Exhibit 10.7

 

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT (this “Agreement”), is among Balqon Corporation, a
Nevada corporation (the “Company”), the holders of the Company’s 10% Secured
Subordinated Convertible Notes due March 31, 2013 (collectively, the “Notes”)
each a signatory hereto whether by execution of this Agreement or Annex A to
this Agreement, their endorsees, transferees and assigns (collectively, the
“Secured Parties”), and Matt Goldman, an individual, as collateral agent,
effective as of May 18, 2012 (the “Effective Date”) as evidenced by the date
affixed to the signature pages annexed hereto.

 

WITNESSETH:

 

WHEREAS, the Secured Parties have severally agreed to extend the loans to the
Company evidenced by the Notes; and

 

WHEREAS, in order to induce the Secured Parties to extend the loans evidenced by
the Notes, the Company has agreed to execute and deliver to the Secured Parties
this Agreement and to grant the Secured Parties, pari passu with each other
Secured Party and through the Agent, a security interest in certain property of
the Company to secure the prompt payment, performance and discharge in full of
all of the Company’s obligations under the Notes.

 

NOW, THEREFORE, in consideration of the agreements herein contained and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows:

 

1.                Certain Definitions. As used in this Agreement, the following
terms shall have the meanings set forth in this Section 1. Terms used but not
otherwise defined in this Agreement that are defined in Article 9 of the UCC
(such as “account”, “chattel paper”, “commercial tort claim”, “deposit account”,
“document”, “equipment”, “fixtures”, “general intangibles”, “goods”,
“instruments”, “inventory”, “investment property”, “letter-of-credit rights”,
“proceeds” and “supporting obligations”) shall have the respective meanings
given such terms in Article 9 of the UCC. Capitalized terms used but not
otherwise defined in this Agreement shall have the meanings ascribed to them in
the Notes.

 

(a)              “Collateral” means the collateral in which the Secured Parties
are granted a security interest by this Agreement and which shall include the
following personal property of the Company, whether presently owned or existing
or hereafter acquired or coming into existence, wherever situated, and all
additions and accessions thereto and all substitutions and replacements thereof,
and all proceeds, products and accounts thereof, including, without limitation,
all proceeds from the sale or transfer of the Collateral and of insurance
covering the same and of any tort claims in connection therewith, and all
dividends, interest, cash, notes, securities, equity interest or other property
at any time and from time to time acquired, receivable or otherwise distributed
in respect of, or in exchange for, any or all of the Pledged Securities (as
defined below):

 

(i)               All goods, including, without limitation, (A) all machinery,
equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances,
furniture, special and general tools, fixtures, test and quality control devices
and other equipment of every kind and nature and wherever situated, together
with all documents of title and documents representing the same, all additions
and accessions thereto, replacements therefor, all parts therefor, and all
substitutes for any of the foregoing and all other items used and useful in
connection with the Company’s businesses and all improvements thereto; and (B)
all inventory;

 

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(ii)             All contract rights and other general intangibles, including,
without limitation, all partnership interests, membership interests, stock or
other securities, rights under any of the Organizational Documents, agreements
related to the Pledged Securities, Intellectual Property (as defined below and
more fully described herein) licenses, distribution and other agreements,
computer software (whether “off-the-shelf”, licensed from any third party or
developed by the Company), computer software development rights, leases,
franchises, customer lists, quality control procedures, grants and rights,
goodwill, trademarks, service marks, trade styles, trade names, patents, patent
applications, copyrights, and income tax refunds;

 

(iii)           All accounts, together with all instruments, all documents of
title representing any of the foregoing, all rights in any merchandising, goods,
equipment, motor vehicles and trucks which any of the same may represent, and
all right, title, security and guaranties with respect to each account,
including any right of stoppage in transit;

 

(iv)            All documents, letter-of-credit rights, instruments and chattel
paper;

 

(v)             All commercial tort claims;

 

(vi)            All deposit accounts and all cash (whether or not deposited in
such deposit accounts);

 

(vii)          All investment property;

 

(viii)         All supporting obligations; and

 

(ix)           All files, records, books of account, business papers, and
computer programs; and

 

(x)            the products and proceeds of all of the foregoing Collateral set
forth in clauses (i)-(ix) above.

 

Without limiting the generality of the foregoing, the “Collateral” shall include
all investment property and general intangibles respecting ownership and/or
other equity interests in any direct or indirect subsidiary of the Company
obtained in the future, including any Pledged Securities, and, in each case, all
certificates representing such shares and/or equity interests and, in each case,
all rights, options, warrants, stock, other securities and/or equity interests
that may hereafter be received, receivable or distributed in respect of, or
exchanged for, any of the foregoing and all rights arising under or in
connection with any of the foregoing, including, but not limited to, all
dividends, interest and cash.

 

Notwithstanding the foregoing, nothing herein shall be deemed to constitute an
assignment of any asset which, in the event of an assignment, becomes void by
operation of applicable law or the assignment of which is otherwise prohibited
by applicable law (in each case to the extent that such applicable law is not
overridden by Sections 9406, 9407 and/or 9408 of the UCC or other similar
applicable law); provided, however, that to the extent permitted by applicable
law, this Agreement shall create a valid security interest in such asset and, to
the extent permitted by applicable law, this Agreement shall create a valid
security interest in the proceeds of such asset.

 

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(b)             “Intellectual Property” means the collective reference to all
rights, priorities and privileges relating to intellectual property, whether
arising under United States, multinational or foreign laws or otherwise,
including, without limitation, (i) all copyrights arising under the laws of the
United States, any other country or any political subdivision thereof, whether
registered or unregistered and whether published or unpublished, all
registrations and recordings thereof, and all applications in connection
therewith, including, without limitation, all registrations, recordings and
applications in the United States Copyright Office, (ii) all letters patent of
the United States, any other country or any political subdivision thereof, all
reissues and extensions thereof, and all applications for letters patent of the
United States or any other country and all divisions, continuations and
continuations-in-part thereof, (iii) all trademarks, trade names, corporate
names, company names, business names, fictitious business names, trade dress,
service marks, logos, domain names and other source or business identifiers, and
all goodwill associated therewith, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all applications in
connection therewith, whether in the United States Patent and Trademark Office
or in any similar office or agency of the United States, any State thereof or
any other country or any political subdivision thereof, or otherwise, and all
common law rights related thereto, (iv) all trade secrets arising under the laws
of the United States, any other country or any political subdivision thereof,
(v) all rights to obtain any reissues, renewals or extensions of the foregoing,
(vi) all licenses for any of the foregoing, and (vii) all causes of action for
infringement of the foregoing.

 

(c)              “Majority in Interest” means, at any time of determination, the
Secured Parties holding 51% of then-outstanding principal amount of Notes.

 

(d)             “Necessary Endorsement” means undated stock powers endorsed in
blank or other proper instruments of assignment duly executed and such other
instruments or documents as the Agent (as that term is defined below) may
reasonably request.

 

(e)              “Obligations” means all of the liabilities and obligations
(primary, secondary, direct, contingent, sole, joint or several) due or to
become due, or that are now or may be hereafter contracted or acquired, or owing
to, of the Company to the Secured Parties, including, without limitation, all
obligations under this Agreement, the Notes and any other instruments,
agreements or other documents executed and/or delivered in connection herewith
or therewith, in each case, whether now or hereafter existing, voluntary or
involuntary, direct or indirect, absolute or contingent, liquidated or
unliquidated, whether or not jointly owed with others, and whether or not from
time to time decreased or extinguished and later increased, created or incurred,
and all or any portion of such obligations or liabilities that are paid, to the
extent all or any part of such payment is avoided or recovered directly or
indirectly from any of the Secured Parties as a preference, fraudulent transfer
or otherwise as such obligations may be amended, supplemented, converted,
extended or modified from time to time. Without limiting the generality of the
foregoing, the term “Obligations” shall include, without limitation: (i)
principal of, and interest on the Notes and the loans extended pursuant thereto;
(ii) any and all other fees, indemnities, costs, obligations and liabilities of
the Company from time to time under or in connection with this Agreement, the
Notes and any other instruments, agreements or other documents executed and/or
delivered in connection herewith or therewith; and (iii) all amounts (including
but not limited to post-petition interest) in respect of the foregoing that
would be payable but for the fact that the obligations to pay such amounts are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Company.

 

(f)              “Organizational Documents” means the Company’s articles of
incorporation and bylaws.

 

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(g)             “Pledged Interests” shall have the meaning ascribed to such term
in Section 4(j).

 

(h)             “Pledged Securities” means all the capital stock and other
equity interests in any direct or indirect subsidiary of the Company obtained
after the date of this Agreement.

 

(i)               “Super Majority in Interest” means, at any time of
determination, the Secure Parties holding 67% of then-outstanding principal
amount of Notes.

 

(j)               “UCC” means the Uniform Commercial Code of the State of
California and or any other applicable law of any state or states which has
jurisdiction with respect to all, or any portion of, the Collateral or this
Agreement, from time to time. It is the intent of the parties that defined terms
in the UCC should be construed in their broadest sense so that the term
“Collateral” will be construed in its broadest sense. Accordingly if there are,
from time to time, changes to defined terms in the UCC that broaden the
definitions, they are incorporated herein and if existing definitions in the UCC
are broader than the amended definitions, the existing ones shall be
controlling.

