ex10-5.htm

Exhibit
    10.5

    SECURITY
      AGREEMENT

     

    THIS
      SECURITY AGREEMENT (the
“Security
      Agreement”) is dated as of the 21st
      day of December
      2007 by and among XA, Inc., a Nevada Corporation (“XA”),
      The
      Experiential Agency, Inc., XA Scenes, Inc., XA Interactive, Inc., and Fiori
      XA,
      Inc. (collectively the with XA, the “Debtor”)
      and
      Sands Brothers Venture Capital III LLC (the “Secured
      Party”).

     

    WITNESSETH

     

    WHEREAS,
      pursuant to a
      Securities Purchase Agreement, dated as of the date hereof, as may be amended
      or
      supplemented from time to time (the “SPA”),
      the
      Debtor is selling to the Secured Party 11% Senior Secured Convertible Promissory
      Notes, in the principal amount of $200,000 in 11% Senior Secured Convertible
      Promissory Note are being sold on the date hereof, (the “Second
      Follow On
      Notes”), which is in addition to an aggregate of $3,150,000 in 11%
      Senior Secured Convertible Promissory Notes previously sold by the Debtor to
      certain parties (the “Prior
      Purchasers”) in August, September and October 2006 and June 2007
      (the “Prior
      Notes”)
      and along with the Follow On Notes, each, a “Note”:
      and
      collectively, the “Notes”)
      sold
      to certain parties (the “Purchasers”);
      and

     

    WHEREAS,
      Debtor has agreed,
      pursuant to the terms and conditions of the SPA, in connection with the
      Financing described therein, to secure the repayment of the Note, as more
      specifically provided herein;

     

    NOW,
      THEREFORE, in
      consideration of the foregoing, Debtor and the Secured Party agree as
      follows:

     

    SECTION
      1.                                Definitions.

     

    1.1           Certain
      Defined
      Terms. The
      following terms, as used herein, have the meanings set forth below:

     

    “Accounts”
      means all “accounts” (as defined in the UCC) now owned or hereafter created or
      acquired by Debtor including all of the following now owned or hereafter created
      or acquired by Debtor: (a) accounts receivable, contracts, contract rights,
      book debts, notes, drafts and other obligations or indebtedness owing to Debtor
      arising from the sale, lease or exchange of goods or other property or the
      performance of services; (b) Debtor’s rights in, to and under all purchase
      orders for goods, services or other property; (c) Debtor’s rights to any
      goods, services or other property represented by any of the foregoing (including
      returned or repossessed goods and unpaid sellers’ rights of rescission,
      repletion, reclamation and rights to stoppage in transit); (d) monies due
      to or to become due to Debtor under all contracts for the sale, lease or
      exchange of goods or other property or the performance of services (whether
      or
      not yet earned by performance on the part of Debtor); and (e) Proceeds of
      any of the foregoing and all collateral security and guaranties of any kind
      given by any Person with respect to any of the foregoing.

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


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

     

    “Computer
      Software”
or
“Software”
      means a computer program and any supporting information provided in connection
      with a transaction relating to the program.

     

    “Contracts”
      means all contracts and agreements (as defined in the UCC).

     

    “Copyrights”
      means collectively all of the following now owned or hereafter created or
      acquired by Debtor: (a) all literary works, derivative works, works for
      hire, compositions, compilations of all or some of the foregoing, whether
      published or unpublished, all registrations or recordings thereof, and all
      applications in connection therewith including registrations, recordings and
      applications in the Copyright Office of the United States, or any other country;
      (b) all reissues, extensions or renewals thereof; (c) all income,
      royalties, damages and payments now or hereafter due or payable under any of
      the
      foregoing or with respect to any of the foregoing including damages or payments
      for past or future infringements of any of the foregoing; (d) the right to
      sue for past, present and future infringements or any of the foregoing; and
      (e) all rights corresponding to any of the foregoing throughout the
      world.

     

    “Debtor”
has
      the meaning assigned to that term in the introduction to this Security
      Agreement.

     

    “Documents”
      means all “documents” (as defined in the UCC) or other receipts covering,
      evidencing or representing goods now owned or hereafter acquired by
      Debtor.

     

    “Equipment”
      means all “equipment” (as defined in the UCC) now owned or hereafter acquired by
      Debtor including all machinery, motor vehicles, trucks, trailers, vessels,
      aircraft and rolling stock and all parts thereof and all additions and
      accessions thereto and replacements therefor.

     

    “Event
      of
      Default” has the meaning assigned to that term in Section 8(a).

     

    “Fixtures”
      means all of the following now owned or hereafter acquired by Debtor: plant
      fixtures; business fixtures; other fixtures and storage office facilities,
      wherever located; and all additions and accessions thereto and replacements
      therefor.

