Document:

Exhibit 10.9

 

SECURITY AGREEMENT

 

THIS
SECURITY AGREEMENT (the “Agreement”), is entered into and made effective as of May 30,
2006, by and between ISONICS CORPORATION, a California corporation with its principal
place of business located at 5906 McIntyre Street Golden, Colorado 80403
(the “Company”), and the BUYER(S)
listed on Schedule I attached to the Securities Purchase Agreement dated
the date hereof (the “Secured
Party”).

 

WHEREAS,
the Company shall issue and sell to the Secured Party, as
provided in the Securities Purchase Agreement of even date herewith between the
Company and the Secured Party (the “Securities Purchase Agreement”), and
the Secured Party shall purchase up to Sixteen Million Dollars ($16,000,000) of
secured convertible debentures (the “Convertible Debentures”),
which shall be convertible into shares of the Company’s common stock, no par
value (the “Common Stock”) (as converted, the “Conversion Shares”)
in the respective amounts set forth opposite each Buyer(s) name on Schedule I
attached to the Securities Purchase Agreement;

 

WHEREAS,
to induce the Secured Party to enter into the transaction
contemplated by the Securities Purchase Agreement, the Convertible Debentures,
the Investor Registration Rights Agreement of even date herewith between the
Company and the Secured Party (the “Investor Registration Rights Agreement”),
the Subsidiary Security Agreements of even date herewith by and between the
Isonics Vancouver, Inc., Isonics Homeland Security and Defense
Corporation, and Protection Plus Security Corporation, all of which are wholly
owned subsidiaries of the Company and the Secured Party (the “Security
Agreement”), and the Irrevocable Transfer Agent Instructions among the
Company, the Secured Party, Continental Stock Transfer and Trust Company, and
David Gonzalez, Esq. (the “Transfer Agent Instructions”)
(collectively referred to as the “Transaction Documents”), the Company
hereby grants to the Secured Party a security interest in and to the pledged
property identified on Exhibit A hereto (collectively referred to
as the “Pledged Property”) until the satisfaction of the Obligations, as
defined herein below.

 

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

 

ARTICLE 1.

 

DEFINITIONS AND INTERPRETATIONS

 

Section 1.1.                                   Recitals.

 

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

 

Section 1.2.                                   Interpretations.

 

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

 

 

Section 1.3.                                   Obligations
Secured.

 

The obligations secured
hereby are any and all obligations of the Company now existing or hereinafter
incurred to the Secured Party, whether oral or written and whether arising
before, on or after the date hereof including, without limitation, those
obligations of the Company to the Secured Party under this Agreement, the
Transaction Documents, and any other amounts now or hereafter owed to the
Secured Party by the Company thereunder or hereunder (collectively, the “Obligations”).

 

ARTICLE 2.

 

PLEDGED PROPERTY, ADMINISTRATION
OF COLLATERAL 

AND TERMINATION OF SECURITY INTEREST

 

Section 2.1.                                   Pledged
Property.

 

(a)                                  Company
hereby pledges to the Secured Party, and creates in the Secured Party for its
benefit, a security interest for such time until the Obligations are paid in
full, in and to all of the property of the Company as set forth in Exhibit ”A”
attached hereto and the products thereof and the proceeds of all such items
(collectively, the “Pledged Property”):

 

(b)                                 Simultaneously
with the execution and delivery of this Agreement, the Company shall make,
execute, acknowledge, file, record and deliver to the Secured Party any
documents reasonably requested by the Secured Party to perfect its security
interest in the Pledged Property.  Simultaneously with the execution and delivery
of this Agreement, the Company shall make, execute, acknowledge and deliver to
the Secured Party such documents and instruments, including, without
limitation, financing statements, certificates, affidavits and forms as may, in
the Secured Party’s reasonable judgment, be necessary to effectuate, complete
or perfect, or to continue and preserve, the security interest of the Secured
Party in the Pledged Property, and the Secured Party shall hold such documents
and instruments as secured party, subject to the terms and conditions contained
herein.

 

Section 2.2.                                   Rights;
Interests; Etc.

 

(a)                                  So
long as no Event of Default (as hereinafter defined) shall have occurred
and be continuing:

 

(i)                                     the
Company shall be entitled to exercise any and all rights pertaining to the
Pledged Property or any part thereof for any purpose not inconsistent with the
terms hereof; and

 

(ii)                                  the
Company shall be entitled to receive and retain any and all payments paid or
made in respect of the Pledged Property.

 

(b)                                 Upon
the occurrence and during the continuance of an Event of Default:

 

(i)                                     All
rights of the Company to exercise the rights which it would otherwise be
entitled to exercise pursuant to Section 2.2(a)(i) hereof and to
receive payments

 

2

 

which it would
otherwise be authorized to receive and retain pursuant to Section 2.2(a)(ii) hereof
shall be suspended, and all such rights shall thereupon become vested in the
Secured Party who shall thereupon have the sole right to exercise such rights
and to receive and hold as Pledged Property such payments; provided, however, that if the Secured
Party shall become entitled and shall elect to exercise its right to realize on
the Pledged Property pursuant to Article 5 hereof, then all cash sums
received by the Secured Party, or held by Company for the benefit of the
Secured Party and paid over pursuant to Section 2.2(b)(ii) hereof,
shall be applied against any outstanding Obligations; and

 

(ii)                                  All
interest, dividends, income and other payments and distributions which are
received by the Company contrary to the provisions of Section 2.2(b)(i) hereof
shall be received in trust for the benefit of the Secured Party, shall be
segregated from other property of the Company and shall be forthwith paid over
to the Secured Party; or

 

(iii)                               The
Secured Party in its sole discretion shall be authorized to sell any or all of
the Pledged Property at public or private sale in order to recoup all of the
outstanding principal plus accrued interest owed pursuant to the Convertible
Debenture as described herein

 

(c)                                  An
“Event of Default” shall be deemed to have occurred under this Agreement
upon an Event of Default under the Convertible Debentures.

 

ARTICLE 3.

 

ATTORNEY-IN-FACT; PERFORMANCE

 

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

 

Upon the occurrence of an
Event of Default, the Company hereby appoints the Secured Party as its
attorney-in-fact, with full authority in the place and stead of the Company and
in the name of the Company or otherwise, from time to time in the Secured Party’s
discretion to take any action and to execute any instrument which the Secured
Party may reasonably deem necessary to accomplish the purposes of this
Agreement, including, without limitation, to receive and collect all
instruments made payable to the Company representing any payments in respect of
the Pledged Property or any part thereof and to give full discharge for the
same.  The Secured Party may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Pledged Property as and when the Secured Party may
determine.  To facilitate collection, the
Secured Party may notify account debtors and obligors on any Pledged Property
to make payments directly to the Secured Party.

 

Section 3.2.                                   Secured
Party May Perform.

 

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

 

3

 

ARTICLE 4.

 

REPRESENTATIONS AND WARRANTIES

 

Section 4.1.                                   Authorization;
Enforceability.

 

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

 

Section 4.2.                                   Ownership
of Pledged Property.

