Document:

EXHIBIT
10.4

      

      SECURITY
AGREEMENT

      

      This
Security Agreement (as amended, modified or otherwise supplemented from time to
time, this “Security
Agreement”), dated as of November __, 2010, is executed by KL Energy
Corp., a Nevada corporation (together with its successors and assigns, "Company"), in favor of Collateral Agent (as herein
defined) on behalf of the Investors listed on the signature pages
hereof.

      

      RECITALS

       

      A.  Company
and the Investors have entered into a Note and Warrant Purchase Agreement, dated
as of the date hereof (the “Purchase Agreement”), pursuant
to which the Company has issued convertible promissory notes, dated as of the
date hereof (as amended, modified or otherwise supplemented from time to time,
(each a “Note” and
collectively, the “Notes”) in an aggregate
principal amount of up to seven million five hundred thousand dollars
($7,500,000) in favor of the Investors.

      

      B.  In
order to induce each Investor to extend the credit evidenced by the Notes,
Company has agreed to enter into this Security Agreement and to grant Collateral
Agent, for the benefit of itself and the Investors, the security interest in the
Collateral described below.

      

      AGREEMENT

       

      NOW,
THEREFORE, in consideration of the above recitals and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Company hereby agrees with Collateral Agent and the Investors as
follows:

      

      1.  Definitions and
Interpretation.  When used in this Security Agreement, the
following terms have the following respective meanings:

       

      "Collateral" has the meaning
given to that term in Section 2 hereof.

       

      "Obligations" means all loans,
advances, debts, liabilities and obligations, howsoever arising, owed by Company
to Collateral Agent and the Investors of every kind and description (whether or
not evidenced by any note or instrument and whether or not for the payment of
money), now existing or hereafter arising under or pursuant to the terms of the
Notes and the other Transaction Documents, including, all interest, fees,
charges, expenses, attorneys' fees and costs and accountants' fees and costs
chargeable to and payable by Company hereunder and thereunder, in each case,
whether direct or indirect, absolute or contingent, due or to become due, and
whether or not arising after the commencement of a proceeding under Title 11 of
the United States Code (11 U.S.C. Section 101 et seq.), as amended from time to
time (including post-petition interest) and whether or not allowed or allowable
as a claim in any such proceeding.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      “Permitted Liens” means (a)
Liens for taxes not yet delinquent or Liens for taxes being contested in good
faith and by appropriate proceedings for which adequate reserves have been
established; (b) Liens in respect of property or assets imposed by law which
were incurred in the ordinary course of business, such as carriers’,
warehousemen’s, materialmen’s and mechanics’ Liens and other similar Liens
arising in the ordinary course of business which are not delinquent or remain
payable without penalty or which are being contested in good faith and by
appropriate proceedings; (c) Liens incurred or deposits made in the ordinary
course of business in connection with workers’ compensation, unemployment
insurance and other types of social security, and other Liens to secure the
performance of tenders, statutory obligations, contract bids, government
contracts, performance and return of money bonds and other similar obligations,
incurred in the ordinary course of business, whether pursuant to statutory
requirements, common law or consenual arrangements; (d) Liens in favor of the
Collateral Agent; (e) Liens upon any equipment acquired or held by Company or
any of its Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition of
such equipment, so long as such Lien extends only to the equipment financed, and
any accessions, replacements, substitutions and proceeds (including insurance
proceeds) thereof or thereto; (f) Liens arising from judgments, decrees or
attachments in circumstances not constituting an Event of Default under the
Note; (g) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payments of customs duties in connection with the importation
of goods, (h) Liens which constitute rights of setoff of a customary nature or
banker’s liens, whether arising by law or by contract; (i) Liens on insurance
proceeds in favor of insurance companies granted solely as security for financed
premiums; and (j) leases or subleases and licenses or sublicenses granted in the
ordinary course of Company’s business.

       

      "UCC" means the Uniform
Commercial Code as in effect in the State of South Dakota from time to
time.

      

      All
capitalized terms not otherwise defined herein shall have the respective
meanings given in the Notes.  Unless otherwise defined herein, all
terms defined in the UCC have the respective meanings given to those terms in
the UCC.

      

      2.  Grant of Security
Interest.  As security for the Obligations, Company hereby
pledges to Collateral Agent and grants to Collateral Agent a security interest
of first priority in all right, title and interests of Company in and to the
property described in Attachment 1 hereto,
whether now existing or hereafter from time to time acquired (collectively, the
“Collateral”).  Notwithstanding
the foregoing, the security interest granted herein shall not extend to and the
term “Collateral” shall not include any equipment or other property financed by
a third party, provided that such third party’s Liens are Liens of the type
described in subsection (e) of the definition of Permitted Liens; provided
further that such equipment or other property shall be deemed “Collateral”
hereunder if such third party’s Lien is released or otherwise
terminated.

      

      3.  General Representations and
Warranties.  Company represents and warrants to Collateral
Agent and the Investors that (a) Company is the owner of the Collateral (or, in
the case of after-acquired Collateral, at the time Company acquires rights in
the Collateral, will be the owner thereof) and that no other Person has (or, in
the case of after-acquired Collateral, at the time Company acquires rights
therein, will have) any right, title, claim or interest (by way of Lien or
otherwise) in, against or to the Collateral, other than Permitted Liens; (b)
upon the filing of UCC-1 financing statements in the appropriate filing offices,
Collateral Agent has (or in the case of after-acquired Collateral, at the time
Company acquires rights therein, will have) a first priority perfected security
interest in the Collateral to the extent that a security interest in the
Collateral can be perfected by such filing, except for Permitted Liens; (c) all
Inventory has been (or, in the case of hereafter produced Inventory, will be)
produced in compliance with applicable laws, including the Fair Labor Standards
Act; (d) all accounts receivable and payment intangibles are genuine and
enforceable against the party obligated to pay the same; (e) the originals of
all documents evidencing all accounts receivable and payment intangibles of
Company and the only original books of account and records of Company relating
thereto are, and will continue to be, kept at the address of the Company set
forth in Section 10 of this Security Agreement.