 

2.                Grant of Security Interest in Collateral. As an inducement for
the Secured Parties to extend the loans as evidenced by the Notes and to secure
the complete and timely payment, performance and discharge in full, as the case
may be, of all of the Obligations, the Company hereby unconditionally and
irrevocably pledges, grants and hypothecates to the Agent, as representative of
the Secured Parties, for the ratable benefit of the Secured Parties a security
interest in and to, a lien upon and a right of set-off against all of their
respective right, title and interest of whatsoever kind and nature in and to,
the Collateral (a “Security Interest” and, collectively, the “Security
Interests”).

 

3.                Delivery of Certain Collateral. Contemporaneously or prior to
the execution of this Agreement, the Company shall deliver or cause to be
delivered to the Agent any and all certificates and other instruments or
documents representing any of the Collateral, in each case, together with all
Necessary Endorsements.

 

4.                Representations, Warranties, Covenants and Agreements of the
Company. Except as set forth under the corresponding section of the disclosure
schedule delivered to the Secured Parties concurrently herewith (the “Disclosure
Schedule”), which Disclosure Schedule shall be deemed a part hereof, the Company
represents and warrants to, and covenants and agrees with, the Secured Parties,
as of the Effective Date, as follows:

 

(a)              The Company has the requisite corporate power and authority to
enter into this Agreement and otherwise to carry out its obligations hereunder.
The execution, delivery and performance by the Company of this Agreement and the
filings contemplated therein have been duly authorized by all necessary action
on the part of the Company and no further action is required by the Company.
This Agreement has been duly executed by the Company. This Agreement constitutes
the legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization and similar laws of
general application relating to or affecting the rights and remedies of
creditors and by general principles of equity.

 

(b)             The Company has no place of business or offices where their
respective books of account and records are kept (other than temporarily at the
offices of its attorneys or accountants) or places where Collateral is stored or
located, except the Company’s principal executive offices.

 

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(c)              The Company shall at all times maintain its books of account
and records relating to the Collateral at its principal place of business and
its Collateral at its principal place of business and may not relocate such
books of account and records or tangible Collateral unless it delivers to the
Secured Parties at least 30 days prior to such relocation (i) written notice of
such relocation and the new location thereof (which location must be within the
United States) and (ii) evidence that appropriate financing statements under the
UCC and other necessary documents have been filed and recorded and other steps
have been taken to perfect the Security Interests created in favor of the
Secured Parties as a valid, perfected and continuing perfected first priority
lien in the Collateral.

 

(d)             The Company hereby authorizes the Agent to file one or more
financing statements under the UCC, with respect to the Security Interests, with
the proper filing and recording agencies in any jurisdiction deemed proper by
it.

 

(e)              The execution, delivery and performance of this Agreement by
the Company does not (i) violate any of the provisions of any Organizational
Documents of the Company or any judgment, decree, order or award of any court,
governmental body or arbitrator or any applicable law, rule or regulation
applicable to the Company or (ii) conflict with, or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation (with or without notice, lapse of time or both) of, any agreement,
credit facility, debt or other instrument (evidencing the Company’s debt or
otherwise) or other understanding to which the Company is a party or by which
any property or asset of the Company is bound or affected. If any, all required
consents (including, without limitation, from stockholders or creditors of the
Company) necessary for the Company to enter into and perform its obligations
hereunder have been obtained.

 

(f)              As of the date of this Agreement, the Company has no
subsidiaries, no Pledged Securities and no Pledged Interests.

 

(g)             The ownership and other equity interests in partnerships and
limited liability companies, if any, obtained after the date of this Agreement
and included in the Collateral (the “Pledged Interests”) by their express terms
will not provide that they are securities governed by Article 8 of the UCC and
will not be held in a securities account or by any financial intermediary.

 

(h)             Upon the request of the Agent, acting upon the written direction
of a Super Majority in Interest, the Company will sign and deliver to the Agent
on behalf of the Secured Parties at any time or from time to time one or more
financing statements pursuant to the UCC and will pay the cost of filing the
same in all public offices wherever filing is, or is deemed by the Agent to be,
necessary or desirable to effect the rights and obligations provided for herein.
Without limiting the generality of the foregoing, the Company shall pay all
fees, taxes and other amounts necessary to maintain the Collateral and the
Security Interests hereunder, and the Company shall obtain and furnish to the
Agent from time to time, upon demand, such releases and/or subordinations of
claims and liens which may be required to maintain the priority of the Security
Interests hereunder.

 

(i)               The Company will not transfer, pledge, hypothecate, encumber,
license, sell or otherwise dispose of any of the Collateral (except for
non-exclusive licenses granted by the Company in its ordinary course of business
and sales of inventory by the Company in its ordinary course of business)
without the prior written consent of a Majority in Interest.

 

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(j)               The Company shall keep and preserve its equipment, inventory
and other tangible Collateral in good condition, repair and order and shall not
operate or locate any such Collateral (or cause to be operated or located) in
any area excluded from insurance coverage.

 

(k)             The Company shall maintain with financially sound and reputable
insurers, insurance with respect to the Collateral, including Collateral
hereafter acquired, against loss or damage of the kinds and in the amounts
customarily insured against by entities of established reputation having similar
properties similarly situated and in such amounts as are customarily carried
under similar circumstances by other such entities and otherwise as is prudent
for entities engaged in similar businesses but in any event sufficient to cover
the full replacement cost thereof. The Company shall cause each insurance policy
issued in connection herewith to provide, that (a) the Agent will be named as
lender loss payee and additional insured under each such insurance policy and
(b) if such insurance be proposed to be cancelled or materially changed for any
reason whatsoever, such insurer will promptly notify the Agent and such
cancellation or change shall not be effective as to the Agent for at least
thirty (30) days after receipt by the Agent of such notice, unless the effect of
such change is to extend or increase coverage under the policy. If no Event of
Default exists and if the proceeds arising out of any claim or series of related
claims do not exceed $100,000, loss payments in each instance will be applied by
the Company to the repair and/or replacement of property with respect to which
the loss was incurred to the extent reasonably feasible, and any loss payments
or the balance thereof remaining, to the extent not so applied, shall be payable
to the Company; provided, however, that payments received by the Company after
an Event of Default occurs and is continuing or in excess of $100,000 for any
occurrence or series of related occurrences shall be paid to the Agent for the
benefit of the Secured Parties and, if received by the Company, shall be held in
trust for the Secured Parties and immediately paid over to the Agent unless
otherwise directed in writing by a Majority Interest. Copies of such policies or
the related certificates, in each case, naming the Agent as lender loss payee
and additional insured shall be delivered to the Agent at least annually and at
the time any new policy of insurance is issued. The Agent shall have no
obligation or liability for determining whether insurance coverage is
appropriate or in effect.

 

(l)               The Company shall promptly execute and deliver to the Agent
such further deeds, mortgages, assignments, security agreements, financing
statements or other instruments, documents, certificates and assurances and take
such further action as the Agent, acting upon the written direction of a Super
Majority in Interest, may deem necessary to perfect, protect or enforce the
Secured Parties’ security interest in the Collateral including, without
limitation, if applicable, the execution and delivery of a separate security
agreement with respect to the Company’s Intellectual Property (“Intellectual
Property Security Agreement”) in which the Secured Parties have been granted a
security interest hereunder, which Intellectual Property Security Agreement,
other than as stated therein, shall be subject to all of the terms and
conditions hereof.

 

(m)           The Company shall permit the Agent, acting upon the written
direction of a Super Majority in Interest, and its representatives and agents to
inspect the Collateral during normal business hours and upon reasonable prior
notice, and to make copies of records pertaining to the Collateral as may be
reasonably requested by the Agent from time to time.

 

(n)             The Company shall take all steps reasonably necessary to
diligently pursue and seek to preserve, enforce and collect any rights, claims,
causes of action and accounts receivable in respect of the Collateral.

 

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(o)             The Company shall promptly notify the Secured Parties and the
Agent in sufficient detail upon becoming aware of any attachment, garnishment,
execution or other legal process levied against any Collateral and of any other
information received by the Company that may materially affect the value of the
Collateral, the Security Interest or the rights and remedies of the Secured
Parties hereunder.

 

(p)             All information heretofore, herein or hereafter supplied to the
Secured Parties by or on behalf of the Company with respect to the Collateral is
accurate and complete in all material respects as of the date furnished.

 

(q)             The Company shall at all times preserve and keep in full force
and effect their respective valid existence and good standing and any rights and
franchises material to its business.

 

(r)              The Company will not change its name, type of organization,
jurisdiction of organization, organizational identification number (if it has
one), legal or corporate structure, or identity, or add any new fictitious name
unless it provides at least 30 days prior written notice to the Secured Parties
and the Agent of such change and, at the time of such written notification, the
Company provides any financing statements or fixture filings necessary to
perfect and continue the perfection of the Security Interests granted and
evidenced by this Agreement.

 

(s)              Except in the ordinary course of business, the Company may not
consign any of its inventory or sell any of its inventory on bill and hold, sale
or return, sale on approval, or other conditional terms of sale without the
consent of a Majority Interest which shall not be unreasonably withheld.

 

(t)              The Company may not relocate its chief executive office to a
new location without providing 30 days prior written notification thereof to the
Secured Parties and the Agent and so long as, at the time of such written
notification, the Company provides any financing statements or fixture filings
necessary to perfect and continue the perfection of the Security Interests
granted and evidenced by this Agreement.

