SECURITY AGREEMENT

 

This Security Agreement (as amended, modified or otherwise supplemented from
time to time, this “Security Agreement”), dated as of May 21, 2012, is executed
by Innolog Holdings Corporation, a Nevada corporation (“IHC”), and Innovative
Logistics Techniques, Inc., a Virginia corporation (“ILT”, and together with
IHC, their successors and assigns, are referred to herein collectively as
“Company”), in favor of Collateral Agent (as herein defined) on behalf of the
purchasers listed on the signature pages hereto and executing this Security
Agreement (“Purchasers”).

 

RECITALS

 

A.           Company has entered into a Confessed Judgment Promissory Note with
certain Purchasers, dated March 31, 2009 (the “2009 Note”), which is secured by
liens on the Collateral (as defined below).

 

B.           Company and certain Purchasers have entered into a Note Purchase
Agreement, dated as of the date hereof (as amended, modified or otherwise
supplemented from time to time, the “Purchase Agreement”), pursuant to which
Company has issued, or may issue, convertible promissory notes (together with
the 2009 Note, each a “Note” and collectively, the “Notes”).

 

C.           In order to induce each Purchaser to extend the credit evidenced by
the Notes, Company desires to enter into this Security Agreement and to grant
Collateral Agent, for the benefit of itself and the Purchasers, the security
interest in the Collateral described below.

 

D.           The undersigned that are holders of the 2009 Note (“2009
Noteholders”) have agreed that the lien and security interest granted in the
Collateral as contemplated herein will be pari passu in all respects with the
lien granted under the 2009 Note with respect to their interests and that,
notwithstanding anything to the contrary in the 2009 Note, the Collateral Agent
appointed herein will endeavor to serve all Purchasers equally in right of
payment and exercising rights with respect to any security interests in the
Collateral.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the above recitals and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Company hereby agrees with Collateral Agent and the Purchasers as
follows:

 

1.    Definitions and Interpretation. When used in this Security Agreement, the
following terms have the following respective meanings:

 

“Collateral” has the meaning given to that term in Section 2 hereof.

 

“Obligations” means all loans, advances, debts, liabilities and obligations,
howsoever arising, owed by Company to Collateral Agent and the Purchasers of
every kind and description (whether or not evidenced by any note or instrument
and whether or not for the payment of money), now existing or hereafter arising
under or pursuant to the terms of the Notes and the other Loan Documents,
including, all interest, fees, charges, expenses, attorneys’ fees and costs and
accountants’ fees and costs chargeable to and payable by Company hereunder and
thereunder, in each case, whether direct or indirect, absolute or contingent,
due or to become due, and whether or not arising after the commencement of a
proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et
seq.), as amended from time to time (including post-petition interest) and
whether or not allowed or allowable as a claim in any such proceeding.

 

 

 

  

“Person” means and includes an individual, a partnership, a corporation
(including a business trust), a joint stock company, a limited liability
company, an unincorporated association, a joint venture or other entity or a
governmental authority.

 

“UCC” means the Uniform Commercial Code as in effect in the Commonwealth of
Virginia from time to time.

 

All capitalized terms not otherwise defined herein shall have the respective
meanings given in the Purchase Agreement. Unless otherwise defined herein, all
terms defined in the UCC have the respective meanings given to those terms in
the UCC.

 

2.    Grant of Security Interest; Acknowledgment. As security for the
Obligations, Company hereby pledges to Collateral Agent and grants to Collateral
Agent a security interest of first priority in all right, title and interests of
Company in and to the property described in Attachment 1 hereto, whether now
existing or hereafter from time to time acquired (collectively, the
“Collateral”). The Company and each Purchaser hereby agrees that each lien or
security interest of the 2009 Noteholders in the property and assets
constituting the Collateral, to the extent of the obligations secured by such
lien or security interest, shall be pari passu in all respects with respect to
such Purchaser, including, but not limited to, priority and payment, with each
lien or security interest of all Purchasers in the property and assets
constituting the Collateral, to the extent of the obligations secured by such
liens or security interests.

