Document:

Exhibit 10.4

 

THIS WARRANT
AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS.  THIS WARRANT AND THE
COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IMPLANT
SCIENCES CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

 

Right to Purchase up to 50,000 Shares of Common Stock
of

IMPLANT SCIENCES CORPORATION 

(subject to adjustment as provided herein)

 

COMMON STOCK
PURCHASE WARRANT

 

	
  No.                                   

  	
  Issue Date: 
  As of September 30, 2005

  

 

IMPLANT SCIENCES CORPORATION, a corporation organized
under the laws of the Commonwealth of Massachusetts (the “Company”), hereby
certifies that, for value received, LAURUS MASTER FUND, LTD., or assigns (the “Holder”),
is entitled, subject to the terms set forth below, to purchase from the Company
(as defined herein) from and after the Issue Date of this Warrant and at any
time or from time to time before 5:00 p.m., New York time, through the
close of business September 30, 2010 (the “Expiration Date”), up to Fifty
Thousand (50,000) fully paid and nonassessable shares of Common Stock (as
hereinafter defined), $0.10 par value per share, at the applicable Exercise
Price per share (as defined below).  The
number and character of such shares of Common Stock and the applicable Exercise
Price per share are subject to adjustment as provided herein.

 

As used herein the following terms, unless the context
otherwise requires, have the following respective meanings:

 

(a)           The term “Company” shall
include IMPLANT SCIENCES CORPORATION and any corporation which shall succeed,
or assume the obligations of, IMPLANT SCIENCES CORPORATION hereunder.

 

(b)           The term “Common Stock”
includes (i) the Company’s Common Stock, par value $0.10 per share; and (ii) any
other securities into which or for which any of the securities described in the
preceding clause (i) may be converted or exchanged pursuant to a plan of
recapitalization, reorganization, merger, sale of assets or otherwise.

 

(c)           The term “Other Securities”
refers to any stock (other than Common Stock) and other securities of the
Company or any other person (corporate or otherwise) which the holder of the
Warrant at any time shall be entitled to receive, or shall have received, on
the exercise of the Warrant, in lieu of or in addition to Common Stock, or

 

 

which at any time shall be issuable or shall have been
issued in exchange for or in replacement of Common Stock or Other Securities
pursuant to Section 4 or otherwise.

 

(i)            The “Exercise
Price” applicable under this Warrant shall be $10.20.

 

1.             Exercise of Warrant.

 

1.1.          Number of Shares Issuable upon Exercise.  From and after the date hereof through and
including the Expiration Date, the Holder shall be entitled to receive, upon
exercise of this Warrant in whole or in part, by delivery of an original or fax
copy of an exercise notice in the form attached hereto as Exhibit A (the “Exercise
Notice”), shares of Common Stock of the Company, subject to adjustment pursuant
to Section 4.

 

1.2.          Company Acknowledgment.  The Company will, at the time of the exercise
of this Warrant, upon the request of the holder hereof acknowledge in writing
its continuing obligation to afford to such holder any rights to which such
holder shall continue to be entitled after such exercise in accordance with the
provisions of this Warrant.  If the
holder shall fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford to such holder any such rights.

 

1.3.          Trustee for Warrant Holders.  In the event that a bank or trust company
shall have been appointed as trustee for the holders of this Warrant pursuant
to Subsection 3.2, such bank or trust company shall have all the powers
and duties of a warrant agent (as hereinafter described) and shall accept, in
its own name for the account of the Company or such successor person as may be
entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this Section 1.

 

2.             Procedure for Exercise.

 

2.1.          Delivery of Stock Certificates, Etc., on Exercise.  The Company agrees that the shares of Common
Stock purchased upon exercise of this Warrant shall be deemed to be issued to
the Holder as the record owner of such shares as of the close of business on
the date on which this Warrant shall have been surrendered and payment made for
such shares in accordance herewith.  As
soon as practicable after the exercise of this Warrant in full or in part, and
in any event within three (3) business days thereafter, the Company at its
expense (including the payment by it of any applicable issue taxes) will cause
to be issued in the name of and delivered to the Holder, or as such Holder
(upon payment by such Holder of any applicable transfer taxes) may direct in
compliance with applicable securities laws, a certificate or certificates for
the number of duly and validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such Holder shall be entitled on
such exercise, pursuant to Section 1 or otherwise.

 

2.2.          Exercise.

 

(a)           Payment may be made in cash or by certified or
official bank check payable to the order of the Company equal to the applicable
aggregate Exercise Price, for the number of Common Shares specified in such
Exercise Notice (as such exercise number shall be adjusted to reflect any
adjustment in the total number of shares of

 

2

 

Common Stock issuable to the Holder per the terms of this Warrant) and
the Holder shall thereupon be entitled to receive the number of duly
authorized, validly issued, fully-paid and non-assessable shares of Common
Stock (or Other Securities) determined as provided herein.