     

    “General
      Intangibles” means all “general intangibles” (as defined in the
      UCC) now owned or hereafter acquired by Debtor including all right, title and
      interest of Debtor in and to: (a) all Software of the Debtor, including all
      source code and object code thereto; (b) all agreements, leases, licenses
      and contracts to which Debtor is or may become a party; (c) all obligations
      or indebtedness owing to Debtor (other than Accounts) from whatever source
      arising; (d) all tax refunds; (e) Intellectual Property; and
      (f) all trade secrets and other confidential information relating to the
      business of Debtor.

     


    
      
        
        

      

      
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    “Instruments”
      means all “instruments” “chattel paper” or “letters of credit” (each as defined
      in the UCC) including promissory notes, drafts, bills of exchange and trade
      acceptances, now owned or hereafter acquired by Debtor.

     

    “Intellectual
      Property” means collectively all of the following: Copyrights,
      Copyright Licenses, Patents, Trademarks and Trademark Licenses.

     

     “Inventory”
      means all “inventory” (as defined in the UCC), now owned or hereafter acquired
      by Debtor, wherever located including finished goods, raw materials, work in
      process and other materials and supplies (including packaging and shipping
      materials) used or consumed in the manufacture or production thereof and goods
      which are returned to or repossessed by Debtor.

     

    “Permitted
      Senior
      Indebtedness” shall mean the prior first priority security
      interest of LaSalle Bank National Association (“LaSalle”), and/or any other bank
      or institutional lending source which shall replace and/or supersede the LaSalle
      loan and debt ; provided,
      however, that in no case shall the aggregate amount of such Permitted
      Senior Indebtedness exceed eight hundred and seventy-five thousand dollars
      ($875,000).

     

    “Proceeds”
      means all proceeds of, and all other profits, rentals or receipts, in whatever
      form, arising from the collection, sale, lease, exchange, assignment, licensing
      or other disposition of, or realization upon, any Collateral including all
      claims of Debtor against third parties for loss of, damage to or destruction
      of,
      or for proceeds payable under, or unearned premiums with respect to, policies
      of
      insurance with respect to any Collateral, and any condemnation or requisition
      payments with respect to any Collateral, in each case whether now existing
      or
      hereafter arising.

     

    “Secured
      Obligations” has the meaning assigned to that term in Section 3.

     

    “Security
      Agreement” means this Security Agreement as it may be amended,
      supplemented or otherwise modified from time to time.

     

    “Security
      Interests” means the security interest granted pursuant to Section 2,
      as well as all other security interests created or assigned as additional
      security for the Secured Obligations pursuant to the provisions of this Security
      Agreement.

     

    “Subsidiaries”
      has the meaning assigned to that term in the introduction to this Security
      Agreement.

     

    “Trademarks”
      means collectively all of the following now owned or hereafter created or
      acquired by Debtor: (a) all trademarks, trade names, corporate names,
      company names, business names, fictitious business names, trade styles, service
      marks, logos, domain names and domain name registrations, other business
      identifiers, prints and labels on which any of the foregoing have
      appeared or appear, all registrations and recordings thereof (to the extent
      Debtor can register such corporate, company or business name as a trademark),
      and all applications in connection therewith including registrations, recordings
      and applications in the Trademark Office or in any similar office or agency
      of
      the United States, any State thereof or any other country or any political
      subdivision thereof; (b) all reissues, extensions or renewals thereof;
      (c) all income, royalties, damages and payments now or hereafter due or
      payable under any of the foregoing or with respect to any of the foregoing
      including damages or payments for past or future infringements of any of the
      foregoing; (d) the right to sue for past, present and future infringements
      of any of the foregoing; (e) all rights corresponding to any of the
      foregoing throughout the world; and (f) all goodwill associated with and
      symbolized by any of the foregoing.

     


    
      
        
        

      

      
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     “UCC”
means
      the
      Uniform Commercial Code as in effect on the date hereof in the State of
      Illinois, Nevada, California, New Jersey and New York or such state as property
      and/or fixtures may be located, as the case may be, as amended from time to
      time, and any successor statute; provided that if
      by
      reason of mandatory provisions of law, the perfection or the effect of
      perfection or non-perfection of the Security Interest in any Collateral is
      governed by the Uniform Commercial Code as in effect on or after the date hereof
      in any other jurisdiction, “UCC” means the Uniform
      Commercial Code as in effect in such other jurisdiction for purposes of the
      provision hereof relating to such perfection or effect of perfection or
      non-perfection.

     

    1.2           Other
      Definition
      Provisions. References to “Sections”
      “subsections,”
      “Exhibits”
and
      “Schedules”
      shall be to Sections, subsections, Exhibits and Schedules, respectively, of
      this Security Agreement unless otherwise specifically provided. References
      to
      the words “including,” “includes” and “include” shall be deemed to be followed
      by the words “without limitation;” and the term “or” has, except where otherwise
      indicated, the inclusive meaning represented by the phrase “and/or.” Any of the
      terms defined in subsection 1.1 may, unless the context otherwise requires,
      be used in the singular or the plural depending on the reference. All references
      to statutes and related regulations shall include any amendments of same and
      any
      successor statutes and regulations.

     

    SECTION
      2.                                Grant of Security
      Interest.