 

Notwithstanding the foregoing, the security interest granted herein shall not
extend to and the term “Collateral” shall not include any equipment or other
property financed by a third party, provided that such third party’s Liens are
Liens of the type described in subsection (e) of the definition of Permitted
Liens; provided further that such equipment or other property shall be deemed
“Collateral” hereunder if such third party’s Lien is released or otherwise
terminated.

 

For the avoidance of doubt, the priorities of the liens or security£interests
established, altered or specified herein and any payment resulting therefrom are
applicable£irrespective of: (i) the time or order of attachment or perfection
thereof;£(ii) the method of perfection; (iii) the time or order of filing
or£recording of financing statements or other instruments; or (iv)
any£amendments to the liens or security interest established, altered
or£specified herein. The agreements among the Purchasers in this Section are for
the purpose of£establishing the relative priorities of the interests of the
Purchasers in the Collateral and shall not inure to the benefit of£any other
Person, other than each Purchaser’s successors and assigns. The security
interest granted under the 2009 Note shall continue uninterrupted by the grant
of the security interest under this Agreement.

 

Each Purchaser and the Company understands, acknowledges and agrees that the
payment of all or any portion of the outstanding principal amount under the
Notes and all interest thereon shall be pari passu in right of payment and in
all other respects to the other Notes. In the event Purchaser receives payments
in excess of its Pro Rata Share (as defined below) of the Company’s payments to
the Purchasers of all of the Notes, then Purchaser shall hold in trust all such
excess payments for the benefit of the holders of the other Notes and shall pay
such amounts held in trust to such other holders upon demand by such holders.

 

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3.    General Representations and Warranties. Company represents and warrants to
Collateral Agent and the Purchasers that (a) Company is the owner of the
Collateral (or, in the case of after-acquired Collateral, at the time Company
acquires rights in the Collateral, will be the owner thereof) and that no other
Person has (or, in the case of after-acquired Collateral, at the time Company
acquires rights therein, will have) any right, title, claim or interest (by way
of Lien or otherwise) in, against or to the Collateral, other than Permitted
Liens; (b) upon the filing of UCC-1 financing statements in the appropriate
filing offices, Collateral Agent has (or in the case of after-acquired
Collateral, at the time Company acquires rights therein, will have) a first
priority perfected security interest in the Collateral to the extent that a
security interest in the Collateral can be perfected by such filing, except for
Permitted Liens; (c) all Inventory has been (or, in the case of hereafter
produced Inventory, will be) produced in compliance with applicable laws,
including the Fair Labor Standards Act; (d) all accounts receivable and payment
intangibles are genuine and enforceable against the party obligated to pay the
same; and (e) the originals of all documents evidencing all accounts receivable
and payment intangibles of Company and the only original books of account and
records of Company relating thereto are, and will continue to be, kept at the
address of the Company set forth in Section 7 of this Security Agreement.

 

4.    Authorized Action by Collateral Agent. Company hereby irrevocably appoints
Collateral Agent as its attorney-in-fact (which appointment is coupled with an
interest) and agrees that Collateral Agent may perform (but Collateral Agent
shall not be obligated to and shall incur no liability to Company or any third
party for failure so to do) any act which Company is obligated by this Security
Agreement to perform, and to exercise such rights and powers as Company might
exercise with respect to the Collateral, including the right to (a) collect by
legal proceedings or otherwise and endorse, receive and receipt for all
dividends, interest, payments, proceeds and other sums and property now or
hereafter payable on or on account of the Collateral; (b) enter into any
extension, reorganization, deposit, merger, consolidation or other agreement
pertaining to, or deposit, surrender, accept, hold or apply other property in
exchange for the Collateral; (c) make any compromise or settlement, and take any
action it deems advisable, with respect to the Collateral; (d) insure, process
and preserve the Collateral; (e) pay any indebtedness of Company relating to the
Collateral; and (f) file UCC financing statements and execute other documents,
instruments and agreements required hereunder; provided, however, that
Collateral Agent shall not exercise any such powers granted pursuant to
subsections (a) through (e) prior to the occurrence of an Event of Default and
shall only exercise such powers during the continuance of an Event of Default.
Company agrees to reimburse Collateral Agent upon demand for any reasonable
costs and expenses, including attorneys’ fees, Collateral Agent may incur while
acting as Company’s attorney-in-fact hereunder, all of which costs and expenses
are included in the Obligations. It is further agreed and understood between the
parties hereto that such care as Collateral Agent gives to the safekeeping of
its own property of like kind shall constitute reasonable care of the Collateral
when in Collateral Agent’s possession; provided, however, that Collateral Agent
shall not be required to make any presentment, demand or protest, or give any
notice and need not take any action to preserve any rights against any prior
party or any other person in connection with the Obligations or with respect to
the Collateral.