 

3.             Effect of Reorganization, Etc.; Adjustment of
Exercise Price.

 

3.1.          Reorganization, Consolidation, Merger, Etc.  In case at any time or from time to time, the
Company shall (a) effect a reorganization, (b) consolidate with or
merge into any other person, or (c) transfer all or substantially all of
its properties or assets to any other person under any plan or arrangement
contemplating the dissolution of the Company, then, in each such case, as a
condition to the consummation of such a transaction, proper and adequate provision
shall be made by the Company whereby the Holder, on the exercise hereof as
provided in Section 1 at any time after the consummation of such
reorganization, consolidation or merger or the effective date of such
dissolution, as the case may be, shall receive, in lieu of the Common Stock (or
Other Securities) issuable on such exercise prior to such consummation or such
effective date, the stock and other securities and property (including cash) to
which such Holder would have been entitled upon such consummation or in
connection with such dissolution, as the case may be, if such Holder had so
exercised this Warrant, immediately prior thereto, all subject to further
adjustment thereafter as provided in Section 4.

 

3.2.          Dissolution. 
In the event of any dissolution of the Company following the transfer of
all or substantially all of its properties or assets, the Company, concurrently
with any distributions made to holders of its Common Stock, shall at its
expense deliver or cause to be delivered to the Holder the stock and other
securities and property (including cash, where applicable) receivable by the
Holder pursuant to Section 3.1, or, if the Holder shall so instruct the
Company, to a bank or trust company specified by the Holder and having its
principal office in New York, NY as trustee for the Holder (the “Trustee”).

 

3.3.          Continuation of Terms.  Upon any reorganization, consolidation,
merger or transfer (and any dissolution following any transfer) referred to in
this Section 3, this Warrant shall continue in full force and effect and
the terms hereof shall be applicable to the shares of stock and other
securities and property receivable on the exercise of this Warrant after the
consummation of such reorganization, consolidation or merger or the effective
date of dissolution following any such transfer, as the case may be, and shall
be binding upon the issuer of any such stock or other securities, including, in
the case of any such transfer, the person acquiring all or substantially all of
the properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant as provided in Section 4.  In the event this Warrant does not continue
in full force and effect after the consummation of the transactions described
in this Section 3, then the Company’s securities and property (including
cash, where applicable) receivable by the Holder will be delivered to the
Holder or the Trustee as contemplated by Section 3.2.

 

4.             Extraordinary Events Regarding Common Stock.  In the event that the Company shall (a) issue
additional shares of the Common Stock as a dividend or other distribution on
outstanding Common Stock or any preferred stock issued by the Company (b) subdivide
its outstanding shares of Common Stock, or (c) combine its outstanding
shares of the Common

 

3

 

Stock into a smaller number of shares of the Common Stock, then, in
each such event, the Exercise Price shall, simultaneously with the happening of
such event, be adjusted by multiplying the then Exercise Price by a fraction,
the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such event and the denominator of which shall
be the number of shares of Common Stock outstanding immediately after such
event, and the product so obtained shall thereafter be the Exercise Price then
in effect. The Exercise Price, as so adjusted, shall be readjusted in the same
manner upon the happening of any successive event or events described herein in
this Section 4.  The number of
shares of Common Stock that the Holder shall thereafter, on the exercise hereof
as provided in Section 1, be entitled to receive shall be adjusted to a
number determined by multiplying the number of shares of Common Stock that
would otherwise (but for the provisions of this Section 4) be issuable on
such exercise by a fraction of which (a) the numerator is the Exercise
Price that would otherwise (but for the provisions of this Section 4) be
in effect, and (b) the denominator is the Exercise Price in effect on the
date of such exercise (taking into account the provisions of this Section 4).

 

5.             Certificate as to Adjustments.  In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on
the exercise of this Warrant, the Company at its expense will promptly cause
its Chief Financial Officer or other appropriate designee to compute such
adjustment or readjustment in accordance with the terms of this Warrant and
prepare a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based,
including a statement of (a) the consideration received or receivable by
the Company for any additional shares of Common Stock (or Other Securities)
issued or sold or deemed to have been issued or sold, (b) the number of
shares of Common Stock (or Other Securities) outstanding or deemed to be
outstanding, and (c) the Exercise Price and the number of shares of Common
Stock to be received upon exercise of this Warrant, in effect immediately prior
to such adjustment or readjustment and as adjusted or readjusted as provided in
this Warrant.  The Company will forthwith
mail a copy of each such certificate to the Holder and any Warrant agent of the
Company (appointed pursuant to Section 11 hereof).