     

    In
      order
      to secure the payment and performance of the Secured Obligations in accordance
      with the terms thereof, except as otherwise specifically provided in this
      Security Agreement, the Debtor hereby grants to the Secured Party, a continuing
      first priority security interest and lien in and to all right, title and
      interest of Debtor in the following property, whether now owned or existing
      or
      hereafter acquired or arising and regardless of where located, which first
      priority security interest shall be pari passu to the first priority security
      interest of the Purchasers and the other purchasers who invest during the
      offering to which this Security Agreement is a part), and subject only to the
      Permitted Senior Indebtedness (all being collectively referred to as the “Collateral”).

     


    
      
        
        

      

      
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      (a)           Accounts;

       

      (b)           Inventory;

       

      (c)           Computer
        Software;

       

      (d)           General
        Intangibles;

       

      (e)           Documents;

       

      (f)           Instruments;

       

      (g)           Equipment;

       

      (h)           Fixtures;

       

      (i)           Contracts;

       

      (j)           All
        deposit accounts of Debtor maintained with any bank or financial
        institution;

       

      (k)           All
        books, records, ledger cards, files, correspondence, computer programs, tapes,
        disks and related data processing software that at any time evidence or contain
        information relating to any of the property described in subparts (a) -
        (j) above or are otherwise necessary or helpful in the collection thereof
        or realization thereon;

       

      (l)           any
        and all other assets of the Debtor, whether currently held or hereafter
        acquired; and

       

      (m)           Proceeds
        of all or any of the property described in subparts (a) -
        (l) above.

       

      Notwithstanding
        the foregoing, so long as no Event of Default has occurred and is continuing,
        Debtor shall have the exclusive, non-transferable right and license to use
        the
        Collateral and the exclusive right to sell, transfer, convey, rent, lease,
        and
        grant to third parties licenses and sublicenses with respect to the Collateral,
        provided that any such sale, transfer, conveyance, rental, lease, license
        or
        sublicense is effected in the Debtor’s ordinary course of
        business.  In the event that the Debtor sells any of its inventory in
        the ordinary course of business, such shall be transferred without any liens
        under the terms of this Security Agreement.

       

      SECTION
        3.                                Security for
        Obligations.

       

      This
        Security Agreement secures the
        payment and performance of all obligations, liabilities, duties and covenants
        of
        Debtor to the Secured Party with respect to the Notes, plus any and all accrued
        (and accruing) but unpaid interest on all such indebtedness (all such debts,
        obligations and liabilities of Debtor being collectively called the “Secured
        Obligations”).

       


      
        
          
          

        

        
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      SECTION
        4.                                Debtor Remains
        Liable.

       

      Anything
        herein to the contrary
        notwithstanding: (a) Debtor shall remain liable under the contracts and
        agreements included in the Collateral to the extent set forth therein to
        perform
        all of its duties and obligations thereunder to the same extent as if this
        Security Agreement had not been executed; (b) the exercise by the Secured
        Party of any of the rights hereunder shall not release Debtor from any of
        its
        duties or obligations under the contracts and agreements included in the
        Collateral; and (c) the Secured Party shall not have any obligation or
        liability under the contracts and agreements included in the Collateral by
        reason of this Security Agreement, nor shall the Secured Party be obligated
        to
        perform any of the obligations or duties of Debtor thereunder or to take
        any
        action to collect or enforce any claim for payment assigned
        hereunder.

       

      SECTION
        5.                                Representations
        and
        Warranties. Debtor
        represents and
        warrants as follows:

       

      5.1.           Binding
        Obligation;
        Authorization. This Security Agreement and the Note are legally
        valid and binding obligations of Debtor, enforceable against it in accordance
        with their terms, except as limited by applicable bankruptcy, insolvency,
        reorganization, moratorium and other laws of general application affecting
        enforcement of creditors’ rights generally. The execution, delivery and
        performance of this Security Agreement and the Note by the Debtor has been
        duly
        approved by the Board of Directors of the Debtor and all other actions required
        to authorize and effect the granting of the Security Interests and the issuance
        of the Note has been duly taken and approved by the Debtor.

       

      5.2.           Location
        of Equipment and
        Inventory. All of the Equipment and Inventory is located at the
        places specified on Schedule I.

       

      5.3.           Ownership
        of Collateral;
        Outstanding Loans. The Company owns the Collateral free and clear
        of any liens, security interests, charges or other encumbrances (collectively,
        “Liens”).
        No
        financing statement or other form of Lien notice covering all or any part
        of the
        Collateral is on file in any recording office, except for those in favor
        of the
        Secured Party.

       

      5.4.           Office
        Locations; Fictitious
        Names. The
        chief place of
        business, the chief executive office and the office where Debtor keeps its
        books
        and records are located at the places specified on Schedule I.

