Document:

matechexh10_38.htm

    
      
        
 
Exhibit 10.38

     

    CONVERTIBLE
DEBENTURE

     

    THE
SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD IN
RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH
LAWS.  THE SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY
AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH
LAWS PURSUANT TO REGISTRATION OR AN EXEMPTION THEREFROM.  THE
SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING
AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY
OR ADEQUACY OF THE OFFERING MATERIALS.  ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.

     

    
      
        	ISSUANCE
      DATE 	
                July 31,
      2008

              
	CONVERTIBLE
      DEBENTURE DUE	December 31,
      2011
	AMOUNT	US$
      1’000’000.--

      

       

    

    FOR VALUE
RECEIVED, Material Technologies, Inc., a Delaware corporation (the “Company”),
hereby promises to pay KREUZFELD
LTD. or registered assigns (the “Holder”) on December 31, 2011 (the
“Maturity Date”), the original principal amount of  US$ one million
(US$ 1’000’000.--), and to pay interest on the principal amount hereof, in such
amounts, at such times and on such terms and conditions as are specified
herein.

     

    Article 1. Interest

     

    The
Company shall pay interest on the unpaid principal amount and accrued but unpaid
interest of this Convertible Debenture (the “Debenture”) in quarterly payments
of accrued interest, payable on the first day of each quarter, at the rate of
Ten Percent (10%) per annum, payable in arrears, in cash, until the principal
amount hereof is paid in full or has been converted.  Interest shall
accrue from the date of each advance, on the full amount of such
advance.  Notwithstanding the foregoing, the Company shall have the
right to defer payment of interest until the Maturity Date, provided that the
Company shall not defer any interest payments to the extent of positive Earnings
Before Interest, Taxes, Depreciation and Amortization
(“EBITDA”).  Therefore, at the election of the Company, interest may
be paid out of, and only to the extent of, EBITDA, until the Maturity Date, at
which time all principal and accrued but unpaid interest shall be due and
payable.

     

    Article 2. Method
of Payment

     

    The
Company may SWIFT wire the payment of interest to the account designated by the
Holder of this Debenture.  Alternatively, the Company shall have the
right at any time to pay accrued but unpaid interest in shares of the Company’s
Class A Common Stock (“Common Stock”), based on a price equal to fifty percent
(50%) of the average closing price of such Common Stock for the ten trading days
prior to issuance of such Common Stock to the Holder, so long as such shares
are

    
      
         

      

      
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    actually
delivered to the Holder within seven business days of issuance.  In
the event the Company elects to pay any accrued interest by issuance of Common
Stock, then the Company shall notify the Holder in writing not less than ten
(10) business days prior to the issuance of such shares, and the Holder shall
have the right at any time before receipt of delivery of such shares to notify
the Company of the Holder’s desire not to accept payment of interest in the form
of Common Stock.  In such event, the Company shall not have the right
to pay any accrued interest in the form of Common Stock.  In such
event the Company shall have the right to continue to accrue such interest until
the Maturity Date.

     

    The
Company shall have the right at any time to prepay the Debenture in whole or in
part, upon not less than fifteen (15) days prior written notice to the Holders
(a “Prepayment Notice”).  Other than with respect to a prepayment
arising under Section 3.1(b), during the fifteen (15) days following the
Holder’s receipt of such Prepayment Notice, the Holder shall have the right to
convert this Debenture at the then applicable Conversion Price, notwithstanding
any notice provision or conversion limitation set forth in Section 3.1(a), which
shall in such event not apply and be waived.

     

    Article
3.  Conversion

     

    Section
3.1.  Conversion
Privilege

     

    (a)           The
Holder of this Debenture shall have the right, at its option, to convert this
Debenture into shares of Common Stock at any time following the date hereof, and
then only after not less than thirty (30) days prior notice to the
Company.  The number of shares of Common Stock issuable upon the
conversion of this Debenture is determined pursuant to Section 3.2 and rounding
the result to the nearest whole share.  At any time after delivery by
Holder to the Company of a Notice of Intent to Convert, the Company shall not
have the right to pre-pay the balance due on the Debenture, and the Holder shall
convert the Debenture according to the terms herein on the 30th
day following the mailing or transmission of such notice of intent (the “Notice
of Intent Date”).  In the event such notice of intent is mailed or
transmitted within 30 days of the Maturity Date, the Holder shall have the right
to extend the Maturity Date so as to allow conversion of the Debenture 30 days
after the Notice of Intent Date.

     

    (b)           In
the event the Holder of the Debenture elects to convert all or any portion of
the Debenture into Common Stock at any time, and the then applicable Conversion
Price is less than $0.10 per share, then the Company shall have the right, at
any time during the 30 days following the date of the Holder’s Notice of
Conversion, to prepay all or any portion of the Debenture that has been
requested to be converted, and the Company will therefore not be required to
issue shares of Common Stock upon conversion so long as such Debenture is paid
with good, cleared funds prior to the date the Company is required to issue the
Common Stock.  This provision shall be waived in the event the Holder
at any time elects to convert the Debenture at a Conversion Price equal to
$0.10.

     

    (c)           Less
than all of the principal amount of this Debenture may be converted into Common
Stock if the portion converted is $1,000 or a whole multiple of $1,000 and the
provisions of this Article 3 that apply to the conversion of all of the
Debenture shall also apply to the conversion of a portion of it.  This
Debenture may not be converted, whether in whole or in part, except in
accordance with Article 3.

    
      
         

      

      
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    Section
3.2.  Conversion
Procedure.

     

    (a)           Debentures.  Subject
to Section 3.1, after having received not less than thirty (30) days prior
notice of Holder’s intent to purchase (which notice shall not in any event
obligate the Holder to convert any portion of this Debenture), upon the
Company’s receipt of a facsimile or original of Holder’s duly completed and
signed Notice of Conversion (a copy of which is attached hereto as Exhibit A),
the Company shall instruct its transfer agent to issue one or more Certificates
representing that number of shares of Common Stock into which the Debentures are
convertible in accordance with the provisions regarding
conversion.  The Company’s transfer agent or attorney shall act as
Registrar and shall maintain an appropriate ledger containing the necessary
information with respect to each Debenture.