 

The Company warrants and
represents that it is the legal and beneficial owner of the Pledged Property
free and clear of any lien, security interest, option or other charge or
encumbrance except for the security interest created by this Agreement and
other security interests filed of record with the Secretary of States of
California, Delaware, New York, and Washington. 
To the knowledge of the Company, the security interests filed of record
include a security interest for the benefit of Silver Silicon LLC in connection
with the assets of the Company’s semiconductor division and subsidiary, and
security interests for various capital leases and as well as a collateralization
of indebtedness of Protection Plus Security Corporation’s loan from HSBC Bank.

 

ARTICLE 5.

 

DEFAULT; REMEDIES; SUBSTITUTE
COLLATERAL

 

Section 5.1.                                   Default
and Remedies.

 

(a)                                  If
an Event of Default occurs under the Convertible Debentures, and after the any
applicable cure or grace period, then in each such case the Secured Party may
declare the Obligations to be due and payable immediately, by a notice in
writing to the Company, and upon any such declaration, the Obligations shall
become immediately due and payable.

 

(b)                                 Upon
the occurrence of an Event of Default under the Convertible Debentures, and
after the any applicable cure or grace period, the Secured Party shall: (i) be
entitled to receive all distributions with respect to the Pledged Property, (ii) to
cause the Pledged Property to be transferred into the name of the Secured Party
or its nominee, (iii) to dispose of the Pledged Property, and (iv) to
realize upon any and all rights in the Pledged Property then held by the
Secured Party.

 

Section 5.2.                                   Method
of Realizing Upon the Pledged Property: Other Remedies.

 

Upon the occurrence of an
Event of Default under the Convertible Debentures, and after any applicable
cure or grace period, in addition to any rights and remedies available at law
or in equity, the following provisions shall govern the Secured Party’s right
to realize upon the Pledged Property:

 

4

 

(a)                                  Any
item of the Pledged Property may be sold for cash or other value in any number
of lots at brokers board, public auction or private sale and may be sold
without demand, advertisement or notice (except that the Secured Party shall
give the Company ten (10) days’ prior written notice of the time and
place or of the time after which a private sale may be made (the “Sale
Notice”)), which notice period is hereby agreed to be commercially
reasonable.  At any sale or sales of the
Pledged Property, the Company may bid for and purchase the whole or any part of
the Pledged Property and, upon compliance with the terms of such sale, may
hold, exploit and dispose of the same without further accountability to the
Secured Party.  The Company will execute
and deliver, or cause to be executed and delivered, such instruments, documents,
assignments, waivers, certificates, and affidavits and supply or cause to be
supplied such further information and take such further action as the Secured
Party reasonably shall require in connection with any such sale.

 

(b)                                 Any
cash being held by the Secured Party as Pledged Property and all cash proceeds
received by the Secured Party in respect of, sale of, collection from, or other
realization upon all or any part of the Pledged Property shall be applied as
follows:

 

(i)                                     to
the payment of all amounts due the Secured Party for the expenses reimbursable
to it hereunder or owed to it pursuant to Section 8.3 hereof;

 

(ii)                                  to
the payment of the Obligations then due and unpaid.

 

(iii)                               the
balance, if any, to the person or persons entitled thereto, including, without
limitation, the Company.

 

(c)                                  In
addition to all of the rights and remedies which the Secured Party may have
pursuant to this Agreement, the Secured Party shall have all of the rights and
remedies provided by law, including, without limitation, those under the
Uniform Commercial Code.

 

(i)                                     If
the Company fails to pay such amounts due upon the occurrence of an Event of
Default which is continuing, then the Secured Party may institute a judicial
proceeding for the collection of the sums so due and unpaid, may prosecute such
proceeding to judgment or final decree and may enforce the same against the
Company and collect the monies adjudged or decreed to be payable in the manner
provided by law out of the property of Company, wherever situated.

 

(ii)                                  The
Company agrees that it shall be liable for any reasonable fees, expenses and
costs incurred by the Secured Party in connection with enforcement, collection
and preservation of the Transaction Documents, including, without limitation,
reasonable legal fees and expenses, and such amounts shall be deemed included
as Obligations secured hereby and payable as set forth in Section 8.3
hereof.

 

Section 5.3.                                   Proofs
of Claim.

 

In case of the pendency of any receivership,
insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment,
composition or other judicial proceeding relating to the Company or the
property of the Company or of such other obligor or its creditors, the Secured
Party (irrespective of whether the Obligations shall then be due and payable as
therein expressed

 

5

 

or by declaration or
otherwise and irrespective of whether the Secured Party shall have made any
demand on the Company for the payment of the Obligations), subject to the
rights of Previous Security Holders, shall be entitled and empowered, by
intervention in such proceeding or otherwise:

 

(i)                                     to
file and prove a claim for the whole amount of the Obligations and to file such
other papers or documents as may be necessary or advisable in order to have the
claims of the Secured Party (including any claim for the reasonable legal fees
and expenses and other expenses paid or incurred by the Secured Party permitted
hereunder and of the Secured Party allowed in such judicial proceeding), and

 

(ii)                                  to
collect and receive any monies or other property payable or deliverable on any
such claims and to distribute the same; and any custodian, receiver, assignee,
trustee, liquidator, sequestrator or other similar official in any such
judicial proceeding is hereby authorized by the Secured Party to make such
payments to the Secured Party and, in the event that the Secured Party shall
consent to the making of such payments directed to the Secured Party, to pay to
the Secured Party any amounts for expenses due it hereunder.

 

Section 5.4.                                   Duties
Regarding Pledged Property.

 

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

 

ARTICLE 6.

 

AFFIRMATIVE COVENANTS

 

The Company covenants and
agrees that, from the date hereof and until the Obligations have been fully
paid and satisfied, unless the Secured Party shall consent otherwise in writing
(as provided in Section 8.4 hereof):

 

Section 6.1.                                   Existence,
Properties, Etc.

 

(a)                                  The
Company shall do, or cause to be done, all things, or proceed with due
diligence with any actions or courses of action, that may be reasonably
necessary (i) to maintain Company’s due organization, valid existence and
good standing under the laws of its state of incorporation, and (ii) to
preserve and keep in full force and effect all qualifications, licenses and
registrations in those jurisdictions in which the failure to do so could have a
Material Adverse Effect (as defined below); and (b) the Company shall not
do, or cause to be done, any act impairing the Company’s corporate power or
authority (i) to carry on the Company’s business as now conducted, and (ii) to
execute or deliver this Agreement or any other document delivered in connection
herewith, including, without limitation, any UCC-1 Financing Statements
required by the Secured Party to which it is or will be a party, or
perform any of its obligations hereunder or thereunder.  For purpose of this Agreement, the term “Material
Adverse Effect” shall mean any material and adverse affect as determined by
Secured Party in its sole discretion, whether individually or in the aggregate,
upon (a) the Company’s assets, business, operations, properties

 

6

 

or condition, financial
or otherwise; (b) the Company’s to make payment as and when due of all or
any part of the Obligations; or (c) the Pledged Property.

 

Section 6.2.                                   Accounts
and Reports.

