Document:

QuickLinks
 -- Click here to rapidly navigate through this document

 
 

Exhibit 10.4    
    

EXHIBIT F  

TO:
The Purchasers of Isonics Corporation, 8% Convertible Debentures and Warrants 

Gentlemen:

        This
letter will confirm my agreement to vote all shares of Isonics Corporation, a California corporation (the "Company") voting stock
over which I have voting control in favor of any resolution presented to the shareholders of the Company to approve the issuance, in the aggregate, more than 19.999% of the number of shares of common
stock of the Company outstanding on the date of closing of the pursuant to that certain Securities Purchase Agreement, dated January 10, 2005, among the Company and the purchasers signatory
thereto (the "Purchase Agreement") and the other agreements entered into in connection therewith or as otherwise may be required by the applicable rules
and regulations of the Nasdaq Smallcap Market (or any successor entity). This agreement is given in consideration of, and as a condition to enter into such Securities Purchase Agreement and is not
revocable by me. 

	 	 	
	 	 
	 	 	Name:	 	 
	 	 	Percentage Beneficial Ownership:	 	 

QuickLinks

Exhibit 10.4QuickLinks
 -- Click here to rapidly navigate through this document
  

Exhibit 10.5  

EXHIBIT A  

NEITHER
THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE
STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE
SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. 

Original
Issue Date: February    , 2005

Original Conversion Price (subject to adjustment herein): $5.00

	 	 	$	 
	 	 	 	

 
 

8% CONVERTIBLE DEBENTURE    
    

        THIS DEBENTURE is one of a series of duly authorized and issued 8% Convertible Debentures of Isonics Corporation, a California corporation, having a principal
place of business at                        (the "Company"), designated as its 8%
Convertible Debenture (the
"Debenture(s)"). 

        FOR
VALUE RECEIVED, the Company promises to pay to                        or its registered assigns (the "Holder"), or shall have been paid
pursuant to the terms hereunder, the principal sum of $                        by February 28, 2007, or such earlier date as
the Debentures are required or permitted to be repaid as provided hereunder
(the "Maturity Date"), and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture in
accordance with the provisions hereof. This Debenture is subject to the following additional provisions: 

        Section 1.    Definitions.    For the purposes hereof, in addition to the terms defined elsewhere in this
Debenture: (a) capitalized terms not otherwise defined herein have the meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the following
meanings: 

        "Alternate Consideration" shall have the meaning set forth in Section 5(d). 

        "Base Conversion Price" shall have the meaning set forth in Section 5(b). 

        "Business Day" means any day except Saturday, Sunday and any day which shall be a federal legal holiday in the United States or a day on
which banking institutions in the State of New York are authorized or required by law or other government action to close. 

        "Buy-In" shall have the meaning set forth in Section 4(d)(v). 

        "Change of Control Transaction" means the occurrence after the date hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of
capital stock of the Company, by contract or otherwise) of in excess of 33% of the voting securities of the Company, or (ii) the Company merges into or consolidates with any other Person, or
any Person merges into or consolidates with the Company and, after giving 

1

 

effect
to such transaction, the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the Company or the successor entity of such
transaction, or (iii) the Company sells or transfers its assets, as an entirety or substantially as an entirety, to another Person and the stockholders of the Company immediately prior to such
transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, (iv) a replacement at one time or within a three year period of more than
one-half of the members of the Company's board of directors which is not approved by a majority of those individuals who are members of the board of directors on the date hereof (or by
those individuals who are serving as members of the board of directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who
are members on the date hereof), or (v) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in
(i) or (iv). 

        "Closing Price" means on any particular date (a) the last reported closing bid price per share of Common Stock on such date on the
Trading Market (as reported by Bloomberg L.P. at 4:15 PM (New York time), or (b) if there is no such price on such date, then the closing bid price on the Trading Market on the date nearest
preceding such date (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing bid price for regular session trading on such day), or (c) if the Common Stock is not then listed
or quoted on a Trading Market and if prices for the Common Stock are then quoted on the OTC Bulletin Board, the closing bid price of the Common Stock for such date (or the nearest preceding date) on
the OTC Bulletin Board (as reported by Bloomberg L.P. at 4:15 PM (New York time), (d) if the Common Stock is not then listed or quoted on the Trading Market and if prices for the Common Stock
are then reported in the "pink sheets" published by the Pink Sheets LLC (formerly the National Quotation Bureau Incorporated) or a similar organization or agency succeeding to its functions of
reporting prices, the most recent bid price per share of the Common Stock so reported, or (e) if the shares of Common Stock are not then publicly traded the fair market value of a share of
Common Stock as determined by a qualified independent appraiser selected in good faith by the Purchasers of a majority in interest of the Shares then outstanding. 

        "Common Stock" means the common stock, no par value, of the Company and stock of any other class into which such shares may hereafter be
reclassified or changed. 

        "Conversion Date" shall have the meaning set forth in Section 4(a). 

        "Conversion Price" shall have the meaning set forth in Section 4(b). 

        "Conversion Shares" means the shares of Common Stock issuable upon conversion of Debentures or as payment of interest in accordance with
the terms. 

        "Debenture Register" shall have the meaning set forth in Section 2(c). 

        "Dilutive Issuance" shall have the meaning set forth in Section 5(b). 

        "Dilutive Issuance Notice" shall have the meaning set forth in Section 5(b). 

        "Effectiveness Period" shall have the meaning given to such term in the Registration Rights Agreement. 

