prior agreements, commitments, drafts, communication, discussions and understandings, oral or written, with respect thereto.  This Agreement is not assignable by Borrower and is intended to be solely for the benefit of the parties hereto.

[Signature pages follow.]

4

Transdel Pharmaceuticals, Inc.

November 21, 2011

Page 5

This Agreement shall not become effective unless Lender receives at the address shown below an executed counterpart of this Agreement from Borrower prior to 5:00 p.m. _________ time on _________, ___ (which may be by facsimile transmission).  Upon receipt of such executed counterpart, this Agreement shall become a binding agreement between Lender and Borrower. 

Very truly yours,

		
	DERMASTAR INTERNATIONAL, LLC

	 
	 

	By

	/s/ Mark. L Baum

	Name

	Mark L. Baum

	Title

	Managing Member

	Address:

	 

	 
	 

	Attn.

	Mark L. Baum

	Email:

	 

	Facsimile:

	 

5

Transdel Pharmaceuticals, Inc.

November 21, 2011

Page 6

Acknowledged and Agreed:

		
	TRANSDEL PHARMACEUTICALS, INC.

	 
	 

	By

	/s/ Terry Nida

	Name

	Terry Nida

	Title

	 

	Address:

	 

	 
	 

	Attn.

	 

	Email:

	 

	Facsimile:

	 

6

Exhibit A

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER APPLICABLE SECURITIES LAWS.  IT MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNDER CIRCUMSTANCES THAT WOULD RESULT IN A VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 OR SUCH OTHER LAWS.

SECURED PROMISSORY NOTE

		
	 
	Chula Vista, California

	$[________]

	[_______________]

	 
	 

FOR VALUE RECEIVED, the undersigned, Transdel Pharmaceuticals, Inc., a Delaware corporation (“Borrower”), hereby promises to pay to the order of DermaStar International, LLC (“Lender”), on November 21, 2012, the principal amount of [___________] Dollars ($[______]), and to pay interest on the unpaid principal amount of at the interest rate, and payable on the dates, set forth in the letter agreement dated as of November [__], 2011 (the “Agreement”) between Borrower and Lender.  Capitalized but undefined terms used herein shall have the meanings given to such terms in the Agreement.

Each payment of principal and interest thereon, shall be recorded by Lender on its books, which recordations shall, in the absence of manifest error, be conclusive as to such matters; provided that the failure of Lender to make any such recordation or any error therein shall not limit or otherwise affect the obligations of Borrower hereunder.

This Note is subject to prepayment in whole or in part as provided in the Agreement.

All payments hereunder shall be made in lawful money of the United States of America and in same day or immediately available funds, to Lender, in accordance with Lender’s payment instructions.

Whenever any payment hereunder shall be stated to be due, or whenever any interest payment date or any other date specified hereunder would otherwise occur, on a day other than a Business Day, then such payment shall be made, and such interest payment date or other date shall occur, on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest hereunder.  

Borrower agrees to make all payments under this Note without setoff or deduction (whether for taxes or otherwise) and regardless of any counterclaim or defense.

Notwithstanding anything to the contrary contained herein, the interest paid or agreed to be paid hereunder shall not exceed the maximum rate of non-usurious interest permitted by applicable law (the “Maximum Rate”).  If Lender shall receive interest in an amount that exceeds the Maximum Rate, the excessive interest shall be applied to the principal of this Note or, if it exceeds the unpaid principal, applied to any other Note or refunded to Borrower.  In determining whether the interest contracted for, charged, or received by Lender exceeds the Maximum Rate, Lender may, to the extent permitted by applicable law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the stated term of this Note.

The request of Borrower for the Advance evidenced by this Note and the receipt by Borrower of the proceeds thereof shall be deemed a representation by Borrower as of the date of each such request or receipt that:  (i) Borrower is duly organized or formed, as the case may be, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation, and has all requisite power and authority to execute, deliver and perform its obligations under the Loan Documents; (ii) the execution, delivery and performance by Borrower of the Loan Documents have been duly authorized by all necessary action of Borrower and do not and will not (A) contravene the terms of the articles or certificate of incorporation, or bylaws, or other applicable organizational documents, of Borrower, or result in a breach of or constitute a default under any lease, instrument, contract or other agreement to which Borrower is a party or by which it or its properties may be bound or affected; or (B) violate any provision of any law, rule, regulation, order, judgment, decree or the like binding on or affecting Borrower; (iii) this Note and the other Loan Documents are the legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms; (iv) Borrower has no subsidiaries.