 

(u)             The Company is organized under the laws of the state of Nevada.

 

(v)             At any time and from time to time that any Collateral consists
of instruments, certificated securities or other items that require or permit
possession by the secured party to perfect the security interest created hereby,
the Company shall inventory and deliver such Collateral to the Agent.

 

(w)            The Company, in its capacity as issuer, hereby agrees to comply
with any and all orders and instructions of a Super Majority in Interest
regarding the Pledged Interests consistent with the terms of this Agreement
without the further consent of the Company as contemplated by Section 8106 (or
any successor section) of the UCC. Further, except with respect to the Senior
Indebtedness, the Company agrees that it shall not enter into a similar
agreement (or one that would confer “control” within the meaning of Article 8 of
the UCC) with any other person or entity.

 

(x)             Upon the request of the Agent, acting upon the written direction
of a Super Majority in Interest, the Company shall cause all tangible chattel
paper constituting Collateral to be delivered to the Agent, or, if such delivery
is not possible, then to cause such tangible chattel paper to contain a legend
noting that it is subject to the security interest created by this Agreement. To
the extent that any Collateral consists of electronic chattel paper, the Company
shall cause the underlying chattel paper to be created, stored and assigned in
accordance with Section 9105 of the UCC (or successor section thereto).

 

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(y)             If there is any investment property or deposit account (except
for deposit accounts held by a holder of Senior Indebtedness) included as
Collateral that can be perfected by “control” through an account control
agreement, the Company shall cause such an account control agreement to be
entered into and delivered to the Agent for the benefit of the Secured Parties
upon the request of the Agent, acting upon the written direction of a Super
Majority in Interest.

 

(z)              To the extent that any Collateral consists of letter-of-credit
rights, the Company shall cause the issuer of each underlying letter of credit
to consent to an assignment of the proceeds thereof to the Secured Parties.

 

(aa)           To the extent that any Collateral is in the possession of any
third party, the Company shall notify such third party of the Secured Parties’
security interest in such Collateral and shall use its best efforts to obtain an
acknowledgement and agreement from such third party with respect to the
Collateral, in form and substance reasonably satisfactory to the Agent.

 

(bb)          If the Company shall at any time hold or acquire a commercial tort
claim, the Company shall promptly notify the Secured Parties in a writing signed
by the Company of the particulars thereof and grant to the Secured Parties in
such writing a security interest therein and in the proceeds thereof, all upon
the terms of this Agreement, with such writing in form and substance reasonably
satisfactory to the agent.

 

(cc)           The Company shall immediately provide written notice to the
Secured Parties of any and all accounts which arise out of contracts with any
governmental authority and, to the extent necessary to perfect or continue the
perfected status of the Security Interests in such accounts and proceeds
thereof, shall execute and deliver to the Agent an assignment of claims for such
accounts and cooperate with the Agent in taking any other steps required, in its
judgment, under the Federal Assignment of Claims Act or any similar federal,
state or local statute or rule to perfect or continue the perfected status of
the Security Interests in such accounts and proceeds thereof.

 

(dd)          The Company shall cause each subsidiary of the Company, if any, to
immediately become a party hereto (an “Additional Obligor”), by executing and
delivering an Additional Obligor Joinder in substantially the form of Annex A
attached hereto and comply with the provisions hereof applicable to the Company.
Concurrent therewith, the Additional Obligor shall deliver to each Secured Party
and the Agent replacement Disclosure Schedule for, or supplements to the
Disclosure Schedule to (or referred to in) this Agreement, as applicable, which
replacement Disclosure Schedule shall supersede, or supplements shall modify,
the Disclosure Schedule then in effect. The Additional Obligor shall also
deliver such opinions of counsel, authorizing resolutions, good standing
certificates, incumbency certificates, organizational documents, financing
statements and other information and documentation as the Agent, acting upon the
written direction of a Super Majority in Interest, may reasonably request. Upon
delivery of the foregoing to the Agent, the Additional Obligor shall be and
become a party to this Agreement with the same rights and obligations as the
Company, for all purposes hereof as fully and to the same extent as if it were
an original signatory hereto and shall be deemed to have made the
representations, warranties and covenants set forth herein as of the date of
execution and delivery of such Additional Obligor Joinder, and all references
herein to the “Company” shall be deemed to include each Additional Obligor.

 

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(ee)           The Company shall vote the Pledged Securities, if any, to comply
with the covenants and agreements set forth herein and in the Notes.

 

(ff)            The Company shall register the pledge of the applicable Pledged
Securities, if any, on the books of the Company. Further, except with respect to
certificated securities delivered to the Agent, the Company shall deliver to the
Agent an acknowledgement of pledge (which, where appropriate, shall comply with
the requirements of the relevant UCC with respect to perfection by registration)
signed by the issuer of the applicable Pledged Securities, which acknowledgement
shall confirm that: (a) it has registered the pledge on its books and records;
and (b) at any time directed by the Agent, acting upon the written direction of
a Super Majority in Interest, during the continuation of an Event of Default,
such issuer will transfer the record ownership of such Pledged Securities into
the name of any designee of the Agent, will take such steps as may be necessary
to effect the transfer, and will comply with all other instructions of a Super
Majority in Interest regarding such Pledged Securities without the further
consent of the Company.

 

(gg)          In the event that, upon an occurrence of an Event of Default, the
Agent, acting upon the written direction of a Super Majority in Interest, shall
sell all or any of the Pledged Securities to another party or parties (herein
called the “Transferee”) or shall purchase or retain all or any of the Pledged
Securities. The Company shall, to the extent applicable: (i) deliver to the
Agent or the Transferee, as the case may be, the articles of incorporation,
bylaws, minute books, stock certificate books, corporate seals, deeds, leases,
indentures, agreements, evidences of indebtedness, books of account, financial
records and all other Organizational Documents and records of the Company and
its direct and indirect subsidiaries; (ii) use its best efforts to obtain
resignations of the persons then serving as officers and directors of the
Company and its direct and indirect subsidiaries, if so directed by a Super
Majority in Interest; and (iii) use its best efforts to obtain any approvals
that are required by any governmental or regulatory body in order to permit the
sale of the Pledged Securities to the Transferee or the purchase or retention of
the Pledged Securities by the Agent and allow the Transferee or the Agent to
continue the business of the Company and its direct and indirect subsidiaries.

 

(hh)          Without limiting the generality of the other obligations of the
Company hereunder, the Company shall promptly (i) cause the security interest
contemplated hereby with respect to all Intellectual Property registered at the
United States Copyright Office or United States Patent and Trademark Office to
be duly recorded at the applicable office, (ii) give the Agent notice whenever
it files an application to register any copyrights, trademarks or patents, and
(iii) supplement any Intellectual Property Security Agreement to grant a
security interest in such new or additional Intellectual Property registered at
the United States Copyright Office or United States Patent and Trademark Office.

 

(ii)             The Company will from time to time, at the expense of the
Company, promptly execute and deliver all such further instruments and
documents, and take all such further action as may be necessary or desirable, or
as the Agent may reasonably request in writing, in order to perfect and protect
any security interest granted or purported to be granted hereby or to enable the
Secured Parties to exercise and enforce their rights and remedies hereunder and
with respect to any Collateral or to otherwise carry out the purposes of this
Agreement.

 

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5.                Effect of Pledge on Certain Rights. If any of the Collateral
subject to this Agreement consists of nonvoting equity or ownership interests
(regardless of class, designation, preference or rights) that may be converted
into voting equity or ownership interests upon the occurrence of certain events
(including, without limitation, upon the transfer of all or any of the other
stock or assets of the issuer), it is agreed that the pledge of such equity or
ownership interests pursuant to this Agreement or the enforcement of any of the
Agent’s rights hereunder shall not be deemed to be the type of event which would
trigger such conversion rights notwithstanding any provisions in the
Organizational Documents or agreements to which the Company is subject or to
which the Company is party.

 

6.                Defaults. The following events shall be “Events of Default”:

 

(a)              The occurrence of an Event of Default under the Notes;

 

(b)             Any representation or warranty of the Company in this Agreement
shall prove to have been incorrect in any material respect when made;

 

(c)              The failure by the Company to observe or perform any of its
obligations hereunder for ten (10) days after delivery to the Company of notice
of such failure by or on behalf of a Secured Party unless such default is
capable of cure but cannot be cured within such time frame and the Company is
using best efforts to cure same in a timely fashion; or

 

(d)             If any provision of this Agreement shall at any time for any
reason be declared to be null and void, or the validity or enforceability
thereof shall be contested by the Company, or a proceeding shall be commenced by
the Company, or by any governmental authority having jurisdiction over the
Company, seeking to establish the invalidity or unenforceability thereof, or the
Company shall deny that the Company has any liability or obligation purported to
be created under this Agreement.

 

7.                Duty To Hold In Trust.

 

(a)              Subject to the terms and conditions contained in the Notes with
respect to Senior Indebtedness, upon the occurrence of any Event of Default and
at any time thereafter, the Company shall, upon receipt of any revenue, income,
dividend, interest or other sums subject to the Security Interests, whether
payable pursuant to the Notes or otherwise, or of any check, draft, note, trade
acceptance or other instrument evidencing an obligation to pay any such sum,
hold the same in trust for the Secured Parties and shall forthwith endorse and
transfer any such sums or instruments, or both, to the Secured Parties, pro-rata
in proportion to their respective then-currently outstanding principal amount of
Notes for application to the satisfaction of the Obligations (and if any Note is
not outstanding, pro-rata in proportion to the initial purchases of the
remaining Notes).