        "Equity Conditions" shall mean, during the period in question, (i) the Company shall have duly honored all conversions and redemptions
scheduled to occur or occurring by virtue of one or more Notice of Conversions, if any, (ii) all liquidated damages and other amounts owing in respect of the Debentures shall have been paid;
(iii) there is an effective Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell all of the shares issuable pursuant to the
Transaction Documents (and the Company believes, in good faith, that 

2

 

such
effectiveness will continue uninterrupted for the foreseeable future), (iv) the Common Stock is trading on the Trading Market and all of the shares issuable pursuant to the Transaction
Documents are listed for trading on a Trading Market (and the Company believes, in good faith, that trading of the Common Stock on a Trading Market will continue uninterrupted for the foreseeable
future), (v) there is a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance of all of the shares issuable pursuant to the Transaction
Documents, (vi) there is then existing no Event of Default or event which, with the passage of time or the giving of notice, would constitute an Event of Default, (vii) all of the shares
issued or issuable pursuant to the transaction proposed would not violate the limitations set forth in Sections 4(c)(i) and 4(c)(ii) and (viii) there is no pending or proposed
Fundamental Transaction, Change of Control Transaction or acquisition transaction that has not been publicly announced. 

        "Event of Default" shall have the meaning set forth in Section 8. 

        "Exchange Act" means the Securities Exchange Act of 1934, as amended. 

        "Fundamental Transaction" shall have the meaning set forth in Section 5(d). 

        "Forced Conversion Notice" shall have the meaning set forth in Section 6(c). 

        "Force Conversion Notice Date" shall have the meaning set forth in Section 6(c). 

        "Interest Conversion Rate" means the lesser of (a) the Conversion Price and (b) the 90% of the lesser of (i) the
average of the 20 Closing Prices ending on the Trading Day immediately prior to the applicable Interest Payment Date or (ii) the average of the 20 Closing Prices ending on the Trading Day
immediately prior to the date the applicable interest payment shares are issued and delivered if after the Interest Payment Date. 

        "Interest Payment Date" shall have the meaning set forth in Section 2(a). 

        "Late Fees" shall have the meaning set forth in Section 2(d). 

        "Mandatory Prepayment Amount" for any Debentures shall equal the sum of (i) the greater of: (A) 130% of the principal amount
of Debentures to be prepaid, plus all accrued and unpaid interest thereon, or (B) the principal amount of Debentures to be prepaid, plus all other accrued and unpaid interest hereon, divided by
the Conversion Price on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is less,
multiplied by the Closing Price on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is
greater, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such Debentures. 

        "Monthly Conversion Price" shall have the meaning set forth in Section 6(a) hereof. 

        "Monthly Redemption" shall mean the redemption of the Debenture pursuant to Section 6(a) hereof. 

        "Monthly Redemption Amount" shall mean, as to a Monthly Redemption,
$                        1. 

	1
	One-twelfth
of the original principal amount of this Debenture. 

        "Monthly Redemption Date" means the 1st Business Day of each month, commencing on March 1, 2006 and ending upon the
full redemption of this Debenture; provided, however, if (i) prior to December 1, 2006 the
Company's cash and cash equivalents, as disclosed in the Company's consolidated balance sheet reported in the most recent periodic filing under the Exchange Act or registration statement filed under
the Securities Act, is less than $7,500,000 or (ii) the Company shall have received notification from the Trading Market or the Commission that delisting or enforcement proceedings or actions
against the Company have been initiated against 

3

 

the
Company, the Monthly Redemptions shall commence on the 1st Business Day of the month after such balance sheet is filed with the Commission or such notice is received by the Company
and continue each month thereafter,. 

        "New York Courts" shall have the meaning set forth in Section 9(d). 

        "Notice of Conversion" shall have the meaning set forth in Section 4(a). 

        "Original Issue Date" shall mean the date of the first issuance of the Debentures regardless of the number of transfers of any Debenture
and regardless of the number of instruments which may be issued to evidence such Debenture. 

        "Person" means a corporation, an association, a partnership, organization, a business, an individual, a government or political
subdivision thereof or a governmental agency. 

        "Purchase Agreement" means the Securities Purchase Agreement, dated as of February 24, 2005, to which the Company and the original
Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms. 

        "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the date of the Purchase Agreement, to which the
Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms. 

        "Registration Statement" means a registration statement meeting the requirements set forth in the Registration Rights Agreement, covering
among other things the resale of the Conversion Shares and naming the Holder as a "selling stockholder" thereunder. 

        "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 

        "Shareholder Approval" shall have the meaning given to such term in the Purchase Agreement. 

        "Subsidiary" shall have the meaning given to such term in the Purchase Agreement. 

        "Threshold Period" shall have the meaning given to such term in Section 6(c). 

        "Trading Day" means a day on which the Common Stock is traded on a Trading Market. 

        "Trading Market" means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in
question: the Nasdaq SmallCap Market, the American Stock Exchange, the New York Stock Exchange or the Nasdaq National Market. 

        "Transaction Documents" shall have the meaning set forth in the Purchase Agreement. 

        Section 2.    Interest.    

        a)    Payment of Interest in Cash or Kind.    The Company shall pay interest to the Holder on the aggregate
unconverted and then outstanding principal amount of this Debenture at the rate of 8% per annum, payable (i) quarterly on March 31, June 30, September 30 and
December 31, beginning on the first such date after the Original Issue Date, (ii) on each Monthly Redemption Date, (iii) on each Conversion Date (as to that principal amount then
being converted) and (iv) on the Maturity Date (except that, if any such date is not a Business Day, then such payment shall be due on the next succeeding Business Day) (each such date, an
"Interest Payment Date"), in cash or shares of Common Stock at the Interest Conversion Rate, or a combination thereof;  provided, however, payment in shares of Common Stock may only occur if during the 10 Trading Days ending
on the Trading Day immediately prior to the applicable Interest Payment Date all of the Equity Conditions have been met and the Company shall have given the Holder notice in accordance with the notice
requirements set forth below. In addition, if the Company elects to pay interest in 

4

 

shares
of Common Stock, such shares shall be delivered no later than the third Trading Day after the Interest Payment Date. 

        b)    Company's Election to Pay Interest in Kind.    Subject to the terms and conditions herein, the decision whether
to pay interest hereunder in shares of Common Stock or cash shall be at the discretion of the Company. Not less than 11 Trading Days prior to each Interest Payment Date, the Company shall provide the
Holder with written notice of its election to pay interest hereunder either in cash or shares of Common Stock (the Company may indicate in such notice that the election contained in such notice shall
continue for later periods until revised). Within 11 Trading Days prior to an Interest Payment Date, the Company's election (whether specific to an Interest Payment Date or continuous) shall be
irrevocable as to such Interest Payment Date. Subject to the aforementioned conditions, failure to timely provide such written notice shall be deemed an election by the Company to pay the interest on
such Interest Payment Date in cash. 