 

6.             Reservation of Stock, Etc., Issuable on
Exercise of Warrant.  The Company
will at all times reserve and keep available, solely for issuance and delivery
on the exercise of this Warrant, shares of Common Stock (or Other Securities)
from time to time issuable on the exercise of this Warrant.

 

7.             Assignment; Exchange of Warrant.  Subject to compliance with applicable
securities laws, this Warrant, and the rights evidenced hereby, may be
transferred by any registered holder hereof (a “Transferor”) in whole or in
part.  On the surrender for exchange of
this Warrant, with the Transferor’s endorsement in the form of Exhibit B
attached hereto (the “Transferor Endorsement Form”) and together with evidence
reasonably satisfactory to the Company demonstrating compliance with applicable
securities laws, which shall include, without limitation, the provision of a
legal opinion from the Transferor’s counsel (at the Company’s expense) that such
transfer is exempt from the registration requirements of applicable securities
laws, the Company at its expense (but with payment by the Transferor of any
applicable transfer taxes) will issue and deliver to or on the order of the
Transferor thereof a new Warrant of like tenor, in the name of the Transferor
and/or the transferee(s) specified in such Transferor Endorsement Form (each
a “Transferee”), calling in the aggregate on the face or

 

4

 

faces thereof for the number of shares of Common Stock called for on
the face or faces of the Warrant so surrendered by the Transferor.

 

8.             Replacement of Warrant.  On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.

 

9.             Registration Rights.  The Holder has not been granted registration
rights by the Company in respect of this Warrant.

 

10.           Maximum Exercise.  Notwithstanding anything contained herein to
the contrary, the Holder shall not be entitled to exercise this Warrant in
connection with that number of shares of Common Stock which would exceed the
difference between (i) 4.99% of the issued and outstanding shares of
Common Stock and (ii) the number of shares of Common Stock beneficially
owned by the Holder.  For the purposes of
the immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934,
as amended, and Regulation 13d-3 thereunder. 
The limitation described in the first sentence of this Section 10
shall automatically become null and void following notice to the Company upon
the occurrence and during the continuance of an Event of Default under and as
defined in the Note made by the Company to the Holder dated the date hereof (as
amended, modified or supplemented from time to time, the “Note”), or upon 75
days prior notice to the Company.

 

11.           Warrant Agent.  The Company may, by written notice to the
each Holder of the Warrant, appoint an agent for the purpose of issuing Common
Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1,
exchanging this Warrant pursuant to Section 7, and replacing this Warrant
pursuant to Section 8, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such
office by such agent.

 

12.           Transfer on the Company’s Books.  Until this Warrant is transferred on the
books of the Company, the Company may treat the registered Holder hereof as the
absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.

 

13.           Notices, Etc.  All notices and other communications from the
Company to the Holder shall be mailed by first class registered or certified
mail, postage prepaid, at such address as may have been furnished to the
Company in writing by such Holder or, until any such Holder furnishes to the
Company an address, then to, and at the address of, the last Holder who has so
furnished an address to the Company.

 

14.           Miscellaneous.  This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought.  THIS WARRANT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF

 

5

 

STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAWS.  ANY ACTION BROUGHT CONCERNING THE
TRANSACTIONS CONTEMPLATED BY THIS WARRANT SHALL BE BROUGHT ONLY IN THE STATE
COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK;
PROVIDED, HOWEVER, THAT THE HOLDER MAY CHOOSE TO WAIVE THIS PROVISION AND
BRING AN ACTION OUTSIDE THE STATE OF NEW YORK. 
The individuals executing this Warrant on behalf of the Company agree to
submit to the jurisdiction of such courts and waive trial by jury.  The prevailing party shall be entitled to
recover from the other party its reasonable attorneys’ fees and costs.  In the event that any provision of this
Warrant is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law.  Any such provision
which may prove invalid or unenforceable under any law shall not affect the
validity or enforceability of any other provision of this Warrant.  The headings in this Warrant are for purposes
of reference only, and shall not limit or otherwise affect any of the terms
hereof.  The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforceability of any other provision hereof. 
The Company acknowledges that legal counsel participated in the
preparation of this Warrant and, therefore, stipulates that the rule of
construction that ambiguities are to be resolved against the drafting party
shall not be applied in the interpretation of this Warrant to favor any party
against the other party.

 

[BALANCE OF PAGE
INTENTIONALLY LEFT BLANK;

SIGNATURE PAGE FOLLOWS]

 

6

 

IN WITNESS WHEREOF, the Company has executed this
Warrant as of the date first written above.