 

The Company shall
maintain a standard system of accounting in accordance with generally accepted
accounting principles consistently applied and provide, at its sole expense, to
the Secured Party the following:

 

(b)                                 as
soon as available, a copy of any notice or other communication alleging any
nonpayment or other material breach or default, or any foreclosure or other
action respecting any material portion of its assets and properties, received respecting
any of the indebtedness of the Company in excess of $500,000 (other than the
Obligations), or any demand or other request for payment under any guaranty,
assumption, purchase agreement or similar agreement or arrangement respecting
the indebtedness or obligations of others in excess of $15,000, including any
received from any person acting on behalf of the Secured Party or beneficiary
thereof.  In connection with the
foregoing, the Secured Party acknowledges that the Company has received notice
of a non-payment required under an agreement dated September 1, 2005, with
Lucent Technologies, Inc., and the Obligations create a risk that a holder
of the 2005 8% Convertible Debentures remaining outstanding may seek to
accelerate their indebtedness; and

 

(c)                                  within
fifteen (15) days after the making of each submission or filing, a copy of
any report, financial statement, notice or other document, whether periodic or
otherwise, submitted to the shareholders of the Company, or submitted to or
filed by the Company with any governmental authority involving or affecting (i) the
Company that could have a Material Adverse Effect; (ii) the Obligations; (iii) any
part of the Pledged Property; or (iv) any of the transactions contemplated
in this Agreement or the Loan Instruments.

 

Section 6.3.                                   Maintenance
of Books and Records; Inspection.

 

The Company shall
maintain its books, accounts and records in accordance with generally accepted
accounting principles consistently applied, and permit the Secured Party, its
officers and employees and any professionals designated by the Secured Party in
writing, at any time and subject to the Company’s normal confidentiality
requirements, to visit and inspect any of its properties (including but not
limited to the collateral security described in the Transaction Documents
and/or the Loan Instruments), corporate books and financial records, and to
discuss its accounts, affairs and finances with any employee, officer or
director thereof.

 

Section 6.4.                                   Maintenance
and Insurance.

 

(d)                                 The
Company shall maintain or cause to be maintained, at its own expense, all of
its assets and properties in good working order and condition, making all
necessary repairs thereto and renewals and replacements thereof.

 

(e)                                  The
Company shall maintain or cause to be maintained, at its own expense, insurance
in form, substance and amounts (including deductibles), which the Company deems
reasonably necessary to the Company’s business, (i) adequate to insure all
assets and properties of the Company, which assets and properties are of a
character usually insured by

 

7

 

persons engaged in the
same or similar business against loss or damage resulting from fire or other
risks included in an extended coverage policy; (ii) against public
liability and other tort claims that may be incurred by the Company; (iii) as
may be required by the Transaction Documents and/or applicable law and (iv) as
may be reasonably requested by Secured Party, all with adequate, financially
sound and reputable insurers.

 

Section 6.2.                                   Contracts
and Other Collateral.

 

The Company shall perform
all of its obligations under or with respect to each instrument, receivable,
contract and other intangible included in the Pledged Property to which the
Company is now or hereafter will be party on a timely basis and in the manner
therein required, including, without limitation, this Agreement.

 

Section 6.3.                                   Defense
of Collateral, Etc.

 

The Company shall defend
and enforce its right, title and interest in and to any part of:  (a) the Pledged Property; and (b) if
not included within the Pledged Property, those assets and properties whose
loss could have a Material Adverse Effect, the Company shall defend the Secured
Party’s right, title and interest in and to each and every part of the Pledged
Property, each against all manner of claims and demands on a timely basis to
the full extent permitted by applicable law.

 

Section 6.4.                                   Payment
of Debts, Taxes, Etc.

 

The Company shall pay, or
cause to be paid, all of its indebtedness and other liabilities and perform, or
cause to be performed, all of its obligations in accordance with the respective
terms thereof, and pay and discharge, or cause to be paid or discharged, all
taxes, assessments and other governmental charges and levies imposed upon it,
upon any of its assets and properties on or before the last day on which the
same may be paid without penalty, as well as pay all other lawful claims
(whether for services, labor, materials, supplies or otherwise) as and when
due

 

Section 6.5.                                   Taxes
and Assessments; Tax Indemnity.

 

The Company shall (a) file
all tax returns and appropriate schedules thereto that are required to be filed
under applicable law, prior to the date of delinquency, (b) pay and
discharge all taxes, assessments and governmental charges or levies imposed
upon the Company, upon its income and profits or upon any properties belonging
to it, prior to the date on which penalties attach thereto, and (c) pay
all taxes, assessments and governmental charges or levies that, if unpaid,
might become a lien or charge upon any of its properties; provided, however, that the Company in
good faith may contest any such tax, assessment, governmental charge or levy
described in the foregoing clauses (b) and (c) so long as appropriate
reserves are maintained with respect thereto.

 

Section 6.6.                                   Compliance
with Law and Other Agreements.

 

The Company shall
maintain its business operations and property owned or used in connection
therewith in compliance with (a) all applicable federal, state and local
laws, regulations and ordinances governing such business operations and the use
and ownership of

 

8

 

such property, and
(b) all agreements, licenses, franchises, indentures and mortgages to
which the Company is a party or by which the Company or any of its properties
is bound.  Without limiting the
foregoing, the Company shall pay all of its indebtedness promptly in accordance
with the terms thereof.

 

Section 6.7.                                   Notice
of Default.

 

The Company shall give
written notice to the Secured Party of the occurrence of any default or Event
of Default under this Agreement, the Transaction Documents or any other Loan
Instrument or any other agreement of Company for the payment of money, promptly
upon the occurrence thereof.

 

Section 6.8.                                   Notice
of Litigation.

 

The Company shall give
notice, in writing, to the Secured Party of (a) any actions, suits or
proceedings wherein the amount at issue is in excess of $50,000, instituted by
any persons against the Company, or affecting any of the assets of the Company,
and (b) any dispute, not resolved within fifteen (15) days of the
commencement thereof, between the Company on the one hand and any governmental
or regulatory body on the other hand, which might reasonably be expected to
have a Material Adverse Effect on the business operations or financial
condition of the Company.

 

ARTICLE 7.

 

NEGATIVE COVENANTS

 

The Company covenants and
agrees that, from the date hereof until the Obligations have been fully paid and
satisfied, the Company shall not, unless the Secured Party shall consent
otherwise in writing:

 

Section 7.1.                                   Indebtedness.

 

Except as contemplated in
Section 9 of the Convertible Debenture the Obligor shall not or permit any
of its subsidiaries to without the Holder’s consent, directly or indirectly,
enter into, create, incur, assume or suffer to exist any indebtedness of any
kind, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits there from
that is senior in any respect to the obligations of the Obligor under the
Debenture.

 

Section 7.2.                                   Liens
and Encumbrances.

 

Except as contemplated in
Section 9 of the Convertible Debenture, the Company shall not directly or
indirectly make, create, incur, assume or permit to exist any assignment,
transfer, pledge, mortgage, security interest or other lien or encumbrance of
any nature in, to or against any part of the Pledged Property or of the Company’s
capital stock, or offer or agree to do so, or own or acquire or agree to
acquire any asset or property of any character subject to any of the foregoing
encumbrances (including any conditional sale contract or other title retention
agreement), or assign, pledge or in any way transfer or encumber its right to
receive any income

 

9

 

or other
distribution or proceeds from any part of the Pledged Property or the Company’s
capital stock; or enter into any sale-leaseback financing respecting any part
of the Pledged Property as lessee, or cause or assist the inception or
continuation of any of the foregoing.

 

Section 7.3.                                   Certificate
of Incorporation, By-Laws, Mergers, Consolidations, Acquisitions, Sales, and Sales of Capital Stock or Grants of Security
Interests.