        c)    Interest Calculations.    Interest shall be calculated on the basis of a 360-day year and shall
accrue daily commencing on the Original Issue Date until payment in full of the principal sum, together with all accrued and unpaid interest and other amounts which may become due hereunder, has been
made. Payment of interest in shares of Common Stock shall otherwise occur pursuant to Section 4(d)(ii) and only for purposes of the payment of interest in shares, the Interest Payment
Date shall be deemed the Conversion Date. Interest shall accrue to and including on the Conversion Date and cease to accrue with respect to any principal amount converted after the Conversion Date,
provided that the Company in fact delivers the Conversion Shares within the time period required by Section 4(d)(ii). Interest hereunder will be paid to the Person in whose name this Debenture
is registered on the records of the Company regarding registration and transfers of Debentures (the "Debenture Register"). Except as otherwise provided
herein, if at any time the Company pays interest partially in cash and partially in shares of Common Stock, then such payment shall be distributed ratably among the Holders based upon the principal
amount of Debentures held by each Holder. 

        d)    Late Fee.    All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at the rate of
18% per annum (or such lower maximum amount of interest permitted to be charged under applicable law) ("Late Fees") which will accrue daily, from the
date such interest is due hereunder
through and including the date of payment. Notwithstanding anything to the contrary contained herein, if on any Interest Payment Date the Company has elected to pay interest in Common Stock and is not
able to pay accrued interest in the form of Common Stock because it does not then satisfy the conditions for payment in the form of Common Stock set forth above, then, at the option of the Holder, the
Company, in lieu of delivering either shares of Common Stock pursuant to this Section 2 or paying the regularly scheduled cash interest payment, shall deliver, within three Trading Days of each
applicable Interest Payment Date, an amount in cash equal to the product of the number of shares of Common Stock otherwise deliverable to the Holder in connection with the payment of interest due on
such Interest Payment Date and the highest Closing Price during the period commencing on the Interest Payment Date and ending on the Trading Day prior to the date such payment is made. 

        e)    Prepayment.    Except as otherwise set forth in this Debenture, the Company may not prepay any portion of the
principal amount of this Debenture without the prior written consent of the Holder. 

        Section 3.    Registration of Transfers and Exchanges.    

        a)    Different Denominations.    This Debenture is exchangeable for an equal aggregate principal amount of Debentures
of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration of transfer or exchange. 

5

 

        b)    Investment Representations.    This Debenture has been issued subject to certain investment representations of
the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and
regulations. 

        c)    Reliance on Debenture Register.    Prior to due presentment to the Company for transfer of this Debenture, the
Company and any agent of the Company may treat the Person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein
provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. 

        Section 4.    Conversion.    

        a)    Voluntary Conversion.    At any time after the Original Issue Date until this Debenture is no longer
outstanding, this Debenture shall be convertible into shares of Common Stock at the option of the Holder, in whole or in part at any time and from time to time (subject to the limitations on
conversion set forth in Section 4(c) hereof). The Holder shall effect conversions by delivering to the Company the
form of Notice of Conversion attached hereto as Annex A (a "Notice of Conversion"), specifying therein
the principal amount of Debentures to be converted and the date on which such conversion is to be effected (a "Conversion Date"). If no Conversion Date
is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is provided hereunder. To effect conversions hereunder, the Holder shall not be required to
physically surrender Debentures to the Company unless the entire principal amount of this Debenture plus all accrued and unpaid interest thereon has been so converted. Conversions hereunder shall have
the effect of lowering the outstanding principal amount of this Debenture in an amount equal to the applicable conversion. The Holder and the Company shall maintain records showing the principal
amount converted and the date of such conversions. The Company shall use best efforts to deliver any objection to any Notice of Conversion within 2 Business Days of receipt of such notice, but such
failure shall not prejudice the Company's rights to contest such calculations at a later date. The Holder and any assignee, by acceptance of this Debenture, acknowledge and agree that, by reason of
the provisions of this paragraph, following conversion of a portion of this Debenture, the unpaid and unconverted principal amount of this Debenture may be less than the amount stated on the face
hereof. 

        b)    Conversion Price.    The conversion price in effect on any Conversion Date shall be equal to  $5.00 (subject to adjustment
herein)(the "Conversion Price"). 

        c)    Conversion Limitations.    

        i.    Trading Market Limitations.    Notwithstanding anything herein to the contrary, if the Company has not obtained
Shareholder Approval (as defined below), then the Company may not issue upon conversion of the Debentures, payment of interest pursuant to Section 2(a) or upon redemption of this Debenture in
shares of Common Stock pursuant to Section 6(a) in excess of 19.999% of the number of shares of Common Stock outstanding on the Trading Day immediately preceding the Original Issue Date, less
(A) the number of shares issued prior to such Conversion Date pursuant to any Debentures, including the Debentures and (B) the number of shares issued prior to such Conversion Date
pursuant to any Warrants (such number of shares, the "Issuable Maximum"). Each Holder shall be entitled to a portion of the Issuable Maximum equal to
the quotient obtained by dividing (x) the aggregate principal amount of the Debenture(s) issued and sold to such Holder on the Original Issue Date by (y) the aggregate principal amount
of all Debentures issued and sold by the Company on the Original Issue Date. If any Holder shall no longer hold the Debenture(s), then such Holder's remaining portion of the Issuable Maximum shall be
allocated pro-rata among the remaining Holders. If on any Conversion Date: (1) the applicable Conversion Price then in effect is such 