     

    (b)           Conversion
Date.  Such conversion shall be effectuated by surrendering to
the Company, or its attorney, the Debentures (or a copy thereof if the Holder
certifies that the original has been lost or destroyed) to be converted together
with a facsimile or original of the signed Notice of Conversion.  The
date on which the Notice of Conversion is effective (“Conversion Date”) shall be
deemed to be the date on which the Holder has delivered to the Company a
facsimile or original of the signed Notice of Conversion, and so long as the
time limitations set forth in Section 3.1(a) have been satisfied.  The
Company shall deliver to the Holder, or per the Holder’s instructions, the
shares of Common Stock within seven (7) business days of receipt of the
Debentures to be converted.

     

    (c)           Common
Stock to be Issued.  Subject to the time limitations set forth
in Section 3.2(a) above, upon the conversion of any Debentures and upon receipt
by the Company or its attorney of a facsimile or original of Holder’s signed
Notice of Conversion, Company shall instruct Company’s transfer agent to issue
Stock Certificates in the name of Holder (or its nominee) and in such
denominations to be specified at conversion representing the number of shares of
Common Stock issuable upon such conversion, as applicable.

     

    (d)           Rule
144.  If, on the Conversion Date, the Common Stock issuable
upon conversion of this Debenture is eligible to be issued without the
restrictive legend required by Rule 144, the Company will, at its own expense,
provide any and all legal opinions required for the issuance of the Common Stock
without restrictive legends and within five business days.

     

    (e)           Conversion
Rate.  Subject to the time limitations set forth in Section
3.1(a), Holder is entitled to convert this Debenture, plus accrued but unpaid
interest, into Common Stock of the Company at the lesser of (i) 50% of the
averaged ten closing prices for the Company’s Common Stock for the ten (10)
trading days immediately preceding the Conversion Date or (ii) $0.10 (the lesser
of the two being referred to as the “Conversion Price”).  No
fractional shares or scrip representing fractions of shares will be issued on
conversion, but the number of shares issuable shall be rounded up or down, as
the case may be, to the nearest whole share.

     

    (f)           Nothing
contained in this Debenture shall be deemed to establish or require the payment
of interest to the Holder at a rate in excess of the maximum rate permitted by
governing law.  In the event that the rate of interest required to be
paid exceeds the maximum rate permitted by

    
      
         

      

      
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    governing
law, the rate of interest required to be paid thereunder shall be automatically
reduced to the maximum rate permitted under the governing law and such excess
shall be returned with reasonable promptness by the Holder to the
Company.

     

    (g)           It
shall be the Company’s responsibility to take all necessary actions and to bear
all such costs to issue certificates for the Common Stock as provided herein,
including the responsibility and cost for delivery of an opinion letter to the
transfer agent, if so required.  The person in whose name the
certificate of Common Stock is to be registered shall be treated as a
shareholder of record on and after the conversion date. Upon surrender of any
Debentures that are to be converted in part, the Company shall issue to the
Holder new Debentures representing the unconverted amount, if so requested by
Holder.

     

    (h)           Payment
of Taxes.  The Company shall pay all documentary stamp taxes,
if any, attributable to the initial issuance of the Common Stock; provided,
however, that the Company shall not be required to pay any tax or taxes which
may be payable, (i) with respect to any secondary transfer of the Debentures or
the Common Stock issuable upon exercise hereof or (ii) as a result of the
issuance of the Common Stock to any person other than the Holder, and the
Company shall not be required to issue or deliver any certificate for any Common
Stock unless and until the person requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have produced evidence that
such tax has been paid to the appropriate taxing authority.

     

    (i)           Conversion
Default.  If, at any time Holder submits a Notice of Conversion
and the Company does not have sufficient authorized but unissued shares of
Common Stock available to effect, in full, a conversion of the Debentures (a
“Conversion Default”), the Company shall promptly issue so many of its
authorized shares as are then available, and then use its best efforts to take
such action as may be required to increase the authorized shares of the Company
in order to provide for the issuance of all required shares upon
Conversion.

     

    Section
3.3.  Company
to Reserve Stock.  The Company shall reserve the number of
shares of Common Stock required pursuant to and upon the terms set forth in the
Subscription Agreement, to permit the conversion of this
Debenture.  All shares of Common Stock which may be issued upon the
conversion hereof shall upon issuance be validly issued,  fully paid
and non-assessable and free from all taxes, liens and charges with respect to
the issuance thereof.

     

    Section
3.4.  Restrictions
on Transfer.  This Debenture has not been registered under the
Securities Act of 1933, as amended, (the “Act”) and is being issued under
Section 4(2) of the Act and Rule 506 of Regulation D promulgated under the
Act.  This Debenture and the Common Stock issuable upon the conversion
thereof may only be offered or sold pursuant to registration under or an
exemption from the Act.  In the event the Company shall file a
registration statement with the Securities and Exchange Commission, on any form
other than a Form S-8, then the Company shall register the shares issuable upon
conversion of this Debenture, as well as any other shares requested to be
registered by the Holder.

     

    Section
3.5.  Mergers,
Etc.  If the Company merges or consolidates with another
corporation or sells or transfers all or substantially all of its assets to
another person and the holders of the Common Stock are entitled to receive
stock, securities or property in respect of or in exchange
for

    
      
         

      

      
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    Common
Stock, then as a condition of such merger, consolidation, sale or transfer, the
Company and any such successor, purchaser or transferee shall amend this
Debenture to provide that it may thereafter be converted on the terms and
subject to the conditions set forth above into the kind and amount of stock,
securities or property receivable upon such merger, consolidation, sale or
transfer by a holder of the number of shares of Common Stock into which this
Debenture might have been converted immediately before such merger,
consolidation, sale or transfer, subject to adjustments which shall be as nearly
equivalent as may be practicable to adjustments provided for in this Article
3.

     

    Article
4.  Mergers

     

    Any reference herein to
the Company shall refer to such surviving or transferee corporation and the
obligations of the Company shall terminate upon such written
assumption.

     

    Article
5.  Reports

     

    The Company will mail to
the Holder hereof at its address as shown on the Register a copy of any annual,
quarterly or other report or proxy statement that it gives to its shareholders
generally at the time such report or statement is sent to shareholders, unless
such report is timely filed with the United States Securities and Exchange
Commission.