 

5.    Default and Remedies.

 

(a)  Default. Company shall be deemed in default under this Security Agreement
upon the occurrence and during the continuance of an Event of Default (as
defined in the Notes).

 

(b)  Remedies. Upon the occurrence and during the continuance of any such Event
of Default, Collateral Agent shall have the rights of a secured creditor under
the UCC, all rights granted by this Security Agreement and by law, including the
right to: (a) require Company to assemble the Collateral and make it available
to Collateral Agent and the Purchasers at a place to be designated by Collateral
Agent and the Purchasers; and (b) prior to the disposition of the Collateral,
store, process, repair or recondition it or otherwise prepare it for disposition
in any manner and to the extent Collateral Agent and the Purchasers deem
appropriate. Company hereby agrees that ten (10) days’ notice of any intended
sale or disposition of any Collateral is reasonable. In furtherance of
Collateral Agent’s rights hereunder, Company hereby grants to Collateral Agent
an irrevocable, non-exclusive license, exercisable without royalty or other
payment by Collateral Agent, and only in connection with the exercise of
remedies hereunder, to use, license or sublicense any patent, trademark, trade
name, copyright or other intellectual property in which Company now or hereafter
has any right, title or interest together with the right of access to all media
in which any of the foregoing may be recorded or stored. During the continuance
of any Event of Default, the Company shall not, without the written consent of
the Collateral Agent, sell, license, grant a right of use or otherwise dispose
of any patent, trademark, trade name, copyright or other intellectual property
in which Company has any right, title or interest, other than pursuant to
standard end-user license agreements, support/maintenance agreements and
agreements entered in the ordinary course of the Company’s business.

 

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(c)  Application of Collateral Proceeds. The proceeds and/or avails of the
Collateral, or any part thereof, and the proceeds and the avails of any remedy
hereunder (as well as any other amounts of any kind held by Collateral Agent at
the time of, or received by Collateral Agent after, the occurrence of an Event
of Default) shall be paid to and applied as follows:

 

(i)          First, to the payment of reasonable costs and expenses, including
all amounts expended to preserve the value of the Collateral, of foreclosure or
suit, if any, and of such sale and the exercise of any other rights or remedies,
and of all proper fees, expenses, liability and advances, including reasonable
legal expenses and attorneys’ fees, incurred or made hereunder by Collateral
Agent;

 

(ii)         Second, to the payment to each Purchaser of the amount then owing
or unpaid on such Purchaser’s Note, and in case such proceeds shall be
insufficient to pay in full the whole amount so due, owing or unpaid upon such
Note, then its Pro Rata Share of the amount remaining to be distributed (to be
applied first to accrued interest and second to outstanding principal);

 

(iii)        Third, to the payment of other amounts then payable to each
Purchaser under any of the Loan Documents, and in case such proceeds shall be
insufficient to pay in full the whole amount so due, owing or unpaid under such
Loan Documents, then its Pro Rata Share of the amount remaining to be
distributed; and

 

(iv)         Fourth, to the payment of the surplus, if any, to Company, its
successors and assigns, or to whomsoever may be lawfully entitled to receive the
same.

 

For purposes of this Security Agreement, the term “Pro Rata Share” shall mean,
when calculating a Purchaser’s portion of any distribution or amount, that
distribution or amount (expressed as a percentage) equal to a fraction (i) the
numerator of which is the aggregate amount of principal and interest then
outstanding under such Purchaser’s Note and (ii) the denominator of which is the
aggregate amount of principal and interest then outstanding under all Notes held
by all Purchasers. In the event that a Purchaser receives payments or
distributions in excess of its Pro Rata Share, then such Purchaser shall hold in
trust all such excess payments or distributions for the benefit of the other
Purchasers and shall pay such amounts held in trust to such other Purchasers
upon demand by such Purchasers.