6

 

that
the shares issuable under this Debenture on any Conversion Date together with (I) the aggregate number of shares of Common Stock that would then be issuable upon conversion in full of all
then outstanding Debentures and (II) the aggregate number of all shares of Common Stock that would then be issuable upon exercise in full of all then outstanding Warrants would exceed the
Issuable Maximum, and (2) the Company's shareholders shall not have previously approved the transactions contemplated by the Transaction Documents, as may be required by the applicable rules
and regulations of the Trading Market (or any successor entity), if any (the "Shareholder Approval"), then the Company shall fairly apportion the shares
of Common Stock available under the Issuable Maximum pro-rata based on each Holder's original principal amount of Debentures issued ("Pro-Rata
Allocation") and, with respect to the remainder of the aggregate principal amount of the Debentures (including any accrued interest) then held by such Holder for which a
conversion in accordance with the applicable conversion price would result in an issuance of shares of Common Stock in excess of such Holder's Pro-Rata Allocation (the
"Excess Principal"), the Company shall be prohibited from issuing shares on such Excess Principal, and shall notify the Holder of the reason therefor.
This Debenture shall thereafter be unconvertible to such extent until and unless Shareholder Approval is subsequently obtained or is otherwise not required, but this Debenture shall otherwise remain
in full force and effect. The Holder shall have the sole and absolute discretion in determining, within its Pro-Rata Allocation, whether to receive Conversion Shares or Warrant Shares. 

        ii.    Holder's Restriction on Conversion.    The Company shall not effect any conversion of this Debenture, and the
Holder shall not have the right to convert any portion of this Debenture, pursuant to Section 4(a) or otherwise, to the extent that after giving effect to such conversion, the Holder (together
with the Holder's affiliates), as set forth on the applicable Notice of Conversion, would beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after
giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of
Common Stock issuable upon conversion of this Debenture with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be
issuable upon (A) conversion of the remaining, nonconverted portion of this Debenture beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Debentures or the Warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(c)(ii),
beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this section applies, the determination of whether
this Debenture is convertible (in relation to other securities owned by the Holder) and of which a portion of this Debenture is convertible shall be in the sole discretion of such Holder. To ensure
compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions
set forth in this paragraph and the Company shall have no obligation to verify or confirm the accuracy of such determination. For purposes of this Section 4(c)(ii), in determining the number of
outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-QSB or
Form 10-KSB, as the case may be, (y) a more recent public announcement by the Company or (z) any other more recent notice by the Company or the Company's Transfer
Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the 

7

 

Holder,
the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of
Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Debenture, by the Holder or its affiliates since the date as of which
such number of outstanding shares of Common Stock was reported. The provisions of this Section 4(c) may be waived by the Holder upon, at the election of the Holder, not less than
61 days' prior notice to the Company, and the provisions of this Section 4(c) shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be
specified in such notice of waiver). 

        d)    Mechanics of Conversion    

        i.    Conversion Shares Issuable Upon Conversion of Principal Amount.    The number of shares of Common Stock issuable
upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Debenture to be converted by (y) the Conversion Price. 

        ii.    Delivery of Certificate Upon Conversion.    Not later than three Trading Days after any Conversion Date, the
Company will deliver to the Holder (A) a certificate or certificates representing the Conversion Shares which shall be free of restrictive legends and trading restrictions (other than those
required by the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of Debentures (including, if so timely elected by the Company, shares of Common
Stock representing the payment of accrued interest) and (B) a bank check in the amount of accrued and unpaid interest (if the Company is required to pay accrued interest in cash). If no legend
is required on the certificates for Conversion Shares pursuant to Section 4.1(c) of the Purchase Agreement, such certificates shall be transmitted by the transfer agent of the Company to the
Holder by crediting the account of the Holder's prime broker with the Depository Trust Company System through the Deposit Withdrawal Agent Commission system if the Company is a participant in such
system, or another established clearing corporation performing similar functions, provided the Holder requests such transmission and provided that the Holder making such request provides the transfer
agent with the prime broker account information necessary to effect such transfer. 

        iii.    Failure to Deliver Certificates.    If in the case of any Notice of Conversion such certificate or
certificates are not delivered to or as directed by the applicable Holder by the fifth Trading Day after a Conversion Date, the Holder shall be entitled by written notice to the Company at any time on
or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the principal amount
of Debentures tendered for conversion, which remedy shall not be the exclusive remedy of the Holder. 

        iv.    Obligation Absolute; Partial Liquidated Damages.    If the Company fails for any reason to deliver to the
Holder such certificate or certificates pursuant to Section 4(d)(ii) by the fifth Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated
damages and not as a penalty, for each $1000 of principal amount being converted, $10 per Trading Day (increasing to $20 per Trading Day after 5 Trading Days after such damages begin to accrue) for
each Trading Day after such fifth Trading Day until such certificates are delivered. The Company's obligations to issue and deliver the Conversion Shares upon conversion of this Debenture in
accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof,
the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or
any other Person 

8

 

of
any obligation to the Company or any violation or alleged violation of law by the Holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation
of the Company to the Holder in connection with the issuance of such Conversion Shares; provided,  however, such delivery shall not operate as a waiver by
the Company of any such action the Company may have against the Holder. In the event a Holder of
this Debenture shall elect to convert any or all of the outstanding principal amount hereof, the Company may not refuse conversion based on any claim that the Holder or any one associated or
affiliated with the Holder of has been engaged in any violation of law, agreement or for any other reason, unless, an injunction from a court, on notice, restraining and or enjoining conversion of all
or part of this Debenture shall have been sought and obtained and the Company posts a surety bond for the benefit of the Holder in the amount of 150% of the principal amount of this Debenture
outstanding, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such
Holder to the extent it obtains judgment. In the absence of an injunction precluding the same, the Company shall issue Conversion Shares or, if applicable, cash, upon a properly noticed conversion.
Nothing herein shall limit a Holder's right to pursue actual damages or declare an Event of Default pursuant to Section 8 herein for the Company's failure to deliver Conversion Shares within
the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or
injunctive relief. The exercise of any such rights shall not prohibit the Holders from seeking to enforce damages pursuant to any other Section hereof or under applicable law. Notwithstanding anything
contained herein to the contrary, if a Holder requires the Company to make payment in respect of liquidated damages hereunder for the failure to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be required to pay such Holder Buy-In Compensation under Section 4(d)(v) in respect of the certificates resulting in
such liquidated damages. 

