Exhibit 10.1


 


Execution Copy


 


SECURITIES
PURCHASE AGREEMENT


 


THIS  SECURITIES PURCHASE AGREEMENT (this “Agreement”),
dated as of June 13, 2008, by and among
ISONICS CORPORATION, a California corporation (the “Company”),
and the Buyers listed on Schedule I attached hereto (individually, a “Buyer”
or collectively “Buyers”).


 


WITNESSETH


 


WHEREAS, the Company
and the Buyer(s) are executing and delivering this Agreement in reliance
upon an exemption from securities registration pursuant to Section 4(2) and/or
Rule 506 of Regulation D (“Regulation D”) as promulgated by the
U.S. Securities and Exchange Commission (the “SEC”) under the Securities
Act of 1933, as amended (the “Securities Act”);


 


WHEREAS, the parties
desire that, upon the terms and subject to the conditions contained herein, the
Company shall issue and sell to the Buyer(s), as provided herein, and the Buyer(s) shall
purchase (i) up to One Million Five Hundred Thousand Dollars ($1,500,000)
of notes in the form attached hereto as “Exhibit A” (the “Notes”)
and (ii) warrants substantially in the form attached hereto as “Exhibit B”
(the “Warrants”), to acquire up to that number of additional shares of
the Company’s common stock, no par value per share (the “Common Stock”)
set forth opposite such Buyer’s name on Schedule I (as exercised, the “Warrant
Shares”) of which One Million One Hundred Seventy-Five Thousand Dollars
($1,175,000) shall be funded within five (5) business day following the
date hereof (the “First Closing”), Fifty Thousand Dollars ($50,000) shall
be funded upon the change of the Company’s transfer agent to Worldwide Stock
Transfer (the “Second Closing”) and Two Hundred Seventy Five Thousand
Dollars ($275,000) shall be funded at the Company’s request (the “Third
Closing”) (individually referred to as a “Closing” collectively
referred to as the “Closings”), for a total purchase price of up to One
Million Five Hundred Dollars ($1,500,000), (the “Purchase Price”) in the
respective amounts set forth opposite each Buyer(s) name on Schedule I
(the “Subscription Amount”);


 


WHEREAS, on June 5,
2006, the Company issued Secured Convertible Debenture (No. CCP-2) in the
amount of Three Million Dollars ($3,000,000) to YA Global Investments, L.P.
(f/k/a Cornell Capital Partners L.P.) (“YA Global”), a Buyer, and on June 13,
2006, such Secured Convertible Debenture was amended and restated as Secured
Convertible Debenture (No. CCP-4) (“Debenture CCP-4”);


 


WHEREAS, on November 16,
2006, the Company issued Secured Convertible Debenture (No. CCP-5) in the
amount of Three Million Dollars ($3,000,000) to YA Global (“Debenture CCP-5”);


 


WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
Company and YA Global have agreed to amend and restate Debenture CCP-4 and
Debenture CCP-5 into one note in the amount of Six Million Dollars ($6,000,000)
in the form attached hereto as Exhibit A (such notes, the “Amendment
Notes”);


 


WHEREAS, on May 31,
2006, the Company issued Secured Convertible Debenture (No. CCP-1) in the
amount of Ten Million Dollars ($10,000,000) to YA Global and on June 13,
2006, 


 

















 


such Secured Convertible
Debenture was amended and restated as Secured Convertible Debenture (No. CCP-3)
(“Debenture CCP-3”);


 


WHEREAS, on April 11,
2007, the Company issued Secured Convertible Debenture (No. CCP-2007-1) in
the amount of Two Million Dollars ($2,000,000) to YA Global (“Debenture
CCP-2007-1”);


 


WHEREAS,
contemporaneously with the execution and delivery of this Agreement the Company
and YA Global have agreed to amend Debenture CCP-3 and Debenture CCP-2007-1
pursuant to an amendment in substantially the form attached hereto as Exhibit Y
(the “Debenture Amendments”);


 


WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement
(the “Registration Rights Agreement”) pursuant to which the Company has
agreed to provide certain registration rights under the Securities Act and the rules and
regulations promulgated there under, and applicable state securities laws;


 


WHEREAS, contemporaneously with the execution and delivery of this Agreement, (i) the Buyer, the
Company, and each subsidiary of the Company are executing and delivering a
Security Agreement (all such security agreements shall be referred to as the “Security
Agreement”) pursuant to which the Company and its wholly owned subsidiaries
agree to provide the Buyer a security interest in Pledged Property (as this
term is defined in the Security Agreement), and (ii) each subsidiary of
the Company is executing and delivering a Guaranty dated the date hereof (the “Guaranty” and collectively with
the Security Agreement, the “Security Documents”) in favor of the Buyer;


 


WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering Irrevocable Transfer Agent
Instructions (the “Irrevocable Transfer Agent Instructions”); and


 


WHEREAS, the Notes,
the Warrants, and the Warrants Shares collectively are referred to herein as
the “Securities”).


 


NOW, THEREFORE, in
consideration of the mutual covenants and other agreements contained in this
Agreement the Company and the Buyer(s) hereby agree as follows:


 


1.     PURCHASE AND SALE OF NOTES.


 


(a)           Purchase of Notes.  Subject to the satisfaction (or waiver) of
the terms and conditions of this Agreement, each Buyer agrees, severally and
not jointly, to purchase at each Closing and the Company agrees to sell and
issue to each Buyer, severally and not jointly, at each Closing, Notes in
amounts corresponding with the Subscription Amount set forth opposite each
Buyer’s name on Schedule I hereto and the Warrants to acquire up that number of
Warrant Shares as set forth opposite such Buyer’s name in column (5) on
Schedule I .


 


(b)           Closing Dates.  The First Closing of the purchase and sale of
the Notes and Warrants shall take place at 10:00 a.m. Eastern Standard
Time on the fifth (5th) 


 

















 


business day following the
date hereof, subject to notification of satisfaction of the conditions to the
First Closing set forth herein and in Sections 6 and 7 below (or such later
date as is mutually agreed to by the Company and the Buyer(s)) (the “First
Closing Date”), the Second Closing of the purchase and sale of the Notes
shall take place at 4:00 p.m. Eastern Standard Time on the date following
the date on which the Buyers receive written notice that the conditions to the
Second Closing set forth herein and in Sections 6 and 7 below have been
satisfied (or such later date as is mutually agreed to by the Company and the
Buyer(s)) (the “Second Closing Date”) and the Third Closing of the
purchase and sale of the Notes shall take place at 4:00 p.m. Eastern
Standard Time on the date following the date on which the Buyers receive
written notice that the Company wishes to consummate the Third Closing (or such
later date as is mutually agreed to by the Company and the Buyer(s)) (the “Third
Closing Date”) (collectively referred to a the “Closing Dates”).  The Closings shall occur on the respective
Closing Dates at the offices of Yorkville Advisors, LLC, 101 Hudson Street, Suite 3700,
Jersey City, New Jersey 07302 (or such other place as is mutually agreed to by
the Company and the Buyer(s)).


 


(c)           Form of
Payment.  Subject to the satisfaction of
the terms and conditions of this Agreement, on each Closing Date, (i) the
Buyers shall deliver to the Company such aggregate proceeds for the Notes and
Warrants to be issued and sold to such Buyer at such Closing, minus the fees to
be paid directly from the proceeds of such Closing as set forth herein, and (ii) the
Company shall deliver to each Buyer, Notes and Warrants which such Buyer is
purchasing at such Closing in amounts indicated opposite such Buyer’s name on
Schedule I, duly executed on behalf of the Company.


 


2.     BUYER’S
REPRESENTATIONS AND WARRANTIES.


 


Each Buyer represents and warrants, severally
and not jointly, that:


 


(a)           Investment
Purpose.  Each Buyer is acquiring the
Securities for its own account for investment only and not with a view towards,
or for resale in connection with, the public sale or distribution thereof,
except pursuant to sales registered or exempted under the Securities Act;
provided, however, that by making the representations herein, such Buyer
reserves the right to dispose of the Securities at any time in accordance with
or pursuant to an effective registration statement covering such Securities or
an available exemption under the Securities Act.  Such Buyer does not presently have any
agreement or understanding, directly or indirectly, with any Person to
distribute any of the Securities.


 


(b)           Accredited
Investor Status.  Each Buyer
is an “Accredited Investor” as that term is defined in Rule 501(a)(3) of
Regulation D.


 


(c)           Reliance on
Exemptions.  Each Buyer
understands that the Securities are being offered and sold to it in reliance on
specific exemptions from the registration requirements of United States federal
and state securities laws and that the Company is relying in part upon the
truth and accuracy of, and such Buyer’s compliance with, the representations,
warranties, agreements, acknowledgments and understandings of such Buyer set
forth herein in order to determine the availability of such exemptions and the
eligibility of such Buyer to acquire the Securities.