       

      5.5.           Perfection.
This
        Security Agreement
        creates a valid and perfected security interest in the Collateral, securing
        the
        payment of the Secured Obligations, and all filings and other actions necessary
        or desirable to perfect and protect such security interest have been duly
        taken
        (or will be taken immediately after the Closing , as defined in the SPA,
        by the
        Debtor at the request of the Secured Party); provided, nothing
        herein constitutes a representation as to actions that must be taken, if
        any, to
        perfect a security interest in any item of Equipment, the ownership of which
        is
        evidenced by a certificate of title.

       


      
        
          
          

        

        
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      5.6.           Governmental
        Authorizations.
No
        authorization, approval or other action by, and no notice to or filing
        with, any governmental authority or regulatory body is required either
        (a) for the grant by Debtor of the Security Interests granted hereby or for
        the execution, delivery or performance of this Security Agreement and/or
        the
        Note by Debtor or (b) for the perfection of or the exercise by the Secured
        Party of its rights and remedies hereunder (except as may have been taken
        by or
        at the direction of Debtor or the Secured Party).

       

      5.7.           Accurate
        Information. All information heretofore, herein or hereafter
        supplied to the Secured Party by or on behalf of Debtor with respect to the
        Collateral is and will be accurate and complete in all material
        respects.

       

      SECTION
        6.                                Further Assurances;
        Covenants.

       

      6.1.           Other
        Documents and
        Actions. Debtor will, from time to time, at its expense,
        immediately execute and deliver all further instruments and documents and
        take
        all further action that may be necessary or desirable, or that the Secured
        Party
        may request, in order to perfect and protect any security interest granted
        or
        purported to be granted hereby or to enable the Secured Party to exercise
        and
        enforce their rights and remedies hereunder with respect to any Collateral.
        Without limiting the generality of the foregoing, Debtor will immediately
        upon
        request of the Secured Party: (a) execute and file such financing or
        continuation statements, or amendments thereto, and such other instruments
        or
        notices, as may be necessary or desirable, or as the Secured Party may request,
        in order to perfect and preserve the security interests granted or purported
        to
        be granted hereby (in such jurisdictions and with such officers as the Secured
        Party so request); (b) upon demand by the Secured Party exhibit the
        Collateral to allow inspection of the Collateral by the Secured Party or
        persons
        designated by the Secured Party; and (c) upon the Secured Party’s request,
        appear in and defend any action or proceeding that may affect Debtor’s title to
        or the Secured Party’s security interest in the Collateral.

       

      6.2.           Business
        Locations. Debtor will keep the Collateral at the locations
        specified on Schedule I
        hereto.

       

      6.3.           Insurance.
At
        its sole expense, the
        Debtor shall insure the Collateral at all times for the full insurable value
        thereof against casualty and theft and against such other risks, in such
        form
        and with such insurers, as may be satisfactory to the Secured Party from
        time to
        time. In addition, each such policy shall (i) name the Secured Party as
        mortgagee and loss payee as its interest may appear and name the Secured
        Party
        as an additional insured relating to liability risks, (ii) provide that no
        act of omission or commission or misrepresentation or breach of warranty
        by the
        Debtor shall affect the Secured Party’s rights thereunder, (iii) provide
        that the Secured Party shall not be liable for any premiums or other amounts
        and
        (iv) upon the agreement of the insurer, at the Debtor’s request, provide
        that the insurer shall give the Secured Party not less than twenty (20) days’
prior written notice of cancellation or lapse. If the Debtor shall fail at
        any
        time to maintain such insurance, the Secured Party may obtain such insurance
        coverage and the Debtor agrees to reimburse the Secured Party therefor on
        demand
        with interest thereon at the rate specified in the Note.
        The
        Debtor shall notify the Secured Party promptly if any loss or casualty relating
        to the Collateral occurs.


      
        
          
          

        

        
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      6.4.           Taxes
        and
        Claims. Debtor will pay promptly when due all property and other
        taxes, assessments and governmental charges or levies imposed upon, and all
        claims against, the Collateral (including claims for labor, materials and
        supplies), except to the extent the validity thereof is being contested in
        good
        faith.

       

      6.5.           Use
        of
        Collateral. Debtor will not use or permit any Collateral to be
        used unlawfully or in violation of any provision of this Security Agreement
        or
        any applicable statute, regulation or ordinance or any policy of insurance
        covering any of the Collateral.

       

      6.6.           Condition
        of
        Collateral. The Debtor shall maintain the Collateral in good
        condition and operate the Collateral with reasonable care and caution and
        the
        Debtor hereby indemnifies and holds the Secured Party harmless from any and
        all
        loss, damage and liability suffered, incurred or asserted by or against the
        Secured Party as a result of the use and operation of the
        Collateral.

       

      6.7.           Records
        Relating to
        Collateral. The Debtor will keep its records concerning the
        Collateral at its address designated on Schedule
        I
        hereof or at such other place or places of which the Secured Party shall
        have
        been notified in writing upon no less than ten (10) days’ advance written
        notice. The Debtor (a) will hold and preserve such records and will permit
        representatives of the Secured Party at any time during normal business hours
        without disrupting the Debtor’s business to examine, inspect and to make
        abstracts from such records and (b) will furnish to the Secured Party such
        information and reports regarding the Collateral as the Secured Party may
        from
        time to time request.

