Exhibit 10.3

INTERCREDITOR AGREEMENT
 
THIS INTERCREDITOR AGREEMENT (this “Agreement”), dated as of August 7, 2013, by
and among ISC8 Inc., a Delaware corporation (the “Company”), The Griffin Fund,
LP (“Griffin Fund”), John Krieger (“Krieger”), Diamond Millennium, Limited
(“Diamond”), Paragold, LP (“Paragold”), Mr. Simon Williams (“Williams”), and
Fundamental Capital Management (“FCM”). Capitalized terms used herein have the
meanings assigned to them in Section 1, below.
 
WHEREAS, the Company is offering to certain Parties its senior subordinated
secured convertible promissory notes in the aggregate principal amount of up to
$4,875,000, bearing simple interest of 12% per annum and with a maturity date of
January 31, 2014, which notes are part of that same series of notes
(individually, a “July 2013 Note”), as those 12% senior subordinated promissory
notes issued on or after September 27, 2012 to Griffin Fund and its affiliates
and certain other investors (the “Griffin Notes”; collectively, the “July
2013Notes”), and which will be issued subject to the execution and delivery of a
form of subscription agreement (the “Subscription Agreement”) provided by the
Company;
 
WHEREAS, as additional consideration for the purchase of Notes, the Company is
to issue to Parties acquiring the July 2013 Notes (a) shares of its common
stock, par value $0.01 per share (“Common Stock”) having a value equal to 25% of
the principal amount of the Notes purchased by such Subscriber (the “Shares”),
calculated using a per Share value equal to the closing market price of the
Company’s stock but not less than $0.09 per share; and (b) warrants to purchase
up to 17,857,153 shares of Common Stock of the Company at a price of $.001 per
Share, which expires on September 30, 2013 (the “Warrant”);
 
WHEREAS, the July 2013 Notes name Griffin Partners LLC as the representative of
the holders of such notes (the “Griffin Holder Representative”) which notes,
together with those 12% senior subordinated promissory notes issued by the
Company on March 31, 2011 (the “March 2011 Notes”) that are pari-passu with the
July 2013 Notes in priority of claims,  will be secured by and to the extent
provided in that certain Security Agreement dated December 23, 2010, as amended
from time to time (the “Security Agreement”) between the Company and Costa Brava
Partnership III L.P (the “Costa Brava Holder Representative”; in this Agreement,
the Costa Brava Holder Representative and the Griffin Holder Representative are
referred to as the “Holder Representative”) as representative of note holders
pursuant to the terms of that Securities Purchase Agreement also dated December
23, 2010 (the “Prior Notes Securities Purchase Agreement”); and
 
WHEREAS, the Parties have agreed to subscribe to purchase the July 2013 Notes
subject to modifications of the priority of the liens created pursuant to the
Security Agreement, which might otherwise apply, and
 
NOW, THEREFORE, in consideration of the mutual covenants and other agreements
contained in this Agreement the parties hereby agree as follows:
 
ARTICLE 1.
DEFINITIONS AND INTERPRETATION

1.1. Definitions.  The following terms used herein, including in the preamble,
recitals, exhibits and schedules hereto, shall have the following meanings:

(a) “Account Debtor” means any Person who is or may become obligated under or on
account of an Account.

(b) “Affiliate” means, for a specified Person, another Person that directly, or
indirectly through one or more intermediaries, controls or is controlled by or
is under common control with the specified Person. For these purposes, “control”
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise, and “controlled” has a
correlative meaning.

(c) “Bankruptcy Code” means the federal Bankruptcy Code.

 
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(d) “Bankruptcy Law” means the Bankruptcy Code and any similar federal, state,
or foreign bankruptcy, insolvency, receivership, or similar law affecting
creditors’ rights generally.

(e) “Business Day” means a day other than a Saturday, Sunday, or other day on
which commercial banks in the United States are authorized or required by law to
close.

(f) “Controlling Collateral Agent” means (i) until the Discharge of the Senior
Credit Obligations, PFG or any party named as Collateral Agent in the credit
agreement between PFG and the Company; and (ii) from and after the Discharge of
the Senior Credit Obligations, but while any First Lien Obligations are
outstanding, the Griffin Holder Representative named in the July 2013 Notes or
any successor thereto; and (iii) after the Discharge of the First-Lien
Obligations, the Holder Representative or any successor thereto under the
Security Agreement.

(g) “Controlling Secured Parties” means, with respect to Shared Collateral, (i)
PFG while its collateral agent is the Controlling Collateral Agent; and (ii) the
First-Lien Secured Parties at all other times.

(h) “Contracted Class Ratio” means, as of any date of determination when
payments are to be made hereunder or otherwise, a percentage equal to 100 times
the quotient of (1) the then sum of (X) the First Lien Obligations, plus (Y) the
Second Lien Obligations divided by (2) the then sum of (A) the First Lien
Obligations, plus (B) the Second Lien Obligations plus (C) the Non-Contracting
2013

(i) “DIP Financing” means the obtaining of credit or incurring debt secured by
Liens on the Collateral pursuant to section 364 of the Bankruptcy Code (or
similar Bankruptcy Law).