       

      
        
          
          

        

        
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      4.  Covenants Relating to
Collateral.  Company hereby agrees (a) to perform all acts that
may be necessary to maintain, preserve, protect and perfect the Collateral, the
Lien granted to Collateral Agent therein and the perfection and priority of such
Lien, except for Permitted Liens; (b) not to use or permit any Collateral to be
used (i) in violation in any material respect of any applicable law, rule or
regulation, or (ii) in violation of any policy of insurance covering the
Collateral; (c) to pay promptly when due all taxes and other governmental
charges, all Liens and all other charges now or hereafter imposed upon or
affecting any Collateral; (d) without 30 days' written notice to Collateral
Agent, (i) not to change Company's name or place of business (or, if Company has
more than one place of business, its chief executive office), or the office in
which Company's records relating to accounts receivable and payment intangibles
are kept, and (ii) not to change Company’s state of incorporation; and (e) to
procure, execute and deliver from time to time any endorsements, assignments,
financing statements and other writings reasonably deemed necessary or
appropriate by Collateral Agent to perfect, maintain and protect its Lien
hereunder and the priority thereof and to deliver promptly upon the request of
Collateral Agent all originals of Collateral consisting of
instruments.

      

      5.  Authorized Action by
Collateral Agent.  Company hereby irrevocably appoints
Collateral Agent as its attorney-in-fact (which appointment is coupled with an
interest) and agrees that Collateral Agent may perform (but Collateral Agent
shall not be obligated to and shall incur no liability to Company or any third
party for failure so to do) any act which Company is obligated by this Security
Agreement to perform, and to exercise such rights and powers as Company might
exercise with respect to the Collateral, including the right to (a) collect by
legal proceedings or otherwise and endorse, receive and receipt for all
dividends, interest, payments, proceeds and other sums and property now or
hereafter payable on or on account of the Collateral; (b) enter into any
extension, reorganization, deposit, merger, consolidation or other agreement
pertaining to, or deposit, surrender, accept, hold or apply other property in
exchange for the Collateral; (c) make any compromise or settlement, and take any
action it deems advisable, with respect to the Collateral; (d) insure, process
and preserve the Collateral; (e) pay any indebtedness of Company relating to the
Collateral; and (f) file UCC financing statements and execute other documents,
instruments and agreements required hereunder; provided, however, that
Collateral Agent shall not exercise any such powers granted pursuant to
subsections (a) through (e) prior to the occurrence of an Event of Default and
shall only exercise such powers during the continuance of an Event of
Default.  Company agrees to reimburse Collateral Agent upon demand for
any reasonable costs and expenses, including attorneys' fees, Collateral Agent
may incur while acting as Company's attorney-in-fact hereunder, all of which
costs and expenses are included in the Obligations.  It is further
agreed and understood between the parties hereto that such care as Collateral
Agent gives to the safekeeping of its own property of like kind shall constitute
reasonable care of the Collateral when in Collateral Agent 's possession; provided, however, that
Collateral Agent shall not be required to make any presentment, demand or
protest, or give any notice and need not take any action to preserve any rights
against any prior party or any other person in connection with the Obligations
or with respect to the Collateral.

       

      
        
          
          

        

        
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      6.  Default and
Remedies.

      

      (a)  Default.  Company
shall be deemed in default under this Security Agreement upon the occurrence and
during the continuance of an Event of Default (as defined in the
Notes).

      

      (b)  Remedies.  Upon
the occurrence and during the continuance of any such Event of Default,
Collateral Agent shall have the rights of a secured creditor under the UCC, all
rights granted by this Security Agreement and by law, including the right
to:  (a) require Company to assemble the Collateral and make it
available to Collateral Agent and the Investors at a place to be designated by
Collateral Agent and the Investors; and (b) prior to the disposition of the
Collateral, store, process, repair or recondition it or otherwise prepare it for
disposition in any manner and to the extent Collateral Agent and the Investors
deem appropriate.  Company hereby agrees that ten (10) days' notice of
any intended sale or disposition of any Collateral is reasonable.  In
furtherance of Collateral Agent 's rights hereunder, Company hereby grants to
Collateral Agent an irrevocable, non-exclusive license, exercisable without
royalty or other payment by Collateral Agent, and only in connection with the
exercise of remedies hereunder, to use, license or sublicense any patent,
trademark, trade name, copyright or other intellectual property in which Company
now or hereafter has any right, title or interest together with the right of
access to all media in which any of the foregoing may be recorded or
stored.