A-1

So long as any amount payable by Borrower hereunder shall remain unpaid: (i) Borrower shall furnish to Lender from time to time such information respecting Borrower’s financial condition as Lender may from time to time reasonably request; (ii) Borrower shall maintain its legal existence, licenses and privileges in good standing under and in compliance with all applicable laws and continue to operate the business currently conducted by Borrower; (iii) Borrower shall not (A) enter into any consolidation, merger, or other combination, (B) become a partner in a partnership, a member of a joint venture, or a member of a limited liability company, or (C) sell, license, transfer or otherwise dispose of any interest in any of Borrower’s assets, except for sales of inventory in the ordinary course of business, licenses or sublicenses of rights in intellectual property on a non-exclusive or other limited basis in the ordinary course of business and sales of obsolete equipment; (iv) Borrower shall not acquire or commit or agree to acquire all or any stock, securities or assets of any other Person (as defined in the Agreement) other than inventory and equipment acquired in the ordinary course of business; (v) Borrower shall not declare or pay any dividends or make any distribution on any of its capital stock or other ownership interests, and also shall not purchase, redeem or otherwise acquire for value any of its capital stock or other ownership interests; (vi) Borrower shall not create or suffer to exist any lien or security interest on any of its assets except as permitted under the Collateral Documents; (vii) Borrower shall not incur any indebtedness other than Permitted Debt (as defined below); (viii) Borrower shall not prepay, redeem, purchase, defease or otherwise satisfy in any manner prior to the scheduled repayment thereof any Permitted Debt, or amend, modify or otherwise change the terms of any Permitted Debt so as to accelerate the scheduled repayment thereof; (ix) Borrower shall not make any loans or other extensions of credit to, or guaranty the obligations of, or invest in, any other Person; (x) Borrower shall not incorporate, create, acquire or suffer to exist any subsidiaries; and (xi) Borrower shall not enter into or engage in any business other than that carried on (or contemplated to be carried on) as of the date hereof.  (As used herein, “Permitted Debt” means the indebtedness owing to Pavel Ladonnikov existing as of the date hereof, the Loan, unsecured liabilities to trade creditors (not the result of the borrowing of money) incurred in connection with the acquisition of goods, supplies, or merchandise on normal trade credit in the ordinary course of business, other current liabilities incurred in the ordinary course of business and not incurred through the borrowing of money, lease obligations incurred in the ordinary course of business, and obligations in respect of taxes or other governmental charges which are not yet due or which are being contested in good faith by appropriate proceedings.)

The occurrence of any of the following shall constitute an “Event of Default” under this Note:

(1)

the failure to make any payment of principal, interest or any other amount payable hereunder when due under this Note;

(2)

any representation or warranty by Borrower under or in connection with any Loan Document shall prove to have been incorrect when made or deemed made;

(3)

the breach of any other condition or obligation under this Note;

(4)

the filing of a petition by or against Borrower under any provision of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time (the “Bankruptcy Code”), or under any similar law relating to bankruptcy, insolvency or other relief for debtors; or appointment of a receiver, trustee, custodian or liquidator of or for all or any part of the assets or property of Borrower; or the insolvency of Borrower; or the making of a general assignment for the benefit of creditors by Borrower; 

(5)

any breach or default occurs under any agreement in connection with any other credit Borrower has obtained from any other Person or which Borrower has guaranteed, the effect of which is to accelerate or permit the acceleration of the maturity of such indebtedness;

(6)

Borrower shall (i) liquidate, wind up or dissolve (or suffer any liquidation, wind-up or dissolution), (ii) suspend its operations other than in the ordinary course of business, or (iii) take any action to authorize any of the actions or events set forth above in this paragraph;

(7)

there is a change in the record or beneficial ownership or control of more than 20% of the voting capital stock of and other voting ownership interests in Borrower compared to such ownership on the date hereof, other than purchases of voting capital stock by Lender;

(8)

the occurrence or existence of any event or condition that has or would reasonably be expected to have a material adverse effect on the business, properties, results of operations, condition (financial or otherwise) or prospects of Borrower (a “Material Adverse Effect”); 

