Exhibit
10.4


 


Execution
Copy


 


SECURITY
AGREEMENT


 


THIS SECURITY AGREEMENT (the “Agreement”),  is entered into and made effective as of June 13,
2008, by and between ISONICS CORPORATION, a California corporation with its principal
place of business located at 5906 McIntyre Street, Golden, CO 80403 (the
“Company”), and the undersigned subsidiaries of the Company (each a “Guarantor,”
and collectively together with the Company, the “Grantors”), in favor YA GLOBAL INVESTMENTS, L.P. (the “Secured
Party”).


 


WHEREAS, in connection with the Securities
Purchase Agreement by and among the Company and the Secured Party of even date
herewith (the “Securities
Purchase Agreement”), the Company has agreed, upon the terms and subject to
the conditions of the Securities Purchase Agreement, to issue to the Secured
Party (i) an aggregate original principal amount of $1,175,000 of notes
(the “Notes”); and (ii) warrants (the “Warrants”) to be
exercisable to acquire shares of the Company’s common stock, no par value per
share (the “Common Stock”) initially in that number of shares of Common
Stock set forth in the Securities Purchase Agreement;


 


WHEREAS, each of the Guarantors (other than the Company) has
executed and delivered a Guaranty dated the date hereof (the “Guaranty”) in favor of the Secured
Party, with respect to the Company’s obligations under the Securities Purchase
Agreement, the Notes, and the Transaction Documents (as defined below); and


 


WHEREAS, each of the Guarantors shall receive a
direct benefit from the Secured Party entering into the Securities Purchase
Agreement, the Notes, and the Transaction Documents; and


 


WHEREAS, it is a condition precedent to the
Secured Party purchasing the Notes and Warrants pursuant to the Securities
Purchase Agreement that the Grantors shall have executed and delivered to the
Secured Party this Agreement providing for the grant to the Secured Party of a
security interest in all personal property of each Grantor to secure all of the
Company’s obligations under the “Transaction Documents” (as defined in the
Securities Purchase Agreement) (the “Transaction
Documents”) and the Guarantors’ obligations under the Guaranty;


 


NOW, THEREFORE, in consideration of the promises and the
mutual covenants herein contained, and for other good and valuable consideration,
the adequacy and receipt of which are hereby acknowledged, the parties hereto
hereby agree as follows:


 


ARTICLE 1.


 


DEFINITIONS
AND INTERPRETATIONS


 


Section 1.1.            Recitals.  The above
recitals are true and correct and are incorporated herein, in their entirety,
by this reference.


 

















 


Section 1.2.            Interpretations. Nothing herein expressed or implied is
intended or shall be construed to confer upon any person other than the Secured
Party any right, remedy or claim under or by reason hereof.


 


Section 1.3.            Definitions.   Reference is hereby
made to the Securities Purchase Agreement and the Convertible Debentures for a
statement of the terms thereof.  All
capitalized terms used in this Agreement and the recitals hereto and not
defined herein shall have the meanings set forth in the Securities Purchase
Agreement, the Convertible Debentures, or in Articles 8 or 9 of the Uniform
Commercial Code as in effect from time to time in the State of New Jersey (the “Code”).


 


Section 1.4.            Other Definitions. 
As used in this Agreement, the following terms shall have the respective
meanings indicated below, such meanings to be applicable equally to both the
singular and plural forms of such terms:


 


“Event of Default” shall be deemed to have
occurred under this Agreement upon the failure by the Company to perform,
observe, or comply with any of the covenants, agreements, terms or conditions
set forth herein or the occurrance of an Event of Default under and as
defined in the Convertible Debentures.


 


ARTICLE 2.


 


PLEDGED
PROPERTY


 


Section 2.1.            Grant of Security Interest.


 


(a)           As collateral security for all of the
Obligations (as defined in Section 2.2 hereof), each Grantor hereby
pledges and assigns to the Secured Party, and grants to the Secured Party for
its benefit, a continuing security interest in and to all personal property of
each Grantor, wherever located and whether now or hereinafter existing and
whether now owned or hereafter acquired, of every kind and description,
tangible or intangible, including without limitation, all Goods, Inventory,
Equipment, Fixtures, Instruments (including promissory notes), Documents,
Accounts (including health-care-insurance receivables, and license fees),
Contracts, Contract Rights, Chattel Paper (whether tangible or electronic), Deposit
Accounts (and in and to any deposits or other sums at any time credited to each
such Deposit Account), Money, Letters of Credit and Letter-of-Credit Rights
(whether or not the letter of credit is evidenced by a writing), Commercial
Tort Claims, Securities and all other Investment Property, General Intangibles
(including payment intangibles and software), Farm Products, all books and
records relating to any of the foregoing, and all supporting obligations, and
any and all proceeds and products of any thereof, including proceeds of
insurance covering any or all of the foregoing, wherever located, whether now
owned, or now due, in which a Grantor has an interest or the power to transfer
rights, or hereafter acquired, arising, or to become due, or in which a Grantor
obtains an interest, or the power to transfer rights, and as more particularly
described on Exhibit A attached hereto (collectively, the Pledged
Property).


 


(b)           Simultaneously with the execution and
delivery of this Agreement, each Grantor shall make, execute, acknowledge,
file, record and deliver to the Secured


 





















 


Party such documents, instruments, and agreements,
including, without limitation, financing statements, certificates, affidavits
and forms as may, in the Secured Party’s reasonable judgment, be necessary to
effectuate, complete or perfect, or to continue and preserve, the security
interest of the Secured Party in the Pledged Property.


 


Section 2.2             Security for Obligations. 
The security interest created hereby in the Pledged Property constitutes
continuing collateral security for all of the following obligations, whether
now existing or hereinafter incurred (collectively, the “Obligations”):


 


(a)  (i) the payment by the Company, as and
when due and payable (by scheduled maturity, acceleration, demand or
otherwise), of all amounts from time to time owing by it in respect of the
Convertible Debentures, the other Transaction Documents, or any other amounts
owing by it to the Secured Party, whether or not now in existence or
hereinafter incurred, or (ii) in the case of any Guarantor, the payment by
such Guarantor, as and when due and payable of all “Guaranteed Obligations”
under (and as defined in) the Guaranty; and


 


(b)  the due performance and observance by the
each Grantor of all of its other obligations from time to time existing in
respect of any of the Transaction Documents, including without limitation, with
respect to any conversion or redemption rights of the Secured Party under the
Convertible Debentures.