     

    Article
6.  Defaults
and Remedies

     

    Section
6.1.  Events
of Default.  An “Event of Default” occurs if (a) the Company
does not make the payment of the principal of this Debenture when the same
becomes due and payable at maturity, upon redemption or otherwise, (b) the
Company does not make a payment, other than a payment of principal, for a period
of five (5) business days after its due date, (c) any of the Company’s
representations or warranties contained in this Debenture were false when made
or the Company fails to comply with any of its other agreements in this
Debenture and such failure continues for the period and after the notice
specified below, (d) the Company shall violate or breach any of the covenants
contained in this Agreement, or (e) the Company pursuant to or within the
meaning of any Bankruptcy Law (as hereinafter defined):  (i) commences
a voluntary petition under Bankruptcy Law; (ii) consents to the entry of an
order for relief against it in an involuntary bankruptcy petition; (iii)
consents to the appointment of a Custodian (as hereinafter defined) of it or for
all or substantially all of its property or (iv) makes a general assignment for
the benefit of its creditors or (v) a court of competent jurisdiction enters an
order or decree under any Bankruptcy Law that:  (A) is for relief
against the Company in an involuntary bankruptcy petition; (B) appoints a
Custodian of the Company or for all or substantially all of its property or (C)
orders the liquidation of the Company, and the order or decree remains unstayed
and in effect for 60 days.  As used in this Section 6.1, the term
“Bankruptcy Law” means Title 11 of the United States Code or any similar federal
or state law for the relief of debtors.  The term “Custodian” means
any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.

     

    Section
6.2.  Acceleration.  If
an Event of Default occurs and is continuing, the Holder hereof by notice to the
Company, may declare the remaining principal amount of this Debenture, together
with all accrued interest, to be due and payable.  Upon such
declaration, the remaining principal amount as well as any accrued but unpaid
interest shall be due and payable immediately.

    
      
         

      

      
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    Section
6.3.  Covenants.  The
Company hereby agrees to comply with each of the following covenants, the breach
or violation of which shall be deemed an Event of Default
hereunder.  Without the prior written consent of the Holders of at
least a majority of the outstanding Debentures:

     

    
      a.            
The
Company shall not increase the compensation paid or payable to any of its
officers or directors by more than five percent (5%) in any one calendar
year;

       

      b.           
The
Company shall at all times comply in all respects with the reporting
requirements of the Securities and Exchange Act of 1934, as amended (the
“Exchange Act”), and shall take such action as is required from time to time to
continue and maintain the eligibility of the Company’s stockholders to transfer
securities without registration under the exemption provided by Rule 144
promulgated under the Act.

    

     

    Article
7.  Record
Ownership

     

    Section
7.1.  Record
Ownership.  The Company, or its attorney, shall maintain a
register of the holders of the Debentures (the “Register”) showing their names
and addresses and the serial numbers and principal amounts of Debentures issued
to or transferred of record by them from time to time.  The Register
may be maintained in electronic, magnetic or other computerized
form.  The Company may treat the person named as the Holder of this
Debenture in the Register as the sole owner of this Debenture.  The
Holder of this Debenture is the person exclusively entitled to receive payments
of interest on this Debenture, receive notifications with respect to this
Debenture, convert it into Common Stock and otherwise exercise all of the rights
and powers as the absolute owner hereof.

     

    Section
7.2.  Registration
of Transfer.  Transfers of this Debenture may be registered on
the books of the Company maintained for such purpose pursuant to Section 7.2
above (i.e., the Register).  Transfers shall be registered when this
Debenture is presented to the Company with a request to register the transfer
hereof and the Debenture is duly endorsed by the appropriate person, reasonable
assurances are given that the endorsements are genuine and effective, and the
Company has received evidence satisfactory to it that such transfer is rightful
and in compliance with all applicable laws, including tax laws and state and
federal securities laws.  When this Debenture is presented for
transfer and duly transferred hereunder, it shall be canceled and a new
Debenture showing the name of the transferee as the record holder thereof shall
be issued in lieu hereof.  When this Debenture is presented to the
Company with a reasonable request to exchange it for an equal principal amount
of Debentures of other denominations, the Company shall make such exchange and
shall cancel this Debenture and issue in lieu thereof Debentures having a total
principal amount equal to this Debenture in such denominations as agreed to by
the Company and Holder.

     

    Section
7.3.  Lost
Debentures.  If this Debenture becomes defaced or mutilated but
is still substantially intact and recognizable, the Company or its agent may
issue a new Debenture in lieu hereof upon its surrender.  Where the
Holder of this Debenture claims that the Debenture has been lost, destroyed or
wrongfully taken, the Company shall issue a new Debenture in place of the
original Debenture if the Holder so requests by written notice to the Company
actually received by the Company before it is notified that the Debenture has
been acquired by a bona fide purchaser and the Holder has delivered to the
Company an indemnity bond in such amount and issued by such surety
as

    
      
         

      

      
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    the
Company deems satisfactory together with an affidavit of the Holder setting
forth the facts concerning such loss, destruction or wrongful taking and such
other information in such form with such proof or verification as the Company
may request.

     

    Sectin
7.4.  Indemnification
for Transfers.  In the event any Holder transfers all or any
portion of the Debenture, the Holder hereby assumes liability for, and hereby
agree to pay, protect, defend (at trial and appellate levels and with attorneys,
consultants and experts reasonably acceptable to Company), and save Company
harmless from and against, and hereby indemnify Company from and against any and
all liens, damages, (including, without limitation, punitive or exemplary
damages) losses, liabilities, obligations, settlement payments, penalties,
fines, assessments, citations, directives, claims, litigation, demands,
defenses, judgments, suits, proceedings, costs, disbursements and expenses of
any kind or of any nature whatsoever (including, without limitation, reasonable
attorneys’, consultants’ and experts’ fees and disbursements actually incurred
in investigating, defending, settling or prosecuting any claim, litigation or
proceeding) (collectively “Costs”)
which may at any time be imposed upon, incurred by or asserted or awarded
against Company, and arising and proximately caused directly from or out of the
subsequent transfer, conveyance or other disposition of the any warrant, Common
Stock or debenture of the Company which results in a violation of, or otherwise
disqualifies the issuance of the such security from any federal and state
exemptions from registration which the Company relied on in issuing the such
security.

     

    Article
8.  Dilution.

     

    The number of shares of
Common Stock issuable upon conversion of the Debentures shall be
dilutive.  The Company’s executive officers and directors have studied
and fully understand the nature of the transactions contemplated by this
Debenture and recognize that the Debenture, if excercised will have a dilutive
effect on existing shareholders.  The board of directors of the
Company has concluded, in its good faith business judgment, that such issuance
is in the best interests of the Company.  The Company specifically
acknowledges that its obligation to issue additional shares of Common Stock is
binding upon the Company and enforceable regardless of the dilution such
issuance may have on the ownership interests of other shareholders of the
Company.