 

Except as contemplated in
the Securities Purchase Agreement and the Convertible Debenture, without the
prior express written consent of the Secured Party, the Company shall not Amend
its Certificate of Incorporation or By-Laws. 
Except as contemplated in the Convertible Debenture The issuances and/or
sales of Capital Stock or grants of
security interests is permitted as outlined in the Convertible Debenture.

 

Section 7.4.                                   Management,
Ownership.

 

The Company shall not
terminate or materially change the positions of James E. Alexander, Boris
Rubizhevsky, and John Sakys without the prior written consent of the Secured
Party.  The employment of James E.
Alexander, Boris Rubizhevsky, and John Sakys in their current positions are
material factors in the Secured Party’s willingness to institute and maintain a
lending relationship with the Company.

 

Section 7.5.                                   Dividends,
Etc.

 

Except as contemplated in
the Convertible Debentures, the Company shall not declare or pay any dividend
of any kind, in cash or in property, on any class of its capital stock, nor
purchase, redeem, retire or otherwise acquire for value any shares of such
stock, nor make any distribution of any kind in respect thereof, nor make any
return of capital to shareholders, nor make any payments in respect of any
pension, profit sharing, retirement, stock option, stock bonus, incentive
compensation or similar plan (except as required or permitted hereunder),
without the prior written consent of the Secured Party.

 

Section 7.6.                                   Guaranties;
Loans.

 

The Company shall not
guarantee nor be liable in any manner, whether directly or indirectly, or
become contingently liable after the date of this Agreement in connection with
the obligations or indebtedness of any person or persons, except for (i) the
indebtedness currently secured by the liens identified on the Pledged Property
identified on Exhibit A hereto and (ii) the endorsement of negotiable
instruments payable to the Company for deposit or collection in the ordinary
course of business.  The Company shall
not make any loan, advance or extension of credit to any person other than in
the normal course of its business.

 

Section 7.7.                                   Conduct
of Business.

 

The Company will continue
to engage, in an efficient and economical manner, in a business of the same
general type as conducted by it on the date of this Agreement.

 

10

 

Section 7.7.                                   Places
of Business.

 

The location of the
Company’s chief place of business is 5906
McIntyre Street Golden, Colorado 80403. 
The Company shall not change the location of its chief place of
business, chief executive office or any place of business disclosed to the
Secured Party or move any of the Pledged Property from its current location
without thirty (30) days’ prior written notice to the Secured Party in each
instance.

 

ARTICLE 8.

 

MISCELLANEOUS

 

Section 8.1.                                   Notices.

 

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

 

	
  If to the
  Secured Party:

  	
  Cornell Capital
  Partners, LP

  
	
   

  	
  101 Hudson
  Street-Suite 3700

  
	
   

  	
  Jersey City, New
  Jersey 07302

  
	
   

  	
  Attention:

  	
  Mark Angelo

  
	
   

  	
   

  	
  Portfolio
  Manager

  
	
   

  	
  Telephone:

  	
  (201)
  986-8300

  
	
   

  	
  Facsimile:

  	
  (201) 985-8266

  
	
   

  	
   

  
	
  With a copy to:

  	
  David
  Gonzalez, Esq.

  
	
   

  	
  101 Hudson
  Street, Suite 3700

  
	
   

  	
  Jersey City, NJ
  07302

  
	
   

  	
  Telephone:

  	
  (201) 985-8300

  
	
   

  	
  Facsimile:

  	
  (201) 985-8266

  

 

11

 

	
  And if to the
  Company:

  	
  Isonics
  Corporation

  
	
   

  	
  5906 McIntyre Street

  
	
   

  	
  Golden, CO 80403

  
	
   

  	
  Attention:

  	
  James E.
  Alexander, President

  
	
   

  	
  Telephone:

  	
  (303) 279-7900

  
	
   

  	
  Facsimile:

  	
  (303) 279-7300

  
	
   

  	
   

  
	
  With a copy to:

  	
  Burns,
  Figa & Will, P.C.

  
	
   

  	
  6400 South
  Fiddler’s Green Circle – Suite 1000

  
	
   

  	
  Greenwood
  Village, CO 80111

  
	
   

  	
  Attention:

  	
  Herrick K.
  Lidstone, Jr., Esq.

  
	
   

  	
  Telephone:

  	
  (303) 796-2626

  
	
   

  	
  Facsimile:

  	
  (303) 796-2777

  

 

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

 

Section 8.2.                                   Severability.

 

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

 

Section 8.3.                                   Expenses.

 

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

 

Section 8.4.                                   Waivers,
Amendments, Etc.

 

The Secured Party’s delay
or failure at any time or times hereafter to require strict performance by
Company of any undertakings, agreements or covenants shall not waiver, affect,
or diminish any right of the Secured Party under this Agreement to demand
strict compliance and performance herewith. 
Any waiver by the Secured Party of any Event of Default shall not waive
or affect any other Event of Default, whether such Event of Default is prior or
subsequent thereto and whether of the same or a different type.  None of the undertakings, agreements and covenants
of the Company contained in this Agreement, and no Event of Default, shall be
deemed to have been waived by the Secured Party, nor may this Agreement be
amended, changed or modified, unless such waiver, amendment, change or
modification is evidenced by an

 

12

 

instrument in
writing specifying such waiver, amendment, change or modification and signed by
the Secured Party.

 

Section 8.5.                                   Continuing
Security Interest.

 

This Agreement shall
create a continuing security interest in the Pledged Property and shall: (i) remain
in full force and effect until payment in full of the Obligations; and (ii) be
binding upon the Company and its successors and heirs and (iii) inure to
the benefit of the Secured Party and its successors and assigns.  Upon the payment or satisfaction in full of
the Obligations, the Company shall be entitled to the return, at its expense,
of such of the Pledged Property as shall not have been sold in accordance with Section 5.2
hereof or otherwise applied pursuant to the terms hereof.

 

Section 8.6.                                   Independent
Representation.

 

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

 

Section 8.7.                                   Applicable
Law:  Jurisdiction.

 

This Agreement shall be
governed by and interpreted in accordance with the laws of the State of New
Jersey without regard to the principles of conflict of laws.  The parties further agree that any action
between them shall be heard in Hudson County, New Jersey, and expressly consent
to the jurisdiction and venue of the Superior Court of New Jersey, sitting in
Hudson County and the United States District Court for the District of New
Jersey sitting in Newark, New Jersey for the adjudication of any civil action
asserted pursuant to this Paragraph.

 

Section 8.8.                                   Waiver
of Jury Trial.

 

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

 

Section 8.9.                                   Entire
Agreement.