 


ARTICLE 3.


 


ATTORNEY-IN-FACT;
PERFORMANCE


 


Section 3.1.            Secured Party Appointed Attorney-In-Fact.


 


The Grantors hereby appoint the Secured Party as its
attorney-in-fact, with full authority in the place and stead of the Grantor and
in the name of the Grantor or otherwise, exercisable after and during the
continuance of an Event of Default, from time to time in the Secured Party’s
discretion to take any action and to execute any instrument which the Secured
Party may reasonably deem necessary to accomplish the purposes of this Agreement,
including, without limitation, to (a) receive and collect all instruments
made payable to the Grantor representing any payments in respect of the Pledged
Property or any part thereof and to give full discharge for the same; (b) demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Pledged Property as and when the Secured Party may determine,
and (c) to facilitate collection, the Secured Party may notify account
debtors and obligors on any Pledged Property to make payments directly to the
Secured Party.  The foregoing power of
attorney is a power coupled with an interest and shall be irrevocable until all
Obligations are paid and performed in full. 
The Grantors agree that the powers conferred on the Secured Party
hereunder are solely to protect the Secured Party’s interests in the Pledged
Property and shall not impose any duty upon the Secured Party to exercise any
such powers.


 

















 


Section 3.2.                                   Secured Party May Perform.


 


If a Grantor fails to perform any agreement contained
herein, the Secured Party, at its option, may itself perform, or cause
performance of, such agreement, and the expenses of the Secured Party incurred
in connection therewith shall be included in the Obligations secured hereby and
payable by such Grantor under Section 8.3.


 


ARTICLE 4.


 


REPRESENTATIONS
AND WARRANTIES


 


Section 4.1.                                   Authorization; Enforceability.


 


Each of the parties hereto represents and warrants
that it has taken all action necessary to authorize the execution, delivery and
performance of this Agreement and the transactions contemplated hereby; and
upon execution and delivery, this Agreement shall constitute a valid and
binding obligation of the respective party, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors’
rights or by the principles governing the availability of equitable remedies.


 


Section 4.2.                                   Ownership of Pledged Property.


 


Each Grantor represents and warrants that it is the
legal and beneficial owner of the Pledged Property free and clear of any lien,
security interest, option or other charge or encumbrance (each, a “Lien”)
except for the security interest created by this Agreement and other Permitted
Liens.  For purposes of this Agreement, “Permitted
Liens” means: (1) the security interest created by this Agreement, (2) existing
Liens which have been disclosed by the Company to the Secured Party on Schedule
4.2 attached hereto; (3) inchoate Liens for taxes, assessments or
governmental charges or levies not yet due, as to which the grace period, if
any, related thereto has not yet expired, or being contested in good faith and
by appropriate proceedings for which adequate reserves have been established in
accordance with GAAP; (4) Liens of carriers, materialmen, warehousemen,
mechanics and landlords and other similar Liens which secure amounts which are
not yet overdue or which are being contested in good faith by appropriate
proceedings for which adequate reserves have been established in accordance
with GAAP; (5) licenses, sublicenses, leases or subleases granted to other
Persons not materially interfering with the conduct of the business of the
Company; (6) Liens securing capitalized lease obligations and purchase
money indebtedness incurred solely for the purpose of financing an acquisition
or lease; (7) easements, rights-of-way, restrictions, encroachments,
municipal zoning ordinances and other similar charges or encumbrances, and
minor title deficiencies, in each case not securing debt and not materially
interfering with the conduct of the business of the Company and not materially
detracting from the value of the property subject thereto; (8) Liens
arising out of the existence of judgments or awards which judgments or awards
do not constitute an Event of Default; (9) Liens incurred in the ordinary
course of business in connection with workers compensation claims, unemployment
insurance, pension liabilities and social security benefits and Liens securing
the performance of bids, tenders, leases and contracts in the ordinary course
of business, statutory obligations, surety bonds, performance bonds and other
obligations of 


 

















 


a like nature (other than appeal bonds) incurred in
the ordinary course of business (exclusive of obligations in respect of the
payment for borrowed money); (10) Liens in favor of a banking institution
arising by operation of law encumbering deposits (including the right of
set-off) and contractual set-off rights held by such banking institution and
which are within the general parameters customary in the banking industry and
only burdening deposit accounts or other funds maintained with a creditor
depository institution; (11) usual and customary set-off rights in leases and
other contracts; and (12) escrows in connection with acquisitions and
dispositions.


 


Section 4.3                                      Location of Pledged Property.


 


The Pledged Property is or will be kept at the
address(es) of each Grantor set forth on the signature pages hereof, or
such other locations as the Grantors have given the Secured Party written notice
prior to the date hereof, and, unless otherwise provided herein, the Grantors
will not remove any Pledged Property from such locations without the prior
written consent of the Secured Party which consent shall not be unreasonably
withheld.


 


Section 4.4                                      Location, State of Incorporation and Name of Grantors.


 


Each Grantor’s principal place of business, state of
organization, organization identification number, and exact legal name is as
set forth on each such Grantor’s signature page to this Agreement.


 


Section 4.5                                      Priority of Security Interest.


 


The security interest granted to the Secured Party
hereunder shall be a first priority security interest subject to no other
Liens.  Except for the Permitted Liens,
no financing statement covering any of the Pledged Property or any proceeds
thereof is on file in any public office.


 


ARTICLE 5.


 


DEFAULT;
REMEDIES


 


Section 5.1                                      Method of Realizing Upon the Pledged
Property: Other Remedies.