        v.    Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion.    In addition to
any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 4(d)(ii) by the fifth Trading
Day after the Conversion Date, and if after such fifth Trading Day the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by such Holder of the Conversion Shares which the Holder anticipated receiving upon such conversion (a "Buy-In"),
then the Company shall (A) pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder
anticipated receiving from the conversion at issue multiplied by (2) the actual sale price of the Common Stock at the time of the sale (including brokerage commissions, if any) giving rise to
such purchase obligation and (B) at the option of the Holder, either reissue Debentures in principal amount equal to the principal amount of the attempted conversion or deliver to the Holder
the number of shares of Common Stock that would have been issued had the Company timely complied with its delivery requirements under Section 4(d)(ii). For example, if the Holder purchases
Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of Debentures with respect to which the actual sale price of the Conversion
Shares at the time of the sale (including brokerage commissions, if any) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence,
the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice and supporting documentation indicating the amounts payable to the Holder in respect of the
Buy-In. Notwithstanding anything contained herein to the contrary, if a Holder requires the Company to make payment in respect of a Buy-In for the failure to timely deliver
certificates hereunder and the Company timely pays in full such payment, the Company shall not be required to pay such Holder liquidated damages under Section 4(d)(iv) in respect of the
certificates resulting in such Buy-In. 

9

  

        vi.    Reservation of Shares Issuable Upon Conversion.    The Company covenants that it will (A) prior to such
time as the shareholders of the Company approve an increase in the Company's authorized capital stock ("Approval Date"), reserve and keep available out
of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of this Debenture and payment of interest on this Debenture the number of shares set forth on  Schedule 3.1(f)
 of the Purchase Agreement and (B) after the Approval Date, reserve and keep available out of its authorized and unissued
shares of Common Stock, solely for the purpose of issuance upon conversion of this Debenture and payment of interest on this Debenture, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of
Section 5) upon the conversion of the outstanding principal amount of the Debentures and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders and be duly and validly authorized, issued and fully paid,
nonassessable and, if the Registration Statement is then effective under the Securities Act, registered for public sale in accordance with such Registration Statement. 

        vii.    Fractional Shares.    Upon a conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Closing Price at such
time. If the Company elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. 

        viii.    Transfer Taxes.    The issuance of certificates for shares of the Common Stock on conversion of the
Debentures shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of
the Holder of such Debentures so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 

        Section 5.    Certain Adjustments.    

        a)    Stock Dividends and Stock Splits.    If the Company, at any time while the Debentures are outstanding:
(A) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common
Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company pursuant to this Debenture, including as interest thereon), (B) subdivide outstanding
shares of Common Stock into a larger number of shares, (C) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or
(D) issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after
such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such 

10

 

dividend
or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. 

        b)    Intentionally Omitted.    

        c)    Pro Rata Distributions.    If the Company, at any time while Debentures are outstanding, shall distribute to all
holders of Common Stock (and not to Holders) evidences of its indebtedness or assets (including cash or cash dividends) or rights or warrants to subscribe for or purchase any security, then in each
such case the Conversion Price shall be determined by multiplying such Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Closing Price determined as of the record date mentioned above, and of which the numerator shall be such Closing Price on such record
date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined
by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holders of the portion of assets or evidences of indebtedness so distributed
or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date
mentioned above. 

        d)    Fundamental Transaction.    if, at any time while this Debenture is outstanding, (A) the Company effects
any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions,
(C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for
other securities, cash or property, or (D) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property (in any such case, a "Fundamental Transaction"), then upon any subsequent conversion
of this Debenture, the Holder shall have the right to elect (i) to retain this Debenture, which shall, after the effective date of such Fundamental Transaction, be non-convertible
into equity securities of the Company or its successor in interest, or (ii) to be repaid 130% of the outstanding principal amount of this Debenture plus 100% of all accrued but unpaid interest
plus 100% of all accrued but unpaid liquidated damages, or (iii) to receive, for each Conversion Share that would have been issuable upon such conversion absent such Fundamental Transaction,
the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such
Fundamental Transaction, the holder of one share of Common Stock (the "Alternate Consideration"). For purposes of any such conversion, the determination
of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such
Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the
Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same
choice as to the Alternate Consideration it receives upon any conversion of this Debenture following such Fundamental Transaction. The Holder shall make such election within 10 Business Days after
receipt of notice of the effective date of such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such
Fundamental Transaction shall issue to the Holder a new debenture consistent with the foregoing provisions and evidencing the Holder's right to convert such debenture into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms 

11

 

requiring
any such successor or surviving entity to comply with the provisions of this paragraph (d) and insuring that this Debenture (or any such replacement security) will be similarly
adjusted upon any subsequent transaction analogous to a Fundamental Transaction. Notwithstanding anything to the contrary contained in this Section, the term "Fundamental Transaction" shall not
include any transaction by which the Company disposes of any assets in its semi-conductor division located in Vancouver, Washington. 

        e)    Calculations.    All calculations under this Section 5 shall be made to the nearest cent or the nearest
1/100th of a share, as the case may be. The number of shares of Common Stock outstanding at any given time shall not includes shares of Common Stock owned or held by or for the account of the Company,
and the description of any such shares of Common Stock shall be considered on issue or sale of Common Stock. For purposes of this Section 5, the number of shares of Common Stock deemed to be
issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding. 

        f)    Exempt Issuance.    Notwithstanding the foregoing, no adjustment will be made under this Section 5 in
respect of an Exempt Issuance. 

        g)    Notice to Holders.    