      

      (c)  Application of Collateral
Proceeds.  The proceeds and/or avails of the Collateral, or any
part thereof, and the proceeds and the avails of any remedy hereunder (as well
as any other amounts of any kind held by Collateral Agent at the time of, or
received by Collateral Agent after, the occurrence of an Event of Default) shall
be paid to and applied as follows:

      

      (i)  First, to the payment
of reasonable costs and expenses, including all amounts expended to preserve the
value of the Collateral, of foreclosure or suit, if any, and of such sale and
the exercise of any other rights or remedies, and of all proper fees, expenses,
liability and advances, including reasonable legal expenses and attorneys’ fees,
incurred or made hereunder by Collateral Agent;

      

      (ii)  Second, to the
payment to each Investor of the amount then owing or unpaid on such Investor’s
Note, and in case such proceeds shall be insufficient to pay in full the whole
amount so due, owing or unpaid upon such Note, then its Pro Rata Share of the
amount remaining to be distributed (to be applied first to accrued interest and
second to outstanding principal);

      

      (iii)  Third, to the payment
of other amounts then payable to each Investor under any of the Transaction
Documents, and in case such proceeds shall be insufficient to pay in full the
whole amount so due, owing or unpaid under such Transaction Documents, then its
Pro Rata Share of the amount remaining to be distributed; and

       

      
        
          
          

        

        
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      (iv)  Fourth, to the
payment of the surplus, if any, to Company, its successors and assigns, or to
whomsoever may be lawfully entitled to receive the same.

       

      For
purposes of this Security Agreement, the term “Pro Rata Share” shall mean, when
calculating a Investor’s portion of any distribution or amount, that
distribution or amount (expressed as a percentage) equal to a fraction (i) the
numerator of which is the original outstanding principal amount of such
Investor’s Note and (ii) the denominator of which is the original aggregate
outstanding principal amount of all Notes issued under the Purchase
Agreement.  In the event that a Investor receives payments or
distributions in excess of its Pro Rata Share, then such Investor shall hold in
trust all such excess payments or distributions for the benefit of the other
Investors and shall pay such amounts held in trust to such other Investors upon
demand by such Investors.

      

      7.  Collateral
Agent.

      

      (a)  Appointment.  The
Investors hereby appoint Mr Pedro de Boeck as collateral agent for the Investors
under this Security Agreement (in such capacity, the “Collateral Agent”) to serve
from the date hereof until the termination of the Security
Agreement.

      

      (b)  Powers and Duties of
Collateral Agent, Indemnity by Investors.

      

      (i)  Each
Investor hereby irrevocably authorizes the Collateral Agent to take such action
and to exercise such powers hereunder as provided herein or as requested in
writing by the Investors of a Majority in Interest in accordance with the terms
hereof, together with such powers as are reasonably incidental
thereto.  Collateral Agent may execute any of its duties hereunder by
or through agents or employees and shall be entitled to request and act in
reliance upon the advise of counsel concerning all matters pertaining to its
duties hereunder and shall not be liable for any action taken or omitted to be
taken by it in good faith in accordance therewith.

      

      (ii)  Neither
the Collateral Agent nor any of its directors, officers or employees shall be
liable or responsible to any Investor or to Company for any action taken or
omitted to be taken by Collateral Agent or any other such person hereunder or
under any related agreement, instrument or document, except in the case of gross
negligence or willful misconduct on the part of the Collateral Agent, nor shall
the Collateral Agent or any of its directors, officers or employees be liable or
responsible for (i) the validity, effectiveness, sufficiency, enforceability or
enforcement of the Notes, this Security Agreement or any instrument or document
delivered hereunder or relating hereto; (ii) the title of Company to any of the
Collateral or the freedom of any of the Collateral from any prior or other liens
or security interests; (iii) the determination, verification or enforcement of
Company’s compliance with any of the terms and conditions of this Security
Agreement; (iv) the failure by Company to deliver any instrument  or
document required to be delivered pursuant to the terms hereof; or (v) the
receipt, disbursement, waiver, extension or other handling of payments or
proceeds made or received with respect to the collateral, the servicing of the
Collateral or the enforcement or the collection of any amounts owing with
respect to the Collateral.

       

      
        
          
          

        

        
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      (iii)  In
the case of this Security Agreement and the transactions contemplated hereby and
any related document relating to any of the Collateral, each of the Investors
agrees to pay to the Collateral Agent, on demand, its Pro Rata Share of all fees
and all expenses incurred in connection with the operation and enforcement of
this Security Agreement, the Notes or any related agreement to the extent that
such fees or expenses have not been paid by Company.  In the case of
this Security Agreement  and each instrument and document relating to
any of the Collateral, each of the Investors and the Company hereby agrees to
hold the Collateral Agent harmless, and to indemnify the Collateral Agent from
and against any and all loss, damage, expense or liability which may be incurred
by the Collateral Agent under this Security Agreement and the transactions
contemplated hereby and any related agreement or other instrument or document,
as the case may be, unless such liability shall be caused by the willful
misconduct or gross negligence of the Collateral Agent.

      

      8.  Miscellaneous.

      

      (a)  Notices.  Except
as otherwise provided herein, all notices, requests, demands, consents,
instructions or other communications to or upon Company or Collateral Agent
under this Security Agreement shall be in writing and faxed, mailed or delivered
to each party to the facsimile number or its address set forth below (or to such
other facsimile number or address as the recipient of any notice shall have
notified the other in writing).  All such notices and communications
shall be effective (a) when sent by Federal Express or other overnight service
of recognized standing, on the business day following the deposit with such
service; (b) when mailed, by registered or certified mail, first class postage
prepaid and addressed as aforesaid through the United States Postal Service,
upon receipt; (c) when delivered by hand, upon delivery; and (d) when faxed,
upon confirmation of receipt.