     

    Article
9.  Notices

     

    Any notice which is
required or convenient under the terms of this Debenture shall be duly given if
it is in writing and delivered in person or mailed by first class mail, postage
prepaid and directed to the Holder of the Debenture at its address as it appears
on the Register or if to the Company to its principal executive offices. The
time when such notice is sent shall be the time of the giving of the
notice.

     

    Article
10.  Time

     

    Where this Debenture
authorizes or requires the payment of money or the performance of a condition or
obligation on a Saturday or Sunday or a public holiday, or authorizes or
requires the payment of money or the performance of a condition or obligation
within, before or after a period of time computed from a certain date, and such
period of time ends on a Saturday or a Sunday or a public holiday, such payment
may be made or condition or obligation performed on the
next

    
      
         

      

      
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    succeeding
business day, and if the period ends at a specified hour, such payment may be
made or condition performed, at or before the same hour of such next succeeding
business day, with the same force and effect as if made or performed in
accordance with the terms of this Debenture.  A “business day” shall
mean a day on which the banks in California are not required or allowed to be
closed.

     

    Article
11.  Waivers

     

    The holders of a majority
in principal amount of the Debentures may waive a default or rescind the
declaration of an Event of Default and its consequences except for a default in
the payment of principal or conversion into Common Stock.

     

    Article
12.  Rules
of Construction

     

    In this Debenture, unless
the context otherwise requires, words in the singular number include the plural,
and in the plural include the singular, and words of the masculine gender
include the feminine and the neuter, and when the sense so indicates, words of
the neuter gender may refer to any gender.  The numbers and titles of
sections contained in the Debenture are inserted for convenience of reference
only, and they neither form a part of this Debenture nor are they to be used in
the construction or interpretation hereof.  Wherever, in this
Debenture, a determination of the Company is required or allowed, such
determination shall be made by a majority of the Board of Directors of the
Company and if it is made in good faith, it shall be conclusive and binding upon
the Company and the Holder of this Debenture.

     

    Article
13.  Governing
Law

     

    The validity, terms,
performance and enforcement of this Debenture shall be governed and construed by
the provisions hereof and in accordance with the laws of the State of California
applicable to agreements that are negotiated, executed, delivered and performed
solely in the State of California.  The prevailing party in any
dispute arising hereunder shall be entitled to recover all of its reasonable
attorney’s fees and costs of defense, prosecution or
litigation.

     

    Article 14.  Litigation

     

     (a)           Forum
Selection and Consent to Jurisdiction.  Any litigation based
thereon, or arising out of, under, or in connection with, this agreement or any
course of conduct, course of dealing, statements (whether oral or written) or
actions of the Company or Holder shall be brought and maintained exclusively in
the state or federal courts of the State of California, city of Los
Angeles.  The Company hereby expressly and irrevocably submits to the
jurisdiction of the state and federal courts of the State of California, city of
Los Angeles, for the purpose of any such litigation as set forth above and
irrevocably agrees to be bound by any final judgment rendered thereby in
connection with such litigation.  The Company further irrevocably
consents to the service of process by registered mail, postage prepaid, or by
personal service within or without the State of California.  The
Company hereby expressly and irrevocably waives, to the fullest extent permitted
by law, any objection which it may have or hereafter may have to the laying of
venue of any such litigation brought in any such court referred to above and any
claim that any such litigation has been brought in any inconvenient
forum.  To the extent that the Company has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal process (whether
through service or notice,

    
      
         

      

      
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    attachment
prior to judgment, attachment in aid of execution or otherwise) with respect to
itself or its property, the Company hereby irrevocably waives such immunity in
respect of its obligations under this agreement and the other loan
documents.

     

     (b)           Waiver
of Jury Trial.  The Holder and the Company hereby knowingly,
voluntarily and intentionally waive any rights they may have to a trial by jury
in respect of any litigation based hereon, or arising out of, under, or in
connection with, this agreement, or any course of conduct, course of dealing,
statements (whether oral or written) or actions of the Holder or the
Company.  The Company acknowledges and agrees that it has received
full and sufficient consideration for this provision and that this provision is
a material inducement for the Holder entering into this agreement.

     

     (c)           Submission
To Jurisdiction.  Any legal action or proceeding in connection
with this Debenture or the performance hereof must be brought in the federal
courts located in the State of California and the parties hereby irrevocably
submit to the exclusive jurisdiction of such courts for the purpose of any such
action or proceeding.

     

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

     

    
      	
              

                

                  MATERIAL
      TECHNOLOGIES, INC.

                  a
      Delaware corporation

                   
By:
      /s/ Robert Bernstein
Robert
      Bernstein

              Chairman
      and CEO

            	
              

                KREUZFELD
      LTD.

                a
      Swiss corporation

                 

                By:____________________
      

                  
                  

                  Markus
      Winkler

                

              

              sole
      officer

            

    

                                                                                                 

     

     

    [Signature
Page to Convertible Debenture]

     

     

     

    
 

    
      
         

      

      
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    Exhibit
A

     

    NOTICE
OF CONVERSION

     

    (To be
Executed by the Registered Holder upon Conversion.)

     

    The
undersigned hereby irrevocably elects, as of ______________, 200 
to convert $_________________ of the Debentures into Shares of Common Stock (the
“Shares”) of Material Technologies, Inc., a Delaware corporation (the
“Company”).

     

    Date of
Conversion_________________________________________

     

    Applicable
Conversion Price_________________________________

     

    Number of
Shares Issuable upon this conversion______________

     

    Signature___________________________________________________

    [Name]

    Address_____________________________________________________

     

    ____________________________________________________________

     

    Phone______________________   Fax___________________________

     

     

     

     

    
 

    
      
         

      

      
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    Assignment
of Debenture

     

    The
undersigned hereby sell(s) and assign(s) and transfer(s) unto

     

     

    (name,
address and SSN or EIN of assignee)

     

    Dollars
($                                )      
           

    (principal
amount of Debenture, $1,000 or integral multiples of $1,000)

     

    of
principal amount of this Debenture together with all accrued and unpaid interest
hereon.