 

















 


(d)           Information.  Each Buyer and its advisors (and his or, its
counsel), if any, have been furnished with all materials relating to the
business, finances and operations of the Company and information he deemed
material to making an informed investment decision regarding his purchase of
the Securities, which have been requested by such Buyer.  Each Buyer and its advisors, if any, have
been afforded the opportunity to ask questions of the Company and its
management.  Neither such inquiries nor
any other due diligence investigations conducted by such Buyer or its advisors,
if any, or its representatives shall modify, amend or affect such Buyer’s right
to rely on the Company’s representations and warranties contained in Section 3
below.  Each Buyer understands that its
investment in the Securities involves a high degree of risk.  Each Buyer is in a position regarding the
Company, which, based upon employment, family relationship or economic
bargaining power, enabled and enables such Buyer to obtain information from the
Company in order to evaluate the merits and risks of this investment.  Each Buyer has sought such accounting, legal
and tax advice, as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.


 


(e)           No Governmental
Review.  Each Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed on or made any recommendation or endorsement of the
Securities, or the fairness or suitability of the investment in the Securities,
nor have such authorities passed upon or endorsed the merits of the offering of
the Securities.


 


(f)            Transfer or
Resale.  Each Buyer understands that
except as provided in the Registration Rights Agreement: (i) the
Securities have not been and are not being registered under the Securities Act
or any state securities laws, and may not be offered for sale, sold, assigned
or transferred unless (A) subsequently registered thereunder, (B) such
Buyer shall have delivered to the Company an opinion of counsel, in a generally
acceptable form, to the effect that such Securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration requirements, or (C) such Buyer provides the Company
with reasonable assurances (in the form of seller and broker representation
letters) that the Buyer is not an affiliate of the Company and that such
Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the Securities Act, as amended (or a successor rule thereto)
(collectively, “Rule 144”), in each case following the applicable
holding period set forth therein; (ii) any sale of the Securities made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of the Securities
under circumstances in which the seller (or the person through whom the
sale is made) may be deemed to be an underwriter (as that term is defined in
the Securities Act) may require compliance with some other exemption under the
Securities Act or the rules and regulations of the SEC thereunder; and (iii) neither
the Company nor any other person is under any obligation to register the
Securities under the Securities Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder.


 


(g)           Legends.  Each Buyer agrees to the imprinting, so long
as is required by this Section 2(g), of a restrictive legend in
substantially the following form:


 


THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE 


 

















 


SECURITIES
LAWS.  THE SECURITIES HAVE BEEN ACQUIRED
SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND MAY NOT
BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.


 


Certificates evidencing the Warrant Shares
shall not contain any legend (including the legend set forth above), (i) while
a registration statement (including the Registration Statement) covering the
resale of such security is effective under the Securities Act, (ii) following
any sale of such Warrant Shares pursuant to Rule 144, (iii) if such
Warrant Shares are eligible for sale under Rule 144, or (iv) if such
legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the SEC).  The Company shall cause its
counsel to issue a legal opinion to the Company’s transfer agent promptly after
the effective date (the “Effective Date”) of a Registration Statement if
required by the Company’s transfer agent to effect the removal of the legend
hereunder.  If all or any portion of the
Warrants are exercised by a Buyer that is not an Affiliate of the Company (a “Non-Affiliated
Buyer”) at a time when there is an effective registration statement to
cover the resale of the Warrant Shares, such Warrant Shares shall be issued
free of all legends.  The Company agrees
that following the Effective Date or at such time as such legend is no longer
required under this Section 2(g), it will, no later than three (3) Trading
Days following the delivery by a Non-Affiliated Buyer to the Company or the
Company’s transfer agent of a certificate representing Warrant Shares issued
with a restrictive legend (such third Trading Day, the “Legend Removal Date”),
deliver or cause to be delivered to such Non-Affiliated Buyer a certificate
representing such shares that is free from all restrictive and other
legends.  The Company may not make any
notation on its records or give instructions to any transfer agent of the
Company that enlarge the restrictions on transfer set forth in this
Section.  Each Buyer acknowledges that
the Company’s agreement hereunder to remove all legends from Warrant Shares is
not an affirmative statement or representation that such Warrant Shares are
freely tradable.  Each Buyer, severally
and not jointly with the other Buyers, agrees that the removal of the
restrictive legend from certificates representing Securities as set forth in
this Section 3(g) is predicated upon the Company’s reliance that the Buyer will
sell any Securities pursuant to either the registration requirements of the
Securities Act, including any applicable prospectus delivery requirements, or an
exemption therefrom, and that if Securities are sold pursuant to a Registration
Statement, they will be sold in compliance with the plan of distribution set
forth therein.


 


(h)           Authorization,
Enforcement.  This
Agreement has been duly and validly authorized, executed and delivered on
behalf of such Buyer and is a valid and binding agreement of such Buyer
enforceable in accordance with its terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency, 


 

















 


reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies.


 


(i)            Receipt of
Documents.  Each Buyer
and his or its counsel has received and read in their entirety:  (i) this Agreement and each
representation, warranty and covenant set forth herein and the Transaction
Documents (as defined herein); (ii) all due diligence and other
information necessary to verify the accuracy and completeness of such representations,
warranties and covenants; (iii) the Company’s Form 10-K for the
fiscal year ended April 30, 2007; (iv) the Company’s Forms 10-Q for
the fiscal quarters ended July 31, 2007, October 31, 2007 and January 31,
2008 and (v) answers to all questions each Buyer submitted to the Company
regarding an investment in the Company; and each Buyer has relied on the
information contained therein and has not been furnished any other documents,
literature, memorandum or prospectus.


 


(j)            Due Formation
of Corporate and Other Buyers.  If the Buyer(s) is a corporation, trust,
partnership or other entity that is not an individual person, it has been
formed and validly exists and has not been organized for the specific purpose
of purchasing the Securities and is not prohibited from doing so.


 


(k)           No Legal Advice
From the Company.  Each Buyer
acknowledges, that it had the opportunity to review this Agreement and the
transactions contemplated by this Agreement with his or its own legal counsel
and investment and tax advisors.  Each
Buyer is relying solely on such counsel and advisors and not on any statements
or representations of the Company or any of its representatives or agents for
legal, tax or investment advice with respect to this investment, the
transactions contemplated by this Agreement or the securities laws of any
jurisdiction.


 


(l)            YA Global, a
Buyer hereunder and the holder of Debentures CCP-3, CCP-4, CCP-5 and CCP-2007-1
and certain warrants issued in connection therewith, hereby consents to the
transactions contemplated hereby and represents and warrants that to the best
of its knowledge, the completion of the transactions hereby will not violate,
constitute a default under, or constitute an event that may create a default
under any of such instruments, or create an event that will result in a
dilution adjustment to any of such instruments except as contemplated in the
Debenture Amendments.


 


3.     REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.


 


Except as set forth under the corresponding
section of the Disclosure Schedules which Disclosure Schedules shall be deemed
a part hereof and to qualify any representation or warranty otherwise made
herein to the extent of such disclosure, the Company hereby makes the
representations and warranties set forth below to each Buyer:


 


(a)           Subsidiaries.  All of the direct and indirect subsidiaries
of the Company are set forth on Schedule 3(a).  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each subsidiary free and
clear of any liens, and all the issued and outstanding shares of capital stock
of each subsidiary are validly issued and are fully 


 

















 


paid, non-assessable and
free of preemptive and similar rights to subscribe for or purchase securities.


 


(b)           Organization
and Qualification.  The Company
and its subsidiaries are corporations duly organized and validly existing in
good standing under the laws of the jurisdiction in which they are
incorporated, and have the requisite corporate power to own their properties
and to carry on their business as now being conducted.  Each of the Company and its subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which the nature of the business conducted by it makes
such qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have or reasonably be expected to
result in (i) a material adverse effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material adverse effect
on the results of operations, assets, business or condition (financial or
otherwise) of the Company and the subsidiaries, taken as a whole, or (iii) a
material adverse effect on the Company’s ability to perform in any material
respect on a timely basis its obligations under any Transaction Document (any
of (i), (ii) or (iii), a “Material Adverse Effect”) and no
proceeding has been instituted in any such jurisdiction revoking, limiting or
curtailing or seeking to revoke, limit or curtail such power and authority or
qualification.