 

6.    Collateral Agent.

 

(a)   Appointment. The Purchasers hereby appoint Glen Hill Investments LLC as
collateral agent for the Purchasers under this Security Agreement (in such
capacity, the “Collateral Agent”) to serve from the date hereof until the
termination of the Security Agreement or until the Collateral Agent resigns from
such appointment or is removed by a Majority in Interest. For the avoidance of
doubt, the 2009 Noteholders hereby appoint the Collateral Agent to serve in such
capacity with respect to the obligations contained under the 2009 Note.

 

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(b)   Powers and Duties of Collateral Agent, Indemnity by Purchasers.

 

(i)          Each Purchaser hereby irrevocably authorizes the Collateral Agent
to take such action and to exercise such powers hereunder as provided herein or
as requested in writing by the Majority in Interest in accordance with the terms
hereof, together with such powers as are reasonably incidental thereto, and each
Purchaser hereby agrees that it will not exercise any remedy available to it
other than in accordance with this agreement independent of the Collateral Agent
unless approved in writing by the Majority in Interest. Collateral Agent may
execute any of its duties hereunder by or through agents or employees and shall
be entitled to request and act in reliance upon the advice of counsel concerning
all matters pertaining to its duties hereunder and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance therewith.

 

(ii)         Neither the Collateral Agent nor any of its member, managers,
directors, officers, employees or representatives (collectively, the
“Representatives”) shall be liable or responsible to any Purchaser or to Company
for any action taken or omitted to be taken by Collateral Agent or any other
such person hereunder or under any related agreement, instrument or document,
except in the case of gross negligence or willful misconduct on the part of the
Collateral Agent, nor shall the Collateral Agent or any of its Representatives
be liable or responsible for (i) the validity, effectiveness, sufficiency,
enforceability or enforcement of the Notes, this Security Agreement or any
instrument or document delivered hereunder or relating hereto; (ii) the title of
Company to any of the Collateral or the freedom of any of the Collateral from
any prior or other liens or security interests; (iii) the determination,
verification or enforcement of Company’s compliance with any of the terms and
conditions of this Security Agreement; (iv) the failure by Company to deliver
any instrument or document required to be delivered pursuant to the terms
hereof; or (v) the receipt, disbursement, waiver, extension or other handling of
payments or proceeds made or received with respect to the collateral, the
servicing of the Collateral or the enforcement or the collection of any amounts
owing with respect to the Collateral.

 

(iii)        In the case of this Security Agreement and the transactions
contemplated hereby and any related document relating to any of the Collateral,
each of the Purchasers agrees to pay to the Collateral Agent, on demand, such
Purchaser’s Pro Rata Share of all fees and all expenses incurred in connection
with the operation and enforcement of this Security Agreement, the Notes or any
related agreement to the extent that such fees or expenses have not been paid by
Company. In the case of this Security Agreement and each instrument and document
relating to any of the Collateral, each of the Purchasers and the Company hereby
agrees to hold the Collateral Agent harmless, and to indemnify the Collateral
Agent from and against any and all loss, damage, expense or liability which may
be incurred by the Collateral Agent under this Security Agreement and the
transactions contemplated hereby and any related agreement or other instrument
or document, as the case may be, unless such liability shall be caused by the
willful misconduct or gross negligence of the Collateral Agent.

 

(iv)         Collateral Agent may resign at any time from its appointment for
any reason upon written notice thereof to the Company. Collateral Agent may be
removed by a Majority in Interest upon written notice to Collateral Agent and
the Company. Collateral Agent shall have no liability to any party arising from
such resignation or removal or with respect to acts, omissions or events
occurring after the date of such resignation or removal. Upon such resignation
or removal, a new Collateral Agent may be appointed by a Majority in Interest or
the Initial Note Purchaser.