 


If any Event of Default shall have occurred and be
continuing:


 


(a)                                  The Secured Party may exercise in respect
of the Pledged Property, in addition to any other rights and remedies provided
for herein or otherwise available to it, all of the rights and remedies of a
secured party upon default under the Code (whether or not the Code applies to
the affected Pledged Property), and also may (i) take absolute control of
the Pledged Property, including, without limitation, transfer into the Secured
Party’s name or into the name of its nominee or nominees (to the extent the
Secured Party has not theretofore done so) and thereafter receive, for the
benefit of the Secured Party, all payments made thereon, give all consents,
waivers and ratifications in respect thereof and otherwise act with respect
thereto as though it were the outright owner thereof, 


 

















 


(ii) require each Grantor to assemble all or part
of the Pledged Property as directed by the Secured Party and make it available
to the Secured Party at a place or places to be designated by the Secured Party
that is reasonably convenient to both parties, and the Secured Party may enter
into and occupy any premises owned or leased by a Grantor where the Pledged
Property or any part thereof is located or assembled for a reasonable period in
order to effectuate the Secured Party’s rights and remedies hereunder or under
law, without obligation to the Grantor in respect of such occupation, and (iii) without
notice except as specified below and without any obligation to prepare or
process the Pledged Property for sale, (A) sell the Pledged Property or any
part thereof in one or more parcels at public or private sale, at any of the
Secured Party’s offices or elsewhere, for cash, on credit or for future
delivery, and at such price or prices and upon such other terms as the Secured
Party may deem commercially reasonable and/or (B) lease, license or
dispose of the Pledged Property or any part thereof upon such terms as the
Secured Party may deem commercially reasonable. 
Each Grantor agrees that, to the extent notice of sale or any other
disposition of the Pledged Property shall be required by law, at least ten (10) days’
notice to the Grantor of the time and place of any public sale or the time
after which any private sale or other disposition of the Pledged Property is to
be made shall constitute reasonable notification.  The Secured Party shall not be obligated to
make any sale or other disposition of any Pledged Property regardless of notice
of sale having been given.  The Secured
Party may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and such sale may, without further
notice, be made at the time and place to which it was so adjourned.  Each Grantor hereby waives any claims against
the Secured Party arising by reason of the fact that the price at which the
Pledged Property may have been sold at a private sale was less than the price
which might have been obtained at a public sale or was less than the aggregate
amount of the Obligations, even if the Secured Party accepts the first offer
received and does not offer such Pledged Property to more than one offeree, and
waives all rights that the Grantor may have to require that all or any part of
such Pledged Property be marshaled upon any sale (public or private) thereof.  Each Grantor hereby acknowledges that (i) any
such sale of the Pledged Property by the Secured Party may be made without
warranty, (ii) the Secured Party may specifically disclaim any warranties
of title, possession, quiet enjoyment or the like, and (iii) such actions
set forth in clauses (i) and (ii) above shall not adversely
affect the commercial reasonableness of any such sale of Pledged Property.


 


(b)                                 Any cash held by the Secured Party as
Pledged Property and all cash proceeds received by the Secured Party in respect
of any sale of or collection from, or other realization upon, all or any part
of the Pledged Property shall be applied (after payment of any amounts payable
to the Secured Party pursuant to Section 8.3 hereof) by the Secured Party
against, all or any part of the Obligations in such order as the Secured Party
shall elect, consistent with the provisions of the Securities Purchase
Agreement.  Any surplus of such cash or
cash proceeds held by the Secured Party and remaining after the indefeasible
payment in full in cash of all of the Obligations shall be paid over to
whomsoever shall be lawfully entitled to receive the same or as a court of
competent jurisdiction shall direct.


 


(c)                                  In the event that the proceeds of any
such sale, collection or realization are insufficient to pay all amounts to
which the Secured Party is legally entitled, each 


 

















 


Grantor shall be liable for the deficiency, together
with interest thereon at the rate specified in the Convertible Debentures for
interest on overdue principal thereof or such other rate as shall be fixed by
applicable law, together with the costs of collection and the reasonable fees,
costs, expenses and other client charges of any attorneys employed by the
Secured Party to collect such deficiency.


 


(d)                                 Each Grantor hereby acknowledges that if
the Secured Party complies with any applicable state, provincial, or federal
law requirements in connection with a disposition of the Pledged Property, such
compliance will not adversely affect the commercial reasonableness of any sale
or other disposition of the Pledged Property.


 


(e)                                  The Secured Party shall not be required
to marshal any present or future collateral security (including, but not
limited to, this Agreement and the Pledged Property) for, or other assurances
of payment of, the Obligations or any of them or to resort to such collateral
security or other assurances of payment in any particular order, and all of the
Secured Party’s rights hereunder and in respect of such collateral security and
other assurances of payment shall be cumulative and in addition to all other
rights, however existing or arising.  To
the extent that the Grantor lawfully may, each Grantor hereby agrees that it
will not invoke any law relating to the marshaling of collateral which might
cause delay in or impede the enforcement of the Secured Party’s rights under
this Agreement or under any other instrument creating or evidencing any of the
Obligations or under which any of the Obligations is outstanding or by which
any of the Obligations is secured or payment thereof is otherwise assured, and,
to the extent that it lawfully may, the Company hereby irrevocably waives the
benefits of all such laws.


 


Section 5.2                                      Duties Regarding Pledged Property.


 


The Secured Party shall have no duty as to the
collection or protection of the Pledged Property or any income thereon or as to
the preservation of any rights pertaining thereto, beyond the safe custody and
reasonable care of any of the Pledged Property actually in the Secured Party’s
possession.


 


ARTICLE 6.


 


AFFIRMATIVE
COVENANTS


 


So long as any of the Obligations shall remain
outstanding, unless the Secured Party shall otherwise consent in writing:


 


Section 6.1.                                   Existence, Properties, Etc.


 


(a)                                  Each Grantor shall do, or cause to be
done, all things, or proceed with due diligence with any actions or courses of
action, that may be reasonably necessary (i) to maintain Grantor’s due
organization, valid existence and good standing under the laws of its state of
incorporation, and (ii) to preserve and keep in full force and effect all
qualifications, licenses and registrations in those jurisdictions in which the
failure to do so could have a Material Adverse Effect (as defined below); and (b) each
Grantor shall not do, or cause to be done, any act impairing the Grantor’s
corporate


 





















 


power or authority
(i) to carry on the Grantor’s business as now conducted, and (ii) to
execute or deliver this Agreement or any other document delivered in connection
herewith, including, without limitation, any UCC-1 Financing Statements
required by the Secured Party (which other loan instruments collectively
shall be referred to as the “Loan Instruments”) to which it is or
will be a party, or perform any of its obligations hereunder or
thereunder.  For purpose of this
Agreement, the term “Material Adverse Effect” shall mean any material
and adverse affect as determined by Secured Party in its reasonable discretion,
whether individually or in the aggregate, upon (a) the Grantor’s assets,
business, operations, properties or condition, financial or otherwise; (b) the
Grantor’s ability to make payment as and when due of all or any part of the
Obligations; or (c) the Pledged Property.


