Document:

Exhibit 10.5

 

FUNDS
ESCROW AGREEMENT

 

This Agreement (this “Agreement”)
is dated as of the 6th day of July 2005 among Implant Sciences
Corporation, a Massachusetts corporation (the “Company”),
Laurus Master Fund, Ltd. (the “Purchaser”),
and Loeb & Loeb LLP (the “Escrow Agent”):

 

W
I  T  N  E  S  S  E  T  H:

 

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

 

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

 

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

 

NOW THEREFORE, the
parties agree as follows:

 

ARTICLE I

 

INTERPRETATION

 

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

 

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

 

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

 

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

 

(d)                                 “Documents”
means copies of the Disbursement Letter, the Securities Purchase Agreement, and
the Term Note, .

 

(e)                                  “Escrowed
Payment” means $3,000,000.

 

 

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

 

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

 

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

 

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

 

1.6.                              Law
Governing this Agreement; Consent to Jurisdiction.  THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.  With
respect to any suit, action or proceeding relating to this Agreement or to the
transactions contemplated hereby (“Proceedings”), each party hereto irrevocably
submits to the exclusive jurisdiction of the courts of the County of New York,
State of New York and the United States District court located in the county of
New York in the State of New York.  Each
party hereto hereby irrevocably and unconditionally (a) waives trial by
jury in any Proceeding relating to this Agreement and for any related
counterclaim and (b) waives any objection which it may have at any time to
the laying of venue of any Proceeding brought in any such court, waives any
claim that such Proceedings have been brought in an inconvenient forum and
further waives the right to object, with respect to such Proceedings, that such
court does not have jurisdiction over such party.  As between the Company and the Purchaser, the
prevailing party shall be entitled to recover from the other party its reasonable
attorneys’ fees and costs.  In the event
that any provision of this Agreement is determined by a court of competent
jurisdiction to be invalid or unenforceable, then the remainder of this
Agreement shall not be affected and shall remain in full force and effect.

 

2

 

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

 

ARTICLE II

 

APPOINTMENT
OF AND DELIVERIES TO THE ESCROW AGENT

 

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

 

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

 

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

 

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

 

ARTICLE III

 

RELEASE OF ESCROW

 

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

 

(a)                                  Promptly
following receipt by the Escrow Agent of (i) copies of the fully executed
Documents and this Agreement, (ii) the Escrowed Payment in immediately
available funds, (iii) joint written instructions (“Joint
Instructions”) executed by the Company and the Purchaser setting
forth the payment direction instructions with respect to the Escrowed Payment
and (iv) Escrow Agent’s verbal instructions from David Grin and/or Eugene
Grin (each of whom is a director of the Purchaser) indicating that all closing
conditions relating to the Documents have been satisfied and directing that the
Escrowed Payment be disbursed by the Escrow Agent in accordance with the Joint
Instructions, then the Escrowed Payment shall be deemed released from escrow
and shall be promptly disbursed in accordance with the Joint Instructions.  The Joint Instructions shall include, without
limitation, Escrow Agent’s authorization to retain from the Escrowed Payment
Escrow Agent’s fee for acting as Escrow Agent hereunder and the Closing Payment
for delivery to Laurus Capital Management, LLC in accordance with the Joint
Instructions.

 

3

 

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

 

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

 

ARTICLE IV

 

CONCERNING THE ESCROW AGENT

 

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

 

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

 

4

 

omitted by Escrow Agent
hereunder in good faith and in accordance with the opinion of such counsel.

 

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

 

(c)                                  The
Purchaser and the Company shall jointly and severally reimburse the Escrow
Agent for its reasonable out-of-pocket expenses (including counsel fees (which
counsel may be Loeb & Loeb LLP or such other counsel of the Escrow
Agent’s choosing) incurred in connection with the performance of its duties and
responsibilities hereunder, which shall not (subject to Section 4.1(b))
exceed $1,500.

 

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

 

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

 

(f)                                    The
Escrow Agent shall not be liable for any action taken or omitted by it in good
faith and reasonably believed by it to be authorized hereby or within the
rights or powers conferred upon it hereunder, nor for action taken or omitted

 

5

 

by it in good faith, and
in accordance with advice of counsel (which counsel may be Loeb &
Loeb, LLP or such other counsel of the Escrow Agent’s choosing), and shall not
be liable for any mistake of fact or error of judgment or for any acts or
omissions of any kind except to the extent any such liability arose from its
own willful misconduct or gross negligence.