(j)  “Discharge of First Lien Obligations” means

(i) payment in full in cash of the principal of and interest (including interest
accruing on or after the commencement of an Insolvency Proceeding, whether or
not such interest would be allowed in the proceeding) on all outstanding
Indebtedness included in the First Lien Obligations

(ii) payment in full in cash of all other First Lien Obligations that are due
and payable or otherwise accrued and owing at or prior to the time such
principal and interest are paid (other than indemnification Obligations for
which no claim or demand for payment, whether oral or written, has been made at
such time),

(k)  
“Discharge of Second Lien Obligations” means

(i) payment in full in cash of the principal of and interest (including interest
accruing on or after the commencement of an Insolvency Proceeding, whether or
not such interest would be allowed in the proceeding) on all outstanding
Indebtedness included in the Second Lien Obligations, and

(ii) payment in full in cash of all other Second Lien Obligations that are due
and payable or otherwise accrued and owing at or prior to the time such
principal and interest are paid (other than indemnification Obligations for
which no claim or demand for payment, whether oral or written, has been made at
such time).

    (l) “Discharge of the Senior Credit Obligation” means

(i)           payment in full in cash of the principal of and interest
(including interest accruing on or after the commencement of an Insolvency
Proceeding, whether or not such interest would be allowed in the proceeding) on
all outstanding Indebtedness included in the Senior Credit Obligations,

(ii)           payment in full in cash of all other Senior Credit Obligations
that are due and payable or otherwise accrued and owing at or prior to the time
such principal and interest are paid (other than indemnification Obligations for
which no claim or demand for payment, whether oral or written, has been made at
such time).

 
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(m) “Disposition” means an “Asset Sale” (as defined in the Securities Purchase
Agreement), or other sale, lease, exchange, transfer, or other disposition.

(n) “Event of Default” has the meaning assigned to that term in the July 2013
Note.

(o) “First Lien Collateral” means the assets of the Company, whether real,
personal, or mixed, as to which a Lien is granted as security for a First Lien
Obligation pursuant to the First Lien Collateral Documents, which Lien is, at
any time of determination, a valid and perfected Lien that has not been avoided,
disallowed, set aside, invalidated, or subordinated pursuant to Chapter 5 of the
Bankruptcy Code or otherwise.

(p) “First Lien Collateral Documents” means

(i) the Security Agreement, the July 2013 Notes, and the Subscription Agreement;

(ii) each other agreement, document, or instrument providing for, evidencing,
guaranteeing, or securing an Obligation under the July 2013 Notes;

(iii) any other document or instrument executed or delivered at any time in
connection with the Obligations under the July 2013 Notes, including any
guaranty of or grant of Collateral to secure such Obligations, and any
intercreditor or joinder agreement to which holders of First Lien Obligations
are parties;

(q) “First Lien Obligations” means all Obligations, as such term is defined in
the Security Agreement, with respect to the July 2013 Notes; but excluding the
Second Lien Obligations and the Non-Contracting Obligations.

(r) “First-Lien Secured Party” means any holder of the July 2013 Notes except
for holders of notes included in the Second Lien Obligations.

(s) “Governmental Authority” means any federal, state, municipal, national, or
other government, governmental department, commission, board, bureau, court,
agency, or instrumentality, or political subdivision thereof, or any entity or
officer exercising executive, legislative, judicial, regulatory, or
administrative functions of or pertaining to any government or any court, in
each case whether associated with a state of the United States, the United
States, or a foreign entity or government.

(t) “Holder Representative” means (i) with regard to the July 2013 Notes,
Griffin; and (ii) with regard to the Griffin Notes, the party named as such in
the Security Agreement or any successor thereto.

(u) “Indebtedness” means and includes all Obligations that constitute
“Indebtedness” under the First Lien Credit Agreement or the Second Lien Credit
Agreement, as applicable.

(v) “Insolvency Proceeding” means

(i) a voluntary or involuntary case or proceeding under the Bankruptcy Code with
respect to a Grantor,
(ii) any other voluntary or involuntary insolvency, reorganization, or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization,
or other similar case or proceeding with respect to a Grantor or a material
portion of its property,

(iii) a liquidation, dissolution, reorganization, or winding up of a Grantor,
whether voluntary or involuntary and whether or not involving insolvency or
bankruptcy, or

(iv) an assignment for the benefit of creditors or other marshaling of assets
and liabilities of a Grantor.
 
 
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(w)  “Lien” means any lien (including, without limitation, judgment liens and
liens arising by operation of law, subrogation, or otherwise), mortgage or deed
of trust, pledge, hypothecation, assignment, security interest, charge, or
encumbrance of any kind (including any agreement to give any of the foregoing,
any conditional sale or other title retention agreement, and any lease in the
nature thereof), and any option, call, trust, U.C.C. financing statement, or
other preferential arrangement having the practical effect of any of the
foregoing, including any right of set-off or recoupment.

(x) “Non-Contracting 2013 Note Obligations” Means all Obligations, as such term
is defined in the Security Agreement, with respect to the Non-Contracting 2013
Notes.

(y) “Non-Contracting 2013 Notes” means those promissory notes identified in
Schedule D to this Agreement.

(z) “Non-Contracting Class Ratio” means, as of any date of determination when
payments are to be made hereunder or otherwise, a percentage equal to one (1)
minus the Contracted Class Ratio.
(aa) “Obligations” means all obligations of every nature of a Person owed to any
obligee under an agreement, whether for principal, interest, or payments for
early termination, fees, expenses, indemnification, or otherwise, and all
guaranties of any of the foregoing, whether absolute or contingent, due or to
become due, now existing or hereafter arising, and including interest and fees
that accrue after the commencement by or against any Person of any proceeding
under any Bankruptcy Law naming such Person as the debtor in such proceeding,
regardless of whether such interest and fees are allowed claims in such
proceeding.