 


(c)           Authorization,
Enforcement, Compliance with Other Instruments.  (i) The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Notes, the Warrants, the Security Documents, the
Registration Rights Agreement, the Irrevocable Transfer Agent Instructions, the
Amendment Notes and the Debenture Amendments and each of the other agreements
entered into by the parties hereto in connection with the transactions
contemplated by this Agreement (collectively the “Transaction Documents”)
and to issue the Securities in accordance with the terms hereof and thereof, (ii) the
execution and delivery of the Transaction Documents by the Company and the consummation
by it of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Securities, and the reservation for issuance
and the issuance of the Warrant Shares, have been duly authorized by the
Company’s Board of Directors and no further consent or authorization is
required by the Company, its Board of Directors or its stockholders, (iii) the
Transaction Documents have been duly executed and delivered by the Company, (iv) the
Transaction Documents constitute the valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors’
rights and remedies.  The authorized
officer of the Company executing the Transaction Documents knows of no reason
why the Company cannot file the Registration Statement as required under the
Registration Rights Agreement or perform any of the Company’s other obligations
under the Transaction Documents except to the extent that the Company is not
eligible to file a registration statement on Form S-3, and except to the
extent the Company is unable file a registration statement as a result of
management’s inability to issue a management’s assessment on the Company’s
internal control of financial reporting or reports a material weakness in
disclosure controls resulting from the Company’s inability to install a
framework for such assessment as required by §404 of the Sarbanes-Oxley Act of
2002 and the rules and regulations thereunder, and except to the extent
that the Company’s independent certified public accountants issue a report on
the Company’s financial statements including a going concern 


 

















 


qualification or, following
a discussion with the SEC, are unwilling to issue any report on or review of
the Company’s financial statements.


 


(d)           Capitalization.  The authorized capital stock of the Company
consists of 175,000,000 shares of Common Stock and 7,650,000 shares of
Preferred Stock, no par value per share (“Preferred Stock”) of which
17,652,987  shares of Common Stock and zero shares
of Preferred Stock are issued and outstanding. 
All of the outstanding shares of capital stock of the Company are
validly issued, fully paid and nonassessable, have been issued in compliance
with all federal and state securities laws, and none of such outstanding shares
was issued in violation of any preemptive rights or similar rights to subscribe
for or purchase securities.  Except as
disclosed in Schedule 3(d): (i) none of the Company’s capital stock is
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company; (ii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of its subsidiaries, or contracts, commitments, understandings
or arrangements by which the Company or any of its subsidiaries is or may
become bound to issue additional capital stock of the Company or any of its subsidiaries
or options, warrants, scrip, rights to subscribe to, calls or commitments of
any character whatsoever relating to, or securities or rights convertible into,
or exercisable or exchangeable for, any capital stock of the Company or any of
its subsidiaries; (iii) there are no outstanding debt securities, notes,
credit agreements, credit facilities or other agreements, documents or
instruments evidencing indebtedness of the Company or any of its subsidiaries
or by which the Company or any of its subsidiaries is or may become bound; (iv) there
are no financing statements securing obligations in any material amounts,
either singly or in the aggregate, filed in connection with the Company or any
of its subsidiaries; (v) there are no outstanding securities or
instruments of the Company or any of its subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its subsidiaries
is or may become bound to redeem a security of the Company or any of its
subsidiaries; (vi) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (vii) the Company does not have any stock appreciation
rights or “phantom stock” plans or agreements or any similar plan or agreement;
and (viii) the Company and its subsidiaries have no liabilities or
obligations required to be disclosed in the SEC Documents but not so disclosed
in the SEC Documents, other than those incurred in the ordinary course of the
Company’s or its subsidiaries’ respective businesses and which, individually or
in the aggregate, do not or would not have a Material Adverse Effect.  The Company has furnished to the Buyers true,
correct and complete copies of the Company’s Certificate of Incorporation, as
amended and as in effect on the date hereof (the “Certificate of Incorporation”), and the Company’s Bylaws, as
amended and as in effect on the date hereof (the “Bylaws”), and the terms of all securities convertible into, or
exercisable or exchangeable for, shares of Common Stock and the material rights
of the holders thereof in respect thereto. 
No further approval or authorization of any stockholder, the Board of
Directors of the Company or others is required for the issuance and sale of the
Securities.  There are no stockholders
agreements, voting agreements or other similar agreements with respect to the
Company’s capital stock to which the Company is a party or, to the knowledge of
the Company, between or among any of the Company’s stockholders.


 

















 


(e)           Issuance of
Securities.  The
issuance of the Notes and the Warrants is duly authorized and free from all
taxes, liens and charges with respect to the issue thereof.  Upon exercise in accordance with the terms of
the Warrants, the Warrant Shares when issued will be validly issued, fully paid
and nonassessable, free from all taxes, liens and charges with respect to the
issue thereof.  The Company has reserved
from its duly authorized capital stock the appropriate number of shares of
Common Stock as set forth in this Agreement.


 


(f)            No Conflicts.   The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated hereby and thereby (including, without
limitation, the issuance of the Notes and the Warrants, and reservation for
issuance and issuance of the Warrant Shares) will not (i) result in a
violation of any certificate of incorporation, certificate of formation, any
certificate of designations or other constituent documents of the Company or
any of its subsidiaries, any capital stock of the Company or any of its
subsidiaries or bylaws of the Company or any of its subsidiaries or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) in any respect under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including foreign, federal and state
securities laws and regulations and the rules and regulations of the National
Association of Securities Dealers Inc.’s OTC Bulletin Board) applicable to the
Company or any of its subsidiaries or by which any property or asset of the
Company or any of its subsidiaries is bound or affected; except in the case of
each of clauses (ii) and (iii), such as could not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect.  The business of the Company and
its subsidiaries is not being conducted, and shall not be conducted in
violation of any material law, ordinance, or regulation of any governmental
entity.  Except as specifically
contemplated by this Agreement and as required under the Securities Act and any
applicable state securities laws, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with,
any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under or contemplated by this Agreement or the
Registration Rights Agreement in accordance with the terms hereof or
thereof.  All consents, authorizations,
orders, filings and registrations which the Company is required to obtain
pursuant to the preceding sentence have been obtained or effected on or prior
to the date hereof.  The Company and its
subsidiaries are unaware of any facts or circumstance, which might give rise to
any of the foregoing.


 


(g)           SEC Documents;
Financial Statements.  The Company
has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), for the two years preceding the
date hereof (or such shorter period as the Company was required by law or
regulation to file such material) (all of the foregoing filed prior to the date
hereof or amended after the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein, being hereinafter referred to as the “SEC Documents”)
on timely basis or has received a valid extension of such time of filing and
has filed any such SEC Document prior to the expiration of any such
extension.  The Company has delivered to
the Buyers or their representatives, or made available through the SEC’s
website at http://www.sec.gov., true and complete copies of the SEC
Documents.  As of their respective 


 

















 


dates, the SEC Documents
complied in all material respects with the requirements of the Exchange Act and
the rules and regulations of the SEC promulgated thereunder applicable to
the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.  As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto.  Such financial
statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as
may be otherwise indicated in such financial statements or the notes thereto,
or (ii) in the case of unaudited interim statements, to the extent they
may exclude footnotes or may be condensed or summary statements) and fairly
present in all material respects the financial position of the Company as of
the dates thereof and the results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).  No other
information provided by or on behalf of the Company to the Buyers which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(i) of this Agreement, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstance under
which they are or were made and not misleading.


 


(h)           10b-5.  The SEC Documents do not include any untrue
statements of material fact, nor do they omit to state any material fact
required to be stated therein necessary to make the statements made, in light
of the circumstances under which they were made, not misleading.


 


(i)            Absence of
Litigation.  To the
knowledge of the Company, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency,
self-regulatory organization or body pending against or affecting the Company,
the Common Stock or any of the Company’s subsidiaries, wherein an unfavorable
decision, ruling or finding would (i) have a Material Adverse Effect.


 


(j)            Acknowledgment
Regarding Buyer’s Purchase of the Notes.  The Company acknowledges and agrees that each
Buyer is acting solely in the capacity of an arm’s length purchaser with
respect to this Agreement and the transactions contemplated hereby.  The Company further acknowledges that each
Buyer is not acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by each Buyer or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to such Buyer’s purchase
of the Securities.  The Company further
represents to each Buyer that the Company’s decision to enter into this
Agreement has been based solely on the independent evaluation by the Company
and its representatives.


 


(k)           No General
Solicitation.  Neither the
Company, nor any of its affiliates, nor any person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the Securities Act) in connection
with the offer or sale of the Securities.


 
















 


(l)            No Integrated
Offering.  Neither the
Company, nor any of its affiliates, nor any person acting on its or their
behalf has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would
require registration of the Securities under the Securities Act or cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of the Securities Act.


 


(m)          Employee
Relations.  Neither the
Company nor any of its subsidiaries is involved in any labor dispute or, to the
knowledge of the Company or any of its subsidiaries, is any such dispute
threatened.  None of the Company’s or its
subsidiaries’ employees is a member of a union and the Company and its subsidiaries
believe that their relations with their employees are good.


 


(n)           Intellectual
Property Rights.  The Company
and its subsidiaries own or possess adequate rights or licenses to use all
trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights necessary to conduct
their respective businesses as now conducted. 
The Company and its subsidiaries do not have any knowledge of any
infringement by the Company or its subsidiaries of trademark, trade name
rights, patents, patent rights, copyrights, inventions, licenses, service
names, service marks, service mark registrations, trade secret or other similar
rights of others, and, to the knowledge of the Company there is no claim,
action or proceeding being made or brought against, or to the Company’s
knowledge, being threatened against, the Company or its subsidiaries regarding
trademark, trade name, patents, patent rights, invention, copyright, license,
service names, service marks, service mark registrations, trade secret or other
infringement; and the Company and its subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.