 

(b)             Subject to the terms and conditions contained in the Notes with
respect to Senior Indebtedness, if the Company shall become entitled to receive
or shall receive any securities or other property (including, without
limitation, shares of Pledged Securities or instruments representing Pledged
Securities acquired after the date hereof, or any options, warrants, rights or
other similar property or certificates representing a dividend, or any
distribution in connection with any recapitalization, reclassification or
increase or reduction of capital, or issued in connection with any
reorganization of the Company or any of its direct or indirect subsidiaries) in
respect of the Pledged Securities (whether as an addition to, in substitution
of, or in exchange for, such Pledged Securities or otherwise), the Company
agrees to (i) accept the same as the agent of the Secured Parties; (ii) hold the
same in trust on behalf of and for the benefit of the Secured Parties; and (iii)
to deliver any and all certificates or instruments evidencing the same to the
Agent on or before the close of business on the fifth business day following the
receipt thereof by the Company, in the exact form received together with the
Necessary Endorsements, to be held by the Agent subject to the terms of this
Agreement as Collateral.

 

10

 

8.                Rights and Remedies Upon Default.

 

(a)              Upon the occurrence of any Event of Default and at any time
thereafter, the Secured Parties, acting through the Agent, shall have the right
to exercise all of the remedies conferred hereunder and under the Notes, subject
to the rights of the holders of any Senior Indebtedness as set forth in the
Notes, and the Secured Parties shall have all the rights and remedies of a
secured party under the UCC. Without limitation, the Agent, for the benefit of
the Secured Parties, shall have the rights and powers listed below and shall act
in accordance with such rights and powers upon the written direction of a Super
Majority in Interest (for the avoidance of doubt, absent written direction from
a Super Majority in Interest, the Agent shall not have the obligation to act in
accordance with the rights set forth below):

 

(i)               The Agent shall have the right to take possession of the
Collateral and, for that purpose, enter, with the aid and assistance of any
person, any premises where the Collateral, or any part thereof, is or may be
placed and remove the same, and the Company shall assemble the Collateral and
make it available to the Agent at places which the Agent shall reasonably
select, whether at the Company’s premises or elsewhere, and make available to
the Agent, without rent, all of the Company’s premises and facilities for the
purpose of the Agent taking possession of, removing or putting the Collateral in
saleable or disposable form and the Company hereby waives its right to notice of
such actions.

 

(ii)             All rights of the Company to exercise the voting and other
consensual rights which it would otherwise be entitled to exercise and all
rights of the Company to receive the dividends and interest which it would
otherwise be authorized to receive and retain, shall cease. Upon such notice,
the Agent shall have the right to receive, for the benefit of the Secured
Parties, any interest, cash dividends or other payments on the Collateral and,
at the option of the Agent, to exercise all voting rights pertaining thereto.
Without limiting the generality of the foregoing, the Agent shall have the right
(but not the obligation) to exercise all rights with respect to the Collateral
as it were the sole and absolute owner thereof, including, without limitation,
to vote and/or to exchange, at the direction of a Majority in Interest, any or
all of the Collateral in connection with a merger, reorganization,
consolidation, recapitalization or other readjustment concerning or involving
the Collateral or the Company or any of its direct or indirect subsidiaries.

 

(iii)           The Agent shall have the right to operate the business of the
Company using the Collateral and shall have the right to assign, sell, lease or
otherwise dispose of and deliver all or any part of the Collateral, at public or
private sale or otherwise, either with or without special conditions or
stipulations, for cash or on credit or for future delivery, in such parcel or
parcels and at such time or times and at such place or places, and upon such
terms and conditions as a Super Majority in Interest may deem commercially
reasonable, all without (except as shall be required by applicable statute and
cannot be waived) advertisement or demand upon or notice to the Company or right
of redemption of the Company, which are hereby expressly waived. Upon each such
sale, lease, assignment or other transfer of Collateral, the Agent, for the
benefit of the Secured Parties, and upon the written direction of a Super
Majority in Interest, may, unless prohibited by applicable law which cannot be
waived, purchase all or any part of the Collateral being sold, free from and
discharged of all trusts, claims, right of redemption and equities of the
Company, which are hereby waived and released.

 

11

 

(iv)            The Agent, acting upon the written direction of the Secured
Parties, shall have the right (but not the obligation) to notify any account
debtors and any obligors under instruments or accounts to make payments directly
to the Agent, on behalf of the Secured Parties, and to enforce the Company’s
rights against such account debtors and obligors.

 

(v)             The Agent, for the benefit of the Secured Parties, and acting
upon the written direction on a Super Majority in Interest, may (but is not
obligated to) direct any financial intermediary or any other person or entity
holding any investment property to transfer the same to the Agent, on behalf of
the Secured Parties, or its designee.

 

(vi)            The Agent may (but is not obligated to) transfer any or all
Intellectual Property registered in the name of the Company at the United States
Patent and Trademark Office and/or Copyright Office into the name of the Secured
Parties or any designee or any purchaser of any Collateral, including that of
the Agent for the benefit of the Secured Parties.

 

(b)             The Agent shall comply with any applicable law in connection
with a disposition of Collateral and such compliance will not be considered
adversely to affect the commercial reasonableness of any sale of the Collateral.
The Agent may, acting upon the written direction of a Super Majority in
Interest, sell the Collateral without giving any warranties and may specifically
disclaim such warranties. If the Agent sells any of the Collateral on credit,
the Company will only be credited with payments actually made by the purchaser
and received by the Agent or party acting on behalf of the Agent. In addition,
the Company waives any and all rights that it may have to a judicial hearing in
advance of the enforcement of any of the Agent’s rights and remedies hereunder,
including, without limitation, its right following an Event of Default to take
immediate possession of the Collateral and to exercise its rights and remedies
with respect thereto.

 

(c)              For the purpose of enabling the Agent to further exercise
rights and remedies under this Section 8 or elsewhere provided by agreement or
applicable law, the Company hereby grants to the Agent, for the benefit of the
Agent and the Secured Parties, an irrevocable, nonexclusive license (exercisable
without payment of royalty or other compensation to the Company) to use, license
or sublicense following an Event of Default, any Intellectual Property now owned
or hereafter acquired by the Company, and wherever the same may be located, and
including in such license access to all media in which any of the licensed items
may be recorded or stored and to all computer software and programs used for the
compilation or printout thereof.

 

9.                Applications of Proceeds. The proceeds of any such sale, lease
or other disposition of the Collateral hereunder or from payments made on
account of any insurance policy insuring any portion of the Collateral shall be
applied first, to the expenses, costs and due compensation of the Agent in
connection with the Agent’s performance hereunder in connection with the
transactions contemplated hereunder (including, without limitation, any taxes,
fees and other costs incurred in connection therewith and any reasonable
attorneys’ fees and expenses incurred by the Agent), and then to satisfaction of
the Obligations pro rata among the Secured Parties (based on then-outstanding
principal amounts of Notes at the time of any such determination), and then to
the payment of any other amounts required by applicable law, after which the
Secured Parties shall pay to the Company any surplus proceeds. If, upon the
sale, license or other disposition of the Collateral, the proceeds thereof are
insufficient to pay all amounts to which the Agent and the Secured Parties are
legally entitled, the Company will be liable for the deficiency, together with
interest thereon, at the rate of 18% per annum or the lesser amount permitted by
applicable law (the “Default Rate”), and the reasonable fees of any attorneys
employed by the Agent or the Secured Parties to collect such deficiency. To the
extent permitted by applicable law, the Company waives all claims, damages and
demands against the Secured Parties and the Agent arising out of the
repossession, removal, retention or sale of the Collateral, unless due solely to
the gross negligence or willful misconduct of the Secured Parties as determined
by a final judgment (not subject to further appeal) of a court of competent
jurisdiction.

 

12

 

10.             Securities Law Provision. The Company recognizes that the Agent
may be limited in its ability to effect a sale to the public of all or part of
the Pledged Securities by reason of certain prohibitions in the Securities Act
of 1933, as amended, or other federal or state securities laws (collectively,
the “Securities Laws”), and may be compelled to resort to one or more sales to a
restricted group of purchasers who may be required to agree to acquire the
Pledged Securities for their own account, for investment and not with a view to
the distribution or resale thereof. The Company agrees that sales so made may be
at prices and on terms less favorable than if the Pledged Securities were sold
to the public, and that the Agent has no obligation to delay the sale of any
Pledged Securities for the period of time necessary to register the Pledged
Securities for sale to the public under the Securities Laws. The Company shall
cooperate with the Agent in its attempt to satisfy any requirements under the
Securities Laws (including, without limitation, registration thereunder if
requested by the Agent) applicable to the sale of the Pledged Securities by the
Agent.