     

    Date:                                  Signed:                                                                                    
  

                                                                        
(Signature
must conform in all

                                                                         respects
to name of Holder shown

                                                                         of
face of Debenture)

     

     

     

     

     

    
 

    
      
         

      

      
        11matechexh10_39.htm

    
      
        
 
Exhibit 10.39

     

    SECURITY
AGREEMENT

     

    SECURITY
AGREEMENT dated as of July 31, 2008, by and between Material Technologies, Inc.,
a Delaware corporation (the “Borrower”,
sometimes referred to herein as the “Grantor”),
and KREUZFELD LTD. (“Lender”), in connection with that certain Secured
Convertible Debenture, dated as of the date hereof (the “Debenture” or the
“Loans”). Capitalized terms not otherwise defined herein shall have the meaning
set forth in that certain Secured Convertible Debenture dated as of the same
date hereof.

     

    The
parties acknowledge the following facts and circumstances:

     

    The
Lender has agreed to extend the Loans to the Borrower pursuant to, and subject
to the terms and conditions of, certain agreements, including this Security
Agreement, the Debenture, and such other agreements and documents as may relate
to any present or future loans, as all such agreements may be amended, modified
or supplemented from time to time, and any consulting agreement or other
agreement between the parties (the “Loan Documents”).  The obligation
of the Lender to extend such Loans is and was conditioned on the execution and
delivery by the Grantor of a security agreement in a form consistent herewith to
secure the Obligations.

     

    Accordingly,
the Grantor and the Lender hereby agree as follows:

     

    1)            
Definitions
of Terms Used Herein. As used herein, the following terms shall have the
following meanings:

     

    a)           
“Accounts
Receivable” means (i) all of the Grantor’s present and future accounts,
general intangibles, chattel paper and instruments, as such terms are defined in
the Uniform Commercial Code, (ii) all moneys, securities and other property and
the proceeds thereof, now or hereafter held or received by, or in transit to,
the Lender from or for the Grantor, whether for safekeeping, pledge, custody,
transmission, collection or otherwise, and all of the deposits (general or
special) of the Grantor, balances, sums and credits with, and all of the
Grantor’s claims against the Lender at any time existing, (iii) all of the
Grantor’s right, title and interest, and all of the Grantor’s rights, remedies,
security and Liens, in, to and in respect of any accounts receivable, including,
without limitation, rights of stoppage in transit, replevin, repossession and
reclamation and other rights and remedies of an unpaid vendor, lienor or secured
party, guaranties or other contracts of suretyship with respect to accounts
receivable, deposits or other security for the obligation of any account debtor,
and credit and other insurance, (iv) all of the Grantor’s right, title and
interest in, to and in respect of all goods relating to, or which by sale have
resulted in, accounts receivable, including, without limitation, all goods
described in invoices or other documents or instruments with respect to, or
otherwise representing or evidencing, any account receivable, and all returned,
reclaimed or repossessed goods, (v) any other right to payment for goods sold,
leased or licensed or for services rendered, whether or not it has been earned
by performance, whether billed or unbilled,

    
      
         

      

      
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    and
whether or not it is evidenced by any Contract, (vi) any note receivable,
and (vii) any other receivable or right to payment of any
nature.

     

    b)          
 “Borrower
Companies” means the Borrower, and all subsidiaries of the Borrower or
any of its subsidiaries.

     

    c)          
 “Cash”
means any cash on hand, cash in bank or other accounts, readily marketable
securities, and other cash-equivalent liquid assets of any nature.

     

    d)         
  “Collateral”
means all (i) Cash, (ii) Accounts Receivable, (iii) Documents, (iv) Equipment,
(v) General Intangibles, (vi) Inventory, (vii) all right, title and interest in
any and all assets, (viii) all Intellectual Property Rights, (viii) all capital
stock of any of the Borrower Companies beneficially owned by such Borrower
Company, and (ix) Proceeds. (See also Exhibit A)

     

    e)           
“Contract”
means any written or oral contract, agreement, instrument, order, arrangement,
commitment or understanding of any nature, including sales orders, purchase
orders, leases, subleases, data processing agreements, maintenance agreements,
license agreements, sublicense agreements, loan agreements, promissory notes,
security agreements, pledge agreements, deeds, mortgages, guaranties,
indemnities, warranties, employment agreements, consulting agreements, sales
representative agreements, joint venture agreements, buy-sell agreements,
options or warrants.

     

    f)          
  “Documents”
means all instruments, files, records, ledger sheets and documents covering or
relating to any of the Collateral.

     

    g)            “Equipment”
means all of the Grantor’s machinery, equipment, vehicles, furniture and
fixtures and all attachments, accessories and equipment now or hereafter owned
or acquired in the Grantor’s business or used in connection therewith, and all
substitutions and replacements thereof, wherever located, whether now owned or
hereafter acquired by the Grantor.

     

    h)      
     “Financial
Obligations” means any debt, liability or obligation of any nature,
whether secured, unsecured, recourse, no recourse, liquidated, unliquidated,
accrued, absolute, fixed, contingent, ascertained, unascertained, known, unknown
or otherwise.

     

    i)           
 “General
Intangibles” means all of the Grantor’s present and future general
intangibles of every kind and description, including (without limitation)
Intellectual Property Rights, patents, patent applications, trade names and
trademarks and the goodwill of the business symbolized thereby, Federal, State
and local tax refund claims of all kinds;
and all contract rights of the Grantor, including, without limitation,
the Contracts.

     

    j)        
   “Intellectual
Property Rights” shall mean all rights and interests (throughout the
universe, in all media, now existing or created in the future, and for the
entire duration of such rights) arising under statutory or common law, contract,
license or otherwise, and whether or not perfected, including, without
limitation all: (i) copyrights, and all registrations, applications for
registration and

    
      
         

      

      
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    licenses
therefore, together with ancillary rights thereto; (ii) trademarks, trade names,
service marks, service names, domain names, published telephone numbers, logos,
slogans and any abbreviations or variations thereto, and all registrations,
applications for registration and licenses therefore, and any attendant goodwill
together with all ancillary rights thereto; (iii) issued or pending patents and
all registrations, applications for registration, reissues, divisions,
continuations, continuations-in-part, renewals and extensions thereof and
licenses therefore, together with all ancillary rights thereto; (iv) trade
secrets and know-how, designs, improvements, formulae, discoveries, inventions,
concepts, ideas, scientific or other technical information and procedures,
legal, financial or business affairs, markets, products, key personnel,
suppliers, customers, prospective customers, policies or operational methods,
plans for future development, other information possessed which is not readily
available to the public, and all copies of the foregoing, regardless of form;
(v) the Software; and (vi) all contracts with government or commercial agencies
and all licenses, permits, filings, authorizations, approvals, or indicia of
authority issued by any government branch, department, commission, board,
bureau, agency or other instrumentality of the United States, any foreign
government or any state of political subdivision thereof.