 

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

 

[REMAINDER OF PAGE INTENTIONALLY LEFT
BLANK]

 

13

 

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

 

 

	
   

  	
  COMPANY:

  
	
   

  	
  ISONICS
  CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   James E.
  Alexander

  
	
   

  	
  Title:

  	
  President and
  Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SECURED
  PARTY:

  
	
   

  	
  CORNELL
  CAPITAL PARTNERS, LP

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Yorkville Advisors, LLC

  
	
   

  	
  Its:

  	
  General
  Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Mark Angelo

  
	
   

  	
  Title:

  	
  Portfolio
  Manager

  
						

 

14

 

EXHIBIT A

DEFINITION OF PLEDGED PROPERTY

 

For the purpose of
securing prompt and complete payment and performance by the Company of all of
the Obligations, the Company unconditionally and irrevocably hereby grants to
the Secured Party a continuing security interest in and to, and lien upon, the
following Pledged Property of the Company:

 

(a)                                  all
goods of the Company, including, without limitation, machinery, equipment,
furniture, furnishings, fixtures, signs, lights, tools, parts, supplies and
motor vehicles of every kind and description, now or hereafter owned by the
Company or in which the Company may have or may hereafter acquire any interest,
and all replacements, additions, accessions, substitutions and proceeds
thereof, arising from the sale or disposition thereof, and where applicable,
the proceeds of insurance and of any tort claims involving any of the
foregoing;

 

(b)                                 all
inventory of the Company, including, but not limited to, all goods, wares,
merchandise, parts, supplies, finished products, other tangible personal
property, including such inventory as is temporarily out of Company’s custody
or possession and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing;

 

(c)                                  all
contract rights and general intangibles of the Company, including, without
limitation, goodwill, trademarks, trade styles, trade names, leasehold
interests, partnership or joint venture interests, patents and patent
applications, copyrights, deposit accounts whether now owned or hereafter
created;

 

(d)                                 all
documents, warehouse receipts, instruments and chattel paper of the Company
whether now owned or hereafter created;

 

(e)                                  all
accounts and other receivables, instruments or other forms of obligations and
rights to payment of the Company (herein collectively referred to as “Accounts”),
together with the proceeds thereof, all goods represented by such Accounts and
all such goods that may be returned by the Company’s customers, and all
proceeds of any insurance thereon, and all guarantees, securities and liens
which the Company may hold for the payment of any such Accounts including,
without limitation, all rights of stoppage in transit, replevin and
reclamation and as an unpaid vendor and/or lienor, all of which the Company
represents and warrants will be bona fide and existing obligations of its
respective customers, arising out of the sale of goods by the Company in the
ordinary course of business;

 

(f)                                    to
the extent assignable, all of the Company’s rights under all present and future
authorizations, permits, licenses and franchises issued or granted in
connection with the operations of any of its facilities;

 

(g)                                 all
products and proceeds (including, without limitation, insurance proceeds) from
the above-described Pledged Property.

 

A-1Exhibit 10.10

 

SECURITY AGREEMENT

 

THIS
SECURITY AGREEMENT (the “Agreement”), is entered into and made effective as of May 30,
2006, by and between Isonics Homeland Security and Defense Corporation, a Delaware corporation with its principal
place of business at 6851 Oak Hall Lane, Suite 119 Columbia, Maryland
21045 (the “Company”), and Cornell Capital Partners, LP (the “Secured Party”).

 

WHEREAS,
the Company is a wholly owned subsidiary of Isonics Corporation (the “Parent”);

 

WHEREAS,
on the date hereof, the Parent shall issue and sell to the Secured Party, as
provided in the Securities Purchase Agreement dated the date hereof, and the
Secured Party shall purchase up to Sixteen Million Dollars ($16,000,000) of
secured convertible debentures (the “Convertible Debentures”),
which shall be convertible into shares of common stock of the Parent, no par
value (the “Common Stock”) (as converted, the “Conversion Shares”),
in the respective amounts set forth opposite each Buyer(s) name on Schedule I
attached to the Securities Purchase Agreement;

 

WHEREAS,
the Company shall benefit from the sale of the
Convertible Debentures by the Parent to the Secured Party;

 

WHEREAS,
to induce the Secured Party to enter into the
transaction contemplated by the Securities Purchase Agreement, the Secured
Convertible Debenture, the Investor Registration Rights Agreement, the
Irrevocable Transfer Agent Instructions, and the Escrow Agreement (collectively
referred to as the “Transaction Documents”), the Company hereby grants
to the Secured Party a security interest in and to the Pledged Property (as
defined below) until the satisfaction of the Obligations, as defined herein
below.

 

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

 

ARTICLE 1.

 

DEFINITIONS AND INTERPRETATIONS

 

Section 1.1.            Recitals.

 

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

 

Section 1.2.            Interpretations.

 

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

 

 

Section 1.3.            Obligations
Secured.

 

The
obligations secured hereby are any and all obligations of the Company or the
Parent now existing or hereinafter incurred to the Secured Party, whether oral
or written and whether arising before, on or after the date hereof including,
without limitation, those obligations of the Parent to the Secured Party under
the Transaction Documents, and any other amounts now or hereafter owed to the
Secured Party by the Parent thereunder or hereunder (collectively, the “Obligations”).

 

ARTICLE 2.

 

PLEDGED PROPERTY, ADMINISTRATION OF COLLATERAL AND

TERMINATION OF SECURITY INTEREST

 

Section 2.1.            Pledged
Property.

 

(a)           The
Company hereby pledges to the Secured Party, and creates in the Secured Party
for its benefit, a security interest for such time until the Obligations are
paid in full, in and to all of the property of the Company as set forth in Exhibit ”A”
attached hereto and the products thereof and the proceeds of all such items
(collectively, the “Pledged Property”):

 

(b)           Simultaneously
with the execution and delivery of this Agreement, the Company shall make,
execute, acknowledge, file, record and deliver to the Secured Party any
documents reasonably requested by the Secured Party to perfect its security
interest in the Pledged Property. 
Simultaneously with the execution and delivery of this Agreement, the
Company shall make, execute, acknowledge and deliver to the Secured Party such
documents and instruments, including, without limitation, financing statements,
certificates, affidavits and forms as may, in the Secured Party’s reasonable
judgment, be necessary to effectuate, complete or perfect, or to continue and
preserve, the security interest of the Secured Party in the Pledged Property,
and the Secured Party shall hold such documents and instruments as secured
party, subject to the terms and conditions contained herein.

 

Section 2.2.            Rights;
Interests; Etc.

 

(a)           So
long as no Event of Default (as hereinafter defined) shall have occurred
and be continuing:

 

(i)            the
Company shall be entitled to exercise any and all rights pertaining to the
Pledged Property or any part thereof for any purpose not inconsistent with the
terms hereof; and

 

(ii)           the
Company shall be entitled to receive and retain any and all payments paid or
made in respect of the Pledged Property.

 

(b)           Upon
the occurrence and during the continuance of an Event of Default:

 

(i)            All
rights of the Company to exercise the rights which it would otherwise be
entitled to exercise pursuant to Section 2.2(a)(i) hereof and to
receive payments

 

2

 

which it would
otherwise be authorized to receive and retain pursuant to Section 2.2(a)(ii) hereof
shall be suspended, and all such rights shall thereupon become vested in the
Secured Party who shall thereupon have the sole right to exercise such rights
and to receive and hold as Pledged Property such payments; provided, however, that if the Secured
Party shall become entitled and shall elect to exercise its right to realize on
the Pledged Property pursuant to Article 5 hereof, then all cash sums
received by the Secured Party, or held by Company for the benefit of the
Secured Party and paid over pursuant to Section 2.2(b)(ii) hereof,
shall be applied against any outstanding Obligations; and

 

(ii)           All
interest, dividends, income and other payments and distributions which are
received by the Company contrary to the provisions of Section 2.2(b)(i) hereof
shall be received in trust for the benefit of the Secured Party, shall be segregated
from other property of the Company and shall be forthwith paid over to the
Secured Party; or

 

(iii)          The
Secured Party in its sole discretion shall be authorized to sell any or all of
the Pledged Property at public or private sale in order to recoup all of the
outstanding principal plus accrued interest owed pursuant to the Convertible
Debenture as described herein

 

(c)           An
“Event of Default” shall be deemed to have occurred under this Agreement
upon an Event of Default under the Convertible Debentures.