 

11.             Costs and Expenses. The Company agrees to pay all out-of-pocket
fees, costs and expenses incurred in connection with any filing required
hereunder, including without limitation, any financing statements pursuant to
the UCC, continuation statements, partial releases and/or termination statements
related thereto or any expenses of any searches reasonably required by a Super
Majority in Interest. The Company shall also pay all other claims and charges
which in the reasonable opinion of a Majority Interest is reasonably likely to
prejudice, imperil or otherwise affect the Collateral or the Security Interests
therein. The Company will also, upon demand, pay to the Agent the amount of any
and all reasonable expenses, including the reasonable fees and expenses of its
counsel and of any experts and agents, which the Agent, for the benefit of the
Secured Parties, may incur in connection with the creation, perfection,
protection, satisfaction, foreclosure, collection or enforcement of the Security
Interest and the preparation, administration, continuance, amendment or
enforcement of this Agreement and pay to the Agent the amount of any and all
reasonable expenses, including the reasonable fees and expenses of its counsel
and of any experts and agents, which the Agent, for the benefit of the Secured
Parties, and the Secured Parties may incur in connection with (i) the
enforcement of this Agreement, (ii) the custody or preservation of, or the sale
of, collection from, or other realization upon, any of the Collateral, or (iii)
the exercise or enforcement of any of the rights of the Secured Parties under
the Notes. Such fees shall be paid within 15 days of submission of a request by
the Agent to the Company.

 

12.             Responsibility for Collateral. The Company assumes all
liabilities and responsibility in connection with all Collateral, and the
Obligations shall in no way be affected or diminished by reason of the loss,
destruction, damage or theft of any of the Collateral or its unavailability for
any reason. Without limiting the generality of the foregoing, (a) neither the
Agent nor any Secured Party (i) has any duty (either before or after an Event of
Default) to collect any amounts in respect of the Collateral or to preserve any
rights relating to the Collateral, or (ii) has any obligation to clean-up or
otherwise prepare the Collateral for sale, and (b) the Company shall remain
obligated and liable under each contract or agreement included in the Collateral
to be observed or performed by the Company thereunder. Neither the Agent nor any
Secured Party shall have any obligation or liability under any such contract or
agreement by reason of or arising out of this Agreement or the receipt by the
Agent or any Secured Party of any payment relating to any of the Collateral, nor
shall the Agent or any Secured Party be obligated in any manner to perform any
of the obligations of the Company under or pursuant to any such contract or
agreement, to make inquiry as to the nature or sufficiency of any payment
received by the Agent or any Secured Party in respect of the Collateral or as to
the sufficiency of any performance by any party under any such contract,
insurance policy or agreement, to present or file any claim, to take any action
to enforce any performance or to collect the payment of any amounts which may
have been assigned to the Agent or to which the Agent or any Secured Party may
be entitled at any time or times.

 

13

 

13.             Security Interests Absolute. All rights of the Secured Parties
and all obligations of the Company hereunder, shall be absolute and
unconditional, irrespective of: (a) any lack of validity or enforceability of
this Agreement, the Notes or any agreement entered into in connection with the
foregoing, or any portion hereof or thereof; (b) any change in the time, manner
or place of payment or performance of, or in any other term of, all or any of
the Obligations, or any other amendment or waiver of or any consent to any
departure from the Notes or any other agreement entered into in connection with
the foregoing; (c) any exchange, release or nonperfection of any of the
Collateral, or any release or amendment or waiver of or consent to departure
from any other collateral for, or any guarantee, or any other security, for all
or any of the Obligations; (d) any action by the Secured Parties to obtain,
adjust, settle and cancel in its sole discretion any insurance claims or matters
made or arising in connection with the Collateral; or (e) any other circumstance
which might otherwise constitute any legal or equitable defense available to the
Company, or a discharge of all or any part of the Security Interests granted
hereby. Until the Obligations shall have been paid and performed in full, the
rights of the Secured Parties shall continue even if the Obligations are barred
for any reason, including, without limitation, the running of the statute of
limitations or bankruptcy. The Company expressly waives presentment, protest,
notice of protest, demand, notice of nonpayment and demand for performance. In
the event that at any time any transfer of any Collateral or any payment
received by the Secured Parties hereunder shall be deemed by final order of a
court of competent jurisdiction to have been a voidable preference or fraudulent
conveyance under the bankruptcy or insolvency laws of the United States, or
shall be deemed to be otherwise due to any party other than the Secured Parties,
then, in any such event, the Company’s obligations hereunder shall survive
cancellation of this Agreement, and shall not be discharged or satisfied by any
prior payment thereof and/or cancellation of this Agreement, but shall remain a
valid and binding obligation enforceable in accordance with the terms and
provisions hereof. The Company waives all right to require the Secured Parties
to proceed against any other person or entity or to apply any Collateral which
the Secured Parties may hold at any time, or to marshal assets, or to pursue any
other remedy. The Company waives any defense arising by reason of the
application of the statute of limitations to any obligation secured hereby.

 

14.             Term of Agreement. This Agreement and the Security Interests
shall terminate on the date on which all payments under the Notes have been
indefeasibly paid in full and all other Obligations have been paid or
discharged; provided, however, that all indemnities of the Company contained in
this Agreement (including, without limitation, Annex B hereto and the payment of
fees and expenses set forth in Section 11 hereof) shall survive and remain
operative and in full force and effect regardless of the termination of this
Agreement or the resignation or removal of the Agent.

 

14

 

15.             Power of Attorney; Further Assurances.

 

(a)              The Company authorizes the Agent, acting on behalf of and at
the direction of the Secured Parties, as set forth herein, and does hereby make,
constitute and appoint the Agent and its officers, agents, successors or assigns
with full power of substitution, as the Company’s true and lawful
attorney-in-fact, with power, in the name of the Agent or the Company, to, after
the occurrence and during the continuance of an Event of Default, (i) endorse
any note, checks, drafts, money orders or other instruments of payment
(including payments payable under or in respect of any policy of insurance) in
respect of the Collateral that may come into possession of the Agent; (ii) to
sign and endorse any financing statement pursuant to the UCC or any invoice,
freight or express bill, bill of lading, storage or warehouse receipts, drafts
against debtors, assignments, verifications and notices in connection with
accounts, and other documents relating to the Collateral; (iii) to pay or
discharge taxes, liens, security interests or other encumbrances at any time
levied or placed on or threatened against the Collateral; (iv) to demand,
collect, receipt for, compromise, settle and sue for monies due in respect of
the Collateral; (v) to transfer any Intellectual Property or provide licenses
respecting any Intellectual Property; and (vi) generally, at the option of the
Agent, and at the expense of the Company, at any time, or from time to time, to
execute and deliver any and all documents and instruments and to do all acts and
things which the Agent, acting upon the written direction of a Super Majority in
Interest, deems necessary to protect, preserve and realize upon the Collateral
and the Security Interests granted therein in order to effect the intent of this
Agreement and the Notes all as fully and effectually as the Company might or
could do; and the Company hereby ratifies all that said attorney shall lawfully
do or cause to be done by virtue hereof. This power of attorney is coupled with
an interest and shall be irrevocable for the term of this Agreement and
thereafter as long as any of the Obligations shall be outstanding. The
designation set forth herein shall be deemed to amend and supersede any
inconsistent provision in the Organizational Documents or other documents or
agreements to which the Company is subject or to which the Company is a party.
Without limiting the generality of the foregoing, after the occurrence and
during the continuance of an Event of Default, each Secured Party is
specifically authorized to execute and file any applications for or instruments
of transfer and assignment of any patents, trademarks, copyrights or other
Intellectual Property with the United States Patent and Trademark Office and the
United States Copyright Office.

 

(b)             On a continuing basis, the Company will make, execute,
acknowledge, deliver, file and record, as the case may be, with the proper
filing and recording agencies in any jurisdiction, including, without
limitation, the jurisdictions indicated on Section 15(b) of the Disclosure
Schedule, all such instruments, and take all such action as may reasonably be
deemed necessary or advisable, or as reasonably requested by the Agent and/or a
Super Majority in Interest, to perfect the Security Interests granted hereunder
and otherwise to carry out the intent and purposes of this Agreement, or for
assuring and confirming to the Agent the grant or perfection of a perfected
security interest in all the Collateral under the UCC.

 

(c)              The Company hereby irrevocably appoints the Agent as the
Company’s attorney-in-fact, with full authority in the place and instead of the
Company and in the name of the Company, to take any action and to execute any
instrument which the Agent, acting upon the written direction of a Super
Majority in Interest, may deem necessary or advisable to accomplish the purposes
of this Agreement, including the filing of one or more financing or continuation
statements and amendments thereto, relative to any of the Collateral without the
signature of the Company where permitted by law, which financing statements may
(but need not) describe the Collateral as “all assets” or “all personal
property” or words of like import, and ratifies all such actions taken by the
Agent. This power of attorney is coupled with an interest and shall be
irrevocable for the term of this Agreement and thereafter as long as any of the
Obligations shall be outstanding.

 

15

 

16.             Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of: (a) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto or by
electronic mail at the e-mail address set forth on the signature pages attached
hereto prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the next
Trading Day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile number set forth on the signature pages
attached hereto or by electronic mail at the e-mail address set forth on the
signature pages attached hereto on a day that is not a Trading Day or later than
5:30 p.m. (New York City time) on any Trading Day, (c) the second (2nd) Trading
Day following the date of mailing, if sent by U.S. nationally recognized
overnight courier service or (d) upon actual receipt by the party to whom such
notice is required to be given. The address for such notices and communications
shall be as set forth on the signature pages attached hereto or such other
address as the recipient party to whom notice is to be given may have furnished
to the other party in writing in accordance herewith.