     

    k)           “Inventory”
means all of the Grantor’s raw materials, work in process, finished goods and
all other inventory (as such term is defined in the Uniform Commercial Code),
whether now owned or hereafter acquired, and all wrapping, packaging,
advertising and shipping materials, and any documents relating
thereto.

     

    l)            
“Obligations”
mean all obligations of Borrower to Lender or any other party under the Loan
Documents, including, without limitation, (a) the due and punctual payment of
the principal of and interest on the Loans, when and as due, whether at
maturity, by acceleration, upon one or more dates set for prepayment or
otherwise and (b) the due and punctual performance of all obligations of the
Grantor at any time and from time to time under any of the Loan
Documents.

     

    m)           “Proceeds”
means any consideration received from the sale, exchange, lease or other
disposition of any asset or property which constitutes Collateral, any other
value received as a consequence of the possession of any Collateral and any
payment received from any insurer or other person or entity as a result of the
destruction, loss, theft or other involuntary conversion of whatever nature of
any asset or property that constitutes Collateral, and shall include, without
limitation, all cash and negotiable instruments received or held by the Lender
pursuant to any lockbox or similar arrangement relating to the payment of
Accounts Receivable.

     

    n)           “Software”
means any computer program, operating system, applications system, firmware or
software of any nature, whether operational, under development or inactive,
including all HTML code, CGI scripts, Java applets, digital content,
programming, documentation, network configurations, a reasonably detailed
description of the process required to build such computer software, any
proprietary tools or files owned that are required to build such computer
software, as well as a description of all tools and files not owned that are
required to build such computer software and any modifications, enhancements,
improvements, updates, upgrades, new releases, revisions, refinements or
revisions thereto, whether in analog, digital, source code, object code, or
other form, in each case to the extent required for or used in the performance
of the business as

    
      
         

      

      
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    conducted
in the past or as currently conducted, object code, source code, databases,
technical manuals, user manuals and other documentation therefore, whether in
machine-readable form, programming language or any other language or symbols,
and whether stored, encoded, recorded or written on disk, tape, film, memory
device, paper or other media of any nature, including, without limitation, all
software used in or with respect to Borrower’s electronic voting
system.

     

    2)            
Security
Interests.  As security for the payment or performance, as the
case may be, of the Obligations, the Grantor hereby creates and grants to the
Lender, its successors and its assigns, a security interest in the Collateral
(the “Security
Interest”).  Without limiting the foregoing, the Lender is
hereby authorized to file one or more financing statements, continuation
statements or other documents for the purpose of perfecting, confirming,
continuing, enforcing or protecting its Security Interest in the Collateral,
naming the Grantor as debtor and the Lender as secured party.  The
Grantor agrees at all times to keep in all material respects accurate and
complete accounting records with respect to the Collateral, including, but not
limited to, a record of all payments and Proceeds received.  Borrower
shall deliver to Lender, for the purpose of perfecting the Security Interest
granted hereby, all capital stock and other securities currently owned by any of
the Borrower Companies, and shall deliver to Lender such documents, and take
such action, as is or may in the future be required to continuously maintain and
perfect the Security Interest granted in this Security Agreement.

     

    3)        
    Except as disclosed in its filings with the Securities
and Exchange Commission, Borrower represents and warrants to Lender as of the
date of this Agreement, and covenants with Lender, as set forth below in each
provision of this Section 3.  Any breach or failure of any of the
representations, warranties and covenants contained in this Agreement, as
supplemented by the Borrower’s filings with the Securities and Exchange
Commission prior to the date hereof, shall be a breach of this Security
Agreement and the Loan Documents.

     

     3.1           Organization.  Each
of the Borrower Companies is a corporation duly organized, validly existing and
in good standing under the Laws of the jurisdiction of its
organization.  Each of the Borrower Companies possesses the full power
and authority to enter into and perform this Agreement.  Each of the
Borrower Companies possesses the full corporate power and authority to own its
Assets and to conduct its business as and where presently conducted. Each of the
Borrower Companies is duly qualified or registered to do business in each
jurisdiction where such qualification or registration is required by applicable
Law.

     

     3.2           Due
Authorization.  The transactions contemplated hereby, as well
as the transactions contemplated in the Security Agreement and the Loan
Documents (the “Transactions”) have been duly authorized by all necessary
corporate actions including actions by the Borrower’s board of directors and
does not constitute a violation of or default under its articles of
incorporation, or bylaws (or similar organizational documents).  The
Borrower’s execution, delivery and performance of this Agreement, and its
consummation of the Transactions, (a) do not constitute a default or breach
(immediately or after the giving of notice, passage of time or both) under any
Contract to which any of the Borrower Companies is a party or by which any of
the Borrower Companies is bound, (b) do not constitute a violation of any
Law or Judgment that is applicable to any of the

    
      
         

      

      
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    Borrower
Companies, or to the business or Assets of any of the Borrower Companies, or to
the Transactions, (c) do not accelerate or otherwise modify any Financial
Obligation of any of the Borrower Companies, (d) do not result in the
creation of any Encumbrance upon, or give to any third party any interest in,
any of the business or Assets, or any of the capital stock of or interests in,
any of the Borrower Companies, and (e) do not require the Consent of any
Person.  This Agreement constitutes the valid and legally binding
agreement of the Borrower enforceable against it in accordance with its terms,
except to the extent that its enforceability may be subject to applicable
bankruptcy, insolvency, reorganization and similar laws affecting the
enforcement of creditors’ rights generally and to general equitable
principles.

     

     3.3           Capital
Stock and Ownership.  All of the issued and outstanding shares
of capital stock of each of the Borrower Companies have been duly authorized and
validly issued, and are fully paid and non-assessable, with no liability or
preemptive rights attaching to the ownership thereof.  All issuances
and grants of all outstanding options, warrants and all offerings, sales and
issuances by each of the Borrower Companies of any shares or other equity
interests were conducted in compliance with all applicable federal and state
securities Laws and all applicable state corporation
Laws.  .