(bb) “Party” means a party to this Agreement.

(cc) “Person” means any natural person, corporation, limited liability company,
trust, business trust, joint venture, association, company, partnership,
Governmental Authority, or other entity.

(dd)  “Proceeds” means

(i) all “proceeds,” as defined in Article 9 of the U.C.C., of the Collateral,
and

(ii) whatever is recovered when Collateral is sold, exchanged, collected, or
disposed of, whether voluntarily or involuntarily, including any additional or
replacement Collateral provided during any Insolvency Proceeding and any payment
or property received in an Insolvency Proceeding on account of any “secured
claim” (within the meaning of section 506(b) of the Bankruptcy Code or similar
Bankruptcy Law).

(ee) “Second Lien Collateral” means all of the property of the Company, whether
real, personal, or mixed, as to which a Lien is granted as security for a Second
Lien Obligation pursuant to the Second Lien Collateral Documents, which Lien is,
at any time of determination, a valid and perfected Lien that has not been
avoided, disallowed, set aside, invalidated, or subordinated pursuant to Chapter
5 of the Bankruptcy Code or otherwise.

(ff) “Second Lien Collateral Documents” means the Security Agreement, and any
other documents or instruments granting a Lien on real or personal property to
secure a Second Lien Obligation or granting rights or remedies with respect to
such Liens.

(gg) “Second Lien Notes” means those specific July 2013 listed in Schedule A to
this Agreement as well as the entirety of the March 2011 Notes.

(hh) “Second Lien Secured Party” means the holders of the Second Lien Notes.

(ii) “Second Lien Obligation” means all Obligations, as such term is defined in
the Security Agreement, with respect to the Second Lien Notes.

(jj)  “Senior Credit Obligations” means all Obligations, as such term is defined
in the Loan and Security Agreement dated December 14, 2011 between the Company
and Partners For Growth III, LP (“PFG”).
 
 
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(kk) “Senior Priority Note Obligations” means all Obligations, as such term is
defined in the Security Agreement, with respect to the promissory notes listed
in Schedule C.

(ll) “Shared Collateral” means all of the property of the Company, whether real,
personal, or mixed, that is (or is required to be) both First Lien Collateral
and Second Lien Collateral.

(mm) “Transaction Documents” means the July 2013 Notes, the Subscription
Agreement, the Security Agreement and this Agreement.

(nn) “U.C.C.” means the Uniform Commercial Code (or any similar legislation) as
in effect in any applicable jurisdiction.

1.2. Accounting Terms.  Except as otherwise expressly provided herein, all
accounting terms not otherwise defined herein shall have the meanings assigned
to them in conformity with GAAP.  Financial statements and other information
required to be delivered by Borrowers to Lenders pursuant to Section 5.1(a)(i),
5.1(a)(ii) and 5.1(a)(iii) shall be prepared on a cash basis and consistent with
Borrowers’ past practices (and delivered together with the reconciliation
statements provided for in Section 5.1(a)(v), if applicable).  Subject to the
foregoing, calculations in connection with the definitions, covenants and other
provisions hereof shall utilize accounting principles and policies in conformity
with those used to prepare the Historical Financial Statements.

1.3. Interpretation, etc.  Any of the terms defined herein may, unless the
context otherwise requires, be used in the singular or the plural, depending on
the reference.  References herein to any Section, Appendix, Schedule or Exhibit
shall be to a Section, an Appendix, a Schedule or an Exhibit, as the case may
be, hereof unless otherwise specifically provided.  The use herein of the word
“include” or “including”, when following any general statement, term or matter,
shall not be construed to limit such statement, term or matter to the specific
items or matters set forth immediately following such word or to similar items
or matters, whether or not nonlimiting language (such as “without limitation” or
“but not limited to” or words of similar import) is used with reference thereto,
but rather shall be deemed to refer to all other items or matters that fall
within the broadest possible scope of such general statement, term or matter.

ARTICLE 2.
PRIORITY

2.1. Priority of Liens.

(a) A Lien on Collateral securing any First Lien Obligation will at all times be
senior and prior in all respects to a Lien on such Collateral securing any
Second Lien Obligation, and a Lien on Collateral securing any Second Lien
Obligation will at all times be junior and subordinate in all respects to a Lien
on such Collateral securing any First Lien Obligation.

(b) as otherwise expressly provided herein, the priority of the Liens securing
First Lien Obligations and the rights and obligations of the Parties will remain
in full force and effect irrespective of:

(i)  
how a Lien was acquired (whether by grant, possession, statute, operation of
law, subrogation, or otherwise),

(ii)  
 the time, manner, or order of the grant, attachment, or perfection of a Lien,

(iii)  
any conflicting provision of the U.C.C. or other applicable law

(iv)  
any defect in, or non-perfection, setting aside, or avoidance of, a Lien or a
First Lien Loan Document or a Second Lien Loan Document,

(v)  
the modification of a First Lien Obligation or a Second Lien Obligation,

(vi)  
the modification of a First Lien Loan Document or a Second Lien Loan Document,

 
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(vii)  
the subordination of a Lien on Shared Collateral to a Lien securing another
obligation of the Company or other Person that is permitted under the First Lien
Loan Documents as in effect on the date hereof or secures a DIP Financing deemed
consented to by the Second Lien Secured Parties pursuant to this Agreement,

(viii)  
the exchange of a security interest in any collateral for a security interest in
other collateral,

(ix)  
the commencement of an Insolvency Proceeding, or

(x)  
any other circumstance whatsoever, including a circumstance that might be a
defense available to, or a discharge of, the Company in respect of a First Lien
Obligation or a Second Lien Obligation or holder of such Obligation.