 

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

 

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

 

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

 

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

 

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

 

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

 

6

 

ARTICLE V

 

GENERAL MATTERS

 

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

 

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

 

	
  If to the Company, to:

  	
  Implant Sciences
  Corporation

  
	
   

  	
  107 Audubon Rd. #5

  
	
   

  	
  Wakefield, MA 01880

  
	
   

  	
  Attn: Tony Armini

  
	
   

  	
  Facsimile: (781) 246-3561

  
	
   

  
	
  With a copy to:

  
	
   

  
	
  (b)                                 If
  to the Purchaser, to:

  
	
   

  
	
  LAURUS
  MASTER FUND, LTD.

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

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

  Cayman Islands, Fax: 345-949-8080

  
	
   

  
	
  (c)                                  If
  to the Escrow Agent, to:

  
	
   

  
	
  Loeb &
  Loeb LLP

  
	
  345
  Park Avenue

  
	
  New
  York, New York 10154

  
	
  Fax:
  (212) 407-4990

  
	
  Attention:
  Scott J. Giordano, Esq.

  

 

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

 

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

 

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

 

7

 

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

 

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

 

8

 

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

 

	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  IMPLANT SCIENCES CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  PURCHASER:

  
	
   

  	
   

  
	
   

  	
  LAURUS MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  ESCROW AGENT:

  
	
   

  	
   

  
	
   

  	
  LOEB & LOEB LLP

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

9

 

SCHEDULE A TO FUNDS
ESCROW AGREEMENT

 

	
  PURCHASER

  	
   

  	
  PRINCIPAL NOTE AMOUNT

  
	
  LAURUS
  MASTER FUND, LTD.,

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

  GT, Ugland House, South Church Street, George

  Town, Grand Cayman, Cayman Islands, Fax:

  345-949-8080

  	
   

  	
  Term
  Note in an aggregate principal amount of $3,000,000

  
	
  TOTAL

  	
   

  	
  $3,000,000

  
	
   

  	
   

  	
   

  
	
  FUND MANAGER

  	
   

  	
  CLOSING PAYMENT

  
	
  LAURUS CAPITAL
  MANAGEMENT, L.L.C.

  825 Third Avenue, 14th Floor

  New York, New York 10022

  Fax: 212-541-4434

  	
   

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

  
	
  TOTAL

  	
   

  	
  $135,000

  
	
   

  	
   

  	
   

  
	
  WARRANTS

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  WARRANT RECIPIENT

  	
   

  	
  WARRANTS TO BE ISSUED ON

  SEPTEMBER 30, 2005

  
	
  LAURUS MASTER
  FUND, LTD.

  M&C Corporate Services Limited, P.O. Box 309 GT, Ugland House, South
  Church Street, George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080

  	
   

  	
  Term Note
  Warrant exercisable into 250,000 shares of common stock of the Company.

  
	
  TOTAL

  	
   

  	
  Warrants
  exercisable into 250,000 shares of common stock of the Company

  

 

10Exhibit 10.6

 

IMPLANT SCIENCES
CORPORATION AND CERTAIN OF ITS SUBSIDIARIES

MASTER SECURITY AGREEMENT

 

 

To:                              Laurus
Master Fund, Ltd.

c/o M&C Corporate Services Limited

P.O. Box 309 GT

Ugland House

South Church Street

George Town

Grand Cayman, Cayman Islands

 

Date: July 6, 2005

 

To Whom It May Concern:

 