 

17.             Other Security. To the extent that the Obligations are now or
hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity,
then the Agent shall have the right, in its sole discretion, to pursue,
relinquish, subordinate, modify or take any other action with respect thereto,
without in any way modifying or affecting any of the Secured Parties’ rights and
remedies hereunder.

 

18.             Appointment of the Agent. The Secured Parties hereby appoint the
Matthew Goldman to act as their agent (the “Agent”) for purposes of exercising
any and all rights and remedies of the Secured Parties hereunder. Such
appointment shall continue until revoked in writing by a Super Majority in
Interest, at which time a Super Majority in Interest shall appoint a new the
Agent. The Agent shall have the rights, responsibilities and immunities set
forth herein and in Annex B hereto. Upon a written request from the Agent, the
Company shall, within two Trading Days of the delivery of such notice, provide
the Agent with the names of the Secured Parties and the outstanding principal
amount of Notes then held by such Secured Parties. Whenever reference is made in
this Agreement to any action by, consent, designation, specification,
requirement or approval of, notice, request or other communication from, or
other direction given or action to be undertaken or to be (or not to be)
suffered or omitted by the Agent to any amendment, waiver or other modification
of this Agreement to be executed (or not to be executed) by the Agent or to any
election, decision, opinion, acceptance, use of judgment, expression of
satisfaction or other exercise of discretion, rights or remedies to be made (or
not to be made) by the Agent, it is understood that in all cases the Agent shall
be fully justified in failing or refusing to take any such action under this
Agreement as it deems appropriate, if it shall not have received such advice or
concurrence of a Super Majority in Interest. This provision is intended solely
for the benefit of the Agent and its successors and permitted assigns and is not
intended to and will not entitle the other parties hereto to any defense, claim
or counterclaim under or in relation to any Transaction document, or confer any
rights or benefits on any party hereto.

 

19.             Miscellaneous.

 

(a)              No course of dealing between the Company and the Secured
Parties, nor any failure to exercise, nor any delay in exercising, on the part
of the Secured Parties, any right, power or privilege hereunder or under the
Notes shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or thereunder preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.

 

(b)             All of the rights and remedies of the Secured Parties with
respect to the Collateral, whether established hereby or by the Notes or by any
other agreements, instruments or documents or by law shall be cumulative and may
be exercised singly or concurrently.

 

(c)              This Agreement, together with the exhibits and Disclosure
Schedule hereto, contain the entire understanding of the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
oral or written, with respect to such matters, which the parties acknowledge
have been merged into this Agreement and the exhibits and Disclosure Schedule
hereto. No provision of this Agreement may be waived, modified, supplemented or
amended except in a written instrument signed, in the case of an amendment, by
the Company and the Secured Parties holding 67% or more of the principal amount
of Notes then outstanding, or, in the case of a waiver, by the party against
whom enforcement of any such waived provision is sought.

 

16

 

(d)             If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their commercially reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.

 

(e)              No waiver of any default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing
waiver in the future or a waiver of any subsequent default or a waiver of any
other provision, condition or requirement hereof, nor shall any delay or
omission of any party to exercise any right hereunder in any manner impair the
exercise of any such right.

 

(f)              This Agreement shall be binding upon and inure to the benefit
of the parties and their successors and permitted assigns. The Company may not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of each Secured Party (other than by merger). Any Secured Party
may assign any or all of its rights under this Agreement to any Person (as
defined in the Purchase Agreement) to whom such Secured Party assigns or
transfers any Obligations, provided such transferee agrees in writing to be
bound, with respect to the transferred Obligations, by the provisions of this
Agreement that apply to the “Secured Parties.”

 

(g)             Each party shall take such further action and execute and
deliver such further documents as may be necessary or appropriate in order to
carry out the provisions and purposes of this Agreement.

 

(h)             Except to the extent mandatorily governed by the jurisdiction or
situs where the Collateral is located, all questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by and construed and enforced in accordance with the internal laws
of the State of California, without regard to the principles of conflicts of law
thereof. Except to the extent mandatorily governed by the jurisdiction or situs
where the Collateral is located, the Company agrees that all proceedings
concerning the interpretations, enforcement and defense of the transactions
contemplated by this Agreement and the Notes (whether brought against a party
hereto or its respective affiliates, directors, officers, shareholders,
partners, members, employees or agents) shall be commenced exclusively in the
state and federal courts sitting in Orange County, California. Except to the
extent mandatorily governed by the jurisdiction or situs where the Collateral is
located, the Company hereby irrevocably submits to the exclusive jurisdiction of
the state and federal courts sitting in Orange County, California for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such proceeding
is improper. Each party hereto hereby irrevocably waives personal service of
process and consents to process being served in any such proceeding by mailing a
copy thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law. Each party hereto hereby irrevocably waives, to the fullest extent
permitted by applicable law, any and all right to trial by jury in any legal
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.

 

17

 

(i)               This Agreement may be executed in any number of counterparts,
each of which when so executed shall be deemed to be an original and, all of
which taken together shall constitute one and the same Agreement. In the event
that any signature is delivered by facsimile transmission, such signature shall
create a valid binding obligation of the party executing (or on whose behalf
such signature is executed) the same with the same force and effect as if such
facsimile signature were the original thereof.

 

(j)               The Company shall indemnify, reimburse and hold harmless the
Agent and the Secured Parties and their respective partners, members,
shareholders, officers, directors, employees and agents (and any other persons
with other titles that have similar functions) (collectively, “Indemnitees”)
from and against any and all losses, claims, liabilities, damages, penalties,
suits, costs and expenses, of any kind or nature, (including fees relating to
the cost of investigating and defending any of the foregoing) imposed on,
incurred by or asserted against such Indemnitee in any way related to or arising
from or alleged to arise from this Agreement or the Collateral, except any such
losses, claims, liabilities, damages, penalties, suits, costs and expenses which
result from the gross negligence or willful misconduct of the Indemnitee as
determined by a final, nonappealable decision of a court of competent
jurisdiction. This indemnification provision is in addition to, and not in
limitation of, any other indemnification provision in the Notes, Annex B, the
Purchase Agreement (as such term is defined in the Notes) or any other
agreement, instrument or other document executed or delivered in connection
herewith or therewith.

 

(k)             Nothing in this Agreement shall be construed to subject the
Agent or any Secured Party to liability as an officer or director of the Company
or a partner in any of the Company’s direct or indirect subsidiaries that is a
partnership or as a member in any of the Company direct or indirect subsidiaries
that is a limited liability company, nor shall the Agent or any Secured Party be
deemed to have assumed any obligations under any partnership agreement or
limited liability company agreement, as applicable, of any the Company or any of
its direct or indirect subsidiaries or otherwise, unless and until any such
Secured Party exercises its right to be substituted for the Company as a partner
or member, as applicable, pursuant hereto.

 

(l)               To the extent that the grant of the security interest in the
Collateral and the enforcement of the terms hereof require the consent, approval
or action of any partner or member, as applicable, of the Company or any direct
or indirect subsidiary of the Company or compliance with any provisions of any
of the Organizational Documents, the Company hereby grants such consent and
approval and waive any such noncompliance with the terms of said documents.

 

(m)           The Company and each Secured Party is subject to the requirements
of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26,
2001)) (the "Patriot Act") and the Agent (for itself and not on behalf of any
Secured Party), hereby notifies all future Secured Parties, including subsequent
assignees or transferees, that pursuant to the requirements of the Patriot Act,
it is required to obtain, verify and record information that identifies the
Secured Party, which information includes the name and address of the Secured
Party and other information that will allow the Agent, to identify the Secured
Party in accordance with the Patriot Act. The Secured Parties shall provide such
information and take such actions as are requested by the Agent in order to
maintain compliance with the Patriot Act.

 

(n)             In no event shall the Agent be responsible or liable for any
failure or delay in the performance of its obligations hereunder directly or
indirectly caused by events beyond its control, including general labor
disputes, acts of war or terrorism, civil or military disturbances, nuclear or
natural catastrophes or acts of God, and interruptions, losses or malfunctions
of utilities, communications or computer (software and hardware) services,
provided that lack of funds or other financial circumstances and labor disputes
only by the personnel of the affected party shall not constitute an event beyond
its control hereunder and provided, further, that the Agent, as the case may be,
shall use reasonable efforts which are consistent with accepted practices in the
banking industry to resume performances as soon as practicable under the
circumstances.

 

 

 

[SIGNATURE PAGES FOLLOW]

 

18

 

IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be
duly executed on the dates set forth below.