 

ARTICLE 3.

 

ATTORNEY-IN-FACT; PERFORMANCE

 

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

 

Upon the
occurrence of an Event of Default, the Company hereby appoints the Secured
Party as its attorney-in-fact, with full authority in the place and stead of
the Company and in the name of the Company or otherwise, from time to time in
the Secured Party’s discretion to take any action and to execute any instrument
which the Secured Party may reasonably deem necessary to accomplish the
purposes of this Agreement, including, without limitation, to receive and
collect all instruments made payable to the Company representing any payments
in respect of the Pledged Property or any part thereof and to give full
discharge for the same.  The Secured
Party may demand, collect, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize on the Pledged Property as and when the Secured Party may
determine.  To facilitate collection, the
Secured Party may notify account debtors and obligors on any Pledged Property
to make payments directly to the Secured Party.

 

Section 3.2.            Secured
Party May Perform.

 

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

 

3

 

ARTICLE 4.

 

REPRESENTATIONS AND WARRANTIES

 

Section 4.1.            Authorization;
Enforceability.

 

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

 

Section 4.2.            Ownership
of Pledged Property.

 

The Company
warrants and represents that it is the legal and beneficial owner of the
Pledged Property free and clear of any lien, security interest, option or other
charge or encumbrance except for the security interest created by this
Agreement and other security interests filed of record with the Secretary of
State of Delaware.  To the knowledge of
the Company, the security interests filed of record include security interests
for various capital leases.

 

ARTICLE 5.

 

DEFAULT; REMEDIES; SUBSTITUTE COLLATERAL

 

Section 5.1.            Default
and Remedies.

 

(a)           If
an Event of Default occurs and after any applicable cure or grace period, then
in each such case the Secured Party may declare the Obligations to be due and
payable immediately, by a notice in writing to the Company, and upon any such
declaration, the Obligations shall become immediately due and payable.

 

(b)           Upon
the occurrence of an Event of Default and after any applicable cur or grace
period, the Secured Party shall:  (i) be
entitled to receive all distributions with respect to the Pledged Property, (ii) to
cause the Pledged Property to be transferred into the name of the Secured Party
or its nominee, (iii) to dispose of the Pledged Property, and (iv) to
realize upon any and all rights in the Pledged Property then held by the
Secured Party.

 

Section 5.2.            Method
of Realizing Upon the Pledged Property; Other Remedies.

 

Upon the
occurrence of an Event of Default, in addition to any rights and remedies
available at law or in equity, the following provisions shall govern the
Secured Party’s right to realize upon the Pledged Property:

 

(a)           Any
item of the Pledged Property may be sold for cash or other value in any number
of lots at brokers board, public auction or private sale and may be sold
without demand, advertisement or notice (except that the Secured Party shall
give the Company ten (10) days’ prior written notice of the time and
place or of the time after which a private sale

 

4

 

may be made
(the “Sale Notice”)), which notice period shall in any event is hereby
agreed to be commercially reasonable.  At
any sale or sales of the Pledged Property, the Company may bid for and purchase
the whole or any part of the Pledged Property and, upon compliance with the
terms of such sale, may hold, exploit and dispose of the same without further
accountability to the Secured Party.  The
Company will execute and deliver, or cause to be executed and delivered, such
instruments, documents, assignments, waivers, certificates, and affidavits and
supply or cause to be supplied such further information and take such further
action as the Secured Party reasonably shall require in connection with any
such sale.

 

(b)           Any
cash being held by the Secured Party as Pledged Property and all cash proceeds
received by the Secured Party in respect of, sale of, collection from, or other
realization upon all or any part of the Pledged Property shall be applied as
follows:

 

(i)            to
the payment of all amounts due the Secured Party for the expenses reimbursable
to it hereunder or owed to it pursuant to Section 8.3 hereof;

 

(ii)           to
the payment of the Obligations then due and unpaid.

 

(iii)          the
balance, if any, to the person or persons entitled thereto, including, without
limitation, the Company.

 

(c)           In
addition to all of the rights and remedies which the Secured Party may have
pursuant to this Agreement, the Secured Party shall have all of the rights and
remedies provided by law, including, without limitation, those under the
Uniform Commercial Code.

 

(i)            If
the Company fails to pay such amounts due upon the occurrence of an Event of
Default which is continuing, then the Secured Party may institute a judicial
proceeding for the collection of the sums so due and unpaid, may prosecute such
proceeding to judgment or final decree and may enforce the same against the
Company and collect the monies adjudged or decreed to be payable in the manner
provided by law out of the property of Company, wherever situated.  The Secured Party may proceed against the
Company without proceeding first against any other party, including, without
limitation, the Parent.

 

(ii)           The
Company agrees that it shall be liable for any reasonable fees, expenses and
costs incurred by the Secured Party in connection with enforcement, collection
and preservation of the Transaction Documents, including, without limitation,
reasonable legal fees and expenses, and such amounts shall be deemed included
as Obligations secured hereby and payable as set forth in Section 8.3
hereof.

 

Section 5.3.            Proofs
of Claim.

 

In case of the pendency of any
receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement,
adjustment, composition or other judicial proceeding relating to the Company or
the property of the Company or of such other obligor or its creditors, the
Secured Party (irrespective of whether the Obligations shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective of
whether the Secured Party shall have made any demand on the Company for the
payment of the Obligations), subject to the rights of Previous

 

5

 

Security
Holders, shall be entitled and empowered, by intervention in such proceeding or
otherwise:

 

(i)            to
file and prove a claim for the whole amount of the Obligations and to file such
other papers or documents as may be necessary or advisable in order to have the
claims of the Secured Party (including any claim for the reasonable legal fees
and expenses and other expenses paid or incurred by the Secured Party permitted
hereunder and of the Secured Party allowed in such judicial proceeding), and

 

(ii)           to
collect and receive any monies or other property payable or deliverable on any
such claims and to distribute the same; and any custodian, receiver, assignee,
trustee, liquidator, sequestrator or other similar official in any such
judicial proceeding is hereby authorized by the Secured Party to make such
payments to the Secured Party and, in the event that the Secured Party shall
consent to the making of such payments directed to the Secured Party, to pay to
the Secured Party any amounts for expenses due it hereunder.

 

Section 5.4.            Duties
Regarding Pledged Property.

 

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

 

ARTICLE 6.

 

AFFIRMATIVE COVENANTS

 

The Company
covenants and agrees that, from the date hereof and until the Obligations have
been fully paid and satisfied, unless the Secured Party shall consent otherwise
in writing (as provided in Section 8.4 hereof):

 

Section 6.1.            Existence,
Properties, Etc.