1.                                       To
secure the payment of all Obligations (as hereafter defined), Implant Sciences
Corporation a Massachusetts corporation (the “Company”), and each other entity
that is required to enter into this Master Security Agreement (each an “Assignor”
and, collectively, the “Assignors”) hereby assigns and grants to Laurus a
continuing security interest in all of the following property now owned or at
any time hereafter acquired by such Assignor, or in which such Assignor now has
or at any time in the future may acquire any right, title or interest (the “Collateral”):
all cash, cash equivalents, accounts, accounts receivable, deposit accounts,
inventory, equipment, goods, fixtures, documents, instruments (including, without
limitation, promissory notes), contract rights, general intangibles (including,
without limitation, payment intangibles and an absolute right to license on
terms no less favorable than those current in effect among such Assignor’s
affiliates), chattel paper, supporting obligations, investment property
(including, without limitation, all partnership interests, limited liability
company membership interests and all other equity interests owned by any
Assignor), letter-of-credit rights, trademarks, trademark applications,
tradestyles, patents, patent applications, copyrights, copyright applications
and other intellectual property in which such Assignor now has or hereafter may
acquire any right, title or interest, all proceeds and products thereof (including,
without limitation, proceeds of insurance) and all additions, accessions and
substitutions thereto or therefor.  In
the event any Assignor wishes to finance the acquisition in the ordinary course
of business of any hereafter acquired equipment and has obtained a written
commitment from an unrelated third party financing source to finance such
equipment, Laurus shall release its security interest on such hereafter
acquired equipment so financed by such third party financing source.  Except as otherwise defined herein, all
capitalized terms used herein shall have the meanings provided such terms in
the Securities Purchase Agreement referred to below.

 

2.                                       The
term “Obligations” as used herein shall mean and include all debts, liabilities
and obligations owing by each Assignor to Laurus arising under, out of, or in
connection with: (i) that certain Securities Purchase Agreement dated as
of the date hereof by and between the Company and Laurus (the “Securities
Purchase Agreement”) and (ii) the Related Agreements referred to in the
Securities Purchase Agreement (the Securities Purchase Agreement and each

 

 

Related Agreement as each may be amended, modified, restated or
supplemented from time to time, collectively, the “Documents”), and in
connection with any documents, instruments or agreements relating to or
executed in connection with the Documents or any documents, instruments or
agreements referred to therein or otherwise, and in connection with any other
indebtedness, obligations or liabilities of each such Assignor to Laurus,
whether now existing or hereafter arising, direct or indirect, liquidated or
unliquidated, absolute or contingent, due or not due and whether under,
pursuant to or evidenced by a note, agreement, guaranty, instrument or
otherwise, including, without limitation, obligations and liabilities of each
Assignor for post-petition interest, fees, costs and charges that accrue after
the commencement of any case by or against such Assignor under any bankruptcy,
insolvency, reorganization or like proceeding (collectively, the “Debtor Relief
Laws”) in each case, irrespective of the genuineness, validity, regularity or
enforceability of such Obligations, or of any instrument evidencing any of the
Obligations or of any collateral therefor or of the existence or extent of such
collateral, and irrespective of the allowability, allowance or disallowance of
any or all of the Obligations in any case commenced by or against any Assignor
under any Debtor Relief Law.

 

3.                                       Each
Assignor hereby jointly and severally represents, warrants and covenants to
Laurus that:

 

(a)                                  it
is a corporation, partnership or limited liability company, as the case may be,
validly existing, in good standing and formed under the respective laws of its
jurisdiction of formation set forth on Schedule A, and each Assignor will
provide Laurus thirty (30) days’ prior written notice of any change in any of
its respective jurisdiction of formation;

 

(b)                                 its
legal name is as set forth in its Certificate of Incorporation or other
organizational document (as applicable) as amended through the date hereof and
as set forth on Schedule A, and it will provide Laurus thirty (30) days’
prior written notice of any change in its legal name;

 

(c)                                  its
organizational identification number (if applicable) is as set forth on Schedule A
hereto, and it will provide Laurus thirty (30) days’ prior written notice of
any change in its organizational identification number;

 

(d)                                 it
is the lawful owner of its Collateral and it has the sole right to grant a
security interest therein and will defend the Collateral against all claims and
demands of all persons and entities;

 

(e)                                  it
will keep its Collateral free and clear of all attachments, levies, taxes,
liens, security interests and encumbrances of every kind and nature (“Encumbrances”),
except (i) Encumbrances securing the Obligations and (ii) Encumbrances
securing indebtedness of each such Assignor (i) not to exceed $50,000 in
the aggregate for all such Assignors so long as all such Encumbrances are
removed or otherwise released to Laurus’ satisfaction within ten (10) days
of the creation thereof; or (ii) indebtedness of an Assignor to each
of  Bridge Bank and Comerica Bank as set
forth on Schedule 3(e) attached hereto;