        i.    Adjustment to Conversion Price.    Whenever the Conversion Price is adjusted pursuant to any of this
Section 5, the Company shall promptly mail to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such
adjustment. If the Company issues a variable rate security, despite the prohibition thereon in the Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock
Equivalents at the lowest possible conversion or exercise price at which such securities may be converted or exercised in the case of a Variable Rate Transaction (as defined in the Purchase
Agreement), or the lowest possible adjustment price in the case of an MFN Transaction. The term "MFN Transaction" shall mean a transaction in which the
Company issues or sells any securities in a capital raising transaction or series of related transactions which grants to an investor the right to receive additional shares based upon future
transactions of the Company on terms more favorable than those granted to such investor in such offering. 

        ii.    Notice to Allow Conversion by Holder.    If (A) the Company shall declare a dividend (or any other
distribution) on the Common Stock; (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Company shall authorize the granting
to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of
conversion of the Debentures, and shall cause to be mailed to the Holders at their last addresses as they shall appear upon the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be 

12

 

determined
or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, that the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified in such notice. Holders are entitled to convert Debentures during the 20-day period commencing the date of
such notice to the effective date of the event triggering such notice, without limiting Holder's right to convert at any other time. 

        Section 6.    Monthly Redemption and Forced Conversion.    

        a)    Monthly Redemption.    On each Monthly Redemption Date, the Company shall redeem the Monthly Redemption Amount
plus accrued but unpaid interest, the sum of all liquidated damages and any other amounts then owing to such Holder in respect of the Debenture. The Monthly Redemption Amount due on each Monthly
Redemption Date shall be paid in cash; provided, however, as to any Monthly Redemption and upon 11
Trading Days' prior written irrevocable notice, in lieu of a cash redemption payment the Company may elect to pay all or part of a Monthly Redemption in Conversion Shares based on a conversion price
equal to the lesser of (a) the then Conversion Price and (b) 88% of the average of the 10 Closing Prices ending on the Trading Day immediately prior to the applicable Monthly Redemption
Date (subject to adjustment for any stock dividend, stock split, stock combination or other similar event affecting the Common Stock during such 10 Trading Day period) (the
"Monthly Conversion Price"); provided, however, that the
Company may not pay the Monthly Redemption Amount in Conversion Shares unless, on the Monthly Redemption Date and during the 10 Trading Day period ending on the Trading Day immediately prior to the
Monthly Redemption Date, the Equity Conditions have been satisfied. The Holders may convert, pursuant to Section 4(a), any principal amount of the Debenture subject to a Monthly Redemption at
any time prior to the date that the Monthly Redemption Amount and all amounts owing thereon are due and paid in full. Unless otherwise
indicated by the Holder in the applicable Notice of Conversion, any principal amount of Debenture converted during any 10 day period until the date the Monthly Redemption Amount is paid shall
be first applied to the principal amount subject to the Monthly Redemption and such Holder's cash payment of the Monthly Redemption Amount on such Monthly Redemption Date shall be reduced accordingly,
and any remaining principal amount so converted shall be applied against the last principal scheduled to be repaid, in reverse time order. The Company covenants and agrees that it will honor all
Notice of Conversions tendered up until such amounts are paid in full. The Company's determination to pay a Monthly Redemption in cash or shares of Common Stock shall be applied ratably to all Holders
based on their initial purchases of Debentures pursuant to the Purchase Agreement. 

        b)    Redemption Procedure.    The payment of cash and/or issuance of Common Stock, as the case may be, pursuant to a
Monthly Redemption shall be made on the Monthly Redemption Date except that if the Company elects to pay in shares of Common Stock, such shares shall be delivered no later than the third Trading Day
after the Monthly Redemption Date. If any portion of the cash payment for a Monthly Redemption shall not be paid by the Company by the respective due date, interest shall accrue thereon at the rate of
18% per annum (or the maximum rate permitted by applicable law, whichever is less) until the payment of the Monthly Redemption Amount, plus all amounts owing thereon is paid in full. If payment for a
Monthly Redemption is made in shares, such issuance will occur otherwise pursuant to Section 4 and be subject to all the provisions therein, including but not limited to, timely delivery of
shares and liquidated damages. Alternatively, if any portion of the Monthly Redemption Amount remains unpaid after such date, 

13

 

the
Holders subject to such redemption may elect, by written notice to the Company given at any time thereafter, to invalidate ab initio such redemption, notwithstanding anything herein contained to
the contrary. 

        c)    Forced Conversion.    Notwithstanding anything herein to the contrary, if after the one year anniversary of the
Closing Date each of the Closing Prices for any 20 Trading Days during a 30 consecutive Trading Day period (such period commencing only after the one year anniversary of the Closing Date, such period
the "Threshold Period")) exceeds 150% of the then Conversion Price, the Company may, within 1 Trading Day of the end of any such period, deliver a
notice to the Holder (a "Forced Conversion Notice" and the date such notice is received by the Holder, the "Forced Conversion
Notice Date") to cause the Holder to convert on the fifth Trading Day after the Forced Conversion Notice Date (the "Forced Conversion
Date") all or part of the then outstanding principal amount of Debentures pursuant to Section 4, which conversion shall be subject to all the provisions therein,
including but not limited to, timely delivery of shares and liquidated damages. The Company may only effect a Forced Conversion Notice if all of the Equity Conditions are met through the applicable
Threshold Period until the date of the applicable Forced Conversion Date and each of the Closing Prices for the period from the 30th Trading Day of the Threshold Period through to the
Forced Conversion Date exceeds 150% of the then Conversion Price. Any Forced Conversion shall be applied ratably to all Holders based on their initial purchases of Debentures pursuant to the Purchase
Agreement. 