2.2. Priority of Payment of Proceeds.

(a) Anything contained herein or in any Transaction Documents to the contrary
notwithstanding, until the Discharge of the First Lien Obligations and the
Discharge of the Second Lien Obligations, if an Event of Default has occurred
and is continuing, and the Controlling Collateral Agent or any Party is taking
action or has taken action to enforce rights in respect of any Shared Collateral
or any distribution is made in respect of any Shared Collateral in any
Insolvency or Liquidation Proceeding of any Borrower, or any Party receives any
payment, including pursuant to any intercreditor agreement (other than this
Agreement) with respect to any Shared Collateral, the proceeds of any sale,
collection or other liquidation of any such Shared Collateral by the Controlling
Collateral Agent or any Party or received by the Controlling Collateral Agent or
any Party and proceeds of any such distribution (subject, in the case of any
such distribution, to the sentence immediately following)(all proceeds of any
sale, collection or other liquidation of any such Shared Collateral and all
proceeds of any such distribution being collectively referred to as “Proceeds”)
shall be applied in the following order of priority:

(i) FIRST to the payment of all fees and expenses owing to the Controlling
Collateral Agent pursuant to the terms of the Security Agreement;

(ii) SECOND, to the payment in full of the Senior Credit Obligations;

(iii) NEXT, to pay in full the Senior Priority Note Obligations, on a pari passu
basis ratably in proportion to the aggregate amount of the Senior Priority Note
Obligations then outstanding;

(iv) NEXT, to pay each of the First Lien Obligations (subject to Section 2.6)
and the Non-Contracting 2013 Note Obligations on a pari passu basis as follows:
(1) to the First Lien Obligations, an amount equal to the Non-Contracting Class
Ratio of proceeds, until such item as the First Lien Obligations have been paid
in full in cash.

(v) NEXT, to pay paid each of the Second Lien Obligations and to the
Non-Contracting 2013 Note obligations on a pari passu basis as follows: (1) to
the Second Lien Obligations, an amount equal to the Contracted Class Ratio of
proceeds and (2) to the Non-Contracting 2013 Obligations an amount equal to the
Non-Contracting Class Ratio of proceeds, until such time as both the Second Lien
Obligations or the Non-Contracting 2013 Note Obligations are paid in full in
cash, with the remainder going to pay any unpaid Obligations under this Section
2.2(a)(v);

(vi) NEXT, to any other promissory notes outstanding, due and payable;

 
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(vii) NEXT, after payment and Discharge of all Senior Priority Note Obligations,
First Lien Note Obligations and Second Lien Obligations, and any other
promissory notes outstanding, due and payable, to the Company or to its
successors or assigns, as its interests may appear, or to whomsoever may be
lawfully entitled to receive the same, or as a court of competent jurisdiction
may direct.

With respect to any Shared Collateral for which a third party (other than a
First-Lien Secured Party or a Second-Lien Secured Party) has a lien or security
interest that is junior in priority to the security interest of any First-Lien
Obligations but senior (as determined by appropriate legal proceedings in the
case of a dispute) to the security interest of any Second-Lien Obligations (such
third party, an “Intervening Creditor”), the value of any Shared Collateral or
Proceeds allocated to such Intervening Creditor shall be deducted on a pro rata,
pari passu basis from the Shared Collateral or Proceeds to be distributed in
respect of the First-Lien Obligations and the Second-Lien Obligations.

(b) Notwithstanding the date, time, method, manner or order of grant, attachment
or perfection of any Liens securing any First-Lien Obligations granted on the
Shared Collateral and notwithstanding any provision of the Uniform Commercial
Code of any jurisdiction, or any other applicable law or the Secured Credit
Documents or any defect or deficiencies in the Liens securing the First-Lien
Obligations or any other circumstance whatsoever, each First-Lien Secured Party
hereby agrees that the Liens securing each of the First Lien Obligations on any
Shared Collateral shall be of equal priority.

(c) Notwithstanding the date, time, method, manner or order of grant, attachment
or perfection of any Liens securing any Second-Lien Obligations granted on the
Shared Collateral and notwithstanding any provision of the Uniform Commercial
Code of any jurisdiction, or any other applicable law or the Secured Credit
Documents or any defect or deficiencies in the Liens securing the Second-Lien
Obligations or any other circumstance whatsoever, each Second-Lien Secured Party
hereby agrees that the Liens securing each Second Lien Obligation on any Shared
Collateral shall be of equal priority.