 


(o)           Environmental
Laws.  The Company and its
subsidiaries are (i) in compliance with any and all applicable foreign,
federal, state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants (“Environmental Laws”), (ii) have
received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license or
approval.


 


(p)           Title.  All real property and facilities held under
lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.


 


(q)           Insurance.  The Company and each of its subsidiaries is
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
subsidiaries are engaged.  Neither the
Company nor any such subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such subsidiary has any reason
to believe that it will not be able to renew its existing insurance 


 

















 


coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its subsidiaries, taken as a whole.


 


(r)            Regulatory
Permits.  The Company and its
subsidiaries possess all material certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory authorities
necessary to conduct their respective businesses, and neither the Company nor
any such subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit.


 


(s)           Internal
Accounting Controls.  The Company
and each of its subsidiaries maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations, (ii) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, and (iii) the recorded amounts for assets are compared
with the existing assets at reasonable intervals and appropriate action is
taken with respect to any differences. 
The Company has not, however, established the framework necessary to
assess the Company’s internal control of financial reporting as required by
§404 of the Sarbanes-Oxley Act of 2002 and consequently will have to report
material weaknesses in the Company’s disclosure controls and internal control
of financial reporting.


 


(t)            No Material
Adverse Breaches, etc. 
Except to the extent YA Global or its agents may declare a breach or
default under the outstanding debentures, warrants, or registration rights
agreement and except for the fact that the Company has insufficient working
capital to fund its operations and its financial statements reflect that the
Company’s current liabilities and total liabilities are in excess of the
Company’s current assets and total assets, respectively, neither the Company
nor any of its subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in
the judgment of the Company’s officers has or is expected in the future to have
a Material Adverse Effect on the business, properties, operations, financial
condition, results of operations or prospects of the Company or its
subsidiaries.  Neither the Company nor
any of its subsidiaries is in breach of any contract or agreement which breach,
in the judgment of the Company’s officers, has or is expected to have a
Material Adverse Effect on the business, properties, operations, financial
condition, results of operations or prospects of the Company or its
subsidiaries.


 


(u)           Tax Status.  The Company and each of its subsidiaries has
made and filed all federal and state income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject and
(unless and only to the extent that the Company and each of its subsidiaries
has set aside on its books provisions reasonably adequate for the payment of
all unpaid and unreported taxes) has paid all taxes and other governmental
assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and has set aside on its books provision reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. 
There are no unpaid taxes in any material amount 


 

















 


claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of
no basis for any such claim.


 


(v)           Certain
Transactions.  Except for
arm’s length transactions pursuant to which the Company makes payments in the
ordinary course of business upon terms no less favorable than the Company could
obtain from third parties and other than the grant of stock options disclosed
in the SEC Documents, none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company (other than
for services as employees, officers and directors), including any contract, agreement
or other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity
in which any officer, director, or any such employee has a substantial interest
or is an officer, director, trustee or partner.


 


(w)          Fees and Rights
of First Refusal.  Except to
the extent any such obligation is owed to YA Global, the Company is not
obligated to offer the securities offered hereunder on a right of first refusal
basis or otherwise to any third parties including, but not limited to, current
or former shareholders of the Company, underwriters, brokers, agents or other
third parties.


 


(x)            Investment
Company.  The Company
is not, and is not an affiliate of, and immediately after receipt of payment
for the Securities, will not be or be an affiliate of, an “investment company”
within the meaning of the Investment Company Act of 1940, as amended.  The Company shall conduct its business in a
manner so that it will not become subject to the Investment Company Act.


 


(y)           Registration
Rights.  Other than each of the Buyers
pursuant to the Transaction Documents and pursuant to other obligations
previously entered into between YA Global and the Company, no Person has any
right to cause the Company to effect the registration under the Securities Act
of any securities of the Company.  There
are no outstanding registration statements not yet declared effective and there
are no outstanding comment letters from the SEC or any other regulatory agency.


 


(z)            Private
Placement.  Assuming
the accuracy of the Buyers’ representations and warranties set forth in Section 2,
no registration under the Securities Act is required for the offer and sale of
the Securities by the Company to the Buyers as contemplated hereby. The
issuance and sale of the Securities hereunder does not contravene the rules and
regulations of the Primary Market.


 


(aa)         Listing and
Maintenance Requirements.  The
Company’s Common Stock is registered pursuant to Section 12(b) or 12(g) of
the Exchange Act, and the Company has taken no action designed to terminate, or
which to its knowledge is likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act nor has the Company
received any notification that the SEC is contemplating terminating such
registration.  Except to the extent
disclosed in the SEC Documents with respect to the delisting of the Company’s
securities from the Nasdaq Capital Market, the Company has not, in the twelve
(12) months 


 

















 


preceding the date hereof,
received notice from any Primary Market on which the Common Stock is or has
been listed or quoted to the effect that the Company is not in compliance with
the listing or maintenance requirements of such Primary Market.  The Company is, and has no reason to believe
that it will not in the foreseeable future continue to be, in compliance with
all such listing and maintenance requirements.


 


(bb)         Reporting
Status.  With a view to making available to the Buyer the benefits of Rule 144
or any similar rule or regulation of the SEC that may at any time permit
the Buyer to sell securities of the Company to the public without registration,
and as a material inducement to the Buyer’s purchase of the Securities, the
Company represents and warrants to the following: (i) the Company is, and
has been for a period of at least 90 days immediately preceding the date
hereof, subject to the reporting requirements of section 13 or 15(d) of
the Exchange Act (ii) the Company has filed all required reports under
section 13 or 15(d) of the Exchange, as applicable, during the 12 months
preceding the date hereof (or for such shorter period that the Company was
required to file such reports), (iii) the Company is not an issuer defined
as a “Shell Company,” and (iv) the Company is not an issuer that has been
at any time previously an issuer defined as a “Shell Company.”  For the purposes hereof, the term “Shell
Company” shall mean an issuer that meets the description defined in paragraph
(i)(1)(i) of Rule 144.  The
Company affirmatively represents that, because the Company may not be able to
meet the requirements of §404 of the Sarbanes-Oxley Act of 2002 or may have to
report material weaknesses of the Company’s disclosure controls or internal
control of financial reporting, holders of the Company’s securities may not be
able to utilize Rule 144 prior to one year from the date hereof.


 


(cc)         Disclosure.  The
Company has made available to the Buyer and its counsel all the information
reasonably available to the Company that the Buyer or its counsel have
requested for deciding whether to acquire the Securities.  No
representation or warranty of the Company contained in this Agreement (as
qualified by the Disclosure Schedule) or any of the other Transaction
Documents, and no certificate furnished or to be furnished to the Buyer at the
Closing, or any due diligence evaluation materials furnished by the Company or
on behalf of the Company, including without limitation, due diligence
questionnaires, or any other documents, presentations, correspondence, or
information contains any untrue statement of a material fact or omits to state
a material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they were
made.


 


(dd)         Manipulation of
Price.  The Company has not, and to its knowledge no one acting on its
behalf has, (i) taken, directly or indirectly, any action designed to
cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or, paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to
pay to any Person any compensation for soliciting another to purchase any other
securities of the Company, other than, in the case of clauses (ii) and
(iii), compensation paid to the Company’s placement agent in connection with
the placement of the Securities.


 


(ee)         Dilutive Effect.  The Company understands and acknowledges that
the number of Warrant Shares issuable upon exercise of the Warrants will
increase in certain circumstances.  The
Company further acknowledges that its obligation to issue the Warrant 


 

















 


Shares upon exercise of the
Warrants in accordance with this Agreement and the Warrants, in each case, is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the Company.


 


(ff)           Annual
Operating Plan.  A true and
correct copy of the Company’s Annual Operating for Fiscal Year 2009 the (“Annual
Operating Plan”) is attached hereto as Exhibit X.


 


4.     COMPANY
ACKNOWLEDGMENTS AND RELEASE.


 


(a)           Acknowledgement of Obligations.  The Company hereby
acknowledges, confirms and agrees that as of the date hereof, the Company is
indebted to YA Global under Debentures CCP-3, CCP-4, CCP-5 and CCP-2007-1.


 


(b)           Acknowledgement of Security Interests.  The Company hereby acknowledges, confirms and
agrees that YA Global has and shall continue to have valid, enforceable and
perfected first-priority liens upon and security interests in the Pledged
Property heretofore granted to YA Global pursuant to the Security Agreement
between the Company and YA Global dated May 30, 2006, the Security
Agreement between Isonics Homeland Security and Defense Corporation, a wholly
owned subsidiary of the Company and YA Global dated May 30, 2006, the
Security Agreement between Protection Plus Corporation, a wholly owned
subsidiary of the Company, and YA Global dated May 30, 2006, the Security
Agreement between Isonics Vancouver, Inc., a wholly owned subsidiary of the
Company, and YA Global dated May 30, 2006 and in the Pledged Shares
heretofore granted to YA Global pursuant to the Pledge and Escrow Agreement
among the Company, David Gonzalez, Esq. and YA Global dated April 10,
2007, or otherwise granted to or held by YA Global.