       

      6.8.           Other
        Information. Debtor will, promptly upon request, provide to the
        Secured Party all information and evidence they may reasonably request
        concerning the Collateral, and in particular the Accounts, to enable the
        Secured
        Party to enforce the provisions of this Security Agreement.

       

      SECTION
        7.                                Transfers and
        Other
        Liens.

       

      Except
        in
        the ordinary course of business, Debtor shall not:

       

      (a)           Sell,
        assign (by operation of law or otherwise) or otherwise dispose of, or grant
        any
        option with respect to, any of the Collateral; or

       

      (b)           Create
        or suffer to exist any Liens with respect to any of the Collateral to secure
        indebtedness of any Person except for (i) the Security Interests created
        by this
        Security Agreement, (ii) any Liens and/or security interests existing prior
        to
        the date of this Security Agreement; (iii) any security interests that are
        junior and subordinate to the Security Interests created
        by this Security Agreement, and (iv) any purchase money security interests
        required in connection with Debtor’s purchase or lease of
        Equipment.

       


      
        
          
          

        

        
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      SECTION
        8.                                Events of Default;
        Remedies

       

      (a)           Each
        of the following events shall be an “Event
        of
        Default” (i) the non-payment of any of the Secured
        Obligations; (ii) the failure of the Debtor to observe or perform any other
        term, provision or condition of the Transaction Documents (as defined in
        the
        SPA), or this Security Agreement, after receipt of notice from the Secured
        Party
        of such failure to observe or perform and the failure of the Debtor to cure
        such
        non-performance or non-observance within fifteen (15) days after receipt
        thereof; (iii) dissolution or termination of existence of, or the
        suspension or termination of operations of the Debtor; (iv) the inability
        of the Debtor, or the Debtor’s admission that it is unable, to pay its debts as
        they become due or any petition in bankruptcy is filed by or against the
        Debtor,
        or any proceeding in bankruptcy, or under any other laws of any jurisdiction
        relating to the relief of debtors is commenced against the Debtor for the
        relief
        or readjustment of any indebtedness of the Debtor, either through
        reorganization, composition, extension or otherwise, (v) the appointment of
        a receiver of any property of the Debtor, (vi) the making by the Debtor of
        any assignment for the benefit of creditors or the taking advantage of any
        insolvency law; (vii) any seizure, vesting, or intervention by or under
        authority of a government, by which the management of the Debtor is displaced
        or
        its authority in the conduct of its business is curtailed; (viii) any
        representation or warranty contained the Note or this Security Agreement,
        shall
        prove to be materially false when made; or (ix) if an event of default shall
        occur for whatever reason under the any of the Notes.

       

      (b)           If
        any Event of Default shall have occurred and be continuing, the Secured Party
        may exercise in respect of the Collateral, in addition to all other rights
        and
        remedies provided for herein or otherwise available to them, all the right
        and
        remedies of a secured party on default under the UCC (whether or not the
        UCC
        applies to the affected Collateral) and also may: (a) require Debtor to,
        and Debtor hereby agrees that it will, at its expense and upon request of
        the
        Secured Party forthwith, assemble all or part of the Collateral as directed
        by
        the Secured Party and make it available to the Secured Party at a place to
        be
        designated by the Secured Party  which is reasonably convenient to the
        Debtor; (b) without notice or demand or legal process, enter upon any
        premises of Debtor and take possession of the Collateral; and (c) without
        notice except as specified below, sell the Collateral or any part thereof
        in one
        or more parcels at public or private sale, at such time or times, for cash,
        on
        credit or for future delivery, and at such price or prices and upon such
        other
        terms as the Secured Party may deem commercially reasonable. Debtor agrees
        that,
        to the extent notice of sale shall be required by law, at least two (2) days’
notice to Debtor of the time and place of any public sale or the time after
        which any private sale is to be made shall constitute reasonable notification.
        At any sale of the Collateral, if permitted by law, the Secured Party may
        bid
        (which bid may be, in whole or in part, in the form of cancellation of
        indebtedness) for the purchase of the Collateral or any portion thereof for
        the
        account of the Secured Party. The Secured Party shall not be obligated to
        make
        any sale of Collateral regardless of notice of sale having been given. The
        Secured Party may adjourn any public or private sale from time to time by
        announcement at the time and place fixed therefor, and such sale may,
without
        further notice, be made at the time and place to which it was so adjourned.
        To
        the extent permitted by law, Debtor hereby specifically waives all rights
        of
        redemption, stay or appraisal which it has or may have under any law now
        existing or hereafter enacted. All cash proceeds received by the Secured
        Party
        resulting from the disposition of or collection from the Collateral may be
        held
        by the Secured Party as collateral for the Secured Obligations and/or then
        or at
        any time thereafter applied in payment of all or any of the Secured Obligations
        in such order as the Secured Party shall elect. The balance of such cash
        proceeds held by the Secured Party and remaining after payment in full of
        the
        Secured Obligations shall be paid over to the Debtor or to the person who
        may be
        lawfully entitled to such balance. The remedies provided in this Security
        Agreement are cumulative and not exclusive of any other remedies provided
        by law
        including, without limitation, any rights of setoff available to the Secured
        Party.