      

      Collateral
Agent:

      
        

      with a copy
to:

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        	 
      	 
	 
      	 
	 
      	 
	
                                                Telephone:

                                              	 	 
	
                                                Facsimile:

                                              	 
      	 

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

       

      
        
          
          

        

        
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      Company:

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  	
                                          306
      East St. Joseph Street

                                        	 
	
                                          Suite
      200, Rapid City

                                        	 
	
                                          South
      Dakota 57701

                                        	 
	
                                          Telephone:

                                        	 	 
	
                                          Facsimile:

                                        	 
      	 

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

       

      with a copy
to:

      Greenberg
Traurig, LLP

      Attn:
Raymond A. Lee, Esq.

      3161
Michelson Drive, Suite 1000

      Irvine,
California 92612-4410

      Telephone:
949-732-6500

      Facsimile:
949-732-6501

      

      (b)  Termination of Security
Interest.  Upon the payment in full of all Obligations, the
security interest granted herein shall terminate and all rights to the
Collateral shall revert to Company.  Upon such termination Collateral
Agent hereby authorizes Company to file any UCC termination statements necessary
to effect such termination and Collateral Agent will execute and deliver to
Company any additional documents or instruments as Company shall reasonably
request to evidence such termination.

      

      (c)  Nonwaiver.  No
failure or delay on Collateral Agent 's part in exercising any right hereunder
shall operate as a waiver thereof or of any other right nor shall any single or
partial exercise of any such right preclude any other further exercise thereof
or of any other right.

      

      (d)  Amendments and
Waivers.  This Security Agreement may not be amended or
modified, nor may any of its terms be waived, except by written instruments
signed by Company and Collateral Agent.  Each waiver or consent under
any provision hereof shall be effective only in the specific instances for the
purpose for which given.

      

      (e)  Assignments.  This
Security Agreement shall be binding upon and inure to the benefit of Collateral
Agent and Company and their respective successors and assigns; provided, however, that Company
may not sell, assign or delegate rights and obligations hereunder without the
prior written consent of Collateral Agent.

      

      (f)  Cumulative Rights,
etc.  The rights, powers and remedies of Collateral Agent under
this Security Agreement shall be in addition to all rights, powers and remedies
given to Collateral Agent by virtue of any applicable law, rule or regulation of
any governmental authority, any Transaction Document or any other agreement, all
of which rights, powers, and remedies shall be cumulative and may be exercised
successively or concurrently without impairing Collateral Agent’s rights
hereunder.  Company waives any right to require Collateral Agent to
proceed against any person or entity or to exhaust any Collateral or to pursue
any remedy in Collateral Agent 's power.

       

      
        
          
          

        

        
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      (g)  Payments Free of Taxes,
Etc.  All payments made by Company under the Transaction
Documents shall be made by Company free and clear of and without deduction for
any and all present and future taxes, levies, charges, deductions and
withholdings.  In addition, Company shall pay upon demand any stamp or
other taxes, levies or charges of any jurisdiction with respect to the
execution, delivery, registration, performance and enforcement of this Security
Agreement.  Upon request by Collateral Agent, Company shall furnish
evidence satisfactory to Collateral Agent that all requisite authorizations and
approvals by, and notices to and filings with, governmental authorities and
regulatory bodies have been obtained and made and that all requisite taxes,
levies and charges have been paid.

      

      (h)  Partial
Invalidity.  If at any time any provision of this Security
Agreement is or becomes illegal, invalid or unenforceable in any respect under
the law or any jurisdiction, neither the legality, validity or enforceability of
the remaining provisions of this Security Agreement nor the legality, validity
or enforceability of such provision under the law of any other jurisdiction
shall in any way be affected or impaired thereby.

      

      (i)  Construction.  Each
of this Security Agreement and the other Transaction Documents is the result of
negotiations among, and has been reviewed by, Company, Investors, Collateral
Agent and their respective counsel.  Accordingly, this Security
Agreement and the other Transaction Documents shall be deemed to be the product
of all parties hereto, and no ambiguity shall be construed in favor of or
against Company, Investors or Collateral Agent.

      

      (j)  Entire
Agreement.  This Security Agreement taken together with the
other Transaction Documents constitute and contain the entire agreement of
Company, Investors and Collateral Agent and supersede any and all prior
agreements, negotiations, correspondence, understandings and communications
among the parties, whether written or oral, respecting the subject matter
hereof.

      

      (k)  Other Interpretive
Provisions.  References in this Security Agreement and each of
the other Transaction Documents to any document, instrument or agreement (a)
includes all exhibits, schedules and other attachments thereto, (b) includes all
documents, instruments or agreements issued or executed in replacement thereof,
and (c) means such document, instrument or agreement, or replacement or
predecessor thereto, as amended, modified and supplemented from time to time and
in effect at any given time.  The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Security Agreement or
any other Transaction Document refer to this Security Agreement or such other
Transaction Document, as the case may be, as a whole and not to any particular
provision of this Security Agreement or such other Transaction Document, as the
case may be.  The words "include" and "including" and words of similar
import when used in this Security Agreement or any other Transaction Document
shall not be construed to be limiting or exclusive.

      

      (l)  Governing
Law.  This Security Agreement shall be governed by and
construed in accordance with the laws of the State of South Dakota without
reference to conflicts of law rules (except to the extent governed by the
UCC).

       

      (m)  Counterparts. This
Security Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall be deemed to constitute
one instrument.

       

      [The
remainder of this page is intentionally left blank]

       

      
        
          
          

        

        
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      IN
WITNESS WHEREOF, Company has caused this Security Agreement to be executed as of
the day and year first above written.