     

     3.4           Financial
and Corporate Records.  The books and records of each of the
Borrower Companies are and have been properly prepared and maintained in form
and substance adequate for preparing audited financial statements in accordance
with GAAP, and such books and records fairly and accurately reflect in all
material respects the financial condition and all of the Assets and Financial
Obligations of each of the Borrower Companies and all Contracts and other
transactions to which each of the Borrower Companies is or was a party or by
which each of the Borrower Companies or the business or Assets of each of the
Borrower Companies is or was affected.  All of the Company’s filings
with the Securities and Exchange Commission are true, complete and correct, were
prepared in accordance with GAAP, are in full compliance with all applicable
laws, and do not contain any untrue statement of material fact, or omit to state
any material fact that is necessary to make the statements made, in light of the
circumstances under which they are made, not false or misleading in any
respect.

     

     3.5           Compliance
with Law.  The operations of each of the Borrower Companies,
the conduct of the business of each of the Borrower Companies, as and where such
business has been or presently is conducted, and the ownership, possession and
use of the Assets of each of the Borrower Companies have complied and currently
do comply in all material respects with all applicable Laws.

     

     3.6           Assets.  Each
of the Borrower Companies has good and valid title to all of its respective
Assets which are owned by it and has the right to transfer all rights, title and
interest in such Assets, free and clear of any Encumbrance.

     

     3.7           Software
and Other Intangibles.  Except for shrinkwrap and other
commercially available Software, each of the Borrower Companies has good and
valid title to, and has the full right to use, all of the Software and General
Intangibles, free and clear of any Encumbrance (except for use restrictions
contained in licensed commercially available Software).  All
shrinkwrap and other commercially available Software has been properly licensed
and all related fees paid.  With respect to the Software, (a) the
Borrower Companies maintain machine-readable master-reproducible copies, source
code listings,

    
      
         

      

      
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    technical
documentation and user manuals for the most current releases or versions thereof
and for all earlier releases or versions thereof currently being supported by
them; (b) in each case, the machine-readable copy substantially conforms to
the corresponding source code listing; (c) it is written for use on
standard operating systems; (d) it can be maintained and modified by
reasonably competent programmers familiar with such language, hardware and
operating systems or other Persons with whom the Borrower presently has service
and maintenance agreements; and (e) in each case, it operates in accordance
with the user manual therefore without material operating
defects.  None of the Software or General Intangibles, or their
respective past or current uses, including the preparation, distribution,
marketing or licensing, has violated or infringed upon, or is violating or
infringing upon, any Software, technology, patent, copyright, trade secret or
other Intangible of any Person.  To the knowledge of the Borrower, no
Person is violating or infringing upon, or has violated or infringed upon at any
time, any of the Software or General Intangibles.  None of the
Software or General Intangibles is owned by or registered in the name of any
current or former owner, shareholder, partner, director, executive, officer,
employee, salesman, agent, customer, representative or contractor of any of the
Borrower Companies nor does any such Person have any interest therein or right
thereto, including the right to royalty payments.  Notwithstanding the
foregoing, the Company is obligated to pay royalty payments equal to not more
than 12% of sales on the Company’s “Fatigue Fuse” product, and a royalty of
approximately 10% of sales of the Company’s Fatigue Sensor product.

     

     3.8           Related
Party Transactions.  Except as fully disclosed in the Company’s
filings with the Securities and Exchange Commission, there are no current real
estate leases, personal property leases, loans, Contracts, transactions,
understandings or other arrangements of any nature between or among any of the
Borrower Companies and any current or former partner, owner, ten percent
shareholder, director, officer or controlling Person of any of the Borrower
Companies (or any of their respective predecessors).

     

     3.9           Full
Disclosure.  No representation or warranty made by the Borrower
in this Agreement or pursuant hereto (a) contains any untrue statement of
material fact; or (b) omits to state any material fact that is necessary to
make the statements made, in light of the circumstances under which they are
made, not false or misleading in any respect.  There is no fact known
to the Borrower or any of its subsidiaries, that has not been disclosed to
Lender in writing, that was or is or, so far as either the Borrower or any of
its subsidiaries can reasonably foresee, will have a material adverse effect on
any of the Borrower Companies, the business, the Assets or financial condition
of any of the Borrower Companies or the ability of the Borrower to perform its
obligations under this Agreement.

     

     3.10           Compliance.  The
Borrower shall comply with all federal and state securities laws, and file all
reports and disclosures required thereby in timely manner.

     

    4)           
 Further
Assurances.  The Grantor agrees, at its expense, to execute,
acknowledge, deliver and cause to be duly filed all such further instruments and
documents and take all such actions as the Lender may from time to time
reasonably request for the assuring and preserving of the Security Interest and
the rights and remedies created hereby, including, without limitation, the
payment of any fees and taxes required in connection with the execution and
delivery of this Agreement, the granting of the Security Interest and the filing
of any financing statements or other documents in connection

    
      
         

      

      
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    herewith.  If
any amount payable under or in connection with any of the Collateral shall be or
become evidenced by any promissory note or other instrument, such note or
instrument shall be promptly pledged and delivered to the Lender, duly endorsed
in a manner satisfactory to the Lender.  The Grantor agrees to notify
promptly the Lender of any change in its corporate name or in the location of
its chief executive office, its chief place of business or the office where it
keeps its records relating to the Accounts Receivable owned by it and the
location of any Equipment.  The Grantor agrees promptly to notify the
Lender if any material portion of the Collateral is damaged or
destroyed.

     

    5)          
  Inspection
and Verification.  The Lender and such persons as the Lender
may designate shall have the right, at any reasonable time or times during the
Grantor’s usual business hours, and upon reasonable notice (which may be
telephonic), to inspect the Collateral owned by the Grantor, all records related
thereto (and to make extracts and copies from such records), and the premises
upon which any such Collateral is located, to discuss the Grantor’s affairs with
the officers of the Grantor and its independent accountants and to verify under
reasonable procedures the validity, amount, quality, quantity, value, and
condition of or any other matter relating to, such Collateral, including, in the
case of Accounts Receivable or Collateral in the possession of a third person,
contacting account debtors and upon the occurrence of an Event of Default or a
third person possessing such Collateral for the purpose of making such a
verification.