A-2

(9)

any of the Loan Documents shall for any reason be revoked or invalidated, or otherwise cease to be in full force and effect, or Borrower or any other Person shall contest in any manner the validity or enforceability thereof, or Borrower or any other Person shall deny that it has any further liability or obligation thereunder or purports to revoke, terminate or rescind any provision thereof; 

(10)

Borrower or any other Person shall fail to perform or observe any term, covenant or agreement contained in the Collateral Documents on its part to be performed or observed and any such failure shall remain unremedied beyond the applicable grace period, if any, specified therein (unless Lender determines that such failure is not capable of remedy);

(11)

 any “Event of Default” under any Collateral Document shall have occurred and be continuing; or any Collateral Document for any reason, except to the extent permitted by the terms thereof, shall cease to create a valid and perfected first priority lien on and security interest in any of the collateral purported to be covered thereby; or

(12)

Borrower shall be named as a defendant in any legal action brought by (i) any current or former employee, executive officer or director of Borrower or (ii) any third party with whom Borrower had entered into any agreement or contract (including any oral contract) prior to the date of the Final Dismissal Order.

Upon the occurrence and continuance of any Event of Default, Lender, at its option, may (i) by notice to Borrower, declare the unpaid principal amount of this Note, all interest accrued and unpaid hereon and all other amounts payable hereunder to be immediately due and payable, whereupon the unpaid principal amount of this Note, all such interest and all such other amounts shall become immediately due and payable, without presentment, demand, protest or further notice of any kind, provided that upon the occurrence of an actual or deemed entry of an order for relief with respect to Borrower under the Bankruptcy Code, the result which would otherwise occur only upon giving of notice by Lender to Borrower as specified above shall occur automatically, without the giving of any such notice; and (ii) whether or not the actions referred to in clause (i) have been taken, exercise any or all of Lender’s rights and remedies under any Collateral Document and any guaranty, and proceed to enforce all other rights and remedies available to Lender under applicable law.

Borrower hereby waives presentment, protest, demand, or other notice of any kind in connection with this Note.

No failure or delay by Lender in exercising, and no course of dealing with respect to, any right, power, or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege.  The rights and remedies of Lender provided herein shall be cumulative and not exclusive of any other rights or remedies provided by law.  

If any provision of this Note shall be held invalid or unenforceable in whole or in part, such invalidity or unenforceability shall not affect the remaining provisions hereof.  

No amendment or waiver of any provision of this Note, nor any consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by Lender and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

This Note shall be binding upon, inure to the benefit of and be enforceable by Borrower, Lender and their respective successors and assigns.

Borrower shall maintain a register in which it will record the initial ownership of this Note and any changes in ownership of this Note which occur as permitted by and in compliance with the terms hereof.

Borrower shall not have the right to assign its rights and obligations hereunder or any interest herein or therein without the prior written consent of Lender.  Lender may sell, assign, transfer or grant participations in all or any portion of Lender’s rights and obligations hereunder. In the event of any such assignment the assignee shall be deemed the “Lender” for all purposes of this Note and any other documents and instruments relating hereto with respect to the rights and obligations assigned to it.  Borrower agrees that in connection with any such grant or assignment, Lender may deliver to the prospective participant or assignee financial statements and other relevant information relating to Borrower.

Time is of the essence for the performance of each and every obligation under this Note.

As provided in the Agreement, Borrower shall pay on demand all costs and expenses of Lender, and fees and disbursements of its legal counsel, incurred in connection with the enforcement or attempted enforcement of this Note.

A-3

This Note is secured by certain collateral more specifically described in the Collateral Documents.

This Note shall be shall be governed by, and construed in accordance with, California law.  Borrower hereby submits to the nonexclusive jurisdiction of the courts of the State of California and the Federal courts of the United States sitting in the State of California for the purposes of all legal proceedings arising out of or relating to this Note and any other Loan Documents.  Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum.

BORROWER AND, BY ITS ACCEPTANCE HEREOF, LENDER, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS NOTE AND THE OTHER LOAN DOCUMENTS.