 


(c)           Confirmation
and Release.  YA Global
hereby represents and warrants to the Company that to the best of its knowledge
it has complied with its obligations under all prior agreements (including
debentures, warrants, securities purchase agreements, security agreements)
between YA Global and the Company and, in connection therewith, has made no
misrepresentation to the Company and has complied with all of its legal
requirements (the “Confirmation”). In consideration thereof, the Company does
hereby agree to, on behalf of itself and its agents, representatives,
attorneys, assigns, heirs, subsidiaries, executors and administrators
(collectively, “Company Parties”) RELEASE AND FOREVER DISCHARGE YA
Global and its subsidiaries and its respective affiliates, parents, joint
ventures, officers, directors, shareholders, interest holders, members,
managers, employees, consultants, representatives, successors and assigns,
heirs, executors and administrators (collectively, “Buyer Parties”) from
all causes of action, suits, debts, claims and demands whatsoever known or
unknown, at law, in equity or otherwise, which the Company Parties ever had or
now has, and any claims for reasonable attorneys’ fees and costs, and
including, without limitation, any claims relating to fees, penalties,
liquidated damages, and indemnification for losses, liabilities and
expenses.  Based upon and subject to the
Confirmation, the release contained in this Section is effective without
regard to the legal nature of the claims raised and without regard to whether
any such claims are based upon tort, equity, or implied or express
contract.  It is expressly understood and
agreed that this release shall operate as a clear and unequivocal waiver by the
Company Parties of any such claim whatsoever.


 

















 


5.     COVENANTS.


 


(a)           Best Efforts.  Each party shall use its best efforts to
timely satisfy each of the conditions to be satisfied by it as provided in
Sections 6 and 7 of this Agreement.


 


(b)           Form D.  The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing.  The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary
to qualify the Securities, or obtain an exemption for the Securities for sale
to the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States, and shall
provide evidence of any such action so taken to the Buyers on or prior to the
Closing Date.


 


(c)           Reporting
Status.  With a view to making
available to the Buyer the benefits of Rule 144 or any similar rule or
regulation of the SEC that may at any time permit the Buyer to sell securities
of the Company to the public without registration, and as a material inducement
to the Buyer’s purchase of the Securities, the Company represents, warrants,
and covenants to the following:


 


(i)            The Company is
subject to the reporting requirements of section 13 or 15(d) of the
Exchange Act and has filed all required reports under section 13 or 15(d) of
the Exchange Act during the 12 months prior to the date hereof (or for such
shorter period that the issuer was required to file such reports), other than Form 8-K
reports;


 


(ii)           from the date
hereof until all the Securities either have been sold by the Buyer, or may
permanently be sold by the Buyer without any restrictions pursuant to Rule 144,
(the “Registration Period”) the Company shall file with the SEC in a
timely manner all required reports under section 13 or 15(d) of the
Exchange Act and such reports shall conform to the requirement of the Exchange
Act and the SEC for filing thereunder to the extent that the Company is capable
of doing so, acknowledging that the Company’s management will not be able to
make its assessment of internal control of financial reporting because the
Company has not implemented the framework required by §404 of the
Sarbanes-Oxley Act of 2002 (which failure will likely result in the Company’s
being required to identify material weaknesses in the Company’s disclosure
controls and internal control of financial reporting), and the Company can give
no assurance that its independent auditors will be able to issue a report on
the Company’s financial statements in the form required by the SEC’s rules and
regulations and any such report issued will contain a going concern
qualification;


 


(iii)          The Company
shall furnish to the Buyer so long as the Buyer owns Securities, promptly upon
request, (i) if true, a written statement by the Company that it has
complied with the reporting requirements of Rule 144, (ii) a copy of
the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested to permit the Buyers to sell such
securities pursuant to Rule 144 without registration if Rule 144 is
available; and


 

















 


(iv)          During the
Registration Period the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would otherwise permit such termination.


 


(d)           Use of Proceeds.  The Company will use the proceeds from the
sale of the Notes for the build up on inventory, capital expenditures and
working capital purposes.


 


(e)           Reservation of
Shares.  On the date hereof, the
Company shall reserve for issuance to the Buyers 13,000,000 shares of Common
Stock for issuance upon exercise of the Warrants (collectively, the “Share
Reserve”).  The Company represents
that it has sufficient authorized and unissued shares of Common Stock available
to create the Share Reserve after considering all other commitments that may
require the issuance of Common Stock. 
The Company shall take all action reasonably necessary to at all times
have authorized, and reserved for the purpose of issuance, such number of
shares of Common Stock as shall be necessary to effect the full exercise of the
Warrants.  If at any time the Share
Reserve is insufficient to effect the full exercise of the Warrants, the
Company shall increase the Share Reserve accordingly.  If the Company does not have sufficient
authorized and unissued shares of Common Stock available to increase the Share
Reserve, the Company shall call and hold a special meeting of the shareholders
within thirty (30) days of such occurrence, for the sole purpose of increasing
the number of shares authorized.  The
Company’s management shall recommend to the shareholders to vote in favor of
increasing the number of shares of Common Stock authorized.  Management shall also vote all of its shares
in favor of increasing the number of authorized shares of Common Stock.


 


(f)            Listings or
Quotation.  The Company’s
Common Stock shall be listed or quoted for trading on any of (a) the
American Stock Exchange, (b) New York Stock Exchange, (c) the Nasdaq
Global Market, (d) the Nasdaq Capital Market, or (e) the Nasdaq OTC
Bulletin Board (which does not include the Pink Sheets LLC) (“OTCBB”)
(each, a “Primary Market”).  The
Company shall promptly secure the listing of all of the Registrable Securities
(as defined in the Registration Rights Agreement) upon each national securities
exchange and automated quotation system, if any, upon which the Common Stock is
then listed (subject to official notice of issuance) and shall maintain such
listing of all Registrable Securities from time to time issuable under the
terms of the Transaction Documents.


 


(g)           Fees and
Expenses.


 


(i)            The Company
shall pay all of its costs and expenses incurred by it connection with the
negotiation, investigation, preparation, execution and delivery of the
Transaction Documents.


 


(ii)           The Company
shall place into escrow $100,000 (the “Monitoring Fees”) upon the First
Closing, directly from the proceeds of the First Closing (as deposited into
escrow, the “Escrow Funds”) which shall be used to compensate Yorkville
Advisors LLC (“Investment Manager”) for monitoring and managing the
purchase and investment made by YA Global Investments, L.P. (“YA Global”)
described herein, pursuant to the Investment Manager’s existing advisory
obligations to YA Global.  Prior to the
Second 


 

















 


Closing and, if applicable,
the Third Closing the Buyers and the Company shall agree to proportionate additional
Monitoring Fees to be placed in escrow. 
The Company, Investment Manager, and YA Global shall enter into an
Escrow Agreement of even date herewith in the form attached hereto as Exhibit D
(the “Escrow Agreement”) appointing an escrow agent (the “Escrow
Agent”) to hold the Escrow Funds and to periodically disburse portions of
such Escrow Funds to the Investment Manager from escrow in accordance with the
terms of the Escrow Agreement.  The
Investment Manager shall periodically receive portions of the Escrow Funds in
accordance with the Escrow Agreement until either: (1) the Escrow Funds
shall have been fully disbursed pursuant the Escrow Agreement or (2) the
Securities shall have been Fully Retired. 
“Fully Retired” shall mean that the Buyer shall have fully disposed of
all the Securities issued or issuable hereunder, shall no longer have any
investment in, or ownership of, any of the Securities, all amounts owed to YA
Global under the Transaction Documents shall have been paid, and the
Transaction Documents shall have been terminated.  When the Securities are Fully Retired, the
remaining Escrow Funds shall be returned to the Company or otherwise disbursed
in accordance with the Escrow Agreement.


 


(iii)          The Company
shall pay a structuring and due diligence fee to Yorkville of Seventy Five
Thousand Dollars ($75,000) which shall be paid directly from the proceeds of
the First Closing.  The structuring and
due diligence fee shall be nonrefundable and payable whether or not any Closing
occurs.


 


(h)           Corporate
Existence.  So long as
any of the Notes remain outstanding, the Company shall not directly or
indirectly consummate any merger, reorganization, restructuring, reverse stock
split consolidation, sale of all or substantially all of the Company’s assets
or any similar transaction or related transactions (each such transaction, an “Organizational
Change”) unless, prior to the consummation an Organizational Change, the
Company obtains the written consent of each Buyer.  In any such case, the Company will make
appropriate provision with respect to such holders’ rights and interests to
insure that the provisions of this Section 4(h) will thereafter be
applicable to the Notes.