 

 

 

COMPANY BALQON CORPORATION   By: /s/ Balwinder Samra                   Balwinder
Samra,        Chief Executive Officer       Dated: May 18, 2012       Address:
1420 240th Street, Harbor City, CA 90710  
                  ____________________   Facsimile: (310) 326-3058   Email:
bsamra@balqon.com AGENT MATTHEW GOLDMAN _________________________   Dated:
____________________   Address: __________________  
                 __________________   Facsimile: __________________   Email:
_____________________

 

 

 

 

19

 

[SIGNATURE PAGE OF SECURED PARTIES TO SECURITY AGREEMENT]

 

 

 

 

 

Name of Secured
Party:                                                                                                                        _____

 

Signature of Secured Party (or Authorized Signatory if an
entity):                                                       

 

Name of Authorized Signatory (if an
entity):                                                                                           

 

Title of Authorized Signatory (if an
entity):                                                                                            

 

Address of Secured
Party:                    _________________________________________    

 

Email Address of Secured
Party:                        ____________________________________

 

Facsimile Number of Secured
Party:                        __________________________________

 

Dated:                                                                                                                                                            

 

 

 

[SIGNATURE PAGE OF SECURED PARTIES FOLLOWS]

 

 

 

20

 

ANNEX A
to
SECURITY
AGREEMENT

 

FORM OF ADDITIONAL OBLIGOR JOINDER

 

Security Agreement dated as of May 18, 2012 made by
Balqon Corporation
to and in favor of
the Secured Parties identified therein (the “Security Agreement”)

 

Reference is made to the Security Agreement as defined above; capitalized terms
used herein and not otherwise defined herein shall have the meanings given to
such terms in, or by reference in, the Security Agreement.

 

The undersigned hereby agrees that upon delivery of this Additional Obligor
Joinder to the Secured Parties referred to above, the undersigned shall (a) be
an Additional Obligor under the Security Agreement, (b) have all the rights and
obligations of the Company under the Security Agreement as fully and to the same
extent as if the undersigned was an original signatory thereto and (c) be deemed
to have made the representations and warranties set forth therein as of the date
of execution and delivery of this Additional Obligor Joinder. WITHOUT LIMITING
THE GENERALITY OF THE FOREGOING, THE UNDERSIGNED SPECIFICALLY GRANTS TO THE
SECURED PARTIES A SECURITY INTEREST IN THE COLLATERAL AS MORE FULLY SET FORTH IN
THE SECURITY AGREEMENT AND ACKNOWLEDGES AND AGREES TO THE WAIVER OF JURY TRIAL
PROVISIONS SET FORTH THEREIN.

 

Attached hereto are supplemental and/or replacement Disclosure Schedule to the
Security Agreement, as applicable.

 

An executed copy of this Additional Obligor Joinder shall be delivered to the
Secured Parties and the Agent, and the Secured Parties and the Agent may rely on
the matters set forth herein on or after the date hereof. This Additional
Obligor Joinder shall not be modified, amended or terminated without the prior
written consent of the Secured Parties.

 

A-1

 

IN WITNESS WHEREOF, the undersigned has caused this Additional Obligor Joinder
to be executed in the name and on behalf of the undersigned.

 

 

 

  [Name of Additional Obligor]       By:____________________       Name:  
Title:       Dated:______________________   Address:_____________________
                _____________________   Facsimile:_____________________  
Email:________________________

 

 

 

 

A-2

 

ANNEX B
to
SECURITY
AGREEMENT

 

THE AGENT

 

1.        Appointment. The Secured Parties (all capitalized terms used herein
and not otherwise defined shall have the respective meanings provided in the
Security Agreement to which this Annex B is attached (the “Agreement”)), by
their acceptance of the benefits of the Agreement, hereby designate Matthew
Goldman (“the Agent”) as the Agent to act as specified herein and in the
Agreement. Each Secured Party shall be deemed irrevocably to authorize the Agent
to take such action on its behalf under the provisions of the Agreement and to
exercise such powers and to perform such duties hereunder and thereunder as are
specifically delegated to or required of the Agent by the terms hereof and
thereof and such other powers as are reasonably incidental thereto. The Agent
may perform any of its duties hereunder by or through its agents or employees at
the expense of the Company as set forth in the Agreement.

 

2.        Nature of Duties. The Agent shall have no duties or responsibilities
except those expressly set forth in the Agreement. Neither the Agent nor any of
its partners, members, shareholders, officers, directors, employees or agents
shall be liable for any action taken or omitted by it as such under the
Agreement or hereunder or in connection herewith or therewith, be responsible
for the consequence of any oversight or error of judgment or answerable for any
loss, unless caused solely by its or their gross negligence or willful
misconduct as determined by a final judgment (not subject to further appeal) of
a court of competent jurisdiction. The duties of the Agent shall be mechanical
and administrative in nature; the Agent shall not have by reason of the
Agreement or any other Transaction Document a fiduciary relationship in respect
of the Company or any Secured Party; and nothing in the Agreement or any other
Transaction Document, expressed or implied, is intended to or shall be so
construed as to impose upon the Agent any obligations in respect of the
Agreement or any other Transaction Document except as expressly set forth herein
and therein.

 

3.        Lack of Reliance on the Agent. Independently and without reliance upon
the Agent, each Secured Party, to the extent it deems appropriate, has made and
shall continue to make (i) its own independent investigation of the financial
condition and affairs of the Company and its subsidiaries in connection with
such Secured Party’s investment in the Company, the creation and continuance of
the Obligations, the transactions contemplated by the Transaction Documents, and
the taking or not taking of any action in connection therewith, and (ii) its own
appraisal of the creditworthiness of the Company and its subsidiaries, and of
the value of the Collateral from time to time, and the Agent shall have no duty
or responsibility, either initially or on a continuing basis, to provide any
Secured Party with any credit, market or other information with respect thereto,
whether coming into its possession before any Obligations are incurred or at any
time or times thereafter. The Agent shall not be responsible to the Company or
any Secured Party for any recitals, statements, information, financial
statements, representations or warranties herein or in any document, certificate
or other writing delivered in connection herewith, or for the execution,
effectiveness, genuineness, validity, enforceability, perfection,
collectability, priority or sufficiency of the Agreement or any other
Transaction Document or any contracts or insurance policies, or for the
financial condition of the Company or the value of any of the Collateral, or be
required to make any inquiry concerning either the performance or observance of
any of the terms, provisions or conditions of the Agreement or any other
Transaction Document, or the financial condition of the Company, or the value of
any of the Collateral, or the existence or possible existence of any default or
Event of Default under the Agreement, the Notes or any of the other Transaction
Documents.

 

B-1

 

4.        Certain Rights of the Agent. The Agent shall have the right to take
any action with respect to the Collateral, on behalf of all of the Secured
Parties upon the written direction of a Super Majority in Interest. Whenever
reference is made in this Agreement to any action by, consent, designation,
specification, requirement or approval of, notice, request or other
communication from, or other direction given or action to be undertaken or to be
(or not to be) suffered or omitted by the Agent to any amendment, waiver or
other modification of this Agreement to be executed (or not to be executed) by
the Agent or to any election, decision, opinion, acceptance, use of judgment,
expression of satisfaction or other exercise of discretion, rights or remedies
to be made (or not to be made) by the Agent, it is understood that in all cases
the Agent shall be fully justified in failing or refusing to take any such
action under this Agreement as it deems appropriate, if it shall not have
received such advice or concurrence of a Super Majority in Interest. This
provision is intended solely for the benefit of the Agent and its successors and
permitted assigns and is not intended to and will not entitle the other parties
hereto to any defense, claim or counterclaim under or in relation to any
Transaction document, or confer any rights or benefits on any party hereto. If
such instructions are not provided despite the Agent’s request therefor, the
Agent shall be entitled to refrain from such act or taking such action, and if
such action is taken, shall be entitled to appropriate indemnification from the
Secured Parties in respect of actions to be taken by the Agent; and the Agent
shall not incur liability to any person or entity by reason of so refraining.
Without limiting the foregoing, (a) no Secured Party shall have any right of
action whatsoever against the Agent as a result of the Agent acting or
refraining from acting hereunder in accordance with the terms of the Agreement
or any other Transaction Document, and the Company shall have no right to
question or challenge the authority of, or the instructions given to, the Agent
pursuant to the foregoing and (b) the Agent shall not be required to take any
action which the Agent believes (i) could reasonably be expected to expose it to
personal liability, or (ii) require it to expend or risk its own funds, or
(iii) is contrary to this Agreement, the Transaction Documents or applicable
law.

 

5.        Reliance. The Agent shall be entitled to conclusively rely, and shall
be fully protected in relying, upon any writing, facsimile, resolution, notice,
statement, certificate, telex, teletype or telecopier message, cablegram,
radiogram, order or other document or telephone message signed, sent or made by
the proper person or entity, and, with respect to all legal matters pertaining
to the Agreement and the other Transaction Documents and its duties thereunder,
upon advice of counsel selected by it and upon all other matters pertaining to
this Agreement and the other Transaction Documents and its duties thereunder,
upon advice of other experts selected by it. Anything to the contrary
notwithstanding, the Agent shall have no obligation whatsoever to any Secured
Party to assure that the Collateral exists or is owned by the Company or is
cared for, protected or insured or that the liens granted pursuant to the
Agreement have been properly or sufficiently or lawfully created, perfected, or
enforced or are entitled to any particular priority.

 

6.        Indemnification. To the extent that the Agent is not reimbursed and
indemnified by the Company, the Secured Parties will jointly and severally
reimburse and indemnify the Agent, in proportion to the outstanding amount of
their respective principal amounts of Notes at the time of determination, from
and against any and all claims, liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by or asserted
against the Agent in performing its duties hereunder or under the Agreement or
any other Transaction Document, or in any way relating to or arising out of the
Agreement or any other Transaction Document except for those determined by a
final judgment (not subject to further appeal) of a court of competent
jurisdiction to have resulted solely from the Agent’s own gross negligence or
willful misconduct. Prior to taking any action hereunder as the Agent, the Agent
may require each Secured Party to deposit with it sufficient sums as it
determines in good faith is necessary to protect the Agent for costs and
expenses associated with taking such action. The provisions of this Section 6
shall survive the termination of the Agreement and the resignation or removal of
the Agent.