       


      
        
          
          

        

        
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      SECTION
        9.                                Limitation on
        Duty of the
        Secured Party with Respect to Collateral.

       

      Beyond
        the safe custody thereof, the Secured Party shall have no duty with respect
        to
        any Collateral in their possession or control (or in the possession or control
        of the Secured Party or bailee) or with respect to any income thereon or
        the
        preservation of rights against prior parties or any other rights pertaining
        thereto. The Secured Party shall be deemed to have exercised reasonable care
        in
        the custody and preservation of the Collateral in their possession if the
        Collateral is accorded treatment substantially equal to that which they accord
        their own property. The Secured Party shall not be liable or responsible
        for any
        loss or damage to any of the Collateral, or for any diminution in the value
        thereof, by reason of the act or omission of any warehouseman, carrier,
        forwarding agency, consignee or other agent or bailee selected by the Secured
        Party in good faith.

       

      SECTION
        10.                              Secured Party
        Appointed
        Attorney-In-Fact.

       

      Debtor
        hereby irrevocably appoints the Secured Party as Debtor’s attorney-in-fact, with
        full authority in the place and stead of Debtor and in the name of Debtor
        to
        take any action and to execute any instrument that the Secured Party may
        deem
        necessary and/or advisable as follows:

       

      (a)           to
        obtain and adjust insurance required to be paid to the Secured Party if Debtor
        has not done so in the ordinary course of its business;

       

      (b)           to
        ask, demand, collect, sue for, recover, compound, receive and give receipts
        for
        moneys due and to become due under or in respect of any of the Collateral
        upon
        the occurrence of an Event of Default;

       

      (c)           to
        receive, endorse, and collect any drafts or other instruments, documents
        and
        chattel paper, in connection with clauses (a) and (b) above upon the
        occurrence of an Event of Default;

       

      (d)           to
        file any claims or take any action or institute any proceedings that the
        Secured
        Party may deem necessary or desirable for the collection of any of the
        Collateral or otherwise to enforce
        the rights of the Secured Party with respect to any of the Collateral if
        Debtor
        has not done so in the ordinary course of its business;

       

      (e)           to
        pay or discharge taxes or liens, levied or placed upon or threatened against
        the
        Collateral, the legality or validity thereof and the amounts necessary to
        discharge the same to be determined by the Secured Party in its sole discretion,
        and such payments made by the Secured Party to become obligations of Debtor
        to
        the Secured Party, due and payable immediately without demand if Debtor has
        not
        done so in the ordinary course of its business;

       

      (f)           to
        sign and endorse any invoices, freight or express bills, bills of lading,
        storage or warehouse receipts, assignments, verifications and notices in
        connection with Accounts and other documents relating to the Collateral upon
        the
        occurrence of an Event of Default;

       

      (g)           generally
        to sell, transfer, pledge, make any agreement with respect to or otherwise
        deal
        with any of the Collateral as fully and completely as though the Secured
        Party
        were the absolute owner thereof for all purposes, and to do, at the Secured
        Party’s option and Debtor’s expense, at any time or from time to time, all acts
        and things that the Secured Party deems necessary to protect, preserve or
        realize on the Collateral upon the occurrence of an Event of Default;
        and

       

      (h)           to
        accomplish the purposes of this Security Agreement if Debtor has not done
        so in
        the ordinary course of its business.

       

      Neither
        the Secured Party nor any person designated by the Secured Party shall be
        liable
        for any acts or omissions or for any error of judgment or mistake of fact
        or
        law. This power, being coupled with an interest, is irrevocable so long as
        this
        Security Agreement shall remain in force.

       

      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      

      SECTION
        11.                                Expenses.

       

      Debtor
        shall pay all insurance expenses and all expenses of protecting, storing,
        warehousing, appraising, insuring, handling, maintaining and shipping the
        Collateral, all costs, fees and expenses of perfecting, and maintaining the
        Security Interest, any and all excise, property, sales and use taxes imposed
        by
        any state, federal or local authority on any of the Collateral, or with respect
        to periodic appraisals and inspections of the Collateral, or with respect
        to the
        sale or other disposition thereof. If Debtor fails to promptly pay any portion
        of the above expenses when due or to perform any other obligation of Debtor
        under this Security Agreement, the Secured Party may, at their option, but
        shall
        not be required to, pay or perform the same and charge Debtor’s account for all
        costs and expenses incurred therefor, and Debtor agrees to reimburse the
        Secured
        Party therefor on demand. All sums so paid or incurred by the Secured Party
        for
        any of the foregoing, any and all other sums for which Debtor may become
        liable
        hereunder and all costs and expenses (including reasonable and documented
        attorneys’ fees, legal expenses and court costs) incurred by the Secured Party
        in enforcing or protecting the Security Interests or any of  their
        rights or remedies under this Security Agreement, the Notes, the Warrants
        and/or other Transaction Documents shall be payable on demand, shall constitute
        Secured Obligations and shall be secured by the Collateral.