 


Section 6.2.                                   Financial Statements and Reports.


 


Each Grantor shall furnish to the Secured Party within
a reasonable time such financial data as the Secured Party may reasonably
request.


 


Section 6.3.                                   Accounts and Reports.


 


Each Grantor shall maintain a standard system of
accounting in accordance with generally accepted accounting principles
consistently applied (“GAAP”) and provide, at its sole expense, to the Secured
Party the following:


 


(a)                                  as soon as available, a copy of any
notice or other communication alleging any nonpayment or other material breach
or default, or any foreclosure or other action respecting any material portion
of its assets and properties, received respecting any of the indebtedness of
the Grantor in excess of $250,000 (other than the Obligations), or any demand
or other request for payment under any guaranty, assumption, purchase agreement
or similar agreement or arrangement respecting the indebtedness or obligations
of others in excess of $250,000; and


 


(b)                                 within fifteen (15) days after the
making of each submission or filing, a copy of any report, financial statement,
notice or other document, whether periodic or otherwise, submitted to the
shareholders of the Grantor, or submitted to or filed by the Grantor with any
governmental authority involving or affecting (i) the Grantor that could
reasonably be expected to have a Material Adverse Effect; (ii) the
Obligations; (iii) any part of the Pledged Property; or (iv) any of
the transactions contemplated in this Agreement or the Loan Instruments
(except, in each case, to the extent any such submission, filing, report,
financial statement, notice or other document is posted on EDGAR Online).


 


Section 6.4.                                   Maintenance of Books and Records;
Inspection.


 


Each Grantor shall maintain its books, accounts and
records in accordance with GAAP, and permit the Secured Party, its officers and
employees and any professionals designated by the Secured Party in writing, at
any time during normal business hours and upon reasonable notice to visit and
inspect any of its properties (including but not limited to the collateral
security described in the Transaction Documents and/or the Loan


 

















 


Instruments), corporate books and financial records,
and to discuss its accounts, affairs and finances with any employee, officer or
director thereof (it being agreed that, unless an Event of Default shall have
occurred and be continuing, there shall be no more than two (2) such
visits and inspections in any Fiscal Year).


 


Section 6.5.                                   Maintenance and Insurance.


 


(a)                                  Each Grantor shall maintain or cause to
be maintained, at its own expense, all of its material assets and properties in
good working order and condition, ordinary wear and tear excepted, making all
necessary repairs thereto and renewals and replacements thereof.


 


(b)                                 Each Grantor shall maintain or cause to
be maintained, at its own expense, insurance in form, substance and amounts
(including deductibles), which the Grantor deems reasonably necessary to the
Company’s business, (i) adequate to insure all assets and properties of
the Grantor of a character usually insured by persons engaged in the same or
similar business against loss or damage resulting from fire or other risks
included in an extended coverage policy; (ii) against public liability and
other tort claims that may be incurred by the Grantor; (iii) as may be
required by the Transaction Documents and/or applicable law and (iv) as
may be reasonably requested by Secured Party, all with financially sound and
reputable insurers.


 


Section 6.6.                                   Contracts and Other Collateral.


 


Each Grantor shall perform all of its obligations
under or with respect to each instrument, receivable, contract and other
intangible included in the Pledged Property to which the Grantor is now or
hereafter will be party on a timely basis and in the manner therein required,
including, without limitation, this Agreement, except to the extent the failure
to so perform such obligations would not reasonably be expected to have a
Material Adverse Effect.


 


Section 6.7.                                   Defense of Collateral, Etc.


 


Each Grantor shall defend and enforce its right, title
and interest in and to any part of:  (a) the
Pledged Property; and (b) if not included within the Pledged Property,
those assets and properties whose loss would reasonably be expected to have a
Material Adverse Effect, each against all manner of claims and demands on a
timely basis to the full extent permitted by applicable law (other than any
such claims and demands by holders of Permitted Liens).


 


Section 6.8.                                   Taxes and Assessments.


 


Each Grantor shall (a) file all material tax
returns and appropriate schedules thereto that are required to be filed under
applicable law, prior to the date of delinquency (taking into account any
extensions of the original due date), (b) pay and discharge all material
taxes, assessments and governmental charges or levies imposed upon the Grantor,
upon its income and profits or upon any properties belonging to it, prior to
the date on which penalties attach thereto, and (c) pay all material
taxes, assessments and


 

















 


governmental charges or levies that, if unpaid, might
become a lien or charge upon any of its properties; provided, however, that the Grantor in good faith may
contest any such tax, assessment, governmental charge or levy described in the
foregoing clauses (b) and (c) so long as appropriate reserves are
maintained with respect thereto if and to the extent required by GAAP.


 


Section 6.9.                                   Compliance with Law and Other Agreements.


 


Each Grantor shall maintain its business operations
and property owned or used in connection therewith in compliance with (a) all
applicable federal, state and local laws, regulations and ordinances governing
such business operations and the use and ownership of such property, and (b) all
agreements, licenses, franchises, indentures and mortgages to which the Grantor
is a party or by which the Grantor or any of its properties is bound, except
where the failure to so comply would not reasonably be expected to have a
Material Adverse Effect.


 


Section 6.10.                             Notice of Default.


 


The Grantors will immediately notify the Secured Party
of any event causing a substantial loss or diminution in the value of all or any
material part of the Pledged Property and the amount or an estimate of the
amount of such loss or diminution. The Grantors shall promptly notify the
Secured Party of any condition or event which constitutes, or would constitute
with the passage of time or giving of notice or both, an Event of Default, and
promptly inform the Secured Party of any events or changes in the financial
condition of any Grantor occurring since the date of the last financial
statement of such Grantor delivered to the Secured Party, which individually or
cumulatively when viewed in light of prior financial statements, which might
reasonably be expected to have a Material Adverse Effect on the business
operations or financial condition of the Grantor.


 


Section 6.11.                             Notice of Litigation.


 


Each Grantor shall give notice, in writing, to the
Secured Party of (a) any actions, suits or proceedings wherein the amount
at issue is in excess of $250,000, instituted by any persons against the
Grantor, or affecting any of the assets of the Company, and (b) any
dispute, not resolved within fifteen (15) days of the commencement thereof,
between the Grantor on the one hand and any governmental or regulatory body on
the other hand, which might reasonably be expected to have a Material Adverse
Effect on the business operations or financial condition of the Grantor.