2.3.  
 Actions with Respect to Shared Collateral.

(a) Only the Controlling Collateral Agent shall have the right to act or refrain
from acting, if it so chooses, with respect to any Shared Collateral (including
with respect to any intercreditor agreement with respect to any Shared
Collateral). No First-Lien Secured Party or Second Lien Secured Party shall
instruct any Collateral Agent to commence any judicial or nonjudicial
foreclosure proceedings with respect to, seek to have a trustee, receiver,
liquidator or similar official appointed for or over, attempt any action to take
possession of, exercise any right, remedy or power with respect to, or otherwise
take any action to enforce its security interest in or realize upon or take any
other action available to it in respect of any Shared Collateral. The First-Lien
Secured Parties and the Second Lien Secured Parties shall not, without prior
consent of the Controlling Collateral Agent (a) commence any Insolvency or
Liquidation Proceeding against the Company; (b) institute any proceedings to
have the Company adjudicated a bankrupt or insolvent; (c) consent to, acquiesce
in or support in any way whatsoever the institution of an Insolvency or
Liquidation Proceeding against the Company; (d) file, consent to or support in
any way whatsoever the filing of a petition seeking reorganization,
restructuring, arrangement, adjustment winding-up, dissolution, composition,
liquidation or other relief under any Bankruptcy Law by or on behalf of any
Borrower; (e) make an assignment for the benefit of any creditor of the Company;
(f) seek to consolidate the Shared Collateral or any other assets of the Company
with the assets of any affiliate of the Company in an Insolvency or Liquidation
Proceeding; or (g) take any action in furtherance of any of the foregoing.

(b) Notwithstanding the equal priority of the Liens securing each of the
First-Lien Obligations, the Controlling Collateral Agent may deal with the
Shared Collateral as if such Controlling Collateral Agent had a senior Lien on
such Collateral. No Party will contest, protest or object to any foreclosure
proceeding or action brought by the Controlling Collateral Agent or a
Controlling Secured Party or any other exercise by the Controlling Collateral
Agent or a Controlling Secured Party of any rights and remedies relating to the
Shared Collateral, or cause the Controlling Collateral Agent to do so. The
foregoing shall not be construed to limit the rights and priorities of any
First-Lien Secured Party, the Controlling Collateral Agent or any Party with
respect to any Collateral not constituting Shared Collateral.

 
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(c) Each of the First-Lien Secured Parties and each of the Second-Lien Secured
Parties agrees that (i) it will not (and hereby waives any right to) challenge,
question, contest, encourage or support any other Person in challenging,
questioning or contesting, in any proceeding (including any Insolvency or
Liquidation Proceeding) the perfection, priority, validity, attachment or
enforceability of a Lien held by or on behalf of any of the other First-Lien
Parties or Second-Lien Parties in all or any part of the Collateral, or the
provisions of this Agreement;  provided that nothing in this Agreement shall be
construed to prevent or impair the rights of any Collateral Agent to enforce
this Agreement.

2.4.  
No Interference; Payment of Collateral or Proceeds.

(a) Reserved.

(b) Each First-Lien Secured Party and Each Second-Lien Secured Party that
obtains possession of any Shared collateral, or that realizes any proceeds or
payment in respect of any Shared Collateral, including pursuant to any
applicable security document or by the exercise of any rights available to it
under applicable law or in any Insolvency or Liquidation Proceeding, or through
any other exercise of remedies (including pursuant to any intercreditor
agreement), at any time prior to the Discharge of the First-Lien Obligations,
shall hold such Shared Collateral, proceeds or payments in trust for the other
First-Lien Secured Parties and Second Lien Secured Parties and promptly transfer
such Shared Collateral, proceeds or payment to the Controlling Collateral Agent
to be distributed in accordance with the provisions of this Agreement.

2.5. Automatic Release of Liens. If at any time the Controlling Collateral Agent
forecloses upon or otherwise exercises remedies against any Shared Collateral
resulting in a sale or disposition thereof, then (whether or not any Insolvency
or Liquidation Proceeding is pending at the time) the Liens in favor of each
other Collateral Agent for the benefit of First Lien Secured Parties or of
Second Lien Secured Parties upon such Shared Collateral will automatically be
released and discharged as and when but only to the extent such Liens of the
Controlling Collateral Agent on such Shared Collateral are released and
discharged; provided that any proceeds of any Shared Collateral realized
therefrom shall be applied pursuant to this Section 2. Each Collateral Agent and
authorized representative agrees to execute and deliver (at the Company’s cost
and expense) all such authorizations and instruments as may reasonably be
requested by any party hereto.

2.6. Subordination of Certain first Lien Obligations to Certain Other First Lien
Obligations.  Proceeds shall be apportioned to certain Obligations held by
Diamond Millennium, Limited and its affiliates prior and in preference to other
First Alien Obligations, in accordance with Schedule E.

ARTICLE 3.
Certain Agreements with Respect to Bankruptcy or Insolvency Proceedings.

3.1. Bankruptcy and Insolvency Generally.

(a) This Agreement shall continue in full force and effect notwithstanding the
commencement of any proceeding under the Bankruptcy Code or any other Federal,
state or foreign bankruptcy, insolvency, receivership or similar law by or
against the Company.

(b) Nothing in this Article 3 limits a First Lien Secured Party from objecting
to an Insolvency Proceeding or otherwise to any action taken by a Second Lien
Secured Party.

(c) The Parties acknowledge that this Agreement is a “subordination agreement”
under section 510(a) of the Bankruptcy Code, which will be effective before,
during, and after the commencement of an Insolvency Proceeding. All references
in this Agreement to the Company will include such Person as a
debtor-in-possession and any receiver or trustee for the Company in an
Insolvency Proceeding.