      

      

      COMPANY:

      

      KL
ENERGY CORP.

      a Nevada
corporation

      

      

      
        
          
            	
                    By:  
      

                  	 
      

          

        

      

      

      Peter
Gross

      President
and Chief Executive Officer

      

      

      AGREED:

      As
Collateral Agent

       

      
        
          
            	
                    Signature:  
      

                  	
                     

                  

          

        

      

       

       

      INVESTOR:

       

      
        
          
            	
                    Name:  
      

                  	
                     

                  

          

        

      

       

       

      
        
          
            	
                    Signature:  
      

                  	
                     

                  

          

        

      

       

      If
Company or Partnership:

       

      
        
          
            	
                    Name:  
      

                  	 
      

          

        

      

       

      
        
          
            	
                    Title:  
      

                  	 
      

          

        

      

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      ATTACHMENT
1

      TO
SECURITY AGREEMENT

       

      All
right, title, interest, claims and demands of Company in and to the following
property:

      

      (i)  All
goods and equipment now owned or hereafter acquired, including, without
limitation, all laboratory equipment, computer equipment, office equipment,
machinery, fixtures, vehicles, and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;

      

      (ii)  All
inventory now owned or hereafter acquired, including, without limitation, all
merchandise, raw materials, parts, supplies, packing and shipping materials,
work in process and finished products including such inventory as is temporarily
out of Company’s custody or possession or in transit and including any returns
upon any accounts or other proceeds, including insurance proceeds, resulting
from the sale or disposition of any of the foregoing and any documents of title
representing any of the above, and Company’s books relating to any of the
foregoing;

      

      (iii)  All
contract rights, general intangibles, health care insurance receivables, payment
intangibles and commercial tort claims, now owned or hereafter acquired,
including, without limitation, all patents, patent rights (and applications and
registrations therefor), trademarks and service marks (and applications and
registrations therefor), inventions, copyrights, mask works (and applications
and registrations therefor), trade names, trade styles, software and computer
programs, trade secrets, methods, processes, know how, drawings, specifications,
descriptions, and all memoranda, notes, and records with respect to any research
and development, goodwill, license agreements, franchise agreements, blueprints,
drawings, purchase orders, customer lists, route lists, infringements, claims,
computer programs, computer disks, computer tapes, literature, reports,
catalogs, design rights, income tax refunds, payments of insurance and rights to
payment of any kind and whether in tangible or intangible form or contained on
magnetic media readable by machine together with all such magnetic
media;

      

      (iv)  All
now existing and hereafter arising accounts, contract rights, royalties, license
rights and all other forms of obligations owing to Company arising out of the
sale or lease of goods, the licensing of technology or the rendering of services
by Company (subject, in each case, to the contractual rights of third parties to
require funds received by Company to be expended in a particular manner),
whether or not earned by performance, and any and all credit insurance,
guaranties, and other security therefor, as well as all merchandise returned to
or reclaimed by Company and Company’s books relating to any of the
foregoing;

      

      (v)  All
documents, cash, deposit accounts, letters of credit, letter of credit rights,
supporting obligations, certificates of deposit, instruments, chattel paper,
electronic chattel paper, tangible chattel paper and investment property,
including, without limitation, all securities, whether certificated or
uncertificated, security entitlements, securities accounts, commodity contracts
and commodity accounts, and all financial assets held in any securities account
or otherwise, wherever located, now owned or hereafter acquired and Company’s
books relating to the foregoing; and

      

      (vi)  Any
and all claims, rights and interests in any of the above and all substitutions
for, additions and accessions to and proceeds thereof, including, without
limitation, insurance, condemnation, requisition or similar payments and the
proceeds thereof.CONDITIONAL
WAIVER AND MODIFICATION

      

      TO
LOAN AND SECURITY AGREEMENT

      

      This
Conditional Waiver and Modification to
Loan and Security Agreement (this
“Modification”)
is entered into as of December 13, 2010 and with an effective date of October
18, 2010 (the “Effective
Date”), by
and between PARTNERS FOR GROWTH II, L.P. ("PFG") and each of Composite
Technology Corporation, CTC Cable Corporation and CTC Renewables Corporation,
each with their principal business address at 2026 McGaw Avenue, Irvine, CA
92614 (individually and collectively, jointly and severally,
"Borrower").  Capitalized terms used herein without definition shall
have the same meanings given them in the Loan Agreement and the Warrants (as
defined below).

       

      Recitals

       

      A.           Borrower
and PFG have entered into that certain Loan and Security Agreement dated as of
April 12, 2010, as amended and modified from time to time (the “Loan
Agreement”), and together with such documents, instruments and security
agreements as were executed reasonably contemporaneously with or in connection
with the Loan Agreement, the “Loan
Documents”), pursuant to which PFG has extended and conditionally-agreed
to make available to Borrower certain advances of money.

       

      B.           On
April 12, 2010, Borrower, Composite Technology Corporation (“CTC”)
issued a warrant to purchase 5,000,000 shares of CTC’s common stock at an
Exchange Price of $0.29 per share (“Warrant
#1”) and a warrant to purchase 5,000,000 shares of CTC’s common stock at
an Exchange Price of $1.00 per share (“Warrant
#2” and, collectively with Warrant #1, the “Warrants”)

       

      C.           Borrower
has notified PFG that it is in breach of the Cumulative Operating Income
(Losses) financial covenant set forth in Section 5 of the Schedule to the Loan
Agreement for the period ended September 30, 2010 (the “Specified
Default”).

       

      D.           Subject
to the truth and accuracy of the representations and warranties of Borrower set
forth herein and subject to the other terms and conditions set forth in this
Modification, PFG is willing to waive the Specified Default, forbear from
exercising remedies under the Loan Agreement based on the Specified Default and
otherwise modify the Loan Documents as specified herein.