 


Section 6.13.                             Future Subsidiaries.


 


If any Grantor shall hereafter create or acquire any
subsidiary, simultaneously with the creation or acquisition of such subsidiary,
such Grantor shall cause such subsidiary to become a party to this Agreement as
an additional “Grantor” hereunder, and to duly execute and deliver a guaranty
of the Obligations in favor of the Secured Party in form and substance
reasonably acceptable to the Secured Party, and to duly execute and/or deliver
such opinions of counsel and other documents, in form and substance


 

















 


reasonably acceptable to
the Secured Party, as the Secured Party shall reasonably request with respect
thereto.


 


Section 6.14.                             Changes to Identity.


 


Each Grantor will (a) give the Secured Party at
least 30 days’ prior written notice of any change in such Grantor’s name,
identity or organizational structure, (b) maintain its jurisdiction of
incorporation, organization or formation as set forth on its respective
signature page attached hereto, (C) immediately notify the Secured
Party upon obtaining an organizational identification number, if on the date
hereof such Grantor did not have such identification number.


 


Section 6.15.                             Establishment
of Deposit Account, Dominion Account Agreements;
Control.


 


Within ten (10) days of the date hereof, each
Grantor, the Secured Party, and each applicable bank or other depository
institution shall enter into a deposit account agreement (“Deposit Account
Agreement”) in the form of Exhibit B with respect to each of the
Grantor’s Deposit Accounts, including, without limitation, all savings,
passbook, money market or other depository accounts, and all certificates of
deposit, maintained by each Company with any bank, savings and loan
association, credit union or other depository institution maintained or used by
each Grantor providing dominion and control over such accounts to the Secured
Party such that upon notice by the Secured Party to such bank or other
depository institution of the occurrence of an Event of Default all actions
under such account shall be taken solely at the Secured Party’s direction.  Each Grantor’s current Deposit Accounts are
set forth on Schedule 6.14 attached hereto.


 


Each Grantor shall cause all cash, all collections and
proceeds from accounts receivable, all receipts from credit card payments, and
all proceeds from the sale of any Pledged Property to be deposited only into
its Deposit Accounts in the ordinary course of business and consistent with past
practices.


 


Each Grantor shall have valid and effective Deposit
Account Agreements in place at all times with respect to all of its Deposit
Accounts.  No Deposit Account shall be
established, used or maintained by the Company unless it first enters into a
Deposit Account Agreement.


 


With respect to each Deposit Account, from and after
the occurrence of an Event of Default, the Secured Party shall have the right,
at any time and from time to time, to exercise its rights under such Deposit
Account Agreement, including, for the avoidance of any doubt, the exclusive
right to give instructions to the financial institution at which such Deposit
Account is maintained as to the disposition of funds or other property on
deposit therein or credited thereto.  The
Secured Party hereby covenants and agrees that it will not send any such notice
to a financial institution at which any such Deposit Account is maintained
directing the disposition of funds or other property therein unless and until
the occurrence of an Event of Default.


 

















 


In connection with the foregoing, each Grantor hereby
authorizes and directs each bank or other depository institution which
maintains any Deposit Account to pay or deliver to the Secured Party upon the
Secured Party’s written demand thereof made at any time after the occurrence of
an Event of Default has occurred all balances in each Deposit Account with such
depository for application to the Obligations then outstanding.


 


Section 6.16                                Perfection of Security Interests.


 


(a)                                  Financing Statements.  
The Grantors hereby irrevocably authorize the Secured Party, at the sole
cost and expense of the Grantors, at any time and from time to time to file in
any filing office in any jurisdiction any initial financing statements and
amendments thereto that (a) indicate the Pledged Property (i) as all
assets of Grantors or words of similar effect, regardless of whether any
particular asset comprised in the Pledged Property falls within the scope of Article 9
of the Code of such jurisdiction, or (ii) as being of an equal or lesser
scope or with greater detail, and (b) contain any other information
required by Part 5 of Article 9 of the Code for the sufficiency or
filing office acceptance of any financing statement or amendment, including (i) whether
such Grantor is an organization, the type of organization and any organization
identification number issued to such Grantor, and (ii) in the case of a
financing statement filed as a fixture filing, a sufficient description of real
property to which the Pledged Property relates. 
Grantors agree to furnish any such information to the Secured Party
promptly upon request.  Grantors also
ratify their authorization for the Secured Party to have filed in any
jurisdiction any initial financing statements or amendments thereto if filed
prior to the date hereof. The Grantors acknowledge that they are not authorized
to file any financing statement or amendment or termination statement with
respect to any financing statement without the prior written consent of the
Secured Party and agree that they will not do so without the prior written
consent of the Secured Party.  The
Grantors acknowledge and agree that this Agreement constitutes an authenticated
record.


 


(b)                                 Possession.   The Grantors
(i) shall have possession of the Pledged Property, except where expressly
otherwise provided in this Agreement or where the Secured Party chooses to
perfect its security interest by possession in addition to the filing of a
financing statement; and (ii) will, where Pledged Property is in the possession
of a third party, join with the Secured Party in notifying the third party of
the Secured Party’s security interest and obtaining an acknowledgment from the
third party that it is holding the Pledged Property for the benefit of the
Secured Party.


 


(c)                                  Control.   In addition to the provisions set forth in Section 6.15
above, the Grantors will cooperate with the Secured Party in obtaining control
with respect to the Pledged Property consisting of (i) Investment
Property, (ii) Letters of Credit and Letter-of-Credit Rights and (iii) electronic
Chattel Paper.


 


(d)                                 Chattel Paper.   Marking of Chattel Paper. The Grantors will
not create any Chattel Paper without placing a legend on the Chattel Paper
acceptable to the Secured Party indicating that the Secured Party has a
security interest in the Chattel Paper.


 
















 


Section 6.17                                Notice of Commercial
Tort Claims. If any Grantor shall at any time acquire a Commercial Tort
Claim, such Grantor shall immediately notify the Secured Party in a writing
signed by such Grantor which shall (a) provide brief details of said claim
and (b) grant to the Secured Party a security interest in said claim and
in the proceeds thereof, all upon the terms of this Agreement, in such form and
substance satisfactory to the Secured Party.