 


(i)            Transactions
With Affiliates.  So long as
any Notes are outstanding, the Company shall not, and shall cause each of its
subsidiaries not to, enter into, amend, modify or supplement, or permit any
subsidiary to enter into, amend, modify or supplement any agreement,
transaction, commitment, or arrangement with any of its or any subsidiary’s
officers, directors, person who were officers or directors at any time during
the previous two (2) years, stockholders who beneficially own five percent
(5%) or more of the Common Stock, or Affiliates (as defined below) or with any
individual related by blood, marriage, or adoption to any such individual or
with any entity in which any such entity or individual owns a five percent (5%)
or more beneficial interest (each a “Related Party”), except for (a) customary
employment arrangements and benefit programs on reasonable terms, (b) any
investment in an Affiliate of the Company, 
(c) any agreement, transaction, commitment, or arrangement on an
arms-length basis on terms no less favorable than terms which would have been
obtainable from a person other than such Related Party, (d) any agreement,
transaction, commitment, or arrangement which is approved by a majority of the
disinterested directors of the Company; for purposes hereof, any director who
is also an officer of the Company or any subsidiary of the Company shall not be
a disinterested director with respect to any such agreement, transaction,
commitment, or arrangement.  “Affiliate”
for purposes hereof means, 


 

















 


with respect to any person
or entity, another person or entity that, directly or indirectly, (i) has
a ten percent (10%) or more equity interest in that person or entity, (ii) has
ten percent (10%) or more common ownership with that person or entity, (iii) controls
that person or entity, or (iv) shares common control with that person or
entity.  “Control” or “controls”
for purposes hereof means that a person or entity has the power, direct or
indirect, to conduct or govern the policies of another person or entity.


 


(j)            Transfer Agent.  The Company covenants and agrees that, in the
event that the Company’s agency relationship with the transfer agent should be
terminated for any reason prior to a date which is two (2) years after the
Closing Date, the Company shall immediately appoint a new transfer agent and
shall require that the new transfer agent execute and agree to be bound by the
terms of the Irrevocable Transfer Agent Instructions (as defined herein).


 


(k)           Restriction on
Issuance of the Capital Stock. So long as any Notes are
outstanding, the Company shall not, without the prior written consent of the
Buyer(s) and except for Excluded Securities, (i) issue or sell shares
of Common Stock or Preferred Stock without consideration or for a consideration
per share less than the bid price of the Common Stock determined immediately
prior to its issuance, (ii) issue any preferred stock, warrant, option,
right, contract, call, or other security or instrument granting the holder
thereof the right to acquire Common Stock without consideration or for a
consideration less than such Common Stock’s Bid Price determined immediately
prior to it’s issuance, (iii) enter into any security instrument granting
the holder a security interest in any and all assets of the Company, or (iv) file
any registration statement on Form S-8.  For the purposes of this Section, “Excluded
Securities” means shares of Common Stock issued or deemed to be issued by
the Company upon the exercise of any option or warrant, or the conversion of
any convertible security, issued or deemed to have been issued by the Company
and outstanding on the date prior to date of this Agreement, provided that the
terms of such option, warrant or convertible security are not amended or
otherwise modified on or after the date of this Agreement, and provided that
the exercise or conversion price is not reduced, adjusted or otherwise modified
and the number of shares of Common Stock issued or issuable is not increased
(whether by operation of, or in accordance with, the relevant governing
documents or otherwise) on or after the date of this Agreement.


 


(l)            Neither the
Buyer(s) nor any of its affiliates have an open short position in the
Common Stock of the Company, and the Buyer(s) agrees that it shall not,
and that it will cause its affiliates not to, engage in any short sales of or
hedging transactions with respect to the Common Stock as long as any Notes
shall remain outstanding.


 


(m)          Rights of First
Refusal.  So long as any portion of Notes are outstanding, if the Company intends
to raise additional capital by the issuance or sale of capital stock of the Company,
including without limitation shares of any class of common stock, any class of
preferred stock, options, warrants or any other securities convertible or
exercisable into shares of common stock (whether the offering is conducted by
the Company, underwriter, placement agent or any third party) the Company shall
be obligated to offer to the Buyers such issuance or sale of capital stock, by
providing in writing the principal amount of capital it intends to raise and
outline of the material terms of such capital raise, prior to the offering such
issuance 


 

















 


or
sale of capital stock to any third parties including, but not limited to,
current or former officers or directors, current or former shareholders and/or
investors of the obligor, underwriters, brokers, agents or other third
parties.  The Buyers shall have ten (10) business days from receipt of
such notice of the sale or issuance of capital stock to accept or reject all or
a portion of such capital raising offer.


 


(n)           Lockup
Agreements.  On the date
hereof, the Company shall obtain from each officer and director a lockup
agreement in the form attached hereto as Exhibit C.


 


(o)           Additional
Registration Statements. 
Until the effective date of the initial Registration Statement, the
Company will not file a registration statement under the Securities Act
relating to securities that are not the Securities.


 


(p)           Review of
Public Disclosures.  All SEC
filings (including, without limitation, all filings required under the Exchange
Act, which include Forms 10-Q and 10-QSB, 10-K and 10K-SB, 8-K, etc) and other
public disclosures made by the Company, including, without limitation, all
press releases, investor relations materials, and scripts of analysts meetings
and calls, shall be reviewed and approved for release by the Company’s
attorneys and, if containing financial information, the Company’s independent
certified public accountants.


 


(q)           Disclosure of
Transaction.  Within four
Business Day following the date of this Agreement, the Company shall file a
Current Report on Form 8-K describing the terms of the transactions
contemplated by the Transaction Documents in the form required by the Exchange
Act and attaching the material Transaction Documents (including, without
limitation, this Agreement, the form of the Notes, the form of Warrant and the
form of the Registration Rights Agreement) as exhibits to such filing.


 


(r)            Revenue.  The Company will not permit its actual
monthly revenue to fall more than 10% below the actual revenue reflected on the
Annual Operating Plan for the quarter ending July 31, 2008 or for any
monthly period thereafter.


 


(s)           EBITDA.  The Company will not permit its monthly
EBITDA to fall more than 10% below the EBITDA reflected on the Annual Operating
Plan for the quarter ending July 31, 2008 or for each quarter thereafter.


 


(t)            Cash Flow.  The Company will not permit its monthly Free
Cash Flow to fall more than 10% below the Free Cash Flow reflected on the
Annual Operating Plan for the quarter ending July 31, 2008 or for each
quarter thereafter.


 


(u)           Officer Bonuses.  The Company will not distribute officer
bonuses, allocated pro rata to a given quarter, unless (i) in such quarter
the Company achieves a minimum of 110% of the targeted EBITDA reflected on the
Annual Operating Plan or (ii) the Buyer(s) consent.


 


(v)           Future Debt
Financing.  If the
Company and/or any of its wholly owned subsidiaries (each a “Grantor”)
obtains a commitment for debt financing, the Buyer will upon written request by
any of the Grantors evaluate such financing offer in good faith.  If such 


 

















 


financing is acceptable to
the Buyer in the Buyers’ sole reasonable discretion, Buyer will release its
security interest in a portion of the inventory and receivables of the Grantor
granted to the Buyer pursuant to the Security Documents.


 


6.     TRANSFER AGENT
INSTRUCTIONS.


 


(a)           The Company
shall issue the Irrevocable Transfer Agent Instructions to its transfer agent,
and any subsequent transfer agent, irrevocably appointing David Gonzalez, Esq.
as the Company’s agent for purpose instructing its transfer agent to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”), registered in the name of each Buyer
or its respective nominee(s), for the Warrant Shares issued upon exercise of the
Warrants as specified from time to time by each Buyer to the Company upon
exercise of the Warrants.  The Company
shall not change its transfer agent without the express written consent of the
Buyers, which may be withheld by the Buyers in their sole discretion.  The Company warrants that no instruction
other than the Irrevocable Transfer Agent Instructions referred to in this Section 5,
and stop transfer instructions to give effect to Section 2(g) hereof
(in the case of the Warrant Shares prior to registration of such shares under
the Securities Act) will be given by the Company to its transfer agent, and
that the Securities shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement and the
other Transaction Documents.  If a Buyer
effects a sale, assignment or transfer of the Securities in accordance with Section 2(f),
the Company shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such
name and in such denominations as specified by such Buyer to effect such sale,
transfer or assignment and, with respect to any transfer, shall permit the
transfer.  In the event that such sale,
assignment or transfer involves Warrant Shares sold, assigned or transferred
pursuant to an effective registration statement or pursuant to Rule 144,
the transfer agent shall issue such Securities to the Buyer, assignee or
transferee, as the case may be, without any restrictive legend.  Nothing in this Section 6 shall affect
in any way the Buyer’s obligations and agreement to comply with all applicable
securities laws upon resale of Warrant Shares. 
The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Buyer by vitiating the intent and
purpose of the transaction contemplated hereby. 
Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 5 will be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 5, that the Buyer(s) shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.