       

      SECTION
        12.                                Termination of
        Security
        Interests; Release of Collateral.

       

      Upon
        payment in full of all Secured Obligations, including the aggregate principal
        amount of the Notes, including all Interest, the Security Interests shall
        immediately terminate and all rights to the Collateral shall revert to Debtor
        automatically and without the need for further action to be taken on the
        part of
        the Debtor or the Secured Party. Upon such termination of the Security Interests
        or release of any Collateral, the Secured Party will, at the expense of Debtor,
        execute and deliver to Debtor such documents as Debtor shall reasonably request
        to evidence the termination of the Security Interests or the release of such
        Collateral, as the case may be.

       

      SECTION
        13.                                Notices.

       

      All
        notices, requests, demands and other communications provided for hereunder
        shall
        be in writing and directed to the applicable party at the addresses set forth
        on
        the signature page hereof or, as to each party, at such other address as
        shall
        be designated by such party in a written notice to the other parties complying
        as to delivery with the terms of this Section. Notice to the Secured Party
        on
        terms designated in this Section
        13
        shall be deemed proper notice the Secured Party. All such notices, requests,
        demands and other communication shall be deemed given upon the earlier to
        occur
        of (i) the third day following deposit thereof with the United States Postal
        Service for mailing via certified or registered mail, return receipt requested,
        or (ii) the actual receipt by the party to whom such notice is
        directed.

      


      SECTION
        14.                                Waivers, Non-Exclusive
        Remedies.

       

      No
        failure on the part of the Secured Party to exercise, and no delay in exercising
        and no course of dealing with respect to, any right under the Note or this
        Security Agreement shall operate as a waiver thereof; nor shall any single
        or
        partial exercise by the Secured Party of any right under the Note or this
        Security Agreement preclude any other or further exercise thereof or the
        exercise of any other right. The rights in this Security Agreement and/or
        the
        Note are cumulative and are not exclusive of any other remedies provided
        by
        law.

       

      SECTION
        15.                                Successors and
        Assigns.

       

      This
        Security Agreement is for the benefit of the Secured Party and each of its
        successors and assigns, and in no event shall the Debtor without the prior
        express written consent of the Secured Party, assign all or any portion of
        the
        Secured Obligations, the rights hereunder, or the Note.  This Security
        Agreement shall be binding on Debtor and its successors and all permitted
        assigns.

       


      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      


      SECTION
        16.                                Severability.

       

      If
        any
        provisions hereof are invalid or unenforceable in any jurisdiction, the other
        provisions hereof shall remain in full force and effect in such jurisdiction
        and
        shall be liberally construed in favor of the Secured Party.

       

      SECTION
        17.                                Changes in
        Writing.

       

      No
        amendment, modification, termination or waiver of any provision of this Security
        Agreement or consent to any departure by Debtor therefrom, shall in any event
        be
        effective without the written concurrence of the Secured Party, and the
        Debtor.

       

      SECTION
        18.                                Applicable Law,
        Etc.

       

      This
        Security Agreement will be governed by and construed exclusively under the
        laws
        of the State of New York as applied to agreements among New York
        residents entered into and to be performed entirely within
        New York.  Each of the parties hereto (1) agree that any
        legal suit, action or proceeding arising out of or relating to this Agreement
        will be instituted exclusively in New York State Supreme Court, County of
        New York, or in the United States District Court for the Southern District
        of New York, (2) waive any objection which the Company may have now or
        hereafter to the venue of any such suit, action or proceeding, and
        (3) irrevocably consent to the jurisdiction of the New York State
        Supreme Court, County of New York, and the United States District Court for
        the Southern District of New York in any such suit, action or
        proceeding.  Each of the parties hereto further agrees to accept and
        acknowledge service of any and all process which may be served in any such
        suit,
        action or proceeding in the New York State Supreme Court, County of
        New York, or in the United States District Court for the Southern District
        of New York and agree that service of process upon it mailed by certified
        mail to its address will be deemed in every respect effective service of
        process
        upon it, in any such suit, action or proceeding.

       

      SECTION
        19.                                Actions
        by Secured
        Party;
        Distributions.

       

      Unless
        otherwise specifically provided herein, wherever this Security Agreement
        provides for actions to be taken by the Secured Party, or any determination
        to
        be made by the Secured Party, the actions of those Holders representing,
        in the
        aggregate, more than 50% of the outstanding Notes shall represent the actions
        or
        agreement of the Secured Party.  In addition, whenever the Secured
        Party is entitled to the distribution of monies, Collateral or any other
        property, pursuant to the terms of this Security Agreement, such monies,
        Collateral and/or other property shall be distributed to the Secured Party,
        on a
        pro-rata basis, based on the outstanding principal amounts under the
        Note.

       

      SECTION
        20.                                Headings.