 


ARTICLE
7.


 


NEGATIVE COVENANTS


 


So long as any of the Obligations shall remain
outstanding, unless the Secured Party shall otherwise consent in writing each
Grantor covenants and agrees that it shall not:


 


Section 7.1.                                   Transfers, Liens
and Encumbrances.


 


(a)                                  Sell,
assign (by operation of law or otherwise), lease, license, exchange or
otherwise transfer or dispose of any of the Pledged Property, except Grantor
may (i) sell or dispose of Inventory in the ordinary course of business,
and (ii) sell or dispose of assets the Grantor  has determined, in good faith, not to be
useful in the conduct of its business, and (iii) sell or dispose of
accounts in the course of collection in the ordinary course of business
consistent with past practice.


 


(b)                                 Directly
or indirectly make, create, incur, assume or permit to exist any Lien in, to or
against any part of the Pledged Property other than Permitted Liens.


 


Section 7.2.                                   Restriction on
Redemption and Cash Dividends


 


Directly or indirectly, redeem, repurchase or declare
or pay any cash dividend or distribution on its capital stock without the prior
express written consent of the Secured Party.


 


Section 7.3.                                   Incurrence of
Indebtedness.


 


Directly or
indirectly, incur or guarantee, assume or suffer to exist any indebtedness,
other than the indebtedness evidenced by the Convertible Debentures and other
Permitted Indebtedness.  “Permitted
Indebtedness” means: (i) indebtedness evidenced by Convertible
Debentures; (ii) indebtedness described on the Disclosure Schedule to the
Securities Purchase Agreement; (iii) indebtedness incurred solely for the
purpose of financing the acquisition or lease of any equipment by the Company,
including capital lease obligations with no recourse other than to such
equipment; (iv) indebtedness (A) the repayment of which has been
subordinated to the payment of the Convertible Debentures on terms and
conditions acceptable to the Secured Party, including with regard to interest
payments and repayment of principal, (B) which does not mature or
otherwise require or permit redemption or repayment prior to or on the 91st
day after the maturity date of any Convertible Debentures then outstanding; and
(C) which is not secured by any assets of the Company; (v) indebtedness
solely between the 


 

















 


Grantor and/or one of its
domestic subsidiaries, on the one hand, and the Grantor and/or one of its
domestic subsidiaries, on the other which indebtedness is not secured by any
assets of the Grantor or any of its subsidiaries, provided that (x) in
each case a majority of the equity of any such domestic subsidiary is directly or
indirectly owned by the Grantor, such domestic subsidiary is controlled by the
Grantor and such domestic subsidiary has executed a security agreement in the
form of this Agreement
and (y) any such loan shall be evidenced by an intercompany note that is pledged
by the Grantor or its
subsidiary, as applicable, as collateral pursuant to this Agreement; (vi) reimbursement
obligations in respect of letters of credit issued for the account of the
Grantor or any of its subsidiaries for the purpose of securing performance
obligations of the Grantor or its subsidiaries incurred in the ordinary course
of business so long as the aggregate face amount of all such letters of credit
does not exceed $500,000 at any one time; and (vii) renewals, extensions
and refinancing of any indebtedness described in clauses (i) or (iii) of
this subsection.


 


Section 7.4.                                   Places of
Business.


 


Change the location of its chief place of business,
chief executive office or any place of business disclosed to the Secured Party,
unless such change in location is to a different location within the United
States and the Grantor provides notice to the Secured Party of new location
within 10 days’ of such change in location.


 


ARTICLE
8.


 


MISCELLANEOUS


 


Section 8.1.                                   Notices.


 


All notices or other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be considered as duly given on:  (a) the
date of delivery, if delivered in person or by nationally recognized overnight
delivery service or (b) five (5) days after mailing if mailed
from within the continental United States by certified mail, return receipt
requested to the party entitled to receive the same:


 




	
  If to the Secured Party:

  	
   

  	
  YA Global Investments, L.P.

  
	
   

  	
   

  	
  101 Hudson Street-Suite 3700

  
	
   

  	
   

  	
  Jersey City, New Jersey 07302

  
	
   

  	
   

  	
  Attention:

  	
  Mark Angelo

  
	
   

  	
   

  	
   

  	
  Portfolio Manager

  
	
   

  	
   

  	
  Telephone:

  	
  (201) 986-8300

  
	
   

  	
   

  	
  Facsimile:

  	
  (201) 985-8266

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  David Gonzalez, Esq.

  
	
   

  	
   

  	
  101 Hudson Street, Suite 3700

  
	
   

  	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
   

  	
  Telephone:

  	
  (201) 985-8300

  
	
   

  	
   

  	
  Facsimile:

  	
  (201) 985-8266

  






 

















 




	
  If to the Company:

  	
   

  	
  Isonics Corporation

  
	
   

  	
   

  	
  5906
  McIntyre Street

  
	
   

  	
   

  	
  Golden,
  CO 80403

  
	
   

  	
   

  	
  Attention: Chief Executive Officer

  
	
   

  	
   

  	
  Telephone:

  	
  (303) 279-7900

  
	
   

  	
   

  	
  Facsimile:

  	
  (303) 279-7300

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Burns, Figa & Will,
  P.C.

  
	
   

  	
   

  	
  Suite 1000, 6400
  South Fiddlers Green Circle

  
	
   

  	
   

  	
  Greenwood Village, CO
  80112

  
	
   

  	
   

  	
  Attention: Herrick K. Lidstone, Jr., Esq.

  
	
   

  	
   

  	
  Telephone:

  	
  (303) 796-2626

  
	
   

  	
   

  	
  Facsimile:

  	
  (303) 796-2777

  
	
   

  	
   

  	
   

  
	
  If to any other Grantor

  	
   

  	
  To the address listed on the respective signature
  pages attached hereto

  






 


Any party may change its address by giving notice to
the other party stating its new address. 
Commencing on the tenth (10th) day after the giving of
such notice, such newly designated address shall be such party’s address for
the purpose of all notices or other communications required or permitted to be
given pursuant to this Agreement.


 


Section 8.2.                                   Severability.


 


If any provision of this Agreement shall be held
invalid or unenforceable, such invalidity or unenforceability shall attach only
to such provision and shall not in any manner affect or render invalid or
unenforceable any other severable provision of this Agreement, and this
Agreement shall be carried out as if any such invalid or unenforceable
provision were not contained herein.