3.2.  
Use of Cash Collateral and DIP Financing

(a) Until the Discharge of First Lien Obligations, the Second Lien Secured
Parties, or any Holder Representative acting on their behalf as holder of a Lien
on the Collateral, will not contest, protest, or object to, and each Second Lien
Secured Party will be deemed to have consented to:

 
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(i) any use, sale, or lease of “cash collateral” (as defined in section 363(a)
of the Bankruptcy Code), and

(ii) the Company obtaining DIP Financing if the First Lien Secured
Parties  consent in writing to such use, sale, or lease, or DIP Financing,
provided that:

(A) the Second Lien Secured Parties otherwise retains their Lien on the Shared
Collateral,

(B) any Second Lien Secured Party may seek adequate protection as permitted
below ( “Adequate Protection”), and, if such adequate protection is not granted,
the Second Lien Secured Parties may object under this section solely on such
basis

(C) such DIP Financing and the Liens securing such DIP Financing are pari passu
with or superior in priority to the then outstanding First Lien Obligations and
the Liens securing such First Lien Obligations, and

(D) the interest rate, fees, advance rates, lending limits, and sublimits are
commercially reasonable under the circumstances.

(b)   Nothing in this section 2.5 limits or impairs the right of Second Lien
Secured Parties to object to any motion regarding DIP Financing (including a DIP
Financing proposed by one or more First Lien Secured Party) or cash collateral
to the extent that:

(i) the objection could be asserted in an Insolvency Proceeding by unsecured
creditors generally, or

(ii)  
the DIP Financing does not meet the requirements this Section 2.

3.3. Sale of Collateral.  The Second Lien Secured Parties will not contest,
protest, or object, and will be deemed to have consented pursuant to section
363(f) of the Bankruptcy Code, to a Disposition of Collateral free and clear of
its Liens or other interests under section 363 of the Bankruptcy Code if the
First Lien Secured Parties in writing to the Disposition, provided that:

(a) either (i) pursuant to court order, the Liens of Second Lien Secured parties
attach to the net Proceeds of the Disposition with the same priority and
validity as the Liens held by the Second Lien Secured Parties on such
Collateral, and the Liens remain subject to the terms of this Agreement, or (ii)
the Proceeds of a Disposition of Collateral received by First Lien Secured
Parties in excess of those necessary to achieve the Discharge of First Lien
Obligations are distributed in accordance with the U.C.C. and applicable law.

(b)  the net cash Proceeds of the Disposition that are applied to First Lien
Obligations permanently reduce the First Lien Obligations pursuant to section
2.1, and

(c) The Second Lien Secured Parties are not deemed to have waived any rights to
credit bid on the Collateral in any such Disposition in accordance with section
363(k) of the Bankruptcy Code.

(d) Notwithstanding the preceding sentence, Second Lien Secured Parties may
object to any Disposition of Collateral that could be raised in an Insolvency
Proceeding by unsecured creditors generally so long as not otherwise
inconsistent with the terms of this Agreement.

3.4. Relief from the Automatic Stay.  Until the Discharge of the First Lien
Obligations, no Second Lien Secured Party may seek relief from the automatic
stay or any other stay in any Insolvency Proceeding in respect of the Shared
Collateral, or oppose any request by or on behalf of any First Lien Secured
Party for relief from the automatic stay, without the First Lien Secured
Parties’ prior written consent, unless such a request by or on behalf of a First
Lien Secured Party has been denied by the Bankruptcy Court.
 
 
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3.5. Adequate Protection.
 
(a) No Second Lien Secured Party will contest, protest, or object to a request
by a First Lien Secured Party for “adequate protection” under any Bankruptcy
Law, or an objection by a First Lien Secured Party to a motion, relief, action,
or proceeding based on a First Lien Secured Party claiming a lack of adequate
protection.

(b) Notwithstanding the preceding section 3.5(a), in an Insolvency Proceeding:

(i) Except as permitted in this section, no Second Lien Secured Party may seek
or request adequate protection or relief from the automatic stay imposed by
section 362 of the Bankruptcy Code.

(ii) If a First Lien Claimholder is granted adequate protection in the form of
additional or replacement Collateral in connection with a motion described in
section 3.2, “Use of Cash Collateral and DIP Financing,” then a Second Lien
Secured Party may seek or request adequate protection in the form of a Lien on
additional or replacement Collateral, which Lien will be subordinated to the
Liens securing the First Lien Obligations and any DIP Financing (and all related
Obligations) on the same basis as the other Liens securing the Second Lien
Obligations are subordinated to the Liens securing First Lien Obligations under
this Agreement.

(c) Any claim by a Second Lien Secured Party under section 507(b) of the
Bankruptcy Code will be subordinate in right of payment to any claim of First
Lien Secured Party under section 507(b) of the Bankruptcy Code and any payment
thereof will be deemed to be Proceeds.