 

 

	
   

  	
  IMPLANT SCIENCES CORPORATION

  
	
   

  	
   

  
	
  WITNESS:

  	
   

  
	
   

  	
  By:

  	
  /s/ Anthony
  J. Armini

  	
   

  
	
   

  	
  Name:

  	
  Anthony Armini

  	
   

  
	
   

  	
   

  	
  Title:

  	
  President

  	
   

  
								

 

7

 

Exhibit A

 

FORM OF SUBSCRIPTION

(To Be Signed Only On Exercise Of Warrant)

 

TO:         IMPLANT
SCIENCES CORPORATION

 

Attention:              Chief
Financial Officer

 

The undersigned, pursuant to the provisions set forth
in the attached Warrant (No.        ),
hereby irrevocably elects to purchase (check applicable box):

 

	
                   

  	
                  
  shares of the Common Stock covered by such Warrant; 

  

 

The undersigned herewith makes payment of the full
Exercise Price for such shares at the price per share provided for in such
Warrant, which is $                      .  Such payment takes the form of (check
applicable box or boxes):

 

	
                   

  	
  $                  in lawful money of the United States. 

  

 

The undersigned requests that the certificates for
such shares be issued in the name of, and delivered to                                                                                             
whose address is                                                                                                                                                       .

 

The undersigned represents and warrants that all
offers and sales by the undersigned of the securities issuable upon exercise of
the within Warrant shall be made pursuant to registration of the Common Stock
under the Securities Act of 1933, as amended (the “Securities Act”) or pursuant
to an exemption from registration under the Securities Act.

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
  (Signature must conform to name of holder
  as specified on the face of the Warrant)

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  

 

A-1

 

Exhibit B

 

FORM OF TRANSFEROR ENDORSEMENT

(To Be Signed Only On Transfer Of Warrant)

 

For value received, the undersigned hereby sells,
assigns, and transfers unto the person(s) named below under the heading “Transferees”
the right represented by the within Warrant to purchase the percentage and
number of shares of Common Stock of IMPLANT SCIENCES CORPORATION into which the
within Warrant relates specified under the headings “Percentage Transferred”
and “Number Transferred,” respectively, opposite the name(s) of such person(s)
and appoints each such person Attorney to transfer its respective right on the
books of IMPLANT SCIENCES CORPORATION with full power of substitution in the
premises.

 

	
  Transferees

  	
   

  	
  Address

  	
   

  	
  Percentage

  Transferred

  	
   

  	
  Number

  Transferred

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
  (Signature must conform to name of holder
  as specified on the face of the Warrant)

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  

 

 

	
   

  	
  SIGNED IN THE PRESENCE OF:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Name)

  
	
  ACCEPTED AND AGREED:

  	
   

  
	
  [TRANSFEREE]

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  (Name)

  	
   

  	
   

  

 

B-1Exhibit
10.5

 

 

FUNDS ESCROW AGREEMENT

 

This Agreement
(this “Agreement”) is dated as of the 30th day of September 2005
among Implant Sciences Corporation, a Massachusetts corporation (the “Company”), Laurus Master Fund, Ltd. (the “Purchaser”), and Loeb & Loeb LLP (the “Escrow Agent”):

 

W I  T  N  E
S  S  E  T  H:

 

WHEREAS, the
Purchaser has advised the Escrow Agent that (a) the Company and the Purchaser
have entered into a Securities Purchase Agreement (the “Securities
Purchase Agreement”) for the sale by the Company to the Purchaser of
Series D Preferred Stock (the “Preferred
Stock”), and (b) the Company will issue to the Purchaser a common
stock purchase warrant (the “Warrant”) in
connection with the issuance of the Term Note,;

 

WHEREAS, the
Company and the Purchaser wish the Purchaser to deliver to the Escrow Agent
copies of the Documents (as hereafter defined) and the Escrowed Payment (as
hereafter defined) to be held and released by Escrow Agent in accordance with
the terms and conditions of this Agreement; and

 

WHEREAS, the
Escrow Agent is willing to serve as escrow agent pursuant to the terms and
conditions of this Agreement;

 

NOW THEREFORE, the
parties agree as follows:

 

ARTICLE
I

 

INTERPRETATION

 

1.1.          Definitions.  Whenever used in this Agreement, the following
terms shall have the meanings set forth below.

 

(a)                   “Agreement” means this
Agreement, as amended, modified and/or supplemented from time to time by
written agreement among the parties hereto.

 

(b)                   “Closing Payment” means the
closing payment to be paid to Laurus Capital Management, LLC, the fund manager,
as set forth on Schedule A hereto.