 

(a)           The
Company shall do, or cause to be done, all things, or proceed with due
diligence with any actions or courses of action, that may be reasonably necessary
(i) to maintain Company’s due organization, valid existence and good
standing under the laws of its state of incorporation, and (ii) to
preserve and keep in full force and effect all qualifications, licenses and
registrations in those jurisdictions in which the failure to do so could have a
Material Adverse Effect (as defined below); and (b) the Company shall not
do, or cause to be done, any act impairing the Company’s corporate power or
authority (i) to carry on the Company’s business as now conducted, and (ii) to
execute or deliver this Agreement or any other document delivered in connection
herewith, including, without limitation, any UCC-1 Financing Statements
required by the Secured Party (which other loan instruments collectively shall
be referred to as the “Loan Instruments”) to which it is or will be
a party, or perform any of its obligations hereunder or thereunder.  For purpose of this Agreement, the term “Material
Adverse Effect” shall mean any material and adverse affect as determined by
Secured Party in its reasonable discretion, whether individually or in the
aggregate, upon (a) the Company’s assets, business, operations, properties

 

6

 

or condition,
financial or otherwise; (b) the Company’s to make payment as and when due
of all or any part of the Obligations; or (c) the Pledged Property.

 

Section 6.2.            Maintenance
of Books and Records; Inspection.

 

The Company
shall maintain its books, accounts and records in accordance with generally
accepted accounting principles consistently applied, and permit the Secured
Party, its officers and employees and any professionals designated by the
Secured Party in writing, at any time and subject to the Company’s normal
confidentiality requirements to visit and inspect any of its properties
(including but not limited to the collateral security described in the
Transaction Documents and/or the Loan Instruments), corporate books and
financial records, and to discuss its accounts, affairs and finances with any employee,
officer or director thereof.

 

Section 6.3.            Maintenance
and Insurance.

 

(b)           The
Company shall maintain or cause to be maintained, at its own expense, all of
its assets and properties in good working order and condition, subject to
ordinary wear and tear, making all necessary repairs thereto and renewals and
replacements thereof.

 

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

 

Section 6.4.            Contracts
and Other Collateral.

 

The Company
shall perform all of its obligations under or with respect to each instrument,
receivable, contract and other intangible included in the Pledged Property to
which the Company is now or hereafter will be party on a timely basis and in
the manner therein required, including, without limitation, this Agreement.

 

Section 6.5.            Defense
of Collateral, Etc.

 

The Company
shall defend and enforce its right, title and interest in and to any part
of:  (a) the Pledged Property; and (b) if
not included within the Pledged Property, those assets and properties whose
loss could have a Material Adverse Effect, the Company shall defend the Secured
Party’s right, title and interest in and to each and every part of the Pledged
Property, each against all manner of claims and demands on a timely basis to
the full extent permitted by applicable law.

 

7

 

Section 6.6.            Payment
of Debts, Taxes, Etc.

 

The Company
shall pay, or cause to be paid, all of its indebtedness and other liabilities
and perform, or cause to be performed, all of its obligations in accordance
with the respective terms thereof, and pay and discharge, or cause to be paid
or discharged, all taxes, assessments and other governmental charges and levies
imposed upon it, upon any of its assets and properties on or before the last
day on which the same may be paid without penalty, as well as pay all other
lawful claims (whether for services, labor, materials, supplies or
otherwise) as and when due.

 

Section 6.7.            Taxes
and Assessments; Tax Indemnity.

 

The Company
shall (a) file all tax returns and appropriate schedules thereto that are
required to be filed under applicable law, prior to the date of delinquency, (b) pay
and discharge all taxes, assessments and governmental charges or levies imposed
upon the Company, upon its income and profits or upon any properties belonging
to it, prior to the date on which penalties attach thereto, and (c) pay
all taxes, assessments and governmental charges or levies that, if unpaid,
might become a lien or charge upon any of its properties; provided, however, that the Company in
good faith may contest any such tax, assessment, governmental charge or levy
described in the foregoing clauses (b) and (c) so long as appropriate
reserves are maintained with respect thereto.

 

Section 6.8.            Compliance
with Law and Other Agreements.

 

The Company
shall maintain its business operations and property owned or used in connection
therewith in compliance with (a) all applicable federal, state and local
laws, regulations and ordinances governing such business operations and the use
and ownership of such property, and (b) all agreements, licenses,
franchises, indentures and mortgages to which the Company is a party or by
which the Company or any of its properties is bound.  Without limiting the foregoing, the Company
shall pay all of its indebtedness promptly in accordance with the terms
thereof.

 

Section 6.9.            Notice
of Default.

 

The Company
shall give written notice to the Secured Party of the occurrence of any default
or Event of Default under this Agreement, the Transaction Documents or any other
Loan Instrument or any other agreement of Company for the payment of money,
promptly upon the occurrence thereof.

 

Section 6.10.          Notice
of Litigation.

 

The Company
shall give notice, in writing, to the Secured Party of (a) any actions,
suits or proceedings wherein the amount at issue is in excess of $50,000,
instituted by any persons against the Company, or affecting any of the assets
of the Company, and (b) any dispute, not resolved within fifteen (15) days
of the commencement thereof, between the Company on the one hand and any
governmental or regulatory body on the other hand, which might reasonably be
expected to have a Material Adverse Effect on the business operations or
financial condition of the Company.

 

8

 

ARTICLE 7.

 

NEGATIVE COVENANTS

 

The Company
covenants and agrees that, from the date hereof until the Obligations have been
fully paid and satisfied, the Company shall not, unless the Secured Party shall
consent otherwise in writing:

 

Section 7.1.            Liens
and Encumbrances.

 

Except as contemplated in Section 9 of the
Convertible Debenture the Obligor shall not or permit any of its subsidiaries
to without the Holder’s consent, directly or indirectly, enter into, create,
incur, assume or suffer to exist any indebtedness of any kind, on or with
respect to any of its property or assets now owned or hereafter acquired or any
interest therein or any income or profits there from that is senior in any
respect to the obligations of the Obligor under the Debenture.

 

Section 7.2.            Articles,
By-Laws, Mergers, Consolidations, Acquisitions and Sales.

 

Without the
prior express written consent of the Secured Party, which consent shall not be
unreasonably withheld, the Company shall not: 
(a) Amend its Articles of Incorporation or By-Laws; (b) be a
party to any merger, consolidation or corporate reorganization, (c) purchase
or otherwise acquire all or substantially all of the assets or stock of, or any
partnership or joint venture interest in, any other person, firm or entity, (d) sell,
transfer, convey, grant a security interest in or lease all or any substantial
part of its assets, nor (e) create any subsidiaries nor convey any of its
assets to any subsidiary in excess of $200,000 in the aggregate.

 

Section 7.3.            Management,
Ownership.

 

The Company shall not terminate or materially
change the positions of James E. Alexander, Boris Rubizhevsky, and John Sakys
without the prior written consent of the Secured Party.  The employment of James E. Alexander, Boris
Rubizhevsky, and John Sakys in their current positions are material factors in
the Secured Party’s willingness to institute and maintain a lending
relationship with the Company.

 

Section 7.4.            Dividends,
Etc.