       

      Section and
        subsection headings in this Security Agreement are included herein for
        convenience of reference only and shall not constitute a part of this Security
        Agreement for any other purpose or be given any substantive effect.

       


      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      



      SECTION
        21.                                Execution.

       

      This
        Agreement may be executed simultaneously in two or more counterparts, each
        of
        which shall be deemed an original but all of which together shall constitute
        one
        and the same instrument.

       

      SECTION
        22.                                Waiver of Jury
        Trial.

       

      DEBTOR
        AND SECURED PARTY HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
        ANY
        CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS SECURITY AGREEMENT.
        DEBTOR AND SECURED PARTY ALSO WAIVE ANY BOND OR INDEMNITY OR SECURITY UPON
        SUCH
        BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF DEBTOR OR THE SECURED
        PARTY HERETO. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING
        OF ANY
        AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT
        MATTER OF THIS TRANSACTION INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH
        OF
        DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. DEBTOR AND SECURED
        PARTY ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO
        A
        BUSINESS RELATIONSHIP THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING
        INTO THIS SECURITY AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER
        IN THEIR RELATED FUTURE DEALINGS. DEBTOR AND SECURED PARTY FURTHER WARRANT
        AND
        REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND
        EACH
        KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
        WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE
        MODIFIED EITHER ORALLY OR IN WRITING AND THE WAIVER SHALL APPLY TO ANY
        SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS SECURITY
        AGREEMENT. IN THE EVENT OF LITIGATION. THIS SECURITY AGREEMENT MAY BE FILED
        AS A
        WRITTEN CONSENT TO A TRIAL BY THE COURT.

       

      Signature
        Page
        Follows


      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

      



      WITNESS
        the due execution
        hereof by the respective duly authorized officers of the

       

      undersigned
        as of the day first above written.

       

      DEBTORS:

      


      XA,
        Inc.

      


      


      By:          /s/
        Joseph
        Wagner                                                               

      Name:  Joseph
        Wagner

      Title:  President
        and
        CEO

      


      XA
        Scenes, Inc.

      


      


      By:          /s/
        Joseph
        Wagner                                                                 

      Name:  Joseph
        Wagner

      Title:  President
        and
        CEO

      


      The
        Experiential Agency,
        Inc.

      


      


      By:          /s/
        Darren
        Andereck                                                                 

      Name:  Darren
        Andereck

      Title:  President

      


      XA
        Interactive,
        Inc.

      


      


      By:          /s/
        Joseph
        Wagner                                                                 

      Name:  Joseph
        Wagner

      Title:  President
        and
        CEO

      


      Fiori
        XA, Inc.

      


      


      By:          /s/
        Darren
        Andereck                                                                

      Darren
        Andereck

      President

      
 

      


      



      
        
          
          

        

        
          14

          
            

          

        

        
          
          

        

      


      SECURED
        PARTY:

      


      


      


      Sands
        Brothers Venture
        Capital III LLC

      


      By:          /s/
        Scott
        Baily                                                     

      Name:
        Scott Baily

      Title:
        COO

      


      

        
          
            
            

          

          
            15

            
              

            

          

          
            
            

          

        




      SCHEDULE
        I TO SECURITY
        AGREEMENT

       

      


      Locations
        of Equipment, Inventory, Books and Records, Chief Executive Officer

      


       

      Locations
        of Equipment and
        Inventory:

       

      
        	
                ●

              	
                Chicago,
                  Illinois - Event decor, furniture and
                  fixtures

              


      

       

      
        	
                 

              	
                ○

              	
                Office
                  - John Hancock Center, 875 North Michigan Avenue, Suite 2626, Chicago,
                  Illinois 60611 - The Experiential Agency,
                  Inc.

              


      

       

      
        	
                 

              	
                ○

              	
                Design
                  Center - 3524 North Halsted, Chicago, IL  60657 - Fiori, XA,
                  Inc.

              


      

       

      
        	
                ●

              	
                Bergen,
                  New Jersey (warehouse) - Event decor, furniture and
                  fixtures

              


      

      1435
        51st
        Street

      North
        Bergen, NJ - The Experiential Agency, Inc.

      


       

      
        	
                ●

              	
                New
                  York, New York and Manhattan, New York - (office space and
                  warehouse),-  Event decor, furniture and
                  fixtures

              


      

       

      
        	
                 

              	
                ○

              	
                New
                  York Office and venue - 636 West 28th Street, Floor 9, New York,
                  NY 10001
                  - XA Scenes, Inc.

              


      

      


      ●           Los
        Angeles, California (office equipment)

      


      ○             110
        S. Fairfax, Suite 210, Los Angeles, CA  90036

      The
        Experiential Agency, Inc.

      


      Location
        of Books and
        Records and Chief Executive Officer:

       

      
        	
                ●

              	
                John
                  Hancock Center, 875 North Michigan Avenue, Suite 2626, Chicago,
                  Illinois
                  60611 -  The Experiential Agency,
                  Inc.

              


      

       




    
      
        
        

      

      
        16