 

(c)                   “Disbursement Letter” means
that certain letter delivered to the Escrow Agent by each of the Purchaser and
the Company setting forth wire instructions and amounts to be funded at the
Closing.

 

 

 

(d)                   “Documents” means copies of
the Disbursement Letter, the Securities Purchase Agreement, Warrant and the
Preferred Stock.

 

(e)                   “Escrowed Payment” means
$5,000,000.

 

1.2.          Entire Agreement.  This Agreement constitutes the entire
agreement among the parties hereto with respect to the matters contained herein
and supersedes all prior agreements, understandings, negotiations and
discussions of the parties, whether oral or written.  There are no warranties, representations and
other agreements made by the parties in connection with the subject matter
hereof except as specifically set forth in this Agreement.

 

1.3.          Extended Meanings.  In this Agreement words importing the
singular number include the plural and vice versa; words importing the
masculine gender include the feminine and neuter genders.  The word “person” includes an individual,
body corporate, partnership, trustee or trust or unincorporated association,
executor, administrator or legal representative.

 

1.4.          Waivers and Amendments.  This Agreement may be amended, modified,
superseded, cancelled, renewed or extended, and the terms and conditions hereof
may be waived, in each case only by a written instrument signed by all parties
hereto, or, in the case of a waiver, by the party waiving compliance.  Except as expressly stated herein, no delay
on the part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any
party of any right, power or privilege hereunder preclude any other or future
exercise of any other right, power or privilege hereunder.

 

1.5.          Headings.  The division of this Agreement into articles,
sections, subsections and paragraphs and the insertion of headings are for
convenience of reference only and shall not affect the construction or
interpretation of this Agreement.

 

1.6.          Law Governing this Agreement;
Consent to Jurisdiction.  THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.  With respect to any suit, action or
proceeding relating to this Agreement or to the transactions contemplated
hereby (“Proceedings”), each party hereto irrevocably submits to the exclusive
jurisdiction of the courts of the County of New York, State of New York and the
United States District court located in the county of New York in the State of
New York.  Each party hereto hereby
irrevocably and unconditionally (a) waives trial by jury in any Proceeding
relating to this Agreement and for any related counterclaim and (b) waives any
objection which it may have at any time to the laying of venue of any
Proceeding brought in any such court, waives any claim that such Proceedings
have been brought in an inconvenient forum and further waives the right to
object, with respect to such Proceedings, that such court does not have
jurisdiction over such party.  As between
the Company and the Purchaser, the

 

2

 

prevailing party shall be
entitled to recover from the other party its reasonable attorneys’ fees and
costs.  In the event that any provision
of this Agreement is determined by a court of competent jurisdiction to be
invalid or unenforceable, then the remainder of this Agreement shall not be
affected and shall remain in full force and effect.

 

1.7.          Construction.  Each party acknowledges that its legal
counsel participated in the preparation of this Agreement and, therefore,
stipulates that the rule of construction that ambiguities are to be resolved
against the drafting party shall not be applied in the interpretation of this
Agreement to favor any party against the other.

 

ARTICLE
II

 

APPOINTMENT OF AND DELIVERIES TO THE ESCROW AGENT

 

2.1.          Appointment.  The Company and the Purchaser hereby
irrevocably designate and appoint the Escrow Agent as their escrow agent for
the purposes set forth herein, and the Escrow Agent by its execution and
delivery of this Agreement hereby accepts such appointment under the terms and
conditions set forth herein.

 

2.2.          Copies of Documents to Escrow Agent.  On or about the date hereof, the Purchaser
shall deliver to the Escrow Agent copies of the Documents executed by the
Company to the extent it is a party thereto.

 

2.3.          Delivery of Escrowed Payment to
Escrow Agent.  On or about the date
hereof, the Purchaser shall deliver to the Escrow Agent the Escrowed Payment.

 

2.4.           Intention to Create Escrow Over
the Escrowed Payment.  The Purchaser
and the Company intend that the Escrowed Payment shall be held in escrow by the
Escrow Agent and released from escrow by the Escrow Agent only in accordance
with the terms and conditions of this Agreement.