 

Except for
dividends payable to the Parent, the Company shall not declare or pay any
dividend of any kind, in cash or in property, on any class of its capital
stock, nor purchase, redeem, retire or otherwise acquire for value any shares
of such stock, nor make any distribution of any kind in respect thereof, nor make
any return of capital to shareholders, nor make any payments in respect of any
pension, profit sharing, retirement, stock option, stock bonus, incentive
compensation or similar plan (except as required or permitted hereunder),
without the prior written consent of the Secured Party, which consent shall not
be unreasonably withheld.

 

9

 

Section 7.5.            Conduct
of Business.

 

The Company
will continue to engage, in an efficient and economical manner, in a business of
the same general type as conducted by it on the date of this Agreement.

 

Section 7.6.            Places
of Business.

 

The location
of the Company’s chief place of business is 6851 Oak Hall Lane, Suite 119
Columbia, Maryland 21045.  The Company
shall not change the location of its chief place of business, chief executive
office or any place of business disclosed to the Secured Party or move any of
the Pledged Property from its current location without thirty (30) days prior
written notice to the Secured Party in each instance.

 

ARTICLE 8.

 

MISCELLANEOUS

 

Section 8.1.            Notices.

 

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

 

	
  If to the Secured Party:

  	
  Cornell Capital Partners, LP

  
	
   

  	
  101 Hudson Street, Suite 3700

  
	
   

  	
  Jersey City, New Jersey 07302

  
	
   

  	
  Attention:

  	
  Mark Angelo

  
	
   

  	
   

  	
  Portfolio Manager

  
	
   

  	
  Telephone:

  	
  (201) 986-8300

  
	
   

  	
  Facsimile:

  	
  (201) 985-8266

  
	
   

  	
   

  
	
  With copy to:

  	
  David Gonzalez, Esq.

  
	
   

  	
  101 Hudson Street, Suite 3700

  
	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
  Telephone:

  	
  (201) 985-8300

  
	
   

  	
  Facsimile:

  	
  (201) 985-8266

  

 

10

 

	
  And if to the Company:

  	
  Isonics Homeland Security and Defense
  Corporation

  
	
   

  	
  6851 Oak Hall Lane, Suite 119

  
	
   

  	
  Columbia, Maryland 21045

  
	
   

  	
  Attention:

  	
  Boris Rubizhevsky

  
	
   

  	
   

  
	
  With a copy to:

  	
  Isonics Corporation

  
	
   

  	
  5906 McIntyre Street

  
	
   

  	
  Golden, CO 80403

  
	
   

  	
  Attention:

  	
  James E. Alexander

  
	
   

  	
  Telephone:

  	
  (303) 279-7900

  
	
   

  	
  Facsimile:

  	
  (303) 279-7300

  

 

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

 

Section 8.2.            Severability.

 

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

 

Section 8.3.            Expenses.

 

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

 

Section 8.4.            Waivers,
Amendments, Etc.

 

The Secured
Party’s delay or failure at any time or times hereafter to require strict
performance by Company of any undertakings, agreements or covenants shall not
waiver, affect, or diminish any right of the Secured Party under this Agreement
to demand strict compliance and performance herewith.  Any waiver by the Secured Party of any Event
of Default shall not waive or affect any other Event of Default, whether such
Event of Default is prior or subsequent thereto and whether of the same or a
different type.  None of the
undertakings, agreements and covenants of the Company contained in this
Agreement, and no Event of Default, shall be deemed to have been waived by the
Secured Party, nor may this Agreement be amended, changed or modified, unless
such waiver, amendment, change or modification is evidenced by an instrument in
writing specifying such waiver, amendment, change or modification and signed by
the Secured Party.

 

11

 

Section 8.5.            Continuing
Security Interest.

 

This Agreement
shall create a continuing security interest in the Pledged Property and shall: (i) remain
in full force and effect until payment in full of the Obligations; and (ii) be
binding upon the Company and its successors and heirs and (iii) inure to
the benefit of the Secured Party and its successors and assigns.  Upon the payment or satisfaction in full of
the Obligations, the Company shall be entitled to the return, at its expense,
of such of the Pledged Property as shall not have been sold in accordance with Section 5.2
hereof or otherwise applied pursuant to the terms hereof.

 

Section 8.6.            Independent
Representation.

 

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

 

Section 8.7.            Applicable
Law:  Jurisdiction.

 

This Agreement
shall be governed by and interpreted in accordance with the laws of the State
of New Jersey without regard to the principles of conflict of laws.  The parties further agree that any action
between them shall be heard in and expressly consent to the jurisdiction and
venue of the 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.

 

Section 8.8.            Waiver
of Jury Trial.

 

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

 

Section 8.9.            Entire
Agreement.

 

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

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

12

 

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

 

 

	
   

  	
  COMPANY:

  
	
   

  	
  ISONICS HOMELAND SECURITY AND DEFENSE
  CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name: Boris Rubizhevsky

  
	
   

  	
  Title:  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SECURED PARTY:

  
	
   

  	
  CORNELL CAPITAL PARTNERS, LP

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Yorkville Advisors, LLC

  
	
   

  	
  Its:

  	
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Mark Angelo

  
	
   

  	
  Title:

  	
  Portfolio Manager

  
					

 

13

 

EXHIBIT A

DEFINITION OF PLEDGED PROPERTY

 

For the
purpose of securing prompt and complete payment and performance by the Company
of all of the Obligations, the Company unconditionally and irrevocably hereby
grants to the Secured Party a continuing security interest in and to, and lien
upon, the following Pledged Property of the Company:

 

(a)           all
goods of the Company, including, without limitation, machinery, equipment,
furniture, furnishings, fixtures, signs, lights, tools, parts, supplies and
motor vehicles of every kind and description, now or hereafter owned by the
Company or in which the Company may have or may hereafter acquire any interest,
and all replacements, additions, accessions, substitutions and proceeds
thereof, arising from the sale or disposition thereof, and where applicable,
the proceeds of insurance and of any tort claims involving any of the
foregoing;

 

(b)           all
inventory of the Company, including, but not limited to, all goods, wares,
merchandise, parts, supplies, finished products, other tangible personal
property, including such inventory as is temporarily out of Company’s custody
or possession and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing;

 

(c)           all
contract rights and general intangibles of the Company, including, without
limitation, goodwill, trademarks, trade styles, trade names, leasehold
interests, partnership or joint venture interests, patents and patent
applications, copyrights, deposit accounts whether now owned or hereafter
created;

 

(d)           all
documents, warehouse receipts, instruments and chattel paper of the Company
whether now owned or hereafter created;

 

(e)           all
accounts and other receivables, instruments or other forms of obligations and
rights to payment of the Company (herein collectively referred to as “Accounts”),
together with the proceeds thereof, all goods represented by such Accounts and
all such goods that may be returned by the Company’s customers, and all
proceeds of any insurance thereon, and all guarantees, securities and liens
which the Company may hold for the payment of any such Accounts including,
without limitation, all rights of stoppage in transit, replevin and
reclamation and as an unpaid vendor and/or lienor, all of which the Company
represents and warrants will be bona fide and existing obligations of its
respective customers, arising out of the sale of goods by the Company in the
ordinary course of business;

 

(f)            to
the extent assignable, all of the Company’s rights under all present and future
authorizations, permits, licenses and franchises issued or granted in
connection with the operations of any of its facilities;

 

(g)           all
products and proceeds (including, without limitation, insurance proceeds) from
the above-described Pledged Property.

 

A-1

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00105-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00105-of-00352.parquet"}]]