 

B-2

 

 

 

7.        Resignation by the Agent.

 

(a)        The Agent may resign from the performance of all its functions and
duties under the Agreement and the other Transaction Documents at any time by
giving 30 days’ prior written notice (pursuant to Section 16 of the Agreement)
to the Company and the Secured Parties. Such resignation shall take effect upon
the appointment of a successor the Agent pursuant to clauses (b) and (c) below.

 

(b)        Upon any such notice of resignation, the Secured Parties, acting by a
Super Majority in Interest, shall appoint a successor the Agent hereunder.

 

(c)        If a successor the Agent shall not have been so appointed within said
30-day period, the Agent shall then appoint a successor the Agent who shall
serve as the Agent until such time, if any, as the Secured Parties appoint a
successor the Agent as provided above. If a successor the Agent has not been
appointed within such 30-day period, the Agent may petition any court of
competent jurisdiction or may interplead the Company and the Secured Parties in
a proceeding for the appointment of a successor the Agent, and all fees,
including, but not limited to, extraordinary fees associated with the filing of
interpleader and expenses associated therewith, shall be payable by the Company
on demand.

 

8.        Rights with respect to Collateral. Each Secured Party agrees with all
other Secured Parties and the Agent (i) that it shall not, and shall not attempt
to, exercise any rights with respect to its security interest in the Collateral,
whether pursuant to any other agreement or otherwise (other than pursuant to
this Agreement), or take or institute any action against the Agent or any of the
other Secured Parties in respect of the Collateral or its rights hereunder
(other than any such action arising from the breach of this Agreement) and (ii)
that such Secured Party has no other rights with respect to the Collateral other
than as set forth in this Agreement and the other Transaction Documents. Upon
the acceptance of any appointment as the Agent hereunder by a successor the
Agent, such successor the Agent shall thereupon succeed to and become vested
with all the rights, powers, privileges and duties of the retiring the Agent and
the retiring the Agent shall be discharged from its duties and obligations under
the Agreement. After any retiring the Agent’s resignation or removal hereunder
as the Agent, the provisions of the Agreement including this Annex B shall inure
to its benefit as to any actions taken or omitted to be taken by it while it was
the Agent.

 

9.        Notices. Any and all notices or other communications or deliveries
shall be made pursuant to Section 16 of the Agreement.

 

B-3

 

ANNEX C
to
SECURITY
AGREEMENT

 

INTELLECTUAL PROPERTY SECURITY AGREEMENT

 

This INTELLECTUAL PROPERTY SECURITY AGREEMENT (“IP Security Agreement”), dated
as of _________, _____, is made by BALQON CORPORATION, a Nevada corporation
(“Grantor”) in favor of Matt Goldman (“Collateral Agent”), as collateral agent
for the holders (the “Secured Parties”) of the Company’s 10% Secured
Subordinated Convertible Notes due March 31, 2013 (the “Notes”).

 

1.               R E C I T A L S

 

A. The Secured Parties have entered into the Notes with Grantor.

 

B. As a condition precedent to the making of loans by the Secured Parties under
the Notes, Grantor has executed and delivered that certain Security Agreement
dated as of the same day herewith, made by and among Grantor and the Secured
Parties (the “Security Agreement”).

 

C. Under the terms of the Security Agreement, Grantor has granted to Collateral
Agent, for the benefit of the Secured Parties, a security interest in, among
other property, certain intellectual property of Grantor, and has agreed to
execute and deliver this IP Security Agreement, for recording with national,
federal and state government authorities including but not limited to, with
respect to individual patents, registered trademarks and registered copyrights,
and applications for the foregoing, recording with the United States Patent and
Trademark Office and the United States Copyright Office.

 

2.               A G R E E M E N T

 

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Grantor agrees as follows:

 

1.                Grant of Security. Grantor hereby grants to Collateral Agent
for the benefit of the Secured Parties a security interest in all of Grantor's
right, title and interest in and to the following (the “IP Collateral”):

 

(a)              All copyrights arising under the laws of the United States, any
other country or any political subdivision thereof, whether registered or
unregistered and whether published or unpublished, all registrations and
recordings thereof, and all applications in connection therewith, including,
without limitation, all registrations, recordings and applications in the United
States Copyright Office;

 

C-1

 

(b)             All letters patent of the United States, any other country or
any political subdivision thereof, all reissues and extensions thereof, and all
applications for letters patent of the United States or any other country and
all divisions, continuations and continuations-in-part thereof;

 

(c)              All trademarks, common law trademarks, trade names, corporate
names, company names, business names, fictitious business names, trade dress,
service marks, logos, domain names and other source or business identifiers, and
all goodwill associated therewith, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all applications in
connection therewith, whether in the United States Patent and Trademark Office
or in any similar office or agency of the United States, any State thereof or
any other country or any political subdivision thereof, or otherwise, and all
common law rights related thereto;

 

(d)             All trade secrets arising under the laws of the United States,
any other country or any political subdivision thereof;

 

(e)              All rights to obtain any reissues, renewals or extensions of
the foregoing;

 

(f)              All licenses for any of the foregoing;

 

(g)             All causes of action for infringement of the foregoing;

 

(h)             Any and all royalties, fees, income, payments and other proceeds
now or hereafter due or payable with respect to any and all of the foregoing;
and

 

(i)               Any and all claims, with respect to any of the foregoing, for
damages and injunctive relief for past, present and future infringement,
dilution, misappropriation, violation, misuse, breach or default, with the right
but no obligation to sue for such legal and equitable relief and to collect, or
otherwise recover, any such damages.

 

2.                Recordation. Grantor authorizes the Commissioner for Patents,
the Commissioner for Trademarks and the Register of Copyrights and any other
government officials to record and register this IP Security Agreement upon
request by the Collateral Agent.

 

3.                Loan Documents. This IP Security Agreement has been entered
into pursuant to and in conjunction with the Security Agreement, which is hereby
incorporated by reference. The provisions of the Security Agreement shall
supersede and control over any conflicting or inconsistent provision herein. The
rights and remedies of the Collateral Agent with respect to the IP Collateral
are as provided by the Security Agreement and annexes thereto, and nothing in
this IP Security Agreement shall be deemed to limit such rights and remedies.

 

4.                Execution in Counterparts. This IP Security Agreement may be
executed in counterparts, each of which shall constitute an original, and all of
which when taken together shall constitute one and the same IP Security
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.

 

C-2

 

 

 

5.                Governing Law. This IP Security Agreement shall be governed by
and construed in accordance with the laws of the State of California, without
regard to the principles of conflicts of law thereof.

 

 

 

IN WITNESS WHEREOF, the parties have caused this IP Security Agreement to be
duly executed and delivered by its officers thereunto duly authorized as of the
date first above written.

 

 

 

GRANTOR BALQON CORPORATION, a Nevada corporation       By: ____________________
      Name: ____________________       Its: ____________________     AGREED TO
AND ACCEPTED:       COLLATERAL AGENT ____________________   Matt Goldman

 

 

 

 

C-3

 

 

 

DISCLOSURE SCHEDULE

 

to the

 

SECURITY AGREEMENT

 

by and among

 

BALQON CORPORATION,

 

THE HOLDERS OF BALQON CORPORATION’S 10% SECURED SUBORDINATED CONVERTIBLE NOTES
DUE MARCH 31, 2013,

 

AND

 

THE COLLATERAL AGENT

 

This Disclosure Schedule is hereby delivered by Balqon Corporation, a Nevada
corporation (the “Company”) in accordance with the provisions of that certain
Security Agreement by and among the Company, the holders of the Company’s 10%
Secured Subordinated Convertible Notes due March 31, 2013 and Matthew Goldman,
an individual, as Collateral Agent (the “Agreement”) entered into in connection
with sale of securities pursuant to those certain Securities Purchase Agreements
(“Exchange Agreements”) entered into between the Company and the investors who
purchased the Company’s securities pursuant to the Company’s Confidential
Private Placement Memorandum dated March 21, 2012. Capitalized terms that are
used in this Disclosure Schedule and are not defined shall have the meaning set
forth in the Agreement.

 

Any matter set forth in a section of this Disclosure Schedule with respect to a
particular representation and warranty in the Agreement shall be deemed an
exception to any other representations and warranties in the Agreement to which
it may relate provided the disclosure is in sufficient detail to enable a
reasonable person to identify such other representations and warranties to which
such information is responsive. Failure to provide a cross-reference from one
section of this Disclosure Schedule to other applicable sections of this
Disclosure Schedule shall not, however, in and of itself be deemed a failure to
disclose unless a reasonable person would be unable to determine that the
disclosure contained in such section of this Disclosure Schedule applies to
other representations or warranties contained in the Agreement.

 

Headings have been inserted on the separate sections of this Disclosure Schedule
for convenience of reference only and shall not have the effect of amending or
changing the content or meaning of the section as set forth in the Agreement.

 

This Disclosure Schedule is part of the Agreement and are incorporated by
reference therein.

 

4

 

Section 15(b).

 

Nevada.