 

7.    Miscellaneous.

 

(a)  Notices. Except as otherwise provided herein, all notices, requests,
demands, consents, instructions or other communications to or upon Company or
Collateral Agent under this Security Agreement shall be in writing and faxed,
mailed or delivered to each party to the facsimile number or its address set
forth below (or to such other facsimile number or address as the recipient of
any notice shall have notified the other in writing). All such notices and
communications shall be effective (a) when sent by Federal Express or other
overnight service of recognized standing, on the business day following the
deposit with such service; (b) when mailed, by registered or certified mail,
first class postage prepaid and addressed as aforesaid through the United States
Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d)
when faxed, upon confirmation of receipt.

 

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Collateral Agent:

 

Glen Hill Investments LLC

836 Glen Leven Drive

Nashville TN 37204

 

Company:

 

Innolog Holdings Corporation

4000 Legato Road, Suite 830

Fairfax, VA 22033

Attn: Executive Chairman

 

(b)  Termination of Security Interest. Upon the payment in full of all
Obligations under the Notes issued pursuant to the Purchase Agreement, the
security interest granted herein shall terminate and all rights to the
Collateral granted pursuant to this Security Agreement shall revert to Company,
provided that any rights obtained other than pursuant to this Security Agreement
(including rights under the 2009 Note) shall not be terminated by this Section
7(b). Upon such termination Collateral Agent hereby authorizes Company to file
any UCC termination statements necessary to effect such termination and
Collateral Agent will execute and deliver to Company any additional documents or
instruments as Company shall reasonably request to evidence such termination.

 

(c)  Nonwaiver. No failure or delay on Collateral Agent’s part in exercising any
right hereunder shall operate as a waiver thereof or of any other right nor
shall any single or partial exercise of any such right preclude any other
further exercise thereof or of any other right.

 

(d)  Amendments and Waivers. This Security Agreement may not be amended or
modified, nor may any of its terms be waived, except by written instruments
signed by Company, a Majority in Interest and the 2009 Noteholders that hold at
least a majority of the outstanding principal in the aggregate under the 2009
Note held by such 2009 Noteholders. Each waiver or consent under any provision
hereof shall be effective only in the specific instances for the purpose for
which given. Each subsequent purchaser of Notes under the Purchase Agreement may
become a party to this Security Agreement by executing a counterpart signature
page hereto.

 

(e)  Assignments. This Security Agreement shall be binding upon and inure to the
benefit of Collateral Agent and Company and their respective successors and
assigns; provided, however, that Company may not sell, assign or delegate rights
and obligations hereunder without the prior written consent of Collateral Agent.

 

(f)  Cumulative Rights, etc. The rights, powers and remedies of Collateral Agent
under this Security Agreement shall be in addition to all rights, powers and
remedies given to Collateral Agent by virtue of any applicable law, rule or
regulation of any governmental authority, any Loan Document or any other
agreement, all of which rights, powers, and remedies shall be cumulative and may
be exercised successively or concurrently without impairing Collateral Agent’s
rights hereunder. Company waives any right to require Collateral Agent to
proceed against any person or entity or to exhaust any Collateral or to pursue
any remedy in Collateral Agent’s power.

 

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(g)  Payments Free of Taxes, Etc. All payments made by Company under the Loan
Documents shall be made by Company free and clear of and without deduction for
any and all present and future taxes, levies, charges, deductions and
withholdings. In addition, Company shall pay upon demand any stamp or other
taxes, levies or charges of any jurisdiction with respect to the execution,
delivery, registration, performance and enforcement of this Security Agreement.
Upon request by Collateral Agent, Company shall furnish evidence satisfactory to
Collateral Agent that all requisite authorizations and approvals by, and notices
to and filings with, governmental authorities and regulatory bodies have been
obtained and made and that all requisite taxes, levies and charges have been
paid.

 

(h)  Partial Invalidity. If at any time any provision of this Security Agreement
is or becomes illegal, invalid or unenforceable in any respect under the law or
any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions of this Security Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.

 

(i)  Expenses. Company shall pay on demand all reasonable fees and expenses,
including reasonable attorneys’ fees and expenses, incurred by Collateral Agent
in connection with custody, preservation or sale of, or other realization on,
any of the Collateral or the enforcement or attempt to enforce any of the
Obligations which is not performed as and when required by this Security
Agreement.