        Section 7.    Negative Covenants.    So long as any portion of this Debenture is outstanding, the Company will
not and will not permit any of its Subsidiaries to directly or indirectly: 

        a)    enter
into, create, incur, assume, guarantee or suffer to exist any indebtedness or liens 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 to, or pari passu with, in any respect, the Company's
obligations under the Debentures, except that the Company may incur payables to its vendors, indebtedness to finance accounts receivable, and indebtedness to purchase or lease items of capital
equipment, which indebtedness may be secured by liens upon the equipment so leased or purchased, but not by any general lien upon the Company's assets; 

        b)    amend
its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Holder; 

        c)     repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its Common
Stock or other equity securities other than as to the Conversion Shares to the extent permitted or required under the Transaction Documents or as otherwise permitted by the Transaction Documents,
except that the Company shall be permitted to redeem shares of its Series A Preferred Stock and its Class B Warrants and Class C Warrants in accordance with their respective
terms; 

        d)    pay
any cash or in kind distribution to any equity holders of the Company or its Subsidiaries, other than dividends required to be paid on the shares of the Company's
Series E Preferred Stock outstanding on the Original Issue Date; and 

        e)    enter
into any agreement with respect to any of the foregoing. 

        Section 8.    Events of Default.    

        a)    "Event
of Default", wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by
operation of 

14

 

law
or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): 

        i.      any
default in the payment of (A) the principal amount of any Debenture, or (B) interest (including Late Fees) on, or liquidated damages in respect of, any
Debenture, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise) which default, solely in the case of an interest
payment or other default under clause (B) above, is not cured, within the earlier to occur of (i) five Trading Days after written notice of such default sent by the Holder or by any
other Holder and (b) ten Trading Days after the Company shall become or should have become aware of such failure; 

        ii.     the
Company shall fail to observe or perform any other covenant or agreement contained in this Debenture (other than a breach by the Company of its obligations to
deliver shares of Common Stock to the Holder upon conversion which breach is addressed in clause (xi) below) which failure is not cured, if possible to cure, within the earlier to occur of
(A) 5 Trading Days after written notice of such default sent by the Holder or by any other Holder and (B)10 Trading Days after the Company shall become or should have become aware of such
failure; 

        iii.    a
default or event of default (subject to any grace or cure period provided for in the applicable agreement, document or instrument) shall occur under (A) any
material term of any of the Transaction Documents other than the Debentures, other than failing to file the initial Registration Statement pursuant to the Registration Rights Agreement in time periods
set forth therein or other than as otherwise specifically set forth as a separate Event of Default hereunder, including but not limited to, the failure to get the Registration Statement effective on
or prior to the Effectiveness Date pursuant to the Registration Rights Agreement (which is separately covered pursuant to clause (ix) hereunder), or (B) any other material agreement,
lease, document or instrument included as an exhibit to the SEC Reports to which the Company or any Subsidiary is bound provided such default or event of default would result in a Material Adverse
Effect on the Company; 

        iv.    any
representation or warranty made herein, in any other Transaction Documents, in any written statement pursuant hereto or thereto, or in any other report, financial
statement or certificate made or delivered to the Holder or any other holder of Debentures shall be untrue or incorrect in any material respect as of the date when made or deemed made; 

        v.     (i) the
Company or any of its Subsidiaries shall commence, or there shall be commenced against the Company or any such Subsidiary, a case under any applicable
bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company or any Subsidiary commences any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any Subsidiary thereof or
(ii) there is commenced against the Company or any Subsidiary thereof any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or
(iii) the Company or any Subsidiary thereof is adjudicated by a court of competent jurisdiction insolvent or bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or (iv) the Company or any Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or (v) the Company or any Subsidiary thereof makes a general assignment for the benefit of creditors; or (vi) the Company shall
fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or (vii) the Company or any Subsidiary thereof shall call 

15

 

a
meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (viii) the Company or any Subsidiary thereof shall by any act or failure to act
expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or (ix) any corporate or other action is taken by the Company or any Subsidiary thereof for the purpose
of effecting any of the foregoing; 

        vi.    the
Company or any Subsidiary shall default in any of its obligations under any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or
other instrument under which there may be issued, or by which there may be secured or evidenced any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement of
the Company in an amount exceeding $250,000, whether such indebtedness now exists or shall hereafter be created and such default shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and payable; 

        vii.   the
Common Stock shall not be eligible for quotation on or quoted for trading on a Trading Market and shall not again be eligible for and quoted or listed for trading
thereon within ten Trading Days or the Company shall have received notification from the Trading Market or the Commission that delisting or enforcement proceedings or actions against the Company have
been initiated against the Company; 

        viii.  the
Company shall be a party to any Change of Control Transaction, shall agree to sell or dispose of all or in excess of 33% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control Transaction); provided, that the sale or other disposition of the Company's semiconductor
business headquartered in Vancouver, Washington, shall not be deemed a sale of assets for this purpose; or shall redeem or repurchase more than a de minimis number of its outstanding shares of Common
Stock or other equity securities of the Company in violation of Section 7(c) above. Redemptions of Conversion Shares and repurchases of shares of Common Stock or other equity securities of
departing officers and directors of the Company; provided such repurchases
shall not exceed $100,000, in the aggregate, for all officers and directors during the term of this Debenture shall not be considered an Event of Default hereunder; 

        ix.    a
Registration Statement shall not have been declared effective by the Commission on or prior to the 270th calendar day after the Closing Date; 

        x.     if,
during the Effectiveness Period (as defined in the Registration Rights Agreement), the effectiveness of the Registration Statement lapses for any reason or the Holder
shall not be permitted to resell Registrable Securities (as defined in the Registration Rights Agreement) under the Registration Statement, in either case, for more than 20 consecutive Trading Days or
35 non-consecutive Trading Days during any 12 month period; provided, however, that
in the event that the Company is negotiating a merger, consolidation, acquisition or sale of all or substantially all of its assets or a similar transaction and in the written opinion of counsel to
the Company, the Registration Statement, would be required to be amended to include information concerning such transactions or the parties thereto that is not available or may not be publicly
disclosed at the time, the Company shall be permitted an additional 20 consecutive Trading during any 12 month period relating to such an event; 

        xi.    the
Company shall fail for any reason to deliver certificates to a Holder prior to the seventh Trading Day after a Conversion Date or Forced Conversion Date pursuant to
and in accordance with Section 4(d) or the Company shall provide notice to the Holder, including by way of public announcement, at any time, of its intention not to comply with requests for
conversions of any Debentures in accordance with the terms hereof; and 