 

2

 

(f)                                    it
will, at its and the other Assignors’ joint and several cost and expense keep
the Collateral in good state of repair (ordinary wear and tear excepted) and
will not waste or destroy the same or any part thereof other than ordinary
course discarding of items no longer used or useful in its or such other
Assignors’ business;

 

(g)                                 it
will not, without Laurus’ prior written consent, sell, exchange, lease or
otherwise dispose of any Collateral, whether by sale, lease or otherwise,
except for the sale of inventory in the ordinary course of business and for the
disposition or transfer in the ordinary course of business during any fiscal
year of obsolete and worn-out equipment or equipment no longer necessary for
its ongoing needs, having an aggregate fair market value of not more than
$75,000 and only to the extent that:

 

(i)                                     the
proceeds of each such disposition are used to acquire replacement Collateral
which is subject to Laurus’  second
priority perfected security interest, or are used to repay the Obligations or
to pay general corporate expenses; or

 

(ii)                                  following
the occurrence of an Event of Default which continues to exist the proceeds of
which are remitted to Laurus to be held as cash collateral for the Obligations;

 

(h)                                 it
will insure or cause the Collateral to be insured in Laurus’ name (as an
additional insured and loss payee) against loss or damage by fire, theft,
burglary, pilferage, loss in transit and such other hazards as Laurus shall
specify in amounts and under policies by insurers acceptable to Laurus and all
premiums thereon shall be paid by such Assignor and the policies delivered to
Laurus.  If any such Assignor fails to do
so, Laurus may procure such insurance and the cost thereof shall be promptly
reimbursed by the Assignors, jointly and severally, and shall constitute
Obligations;

 

(i)                                     it
will at all reasonable times allow Laurus or Laurus’ representatives free
access to and the right of inspection of the Collateral;

 

(j)                                     such
Assignor (jointly and severally with each other Assignor) hereby indemnifies
and saves Laurus harmless from all loss, costs, damage, liability and/or
expense, including reasonable attorneys’ fees, that Laurus may sustain or incur
to enforce payment, performance or fulfillment of any of the Obligations and/or
in the enforcement of this Master Security Agreement or in the prosecution or
defense of any action or proceeding either against Laurus or any Assignor
concerning any matter growing out of or in connection with this Master Security
Agreement, and/or any of the Obligations and/or any of the Collateral except to
the extent caused by Laurus’ own gross negligence or willful misconduct (as
determined by a court of competent jurisdiction in a final and nonappealable
decision).

 

3

 

4.                                       The
occurrence of any of the following events or conditions shall constitute an
“Event of Default” under this Master Security Agreement:

 

(a)                                  any
covenant or any other term or condition of this Master Security Agreement is
breached in any material respect and such breach, to the extent subject to
cure, shall continue without remedy for a period of fifteen (15) days after the
occurrence thereof;

 

(b)                                 any
representation or warranty, or statement made or furnished to Laurus under this
Master Security Agreement by any Assignor or on any Assignor’s behalf should
prove to any time be false or misleading in any material respect on the date as
of which made or deemed made;

 

(c)                                  the
loss, theft, substantial damage, destruction, sale or encumbrance to or of any
of the Collateral or the making of any levy, seizure or attachment thereof or
thereon except to the extent:

 

(i)                                     such
loss is covered by insurance proceeds which are used to replace the item or
repay Laurus; or

 

(ii)                                  said
levy, seizure or attachment does not secure indebtedness in excess of $100,000
in the aggregate for all Assignors and such levy, seizure or attachment has
been removed or otherwise released within ten (10) days of the creation or
the assertion thereof;

 

(d)                                 an
Event of Default shall have occurred under and as defined in any Document.