 


7.     CONDITIONS TO
THE COMPANY’S OBLIGATION TO SELL.


 


The obligation of the Company hereunder to
issue and sell the Notes to the Buyer(s) at the Closings is subject to the
satisfaction, at or before the Closing Dates, of each of the following
conditions, provided that these conditions are for the Company’s sole benefit
and may be waived by the Company at any time in its sole discretion:


 


(a)           Each Buyer
shall have executed the Transaction Documents and delivered them to the
Company.


 
















 


(b)           The Buyer(s) shall
have delivered to the Company the Purchase Price for the Notes and Warrants in
the respective amounts as set forth next to each Buyer as set forth on Schedule
I attached hereto, minus any fees to be paid directly from the proceeds the
Closings as set forth herein, by wire transfer of immediately available U.S.
funds pursuant to the wire instructions provided by the Company.


 


(c)           The representations and
warranties of the Buyer(s) shall be true and correct in all material
respects as of the date when made and as of the Closing Dates as though made at
that time (except for representations and warranties that speak as of a
specific date), and the Buyer(s) shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer(s) at or prior to the Closing Dates.


 


(d)           YA Global shall have
released Two Hundred Thousand Dollars ($200,000) from escrow to the Company for
working capital purposes.


 


8.     CONDITIONS TO THE BUYER’S OBLIGATION TO
PURCHASE.


 


(a)           The obligation of the
Buyer(s) hereunder to purchase the Notes at the First Closing is subject
to the satisfaction, at or before the First Closing Date, of each of the following
conditions, provided that these conditions are for the Buyer’s sole benefit and
may be waived by the Buyer at any time in its sole discretion:


 


(i)            The Company shall
have executed the Transaction Documents and delivered the same to the Buyers.


 


(ii)           The Common Stock
shall be authorized for quotation or trading on the Primary Market, trading in
the Common Stock shall not have been suspended for any reason.


 


(iii)          The representations
and warranties of the Company shall be true and correct in all material
respects (except to the extent that any of such representations and warranties
is already qualified as to materiality in Section 3 above, in which case,
such representations and warranties shall be true and correct without further
qualification) as of the date when made and as of the First Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the First Closing Date


 


(iv)          The Company shall
have executed and delivered to the Buyer(s) the Notes and Warrants in the
respective amounts set forth opposite each Buyer’s name on Schedule I attached
hereto.


 


(v)           The Buyers shall
have received an opinion of counsel from counsel to the Company in a form
satisfactory to the Buyers.


 





















 


(vi)          The Company shall
have provided to the Buyers a true copy of a certificate of good standing
evidencing the formation and good standing of the Company from the secretary of
state (or comparable office) from the jurisdiction in which the Company is
incorporated, as of a date within 10 days of the First Closing Date.


 


(vii)         The Company shall
have delivered to the Buyers a certificate, executed by the Secretary or
Assistant Secretary of the Company and dated as of the First Closing Date, as
to (i) the resolutions consistent with Section 3(c) as adopted
by the Company’s Board of Directors in a form reasonably acceptable to such
Buyer, (ii) the Certificate of Incorporation and (iii) the Bylaws,
each as in effect at the First Closing.


 


(viii)        The Company or the
Buyer shall have filed a form UCC-1 or such other forms as may be required to
perfect the Buyer’s interest in the Pledged Property as detailed in the
Security Agreement dated the date hereof and provided proof of such filing to
the Buyer(s).


 


(ix)           The Company shall
have used its best efforts to provide to the Buyer an acknowledgement, to the
satisfaction of the Buyer, from the Company’s independent certified public
accountants as to its ability to provide all consents required in order to file
a registration statement in connection with this transaction.  In this connection, the Buyer understands
that the Company’s independent certified public accountants have advised the
Company that, before they will issue any report on the Company’s financial
statements for the year ended April 30, 2008, such accountants require a
conference with the SEC regarding the effect of the Company’s inability to
implement a framework necessary to make the management’s assessment of the
Company’s internal control of financial reporting required by §404 of the
Sarbanes-Oxley Act of 2002 (and the material weaknesses that the Company may
have to report in its disclosure controls and internal control of financial
reporting), and if such accountants do not obtain a satisfactory response from
the SEC, such accountants may not issue a report on the Company’s financial
statements for the year ended April 30, 2008 or review financial
statements for any subsequent period.  In
such case, the Company may not be able to file any registration statement.


 


(x)            The Company shall
have created the Share Reserve.


 


(xi)           The Irrevocable
Transfer Agent Instructions, in form and substance satisfactory to the Buyer,
shall have been delivered to and acknowledged in writing by the Company’s
transfer agent.


 


(b)           The obligation of the
Buyer(s) hereunder to accept the Notes at the Second Closing is subject to
the satisfaction, at or before the Second Closing Date, of each of the
following conditions, provided that these conditions are for the Buyer’s sole
benefit and may be waived by the Buyer at any time in its sole discretion:


 


(i)            The Common Stock
shall be authorized for quotation or trading on the Primary Market, trading in
the Common Stock shall not have been suspended for any reason.


 





















 


(ii)           The representations
and warranties of the Company shall be true and correct in all material
respects (except to the extent that any of such representations and warranties
is already qualified as to materiality in Section 3 above, in which case,
such representations and warranties shall be true and correct without further
qualification) as of the date when made and as of the Second Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Second Closing Date.


 


(iii)          The Company shall
have executed and delivered to the Buyers the Notes in the respective amounts
set forth opposite each Buyers name on Schedule I attached hereto.


 


(iv)          The Company will
have changed its transfer agent to Worldwide Stock Transfer and notified the
Buyer(s) of such change.


 


(v)           The Company shall have
certified, in a certificate executed by two officers of the Company and dated
as of the Second Closing Date, that all conditions to the Second Closing have
been satisfied.


 


(c)           The obligation of the
Buyer(s) hereunder to accept the Notes at the Third Closing is subject to
the satisfaction, at or before the Third Closing Date, of each of the following
conditions, provided that these conditions are for the Buyer’s sole benefit and
may be waived by the Buyer at any time in its sole discretion:


 


(i)            The Common Stock
shall be authorized for quotation or trading on the Primary Market, trading in
the Common Stock shall not have been suspended for any reason.


 


(ii)           The representations
and warranties of the Company shall be true and correct in all material respects
(except to the extent that any of such representations and warranties is
already qualified as to materiality in Section 3 above, in which case,
such representations and warranties shall be true and correct without further
qualification) as of the date when made and as of the Second Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Second Closing Date.


 


(iii)          The Company shall
have executed and delivered to the Buyers the Notes in the respective amounts
set forth opposite each Buyers name on Schedule I attached hereto.


 


(iv)          The Company shall
have certified, in a certificate executed by two officers of the Company and
dated as of the Second Closing Date, that all conditions to the Second Closing
have been satisfied.


 





















 


9.     INDEMNIFICATION.


 


(a)           In consideration of
the Buyer’s execution and delivery of this Agreement and acquiring the Notes
hereunder, and in addition to all of the Company’s other obligations under this
Agreement, the Company shall defend, protect, indemnify and hold harmless the
Buyer(s) and each other holder of the Notes, and all of their officers,
directors, employees and agents (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement) (collectively,
the “Buyer Indemnitees”) from and against any and all actions, causes of
action, suits, claims, losses, costs, penalties, fees, liabilities and damages,
and expenses in connection therewith (irrespective of whether any such Buyer
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified
Liabilities”), incurred by the Buyer Indemnitees or any of them as a result
of, or arising out of, or relating to (a) any misrepresentation or breach
of any representation or warranty made by the Company in this Agreement, the
Notes or the other Transaction Documents or any other certificate, instrument
or document contemplated hereby or thereby, (b) any breach of any
covenant, agreement or obligation of the Company contained in this Agreement,
or the other Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, or (c) any cause of action, suit
or claim brought or made against such Buyer Indemnitee and arising out of or
resulting from the execution, delivery, performance or enforcement of this
Agreement or any other instrument, document or agreement executed pursuant
hereto by any of the parties hereto, any transaction financed or to be financed
in whole or in part, directly or indirectly, with the proceeds of the issuance
of the Notes or the status of the Buyer or holder of the Notes,  as a Buyer of Notes from the Company.  To the extent that the foregoing undertaking
by the Company may be unenforceable for any reason, the Company shall make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities, which is permissible under applicable law.


 


(b)           In consideration of
the Company’s execution and delivery of this Agreement, and in addition to all
of the Buyer’s other obligations under this Agreement, the Buyer shall defend,
protect, indemnify and hold harmless the Company and all of its officers,
directors, employees and agents (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the “Company Indemnitees”) from and against any and all
Indemnified Liabilities incurred by the Indemnitees or any of them as a result
of, or arising out of, or relating to (a) any misrepresentation or breach
of any representation or warranty made by the Buyer(s) in this Agreement,
instrument or document contemplated hereby or thereby executed by the Buyer, (b) any
breach of any covenant, agreement or obligation of the Buyer(s) contained
in this Agreement,  the Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby executed by the Buyer, or (c) any cause of action, suit or
claim brought or made against such Company Indemnitee based on material
misrepresentations or due to a material breach and arising out of or resulting
from the execution, delivery, performance or enforcement of this Agreement, the
Transaction Documents or any other instrument, document or agreement executed
pursuant hereto by any of the parties hereto. 
To the extent that the foregoing undertaking by each Buyer may be
unenforceable for any reason, each Buyer shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities, which is
permissible under applicable law.