       

      agreement

       

      1.           Conditional
Waiver; Warrant Restatement.   Subject to each of the
following conditions: (a) satisfaction of the terms of Section 6 hereof; and (b)
there being no Default or Event of Default under the Loan Documents other than
the Specified Default, PFG hereby: (i) agrees to modify the Loan Agreement as
specified in Section 2.1, and (ii) waives the Specified Default.  The
amendment and restatement of the Warrants is unconditional and effective on the
date hereof.

       

      2. 
          Modification
of Loan Documents.

       

      2.1           Modification of Loan
Agreement.   To Section 8 of the Schedule is added a new
paragraph (c), as follows:

      
        
           

        

        
          1

          
            

          

        

        
           

        

      

      

      
        	
                                  (c)

              	
                Security
      Deposit.  On a monthly basis within three (3) Business
      Day after the Date of Determination, Borrower shall deposit with PFG as
      additional security for the Obligations, an amount equal to the cumulative
      shortfall between the required minimum Cumulative Operating Income
      (Losses) specified in Section 5 of this Schedule and Borrower’s actual
      Cumulative Operating Income (Losses) realized by Borrower during each such
      monthly period (the “Security Deposit”). To
      the extent that Borrower’s performance during any subsequent measurement
      period would reduce the afore-specified cumulative shortfall, PFG shall
      return to Borrower the amount that represents the excess of the Security
      Deposit then held by PFG over the cumulative shortfall as at the last
      Measurement Date. PFG shall return such excess Security Deposit within
      three (3) Business Days of the date Borrower certifies its compliance with
      the Cumulative Operating Income (Losses) financial covenant under Section
      6(e) of the Schedule. For example only, Borrower is permitted a $5,000,000
      Cumulative Operating Loss under Section 5 of the Schedule. If Borrower for
      the month ending August 31, 2010 reported a Cumulative Operating Loss of
      $5,500,000, Borrower would be required within one Business Day of the Date
      of Determination to provide PFG a Security Deposit equal to $500,000. If
      Borrower for the month ending September 30, 2010 reported a Cumulative
      Operating Loss of $5,250,000, PFG would be required within three Business
      Days of the Date of Determination to return $250,000 of the Security
      Deposit to Borrower.  If Borrower for the month ending October
      31, 2010 reported a Cumulative Operating Loss of $4,800,000, PFG would be
      required within three Business Days of the Date of Determination to return
      the remaining $250,000 Security Deposit held by PFG to
      Borrower.  If Borrower for the month ending November 30, 2010
      reported a Cumulative Operating Loss of $5,200,000, Borrower would be
      required within three Business Days of the Date of Determination to
      provide PFG a new Security Deposit equal to $200,000. PFG shall not be
      required to pay over to Borrower the amount of any interest earned from
      time to time on the Security Deposit and Borrower waives any claim to the
      same. For the avoidance of doubt, Borrower may include the amount of the
      Security Deposit in  determining compliance with the financial
      covenants set forth in Section 5 of the Schedule (such as, in determining
      the “Cash” component of the Liquidity
Covenant).

              

      

      

      
        	
                          Definitions:

              	
                “Date of Determination”
      means the earlier of (i) the date on which Borrower’s Cumulative Operating
      Income (Losses) under Section 5 of the Schedule is determinable, and (ii)
      the date on which Borrower is required to certify its compliance with the
      Cumulative Operating Income (Losses) financial covenant under Section 6(e)
      of the Schedule.

              

      

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

      

      
        	
                 
      

              	
                “Measurement Date” means
      the last day of each calendar
month.

              

      

      

      2.2           Amendment of
Warrants.  Warrant #1 and Warrant #2 are hereby amended and
restated in their entirety as appended to this Modification as Exhibit A and Exhibit B,
respectively (the “Restated
Warrants”).

      

      2.3           Additional Reporting. Until
such time as PFG otherwise notifies Borrower to the contrary, Borrower shall
provide PFG, as an additional report required under Section 6 of the Loan
Agreement, a weekly cash flow report in such form as PFG shall advise to
Borrower.

      

      3.           Borrower’
Representations, Warranties and Covenants.  Each Borrower
represents, warrants and covenants that:

       

      (a)           immediately
upon giving effect to this Modification (i) the representations and
warranties contained in the Loan Documents are true, accurate and complete in
all material respects as of the date hereof (except to the extent such
representations and warranties relate to an earlier date, in which case they are
true and correct as of such date), and (ii) no Event of Default has
occurred and is continuing;

       

      (b)          each
Borrower has the corporate power and authority to execute and deliver this
Modification and to perform its obligations under the Loan Agreement and the
Warrants, as amended by this Modification;

       

      (c)           the
articles of incorporation, bylaws and other organizational documents of each
Borrower delivered to PFG on or before the Effective Date remain true, accurate
and complete and have not been amended, supplemented or restated and are and
continue to be in full force and effect;

       

      (d)           the
execution and delivery by each Borrower of this Modification and the performance
by Borrower of its obligations under the Loan Agreement and Warrants has been
duly authorized by all necessary corporate action on the part of each entity
constituting Borrower;

       

      (e)           this
Modification has been duly authorized, executed and delivered by each Borrower
and constitutes a binding obligation of each Borrower, enforceable against each
Borrower, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, liquidation, moratorium or other similar laws of
general application and equitable principles relating to or affecting creditors’
rights;

       

      (f)           this
Modification does not require the consent of any third party (including
stockholders) or such consent has been secured;

       

      (g)           this
Modification shall be binding upon all entities within the Borrower corporate
group, whether or not each such entity is party hereto and upon PFG’s request,
Borrower shall cause such other controlled entities to become party to the Loan
Documents, as additional Borrowers; and

       

      (h)          as
of the date hereof, it has no defenses against the obligations to pay any
amounts under the Obligations and it has no claims of any kind against
PFG.  Borrower acknowledges that PFG has acted in good faith and has
conducted in a commercially reasonable manner its relationships with Borrower in
connection with this Modification and in connection with the Loan
Documents.