 

(j)  Construction. Each of this Security Agreement and the other Loan Documents
is the result of negotiations among, and has been reviewed by, Company,
Purchasers, Collateral Agent and their respective counsel. Accordingly, this
Security Agreement and the other Loan Documents shall be deemed to be the
product of all parties hereto, and no ambiguity shall be construed in favor of
or against Company, Purchasers or Collateral Agent.

 

(k)  Entire Agreement. This Security Agreement taken together with the other
Loan Documents constitute and contain the entire agreement of Company,
Purchasers and Collateral Agent and supersede any and all prior agreements,
negotiations, correspondence, understandings and communications among the
parties, whether written or oral, respecting the subject matter hereof.

 

(l)  Other Interpretive Provisions. References in this Security Agreement and
each of the other Loan Documents to any document, instrument or agreement
(a) includes all exhibits, schedules and other attachments thereto, (b) includes
all documents, instruments or agreements issued or executed in replacement
thereof, and (c) means such document, instrument or agreement, or replacement or
predecessor thereto, as amended, modified and supplemented from time to time and
in effect at any given time. The words “hereof,” “herein” and “hereunder” and
words of similar import when used in this Security Agreement or any other Loan
Document refer to this Security Agreement or such other Loan Document, as the
case may be, as a whole and not to any particular provision of this Security
Agreement or such other Loan Document, as the case may be. The words “include”
and “including” and words of similar import when used in this Security Agreement
or any other Loan Document shall not be construed to be limiting or exclusive.

 

(m)  Governing Law. This Security Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Virginia without reference to
conflicts of law rules (except to the extent governed by the UCC).

 

(n)  Counterparts. This Security Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall be deemed to constitute one instrument.

 

[The remainder of this page is intentionally left blank]

 

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IN WITNESS WHEREOF, the parties have caused this Security Agreement to be
executed as of the day and year first above written.

 

  INNOLOG HOLDINGS CORPORATION           By: /s/ William P. Danielczyk       
William P. Danielczyk       Executive Chairman             INNOVATIVE LOGISTICS
TECHNIQUES, INC.           By: /s/ Richard E. Stewart     Name: Richard E.
Stewart     Title: President  

 

AGREED:

  

GLEN HILL INVESTMENTs LLC   As Collateral Agent       By: /s/ Harry R. Jacobson
  Name: Harry R. Jacobson   Title: Manager  

 

Signature page to Security Agreement

 

 

 

 

ATTACHMENT 1

 

To Security Agreement

 

All right, title, interest, claims and demands of Company in and to the
following property:

 

(i)          All Accounts;

 

(ii)         All Chattel Paper;

 

(iii)        All Deposit Accounts and cash;

 

(iv)         All Documents;

 

(v)          All Equipment;

 

(vi)         All General Intangibles;

 

(vii)        All Goods;

 

(viii)      All Instruments;

 

(ix)         All Intellectual Property;

 

(x)          All Inventory;

 

(xi)         All Investment Property;

 

(xii)        All Letter-of-Credit Rights

 

(xiii)        To the extent not otherwise included, all Proceeds and products of
any and all of the foregoing, and all accessions to, substitutions and
replacements for, and rents and profits of each of the foregoing.

 

The term “Intellectual Property” means all intellectual and similar property of
every kind and nature now owned or hereafter acquired by Company, including
inventions, designs, patents (whether registered or unregistered), copyrights
(whether registered or unregistered), trademarks (whether registered or
unregistered), trade secrets, domain names, confidential or proprietary
technical and business information, know-how, methods, processes, drawings,
specifications or other data or information and all memoranda, notes and records
with respect to any research and development, software and databases and all
embodiments or fixations thereof whether in tangible or intangible form or
contained on magnetic media readable by machine together with all such magnetic
media and related documentation, registrations and franchises, and all
additions, improvements and accessions to, and books and records describing or
used in connection with, any of the foregoing.

 

All capitalized terms used in this Attachment 1 and not otherwise defined
herein, shall have the respective meanings given to such terms in the Uniform
Commercial Code of the State of Virginia as in effect from time to time.