 

5.                                       Upon
the occurrence of any Event of Default and at any time thereafter, Laurus may
declare all Obligations immediately due and payable and Laurus shall have the
remedies of a secured party provided in the Uniform Commercial Code as in
effect in the State of New York, this Agreement and other applicable law.  Upon the occurrence of any Event of Default
and at any time thereafter, Laurus will have the right to take possession of
the Collateral and to maintain such possession on any Assignor’s premises or to
remove the Collateral or any part thereof to such other premises as Laurus may
desire.  Upon Laurus’ request, each
Assignor shall assemble or cause the Collateral to be assembled and make it
available to Laurus at a place designated by Laurus.  If any notification of intended disposition
of any Collateral is required by law, such notification, if mailed, shall be
deemed properly and reasonably given if mailed at least ten (10) days
before such disposition, postage prepaid, addressed to the applicable Assignor
either at such Assignor’s address shown herein or at any address appearing on
Laurus’ records for such Assignor.  Any
proceeds of any disposition of any of the Collateral shall be applied by Laurus
to the payment of all expenses in connection with the sale of the Collateral,
including reasonable attorneys’ fees and other legal expenses and disbursements
and the reasonable expenses of retaking, holding, preparing for sale, selling,
and the like, and any balance of such proceeds may be applied by Laurus toward
the payment of the Obligations in such order of application as Laurus may
elect, and each Assignor shall be liable for any deficiency.  For the avoidance of doubt, following the
occurrence and during the continuance of an Event of Default, Laurus shall have
the immediate right to withdraw any and all monies contained in any deposit
account in the name of any Assignor and controlled by Laurus and apply same to
the repayment of the Obligations (in such order of application as Laurus may
elect).

 

4

 

6.                                       If
any Assignor defaults in the performance or fulfillment of any of the terms,
conditions, promises, covenants, provisions or warranties on such Assignor’s
part to be performed or fulfilled under or pursuant to this Master Security
Agreement, Laurus may, at its option without waiving its right to enforce this
Master Security Agreement according to its terms, immediately or at any time
thereafter and without notice to any Assignor, perform or fulfill the same or
cause the performance or fulfillment of the same for each Assignor’s joint and
several account and at each Assignor’s joint and several cost and expense, and
the cost and expense thereof (including reasonable attorneys’ fees) shall be
added to the Obligations and shall be payable on demand with interest thereon
at the highest rate permitted by law, or, at Laurus’ option, debited by Laurus
from any other deposit accounts in the name of any Assignor and controlled by
Laurus.

 

7.                                       With
effect solely upon the occurrence and during the continuance of an Event of
Default beyond any applicable grace period, each Assignor appoints Laurus, any
of Laurus’ officers, employees or any other person or entity whom Laurus may
designate as such Assignor’s attorney, with power to execute such documents in
each such Assignor’s behalf and to supply any omitted information and correct
patent errors in any documents executed by any Assignor or on any Assignor’s
behalf; to file financing statements against such Assignor covering the
Collateral (and, in connection with the filing of any such financing
statements, describe the Collateral as “all assets and all personal property,
whether now owned and/or hereafter acquired” (or any substantially similar
variation thereof)); to sign such Assignor’s name on public records; and to do
all other things Laurus deem necessary to carry out this Master Security
Agreement.  Each Assignor hereby ratifies
and approves all acts of the attorney and neither Laurus nor the attorney will
be liable for any acts of commission or omission, nor for any error of judgment
or mistake of fact or law other than gross negligence or willful misconduct (as
determined by a court of competent jurisdiction in a final and non-appealable
decision).  This power being coupled with
an interest, is irrevocable so long as any Obligations remains unpaid.

 

8.                                       No
delay or failure on Laurus’ part in exercising any right, privilege or option
hereunder shall operate as a waiver of such or of any other right, privilege,
remedy or option, and no waiver whatever shall be valid unless in writing,
signed by Laurus and then only to the extent therein set forth, and no waiver
by Laurus of any default shall operate as a waiver of any other default or of
the same default on a future occasion. 
Laurus’ books and records containing entries with respect to the
Obligations shall be admissible in evidence in any action or proceeding, shall
be binding upon each Assignor for the purpose of establishing the items therein
set forth and shall constitute prima facie proof thereof, absent manifest
error.  Laurus shall have the right to
enforce any one or more of the remedies available to Laurus, successively,
alternately or concurrently.  Each Assignor
agrees to join with Laurus in executing such documents or other instruments to
the extent required by the Uniform Commercial Code in form satisfactory to
Laurus and in executing such other documents or instruments as may be required
or deemed necessary by Laurus for purposes of affecting or continuing Laurus’
security interest in the Collateral.