      
        
           

        

        
          3

          
            

          

        

        
           

        

      

       

      Borrower
understands and acknowledges that PFG is entering into this Modification in
reliance upon, and in partial consideration for, the above representations and
warranties, and agrees that such reliance is reasonable and
appropriate.

       

      4.           Release.  Each Borrower
hereby forever relieves, releases, and discharges PFG and each of its present or
former employees, officers, directors, agents, representatives, attorneys (the
“Indemnitees”),
from any and all possible claims, debts, liabilities, demands, obligations,
promises, acts, agreements, costs and expenses, actions and causes of action, of
every type, kind, nature, description or character, whether known or unknown,
suspected or unsuspected, absolute or contingent, arising out of or in any
manner connected with or related to facts, circumstances, issues, controversies
or claims existing since the beginning of time through and including (but not
after) the date of execution of this Modification, which any Borrower or any of
their respective partners, members, officers, agents or employees may now have
or may hereafter have (but only with respect to facts, circumstances, issues,
controversies or claims existing on or prior to the date of this Modification)
against the Indemnitees, if any, and irrespective of whether any of the
foregoing arise out of contract, tort, violation of laws or regulations or
otherwise, breach of fiduciary duty, breach of any duty of fair dealing, breach
of confidence, breach of funding commitment, undue influence, duress, economic
coercion, violation of any federal or state securities or Blue Sky laws or
regulations, conflict of interest, negligence, bad faith, malpractice,
violations of the racketeer Influenced and Corrupt Organizations Act,
intentional or negligent infliction of mental distress, tortuous interference
with contractual relations, tortuous interference with corporate governance or
prospective business advantage, deceptive trade practices, libel, slander,
conspiracy or any claim relating to the Loan Documents or the transactions
contemplated therein (collectively “Released
Claims”). Without limiting the
foregoing, the Released Claims shall include any and all liabilities or claims
arising out of or in any manner connected with or related to the Loan Documents,
the Recitals hereto, any instruments, agreements or documents executed in
connection with any of the foregoing or the origination, negotiation,
administration, servicing and/or enforcement of any of the
foregoing.  In furtherance of this release, Borrower expressly
acknowledges and waives any and all rights under Section 1542 of the California
Civil Code, which provides as follows: “A general release does not
extend to claims which the creditor does not know or expect to exist in his
favor at the time of executing the release, which if known by him must have
materially affected his settlement with the debtor.” By entering into this
release, Borrower recognizes that no facts or representations are ever
absolutely certain and it may hereafter discover facts in addition to or
different from those which it presently knows or believes to be true, but that
it is the intention of Borrower hereby to fully, finally and forever settle and
release all matters, disputes and differences, known or unknown, suspected or
unsuspected; accordingly, if any Borrower should subsequently discover that any
fact that it relied upon in entering into this release was untrue, or that any
understanding of the facts was incorrect, neither Borrower shall be entitled to
set aside this release by reason thereof, regardless of any claim of mistake of
fact or law or any other circumstances. Borrower acknowledges that it is not
relying upon and has not relied upon any representation or statement made by PFG
with respect to the facts underlying this release or with regard to any of such
party’s rights or asserted rights. This release may be pleaded as a full and
complete defense and/or as a cross-complaint or counterclaim against any action,
suit, or other proceeding that may be instituted, prosecuted or attempted in
breach of this release. Borrower acknowledges that the release contained herein
constitutes a material inducement to PFG to enter into this Modification, and
that PFG would not have done so but for PFG’s expectation that such release is
valid and enforceable in all events.  Borrower hereby represents and
warrants to PFG, and PFG is relying thereon, as follows: (i) except as expressly
stated in this Modification, neither PFG nor any agent, employee or
representative of PFG has made any statement or representation to any Borrower
regarding any fact relied upon by any Borrower in entering into this
Modification; (ii) Borrower has made such investigation of the facts pertaining
to this Modification and all of the matters appertaining thereto, as it deems
necessary; (iii) the terms of this Modification are contractual and not a mere
recital; (iv) this Modification has been carefully read by Borrower, the
contents hereof are known and understood by Borrower, and this Modification is
signed freely, and without duress, by Borrower; (v) Borrower represents and
warrants that it is the sole and lawful owner of all right, title and interest
in and to every claim and every other matter which it releases herein, and that
it has not heretofore assigned or transferred, or purported to assign or
transfer, to any person, firm or entity any claims or other matters herein
released. Borrower shall indemnify PFG, defend and hold it harmless from and
against all claims based upon or arising in connection with prior assignments or
purported assignments or transfers of any claims or matters released
herein.