 

ARTICLE
III

 

RELEASE OF ESCROW

 

3.1.          Release of Escrow.  Subject to the provisions of Section 4.2, the
Escrow Agent shall release the Escrowed Payment from escrow as follows:

 

(a)                   Promptly following receipt by
the Escrow Agent of (i) copies of the fully executed Documents and this
Agreement, (ii) the Escrowed Payment in immediately available funds, (iii)
joint written instructions (“Joint Instructions”)
executed by the Company and the Purchaser setting forth the payment direction
instructions with respect to the Escrowed Payment and (iv) Escrow Agent’s
verbal instructions from David Grin and/or Eugene Grin (each of whom is a
director of the Purchaser) indicating that all closing conditions relating to
the Documents have been satisfied and directing that the Escrowed Payment be
disbursed by the Escrow Agent in accordance with the Joint

 

3

 

Instructions, then the
Escrowed Payment shall be deemed released from escrow and shall be promptly
disbursed in accordance with the Joint Instructions.  The Joint Instructions shall include, without
limitation, Escrow Agent’s authorization to retain from the Escrowed Payment
Escrow Agent’s fee for acting as Escrow Agent hereunder and the Closing Payment
for delivery to Laurus Capital Management, LLC in accordance with the Joint
Instructions.

 

(b)                   Upon receipt by the Escrow
Agent of a final and non-appealable judgment, order, decree or award of a court
of competent jurisdiction (a “Court Order”)
relating to the Escrowed Payment, the Escrow Agent shall remit the Escrowed
Payment in accordance with the Court Order. 
Any Court Order shall be accompanied by an opinion of counsel for the
party presenting the Court Order to the Escrow Agent (which opinion shall be
satisfactory to the Escrow Agent) to the effect that the court issuing the
Court Order is a court of competent jurisdiction and that the Court Order is
final and non-appealable.

 

3.2.          Acknowledgement of Company and
Purchaser; Disputes.  The Company and
the Purchaser acknowledge that the only terms and conditions upon which the
Escrowed Payment are to be released from escrow are as set forth in Sections 3
and 4 of this Agreement.  The Company and
the Purchaser reaffirm their agreement to abide by the terms and conditions of
this Agreement with respect to the release of the Escrowed Payment.  Any dispute with respect to the release of
the Escrowed Payment shall be resolved pursuant to Section 4.2 or by written
agreement between the Company and Purchaser.

 

ARTICLE
IV

 

CONCERNING THE ESCROW
AGENT

 

4.1.          Duties and Responsibilities of the
Escrow Agent.  The Escrow Agent’s
duties and responsibilities shall be subject to the following terms and
conditions:

 

(a)                   The Purchaser and the Company
acknowledge and agree that the Escrow Agent (i) shall not be required to
inquire into whether the Purchaser, the Company or any other party is entitled
to receipt of any Document or all or any portion of the Escrowed Payment; (ii)
shall not be called upon to construe or review any Document or any other
document, instrument or agreement entered into in connection therewith; (iii)
shall be obligated only for the performance of such duties as are specifically
assumed by the Escrow Agent pursuant to this Agreement; (iv) may rely on and
shall be protected in acting or refraining from acting upon any written notice,
instruction, instrument, statement, request or document furnished to it
hereunder and believed by the Escrow Agent in good faith to be genuine and to
have been signed or presented by the proper person or party, without being
required to determine the authenticity or correctness of any fact stated
therein or the propriety or validity or the service thereof; (v) may assume
that any person purporting to give notice or make any statement or execute any
document in connection with the provisions hereof has been duly authorized to
do so; (vi) shall not be responsible for the identity, authority or rights of
any person, firm or company executing or delivering or purporting to execute or
deliver this Agreement or any Document or any funds deposited hereunder or any
endorsement thereon or assignment thereof; (vii) shall

 

4

 

not be under any duty to
give the property held by Escrow Agent hereunder any greater degree of care
than Escrow Agent gives its own similar property; and (viii) may consult
counsel satisfactory to Escrow Agent (including, without limitation, Loeb &
Loeb, LLP or such other counsel of Escrow Agent’s choosing), the opinion of
such counsel to be full and complete authorization and protection in respect of
any action taken, suffered or omitted by Escrow Agent hereunder in good faith
and in accordance with the opinion of such counsel.

 

(b)                   The Purchaser and the Company
acknowledge that the Escrow Agent is acting solely as a stakeholder at their
request and that the Escrow Agent shall not be liable for any action taken by
Escrow Agent in good faith and believed by Escrow Agent to be authorized or
within the rights or powers conferred upon Escrow Agent by this Agreement.  The Purchaser and the Company hereby, jointly
and severally, indemnify and hold harmless the Escrow Agent and any of Escrow
Agent’s partners, employees, agents and representatives from and against any
and all actions taken or omitted to be taken by Escrow Agent or any of them
hereunder and any and all claims, losses, liabilities, costs, damages and
expenses suffered and/or incurred by the Escrow Agent arising in any manner
whatsoever out of the transactions contemplated by this Agreement and/or any
transaction related in any way hereto, including the fees of outside counsel
and other costs and expenses of defending itself against any claims, losses,
liabilities, costs, damages and expenses arising in any manner whatsoever out
the transactions contemplated by this Agreement and/or any transaction related
in any way hereto, except for such claims, losses, liabilities, costs, damages
and expenses incurred by reason of the Escrow Agent’s gross negligence or
willful misconduct.  The Escrow Agent
shall owe a duty only to the Purchaser and the Company under this Agreement and
to no other person.