16

 

        xii.   any
Person shall breach the agreements delivered to the initial Holders pursuant to Section 2.2(a)(iv) of the Purchase Agreement and as a result, the
Company does not obtain Shareholder Approval on or before November 30, 2005. 

        b)    Remedies Upon Event of Default.    If any Event of Default occurs, the full principal amount of this Debenture,
together with interest and other amounts owing in respect thereof, to the date of acceleration shall become, at the Holder's election, immediately due and payable in cash. The aggregate amount payable
upon an Event of Default shall be equal to the Mandatory Prepayment Amount. Commencing 5 days after the occurrence of any Event of Default that results in the eventual acceleration of this
Debenture, the interest rate on this Debenture shall accrue at the rate of 18% per annum, or such lower maximum amount of interest permitted to be charged under applicable law. All Debentures for
which the full Mandatory Prepayment Amount hereunder shall have been paid in accordance herewith shall promptly be surrendered to or as directed by the Company. The Holder need not provide and the
Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and
all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder
and the Holder shall have all rights as a Debenture holder until such time, if any, as the full payment under this Section shall have been received by it. No such rescission or annulment shall affect
any subsequent Event of Default or impair any right consequent thereon. 

        Section 9.    Miscellaneous.    

        a)    Notices.    Any and all notices or other communications or deliveries to be provided by the Holders hereunder,
including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service, addressed to the
Company, at the address set forth above, facsimile number 303-279-7300, Attn: John V. Sakys, CPA, Vice President (with a copy that does not constitute
notice to Burns, Figa & Will, P.C., attn: Herrick K. Lidstone, Jr., Esq., Suite 1030, 6400 Fiddler's Green Circle, Englewood, CO 80111; facsimile
720-493-9951) or such other address or facsimile number as the Company may specify for such purposes by notice to the Holders delivered in accordance
with this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of
(i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:30 p.m. (New York City
time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than
5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the second Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. 

        b)    Absolute Obligation.    Except as expressly provided herein, no provision of this Debenture shall alter or
impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, interest and liquidated damages (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct debt obligation of the Company. This Debenture ranks pari passu with all other
Debentures now or hereafter issued under the terms set forth herein. 

17

 

        c)    Lost or Mutilated Debenture.    If this Debenture shall be mutilated, lost, stolen or destroyed, the Company
shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed Debenture, a new
Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the
ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company. 

        d)    Governing Law.    All questions concerning the construction, validity, enforcement and interpretation of this
Debenture shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees
that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the
"New York Courts"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated hereby (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives,
and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or such New York Courts are improper or inconvenient
venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Debenture and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Debenture or the
transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Debenture, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. 

        e)    Waiver.    Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not
operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon
strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or
any other term of this Debenture. Any waiver must be in writing and signed by the party against whom the waiver is asserted. 

        f)    Severability.    If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this
Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If it shall be
found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal
the maximum permitted rate of interest. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Debenture as
contemplated herein, wherever enacted, now or at any time hereafter 

18

 

in
force, or which may affect the covenants or the performance of this indenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such
power as though no such law has been enacted. 

        g)    Next Business Day.    Whenever any payment or other obligation hereunder shall be due on a day other than a
Business Day, such payment shall be made on the next succeeding Business Day. 

        h)    Headings.    The headings contained herein are for convenience only, do not constitute a part of this Debenture
and shall not be deemed to limit or affect any of the provisions hereof. 

*********************

19

 

        IN
WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly authorized officer as of the date first above indicated. 

	 	 	ISONICS CORPORATION
	

 	
 	

By:	
 	

 
	 	 	 	 	
 Name:

Title:

20

   ANNEX A

NOTICE OF CONVERSION  

        The undersigned hereby elects to convert principal under the 8% Convertible Debenture of Isonics Corporation, a California corporation (the
"Company"), into shares of common stock, no par value (the "Common Stock"), of the Company according to
the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for
such transfer taxes, if any. 

        By
the delivery of this Notice of Conversion the undersigned represents and warrants to the Company that its ownership of the Common Stock does not exceed the amounts determined in
accordance with Section 13(d) of the Exchange Act, specified under Section 4 of this Debenture.    The undersigned further represents and warrants that it has reviewed all of
the reports filed by the Company with the Securities and Exchange Commission, the press releases issued by Isonics, and such other information regarding the Company as it has determined appropriate or
necessary in the circumstances, that it has received such additional information regarding the Company that it has requested, and that it has consulted with its legal, tax, investment, financial, and
other advisors regarding the conversion described in this Conversion Notice. 

        The
undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock. 

        Conversion
calculations: 

	 	 	Date to Effect Conversion:
	

 	
 	

Principal Amount of Debentures to be Converted:
	

 	
 	

Payment of Interest in Common Stock    yes    no
	

 	
 	

If yes, $            of Interest Accrued on Account of Conversion

    at Issue.
	

 	
 	

Number of shares of Common Stock to be issued:
	

 	
 	

Signature:
	

 	
 	

Name:
	

 	
 	

Address:

21

 
Schedule 1

CONVERSION SCHEDULE  

        The 8% Convertible Debentures in the aggregate principal amount of
$                        issued by Isonics Corporation, a California corporation. This Conversion
Schedule reflects conversions made under Section 4 of the above referenced Debenture. 

Dated:

	Date of Conversion

(or for first entry,

Original Issue Date)
	 	Amount of

Conversion
	 	Aggregate

Principal

Amount

Remaining

Subsequent to

Conversion

(or original

Principal

Amount)
	 	Company Attest

	

    	
 	

 	
 	

 	
 	

 
	

	    	 	 	 	 	 	 
	

	    	 	 	 	 	 	 
	

	    	 	 	 	 	 	 
	

	    	 	 	 	 	 	 
	

	    	 	 	 	 	 	 
	

	    	 	 	 	 	 	 
	

	    	 	 	 	 	 	 
	

	    	 	 	 	 	 	 
	

22

QuickLinks

8% CONVERTIBLE DEBENTURE

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00078-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00078-of-00352.parquet"}]]