      
        
           

        

        
          4

          
            

          

        

        
           

        

      

       

      5.           Limitation.  PFG’s
waiver set forth in this Modification shall be limited precisely as written and
shall not be deemed (a) to be a forbearance, waiver or modification of any other
term or condition of the Loan Documents or of any other instrument or agreement
referred to therein or to prejudice any right or remedy which PFG may now have
or may have in the future under or in connection with the Loan Documents or any
instrument or agreement referred to therein; (b) to constitute a modification or
waiver of any rate of interest applicable to outstanding monetary Obligations,
(c) to be a consent to any future amendment or modification, forbearance or
waiver to any instrument or agreement the execution and delivery of which is
consented to hereby, or to any waiver of any of the provisions thereof; or
(d) to limit or impair PFG’s right to demand strict performance of all terms and
covenants of any of the Loan Documents as of any date.  Except as
expressly amended hereby, the Loan Documents and each of them shall continue in
full force and effect.

       

      6.           Effectiveness.  Subject
to the satisfaction of the conditions precedent set forth below, this
Modification shall become effective on the date hereof, but shall continue to be
subject to the satisfaction of all the following conditions:

       

      6.1           Execution and
Delivery.  Each Borrower shall have duly executed and delivered
this Modification and the Restated Warrants to PFG on or before October 18,
2010.

       

      6.2           Update to Representations.
Borrower shall update the Representations to the extent required to make the
Representations true and correct as of the date of this
Modification:  (i) in all respects as to matters addressed in Part A
of the Representations (except for the Collateral values set forth in Part A,
Section 3(g), which must be true and correct in all Non-trivial respects) and
Part B, Section 11, and (ii) in all Non-trivial respects with respect to all
other sections of the Representations Letter.

       

      6.3           Evidence of
Authorization/Consent.  Each Borrower shall have provided PFG
with certified copies of any and all of each Borrower’s required authorizations
or consents (Board, stockholder or other required authorization or consent) to
the execution, delivery and performance of this Modification.

      
        
           

        

        
          5

          
            

          

        

        
           

        

      

       

      6.4           Payment of Security
Deposit.  Borrower shall have deposited with PFG the Security
Deposit due based upon the application of Section 2.1 of this Modification to
Borrower’s  currently-reported and certified Cumulative Net Income
(Losses) which, for the avoidance of doubt, is a Security Deposit equal to $0 as
of October 18, 2010.

       

      6.5           Payment of PFG
Expenses.  Borrower shall pay promptly upon invoice all PFG
costs and expenses (including all reasonable attorneys’ fees and reasonable
expenses) incurred in connection with this Modification.

       

      7.           Counterparts.  This
Modification may be signed in any number of counterparts, and by different
parties hereto in separate counterparts, with the same effect as if the
signatures to each such counterpart were upon a single
instrument.  All counterparts shall be deemed an original of this
Modification.

       

      8.           Integration;
Construction.  This Modification, the Restated Warrants and the
other Loan Documents and any documents executed in connection herewith or
therewith or pursuant hereto or thereto contain the entire agreement between the
parties with respect to the subject matter hereof and supersede all prior
agreements, understandings, offers and negotiations, oral or written, with
respect thereto and no extrinsic evidence whatsoever may be introduced in any
judicial or arbitration proceeding, if any, involving this Modification; except
that any financing statements or other agreements or instruments filed by PFG
with respect to Borrower shall remain in full force and effect. The title of
this Agreement, section headings and quotation marks around amended provisions
are for the readers’ convenience only and shall be ignored for purposes of
integration into the Loan Agreement. The term “Schedule” means the Schedule to
the Loan Agreement. The “General Provisions” of the Loan Agreement are
incorporated by reference herein. This Modification shall be deemed effective as
against any and all Borrower parties that execute and deliver this Modification,
and the failure of any such Borrower to so execute and deliver shall not affect
the enforceability of this Modification against each Borrower party that
does.

       

      9.           Governing
Law; Venue.  THIS MODIFICATION
SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA.  Borrower and PFG each submit to the
exclusive jurisdiction of the State and Federal courts in San Francisco County,
California.

       

      [SIGNATURE
PAGE FOLLOWS]

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

      IN WITNESS WHEREOF, the parties hereto
have caused this Modification to be executed as of the date first written
above.

       

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                	
                                        Borrower:

                                      	 
      	
                                        PFG:

                                      
	 	 	 
	
                                        COMPOSITE
      TECHNOLOGY CORPORATION

                                      	 
      	
                                        PARTNERS
      FOR GROWTH II, L.P.

                                      
	 
      	 
      	 
      
	
                                        By

                                      	 
      	 
      	
                                        By

                                      	 
      
	 
      	
                                        President
      or Vice President

                                      	 
      	 
      
	 
      	 
      	
                                        Name:

                                      	 
      
	
                                        By

                                      	 
      	 
      	 
      
	 
      	
                                        Secretary
      or Ass't Secretary

                                      	 
      	
                                        Title:
      Manager, Partners for Growth II, LLC

                                      
	 
      	 
      	
                                        Its General
    Partner

                                      
	
                                        Borrower:

                                      	 
      	
                                        Borrower:

                                      
	 	 	 
	
                                        CTC
      CABLE CORPORATION

                                      	 
      	
                                        CTC
      RENEWABLES CORPORATION

                                      
	 
      	 
      	 
      
	
                                        By

                                      	 
      	 
      	
                                        By

                                      	 
      
	 
      	
                                        President
      or Vice President

                                      	 
      	 
      	
                                        President
      or Vice President

                                      
	 
      	 
      	 
      
	
                                        By

                                      	 
      	 
      	
                                        By

                                      	 
      
	 
      	
                                        Secretary
      or Ass't Secretary

                                      	
                                          

                                      	 
      	
                                        Secretary
      or Ass't
Secretary

                                      

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

      Exhibit A - Amended and
Restated Warrant #1

      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

      Exhibit A - Amended and
Restated Warrant #2

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