IN THE EVENT ANY LEGAL PROCEEDING IS FILED IN A COURT OF THE STATE OF CALIFORNIA (THE “COURT”) BY OR AGAINST ANY PARTY IN CONNECTION WITH ANY CONTROVERSY, DISPUTE OR CLAIM DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS NOTE, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY (EACH, A “CLAIM”) AND THE WAIVER SET FORTH IN THE PRECEEDING PARAGRAPH IS NOT ENFORCEABLE IN SUCH ACTION OR PROCEEDING, BORROWER AND, BY ITS ACCEPTANCE HEREOF, LENDER, HEREBY AGREE AS FOLLOWS:

(1) WITH THE EXCEPTION OF THE MATTERS SPECIFIED IN SUBPARAGRAPH 2 BELOW, ANY CLAIM WILL BE RESOLVED BY A GENERAL REFERENCE PROCEEDING IN ACCORDANCE WITH THE PROVISIONS OF CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 638 THROUGH 645.1. 

(2) THE FOLLOWING MATTERS SHALL NOT BE SUBJECT TO A REFERENCE PROCEEDING: (A) NON-JUDICIAL FORECLOSURE OF ANY SECURITY INTERESTS IN REAL OR PERSONAL PROPERTY, (B) EXERCISE OF SELF-HELP REMEDIES (INCLUDING SET-OFF), (C) APPOINTMENT OF A RECEIVER AND (D) TEMPORARY, PROVISIONAL OR ANCILLARY REMEDIES (INCLUDING WRITS OF ATTACHMENT, WRITS OF POSSESSION, TEMPORARY RESTRAINING ORDERS OR PRELIMINARY INJUNCTIONS).  THIS NOTE DOES NOT LIMIT THE RIGHT OF ANY PARTY TO EXERCISE OR OPPOSE ANY OF THE RIGHTS AND REMEDIES DESCRIBED IN CLAUSES (A) - (D) AND ANY SUCH EXERCISE OR OPPOSITION DOES NOT WAIVE THE RIGHT OF ANY PARTY TO A REFERENCE PROCEEDING PURSUANT TO THIS NOTE.

(3) UPON THE WRITTEN REQUEST OF ANY PARTY, THE PARTIES SHALL SELECT A SINGLE REFEREE, WHO SHALL BE A RETIRED JUDGE OR JUSTICE.  IF THE PARTIES DO NOT AGREE UPON A REFEREE WITHIN TEN DAYS OF SUCH WRITTEN REQUEST, THEN, ANY PARTY MAY REQUEST THE COURT TO APPOINT A REFEREE PURSUANT TO CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 640(B). A REQUEST FOR APPOINTMENT OF A REFEREE MAY BE HEARD ON AN EX PARTE OR EXPEDITED BASIS, AND THE PARTIES AGREE THAT IRREPARABLE HARM WOULD RESULT IF EX PARTE RELIEF IS NOT GRANTED.  

(4) ALL PROCEEDINGS AND HEARINGS CONDUCTED BEFORE THE REFEREE, EXCEPT FOR TRIAL, SHALL BE CONDUCTED WITHOUT A COURT REPORTER, EXCEPT WHEN ANY PARTY SO REQUESTS, A COURT REPORTER WILL BE USED AND THE REFEREE WILL BE PROVIDED A COURTESY COPY OF THE TRANSCRIPT. THE PARTY MAKING SUCH REQUEST SHALL HAVE THE OBLIGATION TO ARRANGE FOR AND PAY COSTS OF THE COURT REPORTER, PROVIDED THAT SUCH COSTS, ALONG WITH THE REFEREE’S FEES, SHALL ULTIMATELY BE BORNE BY THE PARTY WHO DOES NOT PREVAIL, AS DETERMINED BY THE REFEREE.

A-4

(5) THE REFEREE SHALL APPLY THE RULES OF DISCOVERY AND EVIDENCE APPLICABLE TO PROCEEDINGS AT LAW IN THE STATE OF CALIFORNIA TO THE REFERENCE PROCEEDING AND SHALL DETERMINE ALL ISSUES IN ACCORDANCE WITH APPLICABLE LAW. THE REFEREE SHALL BE EMPOWERED TO ENTER EQUITABLE AS WELL AS LEGAL RELIEF AND RULE ON ANY MOTION WHICH WOULD BE AUTHORIZED IN A TRIAL, INCLUDING MOTIONS FOR DEFAULT JUDGMENT OR SUMMARY JUDGMENT. THE REFEREE SHALL REPORT HIS DECISION, WHICH REPORT SHALL ALSO INCLUDE FINDINGS OF FACT AND CONCLUSIONS OF LAW.

TRANSDEL PHARMACEUTICALS, INC.

By  _______________________________________________

Name  ____________________________________________

Title  _____________________________________________

A-5

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