3.6. Reorganization Securities. Nothing in this Agreement prohibits or limits
the right of a Second Lien Secured Party to receive and retain any debt or
equity securities that are issued by a reorganized debtor pursuant to a plan of
reorganization or similar dispositive restructuring plan in connection with an
Insolvency Proceeding[, provided that any debt securities received by a Second
Lien Secured Party on account of a Second Lien Obligation that constitutes a
“secured claim” within the meaning of section 506(b) of the Bankruptcy Code will
be paid over or otherwise transferred to an agent for application in accordance
with Article 2,  “Priority,” unless such distribution is made under a plan that
is consented to by the affirmative vote of all classes composed of the secured
claims of First Lien Secured Parties. If, in an Insolvency Proceeding, debt
Obligations of the reorganized debtor secured by Liens upon any property of the
reorganized debtor are distributed pursuant to a plan of reorganization or
similar dispositive restructuring plan, both on account of First Lien
Obligations and on account of Second Lien Obligations, then, to the extent the
debt Obligations distributed on account of the First Lien Obligations and on
account of the Second Lien Obligations are secured by Liens upon the same
property, the provisions of this Agreement will survive the distribution of such
debt Obligations pursuant to such plan and will apply with like effect to the
Liens securing such debt Obligations

3.7. Post-Petition Claims.

(a) No Second Lien Secured Party may oppose or seek to challenge any claim by a
First Lien Secured Party for allowance or payment in any Insolvency Proceeding
of First Lien Obligations consisting of Post-Petition Claims.

(b) No First Lien Secured Party may oppose or seek to challenge in an Insolvency
Proceeding a claim by a Second Lien Secured party for allowance and any payment
permitted above under “Adequate Protection,” of Second Lien Obligations
consisting of Post-Petition Claims.

        3.8.  Reserved.
 
3.9. Reinstatement. In the event any First-Lien Obligation shall be paid in full
and such payment or any part thereof shall be subsequently, for whatever reason
(including an order or judgment for disgorgement of a preference under the
Bankruptcy Code, or any similar law, or the settlement of any claim in respect
thereof), be required to be returned or repaid, the terms and conditions of this
Section 2 shall be applicable thereto until all such First-Lien Obligations
shall have been paid in full.

 
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3.10. Insurance. As between the First-Lien Secured Parties and Second-Lien
Secured Parties, the Controlling Collateral Agent shall have the right to adjust
or settle any insurance policy or claim covering or constituting Shared
Collateral in the event of any loss thereunder and to approve any award granted
in any condemnation or similar proceeding affecting the Shared Collateral.

ARTICLE 4.
COLLATERAL AGENT

4.1.  
Reserved.
 

ARTICLE 5.
MISCELLANEOUS.

5.1. Notices. All notices, demands, requests, consents, approvals, and other
communications required or permitted hereunder shall be in writing and, unless
otherwise specified herein, shall be (i) personally served, (ii) deposited in
the mail, registered or certified, return receipt requested, postage prepaid,
(iii) delivered by reputable overnight courier service with charges prepaid, or
(iv) transmitted by hand delivery, electronic mail, or facsimile, addressed as
set forth below or to such other address as such party shall have specified most
recently by written notice.  Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by electronic mail or facsimile, with accurate confirmation
generated by the transmitting facsimile machine, at the address or number
designated below (if delivered on a business day during normal business hours
where such notice is to be received), (b) the first business day following such
delivery (if delivered other than on a business day during normal business hours
where such notice is to be received) or (c) on the second business day following
the date of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first occur.

The addresses for such communications shall be:

If to the Company, to:                                                     
 ISC8 Inc., Attn:  Chief Financial Officer
840 F Avenue, Suite 105
Plano, TX  75093

With a copy to:                                                      
Butzel Long, Attn: Arthur Dudley II, Esq.
150 W. Jefferson, Suite 100
Detroit, MI 48226, and

And if to any of the other parties hereto, at the addresses provided on Schedule
B.

5.2. Entire Agreement; Assignment.  This Agreement and other documents delivered
in connection herewith, including all the schedules to this Agreement, represent
the entire agreement between the parties hereto with respect to the subject
matter hereof and may be amended only by a writing executed by both
parties.  Neither the Company nor the Subscriber have relied on any
representations not contained or referred to in this Agreement and the documents
delivered herewith.  No right or obligation of the Company shall be assigned
without prior notice to and the written consent of the Subscriber.

5.3. Counterparts/Execution.  This Agreement may be executed in any number of
counterparts and by the different signatories hereto on separate counterparts,
each of which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument.  This Agreement
may be executed by facsimile or electronic mail signature and delivered by
facsimile transmission or electronic mail.

 
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5.4. Law Governing this Agreement.  This Agreement shall be governed by and
construed in accordance with the laws of the State of California without regard
to principles of conflicts of laws.  Any action brought by either party against
the other concerning the transactions contemplated by this Agreement shall be
brought only in the state courts of California or in the federal courts located
in the state of California.  The parties and the individuals executing this
Agreement and other agreements referred to herein or delivered in connection
herewith on behalf of the Company agree to submit to the jurisdiction of such
courts.  The prevailing party shall be entitled to recover from the other party
its reasonable attorney's fees and costs.  In the event that any provision of
this Agreement or any other agreement delivered in connection herewith is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law.  Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision of any
agreement.

5.5. Specific Enforcement, Consent to Jurisdiction.  The parties acknowledge and
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached.  It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions hereof, this being in addition to any other remedy to which
any of them may be entitled by law or equity.  Each party hereto waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction in California of such court, that
the suit, action or proceeding is brought in an inconvenient forum or that the
venue of the suit, action or proceeding is improper.  Nothing in this Section
shall affect or limit any right to serve process in any other manner permitted
by law.