 

(c)                   The Purchaser and the Company
shall jointly and severally reimburse the Escrow Agent for its reasonable
out-of-pocket expenses (including counsel fees (which counsel may be Loeb &
Loeb LLP or such other counsel of the Escrow Agent’s choosing) incurred in
connection with the performance of its duties and responsibilities hereunder,
which shall not (subject to Section 4.1(b)) exceed $2,000.

 

(d)                   The Escrow Agent may at any
time resign as Escrow Agent hereunder by giving five (5) business days prior
written notice of resignation to the Purchaser and the Company.  Prior to the effective date of resignation as
specified in such notice, the Purchaser and Company will issue to the Escrow
Agent a Joint Instruction authorizing delivery of the Documents and the
Escrowed Payment to a substitute Escrow Agent selected by the Purchaser and the
Company.  If no successor Escrow Agent is
named by the Purchaser and the Company, the Escrow Agent may apply to a court
of competent jurisdiction in the State of New York for appointment of a
successor Escrow Agent, and deposit the Documents and the Escrowed Payment with
the clerk of any such court and/or otherwise commence an interpleader or
similar action for a determination of where to deposit the same.

 

5

 

(e)                   The Escrow Agent does not
have and will not have any interest in the Documents and the Escrowed Payment,
but is serving only as escrow agent, having only possession thereof.

 

(f)                    The Escrow Agent shall not
be liable for any action taken or omitted by it in good faith and reasonably
believed by it to be authorized hereby or within the rights or powers conferred
upon it hereunder, nor for action taken or omitted by it in good faith, and in
accordance with advice of counsel (which counsel may be Loeb & Loeb, LLP or
such other counsel of the Escrow Agent’s choosing), and shall not be liable for
any mistake of fact or error of judgment or for any acts or omissions of any
kind except to the extent any such liability arose from its own willful
misconduct or gross negligence.

 

(g)                   This Agreement sets forth
exclusively the duties of the Escrow Agent with respect to any and all matters
pertinent thereto and no implied duties or obligations shall be read into this
Agreement.

 

(h)                   The Escrow Agent shall be
permitted to act as counsel for the Purchaser or the Company, as the case may
be, in any dispute as to the disposition of the Documents and the Escrowed
Payment, in any other dispute between the Purchaser and the Company, whether or
not the Escrow Agent is then holding the Documents and/or the Escrowed Payment
and continues to act as the Escrow Agent hereunder.

 

(i)                    The provisions of this
Section 4.1 shall survive the resignation of the Escrow Agent or the
termination of this Agreement.

 

4.2.          Dispute Resolution; Judgments.  Resolution of disputes arising under this
Agreement shall be subject to the following terms and conditions:

 

(a)                   If
any dispute shall arise with respect to the delivery, ownership, right of
possession or disposition of the Documents and/or the Escrowed Payment, or if
the Escrow Agent shall in good faith be uncertain as to its duties or rights
hereunder, the Escrow Agent shall be authorized, without liability to anyone,
to (i) refrain from taking any action other than to continue to hold the
Documents and the Escrowed Payment pending receipt of a Joint Instruction from
the Purchaser and the Company, (ii) commence an interpleader or similar action,
suit or proceeding for the resolution of any such dispute; and/or (iii) deposit
the Documents and the Escrowed Payment with any court of competent jurisdiction
in the State of New York, in which event the Escrow Agent shall give written
notice thereof to the Purchaser and the Company and shall thereupon be relieved
and discharged from all further obligations pursuant to this Agreement.  The Escrow Agent may, but shall be under no
duty to, institute or defend any legal proceedings which relate to the
Documents and the Escrowed Payment.  The
Escrow Agent shall have the right to retain counsel if it becomes involved in
any disagreement, dispute or litigation on account of this Agreement or
otherwise determines that it is necessary to consult counsel which such counsel
may be Loeb & Loeb LLP or such
other counsel of the Escrow Agent’s choosing.

 

6

 

(b)                   The Escrow Agent is hereby
expressly authorized to comply with and obey any Court Order.  In case the Escrow Agent obeys or complies
with a Court Order, the Escrow Agent shall not be liable to the Purchaser and
the Company or to any other person, firm, company or entity by reason of such
compliance.

 

ARTICLE
V

 

GENERAL MATTERS

 

5.1.          Termination.  This escrow shall terminate upon disbursement
of the Escrowed Payment in accordance with the terms of this Agreement or
earlier upon the agreement in writing of the Purchaser and the Company or
resignation of the Escrow Agent in accordance with the terms hereof.