 

9.                                       THIS
MASTER SECURITY AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE
AND PERFORMED IN SUCH

 

5

 

STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.  All of the rights, remedies, options,
privileges and elections given to Laurus hereunder shall inure to the benefit of
Laurus’ successors and assigns.  The term
“Laurus” as herein used shall include Laurus, any parent of Laurus’, any of
Laurus’ subsidiaries and any co-subsidiaries of Laurus’ parent, whether now
existing or hereafter created or acquired, and all of the terms, conditions,
promises, covenants, provisions and warranties of this Agreement shall inure to
the benefit of each of the foregoing, and shall bind the representatives,
successors and assigns of each Assignor.

 

10.                                 Each
Assignor hereby consents and agrees that the state of federal courts located in
the County of New York, State of New York shall have exclusive jurisdiction to
hear and determine any claims or disputes between Assignor, on the one hand,
and Laurus, on the other hand, pertaining to this Master Security Agreement or
to any matter arising out of or related to this Master Security Agreement,
provided, that Laurus and each Assignor acknowledges that any appeals from
those courts may have to be heard by a court located outside of the County of New
York, State of New York, and further provided, that nothing in this Master
Security Agreement shall be deemed or operate to preclude Laurus from bringing
suit or taking other legal action in any other jurisdiction to collect, the
Obligations, to realize on the Collateral or any other security for the
Obligations, or to enforce a judgment or other court order in favor of
Laurus.  Each Assignor expressly submits
and consents in advance to such jurisdiction in any action or suit commenced in
any such court, and each Assignor hereby waives any objection which it may have
based upon lack of personal jurisdiction, improper venue or forum  non
conveniens.  Each Assignor hereby
waives personal service of the summons, complaint and other process issues in
any such action or suit and agrees that service of such summons, complaint and
other process may be made by registered or certified mail addressed to such
assignor at the address set forth on the signature lines hereto and that
service so made shall be deemed completed upon the earlier of such Assignor’s
actual receipt thereof or three (3) days after deposit in the U.S. mails,
proper postage prepaid.

 

The parties desire that their disputes be resolved by
a judge applying such applicable laws. 
Therefore, to achieve the best combination of the benefits of the
judicial system and of arbitration, the parties hereto waive all rights to
trial by jury in any action, suite, or proceeding brought to resolve any
dispute, whether arising in contract, tort, or otherwise between Laurus, and/or
any Assignor arising out of, connected with, related or incidental to the
relationship established between them in connection with this Master Security
Agreement or the transactions related hereto.

 

11.                                 It
is understood and agreed that any person or entity that desires to become an
Assignor hereunder, or is required to execute a counterpart of this Master
Security Agreement after the date hereof pursuant to the requirements of any
Document, shall become an Assignor hereunder by (x) executing a Joinder
Agreement in form and substance satisfactory to Laurus, (y) delivering
supplements to such exhibits and annexes to such Documents as Laurus shall
reasonably request and (z) taking all actions as specified in this Master
Security Agreement as would have been taken by such Assignor had it been an
original party to this Master Security Agreement, in each case with all
documents required above to be delivered to Laurus and with all documents and
actions required above to be taken to the reasonable satisfaction of Laurus.

 

6

 

12.                                 All
notices from Laurus to any Assignor shall be sufficiently given if mailed or
delivered to such Assignor’s address set forth below.

 

	
   

  	
  Very truly
  yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  IMPLANT
  SCIENCES CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
  Address:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  C ACQUISITION CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ACCUREL SYSTEMS

  INTERNATIONAL CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ACKNOWLEDGED:

  
	
   

  	
   

  
	
   

  	
  LAURUS
  MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title

  
								

 

7

 

SCHEDULE A

 

	
  Entity

  	
   

  	
  Jurisdiction of

  Formation

  	
   

  	
  Organization Identification

  Number

  
	
  C Acquisition Corporation

  	
   

  	
  Delaware

  	
   

  	
  201688021

  
	
  Accurel Systems International Corporation

  	
   

  	
  California

  	
   

  	
  770213856

  

 

 

Schedule 3(c)

Term Note with Comerica Bank in the amount of approximately $1.3
million

Line of Credit with Bridge Bank in the amount of $1.5 million

Term note with Accurel Shareholders in the amount of $1.65 million to
be paid with the  proceeds of this
financing

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