 


Section 8.3.                                   Expenses.


 


In the event of an Event of Default, the Company will
pay to the Secured Party the amount of any and all reasonable out-of-pocket
expenses, including the reasonable fees and expenses of its counsel, which the
Secured Party may incur in connection with: 
(i) the custody or preservation of, or the sale, collection from,
or other realization upon, any of the Pledged Property; (ii) the exercise
or enforcement of any of the rights of the Secured Party hereunder or (iii) the
failure by the Grantor to perform or observe any of the provisions hereof.


 


Section 8.4.                                   Waivers,
Amendments, Etc.


 


The Secured Party’s delay or failure at any time or
times hereafter to require strict performance by Grantor of any undertakings, agreements
or covenants shall not waive, affect, or diminish any right of the Secured
Party under this Agreement to demand strict 


 

















 


compliance and
performance herewith.  Any waiver by the
Secured Party of any Event of Default shall not waive or affect any other Event
of Default, whether such Event of Default is prior or subsequent thereto and
whether of the same or a different type. 
None of the undertakings, agreements and covenants of the Grantor
contained in this Agreement, and no Event of Default, shall be deemed to have
been waived by the Secured Party, nor may this Agreement be amended, changed or
modified, unless such waiver, amendment, change or modification is evidenced by
an instrument in writing specifying such waiver, amendment, change or modification
and signed by the Secured Party in the case of any such waiver, and signed by
the Secured Party and the Grantor in the case of any such amendment, change or
modification.  Further, no such document,
instrument, and/or agreement purported to be executed on behalf of the Secured
Party shall be binding upon the Secured Party unless executed by a duly
authorized representative of the Secured Party.


 


Section 8.5.                                   Continuing
Security Interest.


 


This Agreement shall create a continuing security
interest in the Pledged Property and shall: (i) remain in full force and
effect so long as any of the Obligations shall remain outstanding; (ii) be
binding upon each Grantor and its successors and assigns; and (iii) inure
to the benefit of the Secured Party and its successors and assigns.  Upon the payment or satisfaction in full of
the Obligations, this Agreement and the security interest created hereby shall
terminate, and, in connection therewith, each Grantor shall be entitled to the
return, at its expense, of such of the Pledged Property as shall not have been
sold in accordance with Section 5.2 hereof or otherwise applied pursuant
to the terms hereof and the Secured Party shall deliver to the Grantor such
documents as the Grantor shall reasonably request to evidence such termination.


 


Section 8.6.                                   Independent
Representation.


 


Each party hereto acknowledges and agrees that it has
received or has had the opportunity to receive independent legal counsel of its
own choice and that it has been sufficiently apprised of its rights and
responsibilities with regard to the substance of this Agreement.


 


Section 8.7.                                   Applicable
Law:  Jurisdiction.


 


This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New Jersey without regard to the principles
of conflict of laws.  The parties further
agree that any action between them shall be heard in Hudson County, New Jersey,
and expressly consent to the jurisdiction and venue of the Superior Court of
New Jersey, sitting in Hudson County and the United States District Court for
the District of New Jersey sitting in Newark, New Jersey for the adjudication
of any civil action asserted pursuant to this Paragraph, provided, however,
that nothing herein shall prevent the Secured Party from enforcing its rights
and remedies (including, without limitation, by filing a civil action) with
respect to the Pledged Property and/or the Grantors in any other jurisdiction
in which the Pledged Property and/or the Grantors may be located.


 

















 


Section 8.8.                                   Waiver of Jury
Trial.


 


AS A FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER
INTO THIS AGREEMENT AND TO MAKE THE FINANCIAL ACCOMMODATIONS TO THE COMPANY,
THE COMPANY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
RELATED IN ANY WAY TO THIS AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED
TO THIS TRANSACTION.


 


Section 8.9                                      Right of Set
Off.


 


The Grantors each hereby grant to the Secured Party, a
lien, security interest and right of setoff as security for all liabilities and
obligations to the Secured Party, whether now existing or hereafter arising,
upon and against all deposits, credits, collateral and property, now or
hereafter in the possession, custody, safekeeping or control of the Secured
Party or any of its affiliates, or any entity under the control of the Secured
Party, or in transit to any of them. At any time, without demand or notice, the
Secured Party may set off the same or any part thereof and apply the same to
any liability or obligation of the Grantors even though unmatured and regardless
of the adequacy of any other collateral securing the Obligations.  ANY AND ALL RIGHTS TO REQUIRE THE SECURED
PARTY TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL
WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH
RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE GRANTORS, ARE HEREBY
KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.


 


Section 8.10                                Entire Agreement.


 


This Agreement constitutes the entire agreement among
the parties and supersedes any prior agreement or understanding among them with
respect to the subject matter hereof.


 


[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]


 

















 


IN WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.


 


 


	
   

  	
  COMPANY:

  
	
   

  	
  Isonics
  Corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  Gregory A. Meadows

  
	
   

  	
  Title:

  	
  Vice
  President/Assistant Secretary

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Jurisdiction of
  Incorporation, Organization or 

  
	
   

  	
  Formation: California

  
	
   

  	
   

  
	
   

  	
  Organizational ID:

  
				



 

















 


IN WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.


 


 


	
   

  	
  GUARANTOR:

  
	
   

  	
  Isonics
  Vancouver, Inc.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  Gregory A. Meadows

  
	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Isonics Corporation 

  
	
   

  	
  5906
  McIntyre Street  

  
	
   

  	
  Golden,
  CO 80403  

  
	
   

  	
  Attention: Chief Executive Officer  

  
	
   

  	
  Telephone:

  	
  (303) 279-7900

  
	
   

  	
  Facsimile:

  	
  (303) 279-7300

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Jurisdiction of
  Incorporation, Organization or 

  
	
   

  	
  Formation: Washington

  
	
   

  	
  Organizational ID:

  
					



 

















 


IN WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.