 





















 


10.   GOVERNING LAW: MISCELLANEOUS.


 


(a)           Governing Law.  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.


 


(b)           Counterparts.  This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. 
In the event any signature page is delivered by facsimile transmission,
the party using such means of delivery shall cause four (4) additional
original executed signature pages to be physically delivered to the other
party within five (5) days of the execution and delivery hereof.


 


(c)           Headings.  The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.


 


(d)           Severability.  If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or unenforceability
shall not affect the validity or enforceability of the remainder of this
Agreement in that jurisdiction or the validity or enforceability of any
provision of this Agreement in any other jurisdiction.


 


(e)           Entire Agreement,
Amendments.  This Agreement
supersedes all other prior oral or written agreements between the Buyer(s), the
Company, their affiliates and persons acting on their behalf with respect to
the matters discussed herein, and this Agreement and the instruments referenced
herein contain the entire understanding of the parties with respect to the
matters covered herein and therein and, except as specifically set forth herein
or therein, neither the Company nor any Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters.  No provision of this Agreement may be waived
or amended other than by an instrument in writing signed by the party to be
charged with enforcement.


 


(f)            Notices.  Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon confirmation of receipt,
when sent by facsimile; (iii) three (3) days after being sent by U.S.
certified mail, return receipt requested, or (iv) one (1) day after
deposit with a nationally recognized overnight delivery service, in each case
properly addressed to the party to receive the same.  The addresses and facsimile numbers for such
communications shall be:


 





















 


	
  If to the Company, to:

  	
   

  	
  Isonics Corporation

  
	
   

  	
   

  	
  5906 McIntyre Street

  
	
   

  	
   

  	
  Golden, CO 80403

  
	
   

  	
   

  	
  Attn: 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

  
	
   

  	
   

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

  
	
   

  	
   

  	
  Telephone: (303)
  796-2626

  
	
   

  	
   

  	
  Facsimile: (303)
  796-2777

  
	
   

  	
   

  	
   

  



 


If to the Buyer(s), to its
address and facsimile number on Schedule I, with copies to the Buyer’s counsel
as set forth on Schedule I.  Each party
shall provide five (5) days’ prior written notice to the other party of
any change in address or facsimile number.


 


(g)           Successors and
Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns.  Neither the
Company nor any Buyer shall assign this Agreement or any rights or obligations
hereunder without the prior written consent of the other party hereto.


 


(h)           No Third Party
Beneficiaries.  This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns, and is not for the benefit of, nor may any provision
hereof be enforced by, any other person.


 


(i)            Survival.  Unless this Agreement is terminated under Section 9(l),
all agreements, representations and warranties contained in this Agreement or
made in writing by or on behalf of any party in connection with the
transactions contemplated by this Agreement shall survive the execution and
delivery of this Agreement and the Closing.


 


(j)            Publicity.  The Company and the Buyer(s) shall have
the right to approve, before issuance any press release or any other public
statement with respect to the transactions contemplated hereby made by any
party; provided, however, that the Company shall be entitled, without the prior
approval of the Buyer(s), to issue any press release or other public disclosure
with respect to such transactions required under applicable securities or other
laws or regulations (the Company shall use its best efforts to consult the
Buyer(s) in connection with any such press release or other public
disclosure prior to its release and Buyer(s) shall be provided with a copy
thereof upon release thereof).


 


(k)           Further Assurances.  Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.


 





















 


(l)            Termination.  In the event that the First Closing shall not
have occurred with respect to the Buyers on or before five (5) business
days from the date hereof due to the Company’s or the Buyer’s failure to
satisfy the conditions set forth in Sections 6 and 7 above (and the
non-breaching party’s failure to waive such unsatisfied condition(s)), the
non-breaching party shall have the option to terminate this Agreement with
respect to such breaching party at the close of business on such date without
liability of any party to any other party; provided, however, that if this
Agreement is terminated by the Company pursuant to this Section 9(l), the
Company shall remain obligated to reimburse the Buyer(s) for the fees and
expenses of Yorkville Advisors LLC described in Section 4(g) above
(other than the amounts set forth in Section 4(g)(ii)).


 


(m)          Brokerage.  The Company represents that no broker, agent,
finder or other party has been retained by it in connection with the
transactions contemplated hereby and that no other fee or commission has been
agreed by the Company to be paid for or on account of the transactions contemplated
hereby.


 


(n)           No Strict
Construction.  The language used in
this Agreement will be deemed to be the language chosen by the parties to
express their mutual intent, and no rules of strict construction will be
applied against any party.


 


[REMAINDER PAGE INTENTIONALLY LEFT BLANK]


 

















 


IN WITNESS
WHEREOF,
each Buyer and the Company have caused their respective signature page to
this Securities Purchase Agreement to be duly executed as of the date first
written above.


 


 


	
   

  	
  COMPANY:

  
	
   

  	
  ISONICS CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  Gregory A. Meadows

  
	
   

  	
  Title:

  	
  Vice President/Assistant Secretary

  
				



 

















 


IN WITNESS
WHEREOF,
each Buyer and the Company have caused their respective signature page to
this Securities Purchase Agreement to be duly executed as of the date first
written above.


 


 


	
   

  	
  BUYERS:

  
	
   

  	
  YA GLOBAL INVESTMENTS, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Yorkville Advisors, LLC

  
	
   

  	
  Its:

  	
  Investment Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  Mark Angelo

  
	
   

  	
  Its:

  	
  Portfolio Manager

  
				



 

















 


Execution Copy


 


SCHEDULE I


 


SCHEDULE OF BUYERS


 


	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  	
   

  	
  (6)

  	
   

  	
  (7)

  	
   

  	
  (8)

  	
   

  
	
  Buyer

  	
   

  	
  Subscription Amount

  	
   

  	
  Number of 

  Warrant Shares

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Legal Representative’s

  Address and Facsimile

  Number

  	
   

  
	
   

  	
   

  	
  First Closing

  	
   

  	
  Second Closing

  	
   

  	
  Third Closing

  	
   

  	
  First Closing

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  YA Global Investments, L.P. 

   

  101 Hudson Street, Suite 3700

  Jersey City, NJ 07302

  Attention: Mark Angelo

  Telephone: (201) 985-8300

  Facsimile: (201) 985-8266

  Residence: Cayman Islands

  	
   

  	
  $

  	
  1,175,000

  	
   

  	
  $

  	
  50,000

  	
   

  	
  $

  	
  275,000

  	
   

  	
  13,000,000

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  David Gonzalez, Esq.

  101 Hudson Street, Suite 3700

  Jersey City, New Jersey 07302

  Telephone: (201) 985-8300

  Facsimile: (201) 985-8266

  	
   

  
																			



 

















 


Execution Copy


 


LIST OF EXHIBITS:


 


Disclosure Schedule


 


Exhibit A – Form of Notes


 


Exhibit B – Form of Warrant


 


Exhibit C – Form of Lock-Up Agreement


 


Exhibit X – Annual Operating Plan


 


Exhibit Y – Debenture Amendments


 

















 


DISCLOSURE SCHEDULE


 

















 


EXHIBIT C


 


LOCKUP AGREEMENT


 


The undersigned hereby agrees
that for a period commencing on June     , 200 and
expiring on the date thirty (30) days after the date that all amounts owed to
YA Global Investments, L.P. (the “Buyer”), under the Notes issued to the
Buyer pursuant to the Securities Purchase Agreement between Isonics Corporation
(the “Company”) and the Buyer dated June     ,
2008 have been paid (the “Lock-up Period”), he, she or it will not,
directly or indirectly, without the prior written consent of the Buyer, issue,
offer, agree or offer to sell, sell, grant an option for the purchase or sale
of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or
dispose of any securities of the Company, including common stock or options,
rights, warrants or other securities underlying, convertible into, exchangeable
or exercisable for or evidencing any right to purchase or subscribe for any
common stock (whether or not beneficially owned by the undersigned), or any
beneficial interest therein (collectively, the “Securities”) except in
accordance with the volume limitations set forth in Rule 144(e) of
the General Rules and Regulations under the Securities Act of 1933, as
amended.


 


In order to enable the
aforesaid covenants to be enforced, the undersigned hereby consents to the
placing of legends and/or stop-transfer orders with the transfer agent of the
Company’s securities with respect to any of the Securities registered in the
name of the undersigned or beneficially owned by the undersigned, and the
undersigned hereby confirms the undersigned’s investment in the Company.


 


Dated:
                         ,
2008


 


	
   

  	
  Signature

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
  City, State, Zip Code:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Print Social Security Number

  
	
   

  	
  or Taxpayer I.D. Number