 
 
[THIS SPACE INTENTIONALLY LEFT BLANK]

 
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           IN WITNESS WHEREOF, the parties hereto have executed this
INTERCREDITOR AGREEMENT as of the 7 day of August, 2013.
 

  THE COMPANY

ISC8 Inc.
By: /s/ Bill Joll
Name: Bill Joll
Title: President & CFO

THE NOTEHOLDER REPRESENTATIVES

COSTA BRAVA PARTERNSHIP II L.P.
By: Roark, Rearden & Hamot, LLC,
Its General Partner
By: /s/ Seth W. Hamot
Name: Seth W. Hamot
Title: President

GRIFFIN PARTNERS, LLC
By: /s/ Chester White
Name: Chester White
Title: Managing Member

THE PURCHASERS

THE GRIFFIN FUND LP
By: Griffin Partners, LLC,
its General Partner
By: /s/ Chester White
Name: Chester White
Title:Managing Member

JOHN KRIEGER
By: /s/ John Krieger

DIAMOND MILLENNIUM, LIMITED
By: /s/ Twan Seng Go
Name: Twan Seng Go
Title: President

PARAGOLD, LP
By: /s/ Dr. Bud Feldkamp
Name: Dr. Bud Feldkamp
Title: General Partner

FUNDAMENTAL CAPITAL MANAGEMENT, LLC
By: /s/ John Krieger
Name: John Krieger
Title: Manager

SIMON WILLIAMS
By: /s/ Simon Williams
Name: Simon Williams
   

 
 
 
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SCHEDULE A – SECOND LIEN NOTES
 
 
The July 2013 Notes identified below, as well as the entirety of the March 2011
Notes (whose value totaled $5,233,349 at June 30, 2013), are the “Second Lein
Notes” referred to in this document.
 
[iamge103-1.jpg]

 
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SCHEDULE B – NOTICE
 
COSTA BRAVA PARTNERSHIP, III, LP
 
RRH Capital c/o Seth Hamot
420 Boylston Street
Boston, MA 02116
 
GRIFFIN PARTNERS, LLC / THE GRIFFIN FUND, LP
 
Griffin Partners, LLC
555 Montgomery St., Suite 650
San Francisco, CA 94111

 
JOHN KRIEGER / FUNDAMENTAL CAPITAL MANAGEMENT, LLC
 
Fundamental Capital Management, LLC c/o Jay Krieger
140 South Lake Ave. Suite 302
Pasadena, CA 91101

 
DIAMOND MILLENNIUM, LIMITED
 
Diamond Millennium, Limited c/o Secured Mgmt. Corp
10250 Constellation Blvd., Ste. 2770
Los Angeles, CA 90067

WITH COPIES TO:

Buchalter Nemer, c/o Michael Williamson, Esq.
1000 Wilshire Boulevard Suite 1500
Los Angeles, California 90017-2457

 
PARAGOLD, LP
 
Paragold, LP c/o Dr. Irving M. Feldkamp, III
P.O. Box 10669
San Bernadino, CA 92423
 
SIMON WILLIAMS
 
2138 Terrena Valley Drive
San Jose, CA 95121

 
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SCHEDULE C – SENIOR PRIORITY NOTE OBLIGTATIONS
 
The below series of fundings, identified by the date funds were provided to the
Company and the principal balance at 6/30/13, constitute the  “Senior Priority
Note Obligations” referred to in this Intercreditor Agreement.
 
[image103-2.jpg]

 

 
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SCHEDULE D – NON-CONTRACTING 2013 NOTES

 
These promissory notes series, identified by the date funds were provided to the
Company and the initial holder thereof, constitute the “Non-Contracting 2013
Notes” referred to in this Intercreditor Agreement
 

 
Original
Funding
Balance as of
7/31/2013
Simon Williams
1/23/2013
150,000
 
Auerbach
1/29/2013
150,000
 
Brian Cooleen convert SSCNP
2/1/2013
414,729
 
McHugh
1/28/2013
250,000
 
Shekels convert SSCNP
2/1/2013
204,208
 
Simpson
1/31/2013
100,000
 
Tom Stone SSCNP on 2/1/13 (M=8/1/13)
2/1/2013
311,934
 
Turner Atlas
1/30/2013
250,000
 
Kosowsky
3/27/2013
50,000
 
Costa Brava-1
3/25/2013
630,000
 
GF Acquisition
6/25/2013
130,000
 

 

 
 
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SCHEDULE E – PRIORITIZATION OF CERTAIN FIRST LIEN OBLIGATIONS
 
Subject to the provisions of Section 2 of this Intercreditor Agreement, funds
that would normally be owed to the First Lien Secured parties named herein on a
pro-rata basis relative to their ownership of the aggregate amount of first lien
obligations taken as a whole, shall instead be apportioned to the Obligations
held by the investors listed in the schedule below, in the amounts listed
opposite the names of those investors, prior and in preference to the
apportionment of funds to the First Lien Obligations held by The Griffin Fund,
LP in the amount of $400,000 and Fundamental Master Fund, L.P. in the amount of
$750,000:
 
Investor
Diamond Millennium, Limited
Amount
$1,250,000

 
 
All other holders of First Lien Obligations not named herein will be apportioned
funds on a pro-rata basis according to the amount of their First Lien Obligation
relative to the aggregate amount of First Lien Obligations taken as a whole.
 
 

 
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