 


 


	
   

  	
  GUARANTOR:

  
	
   

  	
  Protection
  Plus Security Corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:  Chris Toffales

  
	
   

  	
  Title:    President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address For Notices: 

  
	
   

  	
  Isonics Corporation 

  
	
   

  	
  5906
  McIntyre Street  

  
	
   

  	
  Golden,
  CO 80403  

  
	
   

  	
  Attention: Chief Executive Officer  

  
	
   

  	
  Telephone:

  	
  (303) 279-7900 

  
	
   

  	
  Facsimile:

  	
  (303) 279-7300 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Jurisdiction of
  Incorporation, Organization or 

  
	
   

  	
  Formation: New York

  
	
   

  	
   

  
	
   

  	
  Organizational ID:

  
				



 

















 


IN WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.


 


 


	
   

  	
  GUARANTOR:

  
	
   

  	
  Isonics
  Homeland Security and Defense 

  
	
   

  	
  Corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  Gregory A. Meadows

  
	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address For Notices: 

  
	
   

  	
  Isonics Corporation 

  
	
   

  	
  5906
  McIntyre Street  

  
	
   

  	
  Golden,
  CO 80403  

  
	
   

  	
  Attention: Chief Executive Officer  

  
	
   

  	
  Telephone:

  	
  (303) 279-7900 

  
	
   

  	
  Facsimile:

  	
  (303) 279-7300 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Jurisdiction of
  Incorporation, Organization or 

  
	
   

  	
  Formation: Delaware

  
	
   

  	
   

  
	
   

  	
  Organizational ID:

  
					



 

















 


EXHIBIT A


DEFINITION OF PLEDGED PROPERTY


 


For the purpose of securing prompt and complete
payment and performance by the Grantor of all of the Obligations, the Grantors
each unconditionally and irrevocably hereby grant to the Secured Party a
continuing security interest in and to, and lien upon, the following Pledged
Property of each Grantor (all capitalized terms used herein shall have the
respective meanings ascribed thereto in the Code):


 


All personal property of each Grantor, wherever
located and whether now or hereinafter existing and whether now owned or
hereafter acquired, of every kind and description, tangible or intangible,
including without limitation, all:


 


1.                                       Goods;


 


2.                                       Inventory,
including, without limitation, all goods, merchandise and other personal
property now owned or hereafter acquired by the Grantor which are held for sale
or lease, or are furnished or to be furnished under any contract of service or
are raw materials, work-in-process, supplies or materials used or consumed in
the Grantor’s business, and all products thereof, and all substitutions.
replacements, additions or accessions therefor and thereto; and any cash or
non-cash Proceeds of all of the foregoing;


 


3.                                       Equipment,
including, without limitation, all machinery, equipment, furniture, parts, tools
and dies, of every kind and description, of the Grantor (including automotive
equipment and motor vehicles), now owned or hereafter acquired by the Grantor,
and used or acquired for use in the business of the Grantor, together with all
accessions thereto and all substitutions and replacements thereof and parts
therefor and all cash or non-cash Proceeds of the foregoing;


 


4.                                       Fixtures,
including, without limitation, all goods which are so related to particular
real estate that an interest in them arises under real estate law and all
accessions thereto, replacements thereof and substitutions therefor, including,
but not limited to, plumbing, heating and lighting apparatus, mantels, floor
coverings, furniture, furnishings, draperies, screens, storm windows and doors,
awnings, shrubbery, plants, boilers, tanks, machinery, stoves, gas and electric
ranges, wall cabinets, appliances, furnaces, dynamos, motors, elevators and
elevator machinery, radiators, blinds and all laundry, refrigerating, gas,
electric, ventilating, air-refrigerating, air-conditioning, incinerating and
sprinkling and other fire prevention or extinguishing equipment of whatsoever
kind and nature and any replacements, accessions and additions thereto,
Proceeds thereof and substitutions therefor;


 


5.                                       Instruments
(including promissory notes);


 


6.                                       Documents;


 

















 


7.                                       Accounts,
including, without limitation, all Contract Rights and accounts receivable,
health-care-insurance receivables, and license fees; any other obligations or
indebtedness owed to the Grantor from whatever source arising; all rights of
Grantor to receive any payments in money or kind; all guarantees of Accounts
and security therefor; all cash or non-cash Proceeds of all of the foregoing;
all of the right, title and interest of Grantor in and with respect to the
goods, services or other property which gave rise to or which secure any of the
accounts and insurance policies and proceeds relating thereto, and all of the
rights of the Grantor as an unpaid seller of goods or services, including,
without limitation the rights of stoppage in transit, replevin,
reclamation and resale and all of the foregoing, whether now existing or
hereafter created or acquired;


 


8.                                       Contracts
and Contract Rights, including, to the extent not included in the definition of
Accounts, all rights to payment or performance under a contract not yet earned
by performance and not evidenced by an Instrument or Chattel Paper;


 


9.                                       Chattel
Paper (whether tangible or electronic);


 


10.                                 Deposit
Accounts (and in and to any deposits or other sums at any time credited to each
such Deposit Account);


 


11.                                 Money,
cash and cash equivalents;


 


12.                                 Letters
of Credit and Letter-of-Credit Rights (whether or not the Letter of Credit is
evidenced by a writing);


 


13.                                 Commercial
Tort Claims;


 


14.                                 Securities
Accounts, Security Entitlements, Securities, Financial Assets and all other
Investment Property, including, without limitation, all ownership or membership
interests in any subsidiaries or affiliates (whether or not controlled by the
Grantor);


 


15.                                 General
Intangibles, including, without limitation, all payment intangibles, tax
refunds and other claims of the Grantor against any governmental authority, and
all choses in action, insurance proceeds, goodwill, patents, copyrights,
trademarks, tradenames, customer lists, formulae, trade secrets, licenses,
permits, franchises, designs, computer software, research and literary rights
now owned or hereafter acquired;


 


16.                                 Farm
Products;


 


17.                                 All
books and records (including all ledger sheets, files, computer programs, tapes
and related data processing software) evidencing an interest in or relating to
any of the foregoing;


 


18.                                 To
the extent not already included above, all supporting obligations, and any and
all cash and non-cash Proceeds, products, accessions, and/or replacements of
any of the foregoing, including proceeds of insurance covering any or all of
the foregoing.


 

















 


EXHIBIT B


 


FORM OF
DEPOSIT ACCOUNT AGREEMENT


 

















 


DISCLOSURE
SCHEDULE


 


Schedule 4.2 – Existing Liens


 


Liens to Cornell Capital Partners,
L.P., now known as YA Global Investments, L.P.