 

5.2.          Notices.  All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given one (1) day after being sent by telecopy (with
copy delivered by overnight courier, regular or certified mail):

 

	
   

  	
  If to the Company, to:

  	
  Implant Sciences Corporation

  
	
   

  	
   

  	
  107 Audubon Rd. #5

  
	
   

  	
   

  	
  Wakefield, MA 01880

  
	
   

  	
   

  	
  Attn: Tony Armini

  
	
   

  	
   

  	
  Facsimile: (781) 246-3561

  
	
   

  	
   

  	
   

  
	
   

  	
  With a copy to:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (b)           

  	
  If to the Purchaser, to:

  
	
   

  	
   

  	
   

  
	
   

  	
  LAURUS MASTER
  FUND, LTD.

  
	
   

  	
  M&C
  Corporate Services Limited, P.O. Box 309 GT, Ugland 

  House, South Church Street, George Town, Grand Cayman, 

  Cayman Islands, Fax: 345-949-8080

  
	
   

  	
   

  
	
  (c)           If to the Escrow Agent, to:

  
	
   

  	
   

  
	
   

  	
  Loeb & Loeb
  LLP

  
	
   

  	
  345 Park Avenue

  
	
   

  	
  New York, New
  York 10154

  
	
   

  	
  Fax: (212)
  407-4990

  
	
   

  	
  Attention: Scott
  J. Giordano, Esq.

  

 

or to such other address
as any of them shall give to the others by notice made pursuant to this Section
5.2.

 

7

 

5.3.          Interest.  The Escrowed Payment shall not be held in an
interest bearing account nor will interest be payable in connection therewith.

 

5.4.          Assignment; Binding Agreement.  Neither this Agreement nor any right or
obligation hereunder shall be assignable by any party without the prior written
consent of the other parties hereto. 
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective legal representatives, successors and
assigns.

 

5.5.          Invalidity.  In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal, or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any
way impaired thereby, it being intended that all of the rights and privileges
of the parties hereto shall be enforceable to the fullest extent permitted by
law.

 

5.6.          Counterparts/Execution.  This Agreement may be executed in any number
of counterparts and by different signatories hereto on separate counterparts,
each of which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same agreement.  This Agreement may be executed by facsimile
transmission.

 

8

 

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

 

	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  IMPLANT
  SCIENCES CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Anthony Armini

  	
   

  
	
   

  	
  Name:
  Anthony Armini

  
	
   

  	
  Title:
  President

  
	
   

  	
   

  
	
   

  	
  PURCHASER:

  
	
   

  	
   

  
	
   

  	
  LAURUS
  MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Laurus Master Fund

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  ESCROW
  AGENT:

  
	
   

  	
   

  
	
   

  	
  LOEB
  & LOEB LLP

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Loeb & Loeb LLP

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
								

 

9

 

SCHEDULE A TO FUNDS
ESCROW AGREEMENT

 

	
  PURCHASER

  	
   

  	
  PRINCIPAL NOTE AMOUNT

  
	
  LAURUS MASTER FUND,
  LTD., 

  M&C Corporate Services Limited, P.O. Box 309

  GT, Ugland House, South Church Street, George

  Town, Grand Cayman, Cayman Islands, 

  Fax: 345-949-8080

  	
   

  	
  PReferred Stock in an
  aggregate principal amount of $5,000,000

  
	
  TOTAL

  	
   

  	
  $5,000,000

  

 

	
  FUND MANAGER

  	
   

  	
  CLOSING PAYMENT

  
	
  LAURUS CAPITAL
  MANAGEMENT, L.L.C.

  825 Third Avenue, 14th Floor

  New York, New York 10022

  Fax: 212-541-4434

  	
   

  	
  Closing payment payable
  in connection with investment by Laurus Master Fund, Ltd. for which Laurus
  Capital Management, L.L.C. is the Manager.

  
	
  TOTAL

  	
   

  	
  $90,000

  

 

WARRANTS

 

	
  WARRANT RECIPIENT

  	
   

  	
  WARRANTS TO BE ISSUED AT CLOSING

  
	
  LAURUS MASTER FUND,
  LTD.

  M&C Corporate Services Limited, P.O. Box 309

  GT, Ugland House, South Church Street, George

  Town, Grand Cayman, Cayman Islands, 

  Fax: 345-949-8080

  	
   

  	
  Warrant exercisable
  into 50,000 shares of common stock of the Company.

  
	
  TOTAL

  	
   

  	
  Warrants exercisable into
  50,000 shares of common stock of the Company

  

 

10

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