     

    6)          
  Taxes;
Encumbrances.  At its option, the Lender may discharge past due
taxes, liens, security interests or other encumbrances at any time levied or
placed on the Collateral and not permitted under the Loan Documents, and may pay
for the maintenance and preservation of the Collateral to the extent a Grantor
fails to do so as required by the Loan Documents, and the Grantor agrees to
reimburse the Lender on demand for any payment made or any expense incurred by
it pursuant to the foregoing authorization; provided,
however,
that nothing in this Section 6 shall be interpreted as excusing the Grantor from
the performance of any covenants or other promises with respect to taxes, liens,
Security Interests or other encumbrances and maintenance as set forth herein or
in the Loan Documents.

     

    7)        
    Representations
and Warranties.  The Grantor represents and warrants to the
Lender that:

     

    a)           
 Title
and Authority.  It has (i) rights, interest in and to the
Collateral in which it is granting a security interest hereunder and (ii) the
requisite power and authority to grant to the Lender the Security Interest in
such Collateral pursuant hereto and to execute, deliver and perform its
obligations in accordance with the terms of this Agreement, without the consent
or approval of any other person other than any consent or approval which has
been obtained.

     

    b)       
     Filing.  Fully
executed Uniform Commercial Code financing statements and other such documents
as may be necessary containing a description of the Collateral shall have been,
or shall be delivered to the Lender in a form such that they can be, filed of
record in every governmental, municipal or other office in every jurisdiction in
which any portion of the Collateral is located necessary to publish notice of
and protect the validity of and to establish a valid, legal and perfected
security interest in favor of the Lender in respect of the Collateral in which a
security

    
      
         

      

      
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    interest
may be perfected by filing in the United States and its territories and
possessions, and no further or subsequent filing, refiling, recording,
rerecording, registration or reregistration is necessary in any such
jurisdiction, except as provided under applicable law with respect to the filing
of Uniform Commercial Code continuation statements.

     

    c)            
Validity
of Security Interest.  The Security Interest constitutes a
valid, legal and perfected security interest in all of the Collateral for
payment and performance of the Obligations.

     

    d)            
Information
Regarding Names.  It has disclosed in writing to the Lender any
trade names used to identify it in its business or in the ownership of its
properties.

     

    e)          
  Survival
of Representations and Warranties.  All representations and
warranties of the Grantor contained in this Agreement shall survive the
execution, delivery and performance of this Agreement until the termination of
this Agreement.

     

    8)            
Records
of Accounts Receivable.  The Grantor shall keep or cause to be
kept records of its Accounts Receivable which are accurate in all material
respects.  In addition, the Grantor will provide the Lender with such
further schedules and/or information respecting each Account Receivable as the
Lender may reasonably require.

     

    9)            
Protection
of Security.  The Grantor shall, at its own cost and expense,
take any and all actions reasonably necessary to defend title to the Collateral
owned by it against all persons and to defend the Security Interest of the
Lender in such Collateral, and the priority thereof, against any adverse
mortgage, pledge, security interest, Lien, charge or other encumbrance of any
nature whatsoever.  The Grantee understands that the security interest
granted herein, and the line created hereby, is junior in priority to an
existing security interest.

     

    10)           Continuing
Obligations of the Grantor.  The Grantor shall remain liable to
observe and perform all the conditions and obligations to be observed and
performed by it under each contract, agreement, interest or obligation relating
to the Collateral, all in accordance with the terms and conditions thereof, and
shall indemnify and hold harmless the Lender from any and all such
liabilities.

     

    11)           Use
and Disposition of Collateral.  Without the prior written
consent of Lender, the Grantor shall not make nor permit to be made any
assignment, pledge or hypothecation of the Collateral, or grant any security
interest in the Collateral except for the Security Interest.  The
Grantor shall not make nor permit to be made any transfer of any Collateral,
except Inventory in the ordinary course of business and as otherwise permitted
by the Loan Documents, and the Grantor shall remain at all times in possession
of the Collateral owned by it other than transfers to the Lender pursuant to the
provisions hereof and as otherwise provided in this Agreement or the Loan
Documents.

     

    12)           Limitation
on Modifications of Accounts Receivable.  The Grantor will not,
without the Lender’s prior written consent, grant any extension of the time of
payment of any of its Accounts Receivable, compromise, compound or settle the
same for less than the full amount thereof, release,

    
      
         

      

      
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    wholly or
partly, any person liable for the payment thereof, or allow any credit or
discount whatsoever thereon other than extensions, credits, discounts,
compromises or settlements granted or made in the ordinary course of
business.

     

    13)           Collections.

     

    a)           
The Grantor shall have the right to collect its Accounts Receivable in the
ordinary course of its business.  During the continuance of an Event
of Default and at the request of Lender in its sole discretion, the Grantor
shall (i) arrange for remittances on any of its Account Receivable to be made
directly to lockboxes or blocked accounts designated by the Lender or in such
other manner as the Lender may direct, and (ii) promptly deposit all payments
received by the Grantor on account of Accounts Receivable, whether in the form
of cash, checks, notes, drafts, bills of exchange, money orders or otherwise, in
one or more accounts designated by the Lender in precisely the form received
(but with any endorsements of the Grantor necessary for deposit or collection),
subject to withdrawal by the Lender only, as hereinafter provided, and until
they are deposited, shall be deemed to be held in trust by the Grantor for and
as the Lender’s property and shall not be commingled with the Grantor’s other
funds.

     

    b)          
 Upon the occurrence and during the continuance of an Event of Default, the
Lender shall have the right, as the true and lawful agent of the Grantor, with
power of substitution for the Grantor and in the Grantor’s name, the Lender’s
name or otherwise, for the use and benefit of the Lender (i) to receive,
endorse, assign and/or deliver any and all notes, acceptances, checks, drafts,
money orders or other evidences of payment relating to the Collateral or any
part thereof; (ii) to demand, collect, receive payment of, give receipt for and
give discharges and releases of all or any of the Collateral; (iii) to sign the
name of the Grantor on any invoice or bill of lading relating to any of the
Collateral; (iv) to send verifications of Accounts Receivable to any customer;
(v) to commence and prosecute any and all suits, actions or proceedings at law
or in equity in any court of competent jurisdiction to collect or otherwise
realize on all or any of the Collateral or to enforce any rights in respect of
any Collateral; (vi) to settle, compromise, compound, adjust or defend any
actions, suits or proceedings relating to or pertaining to all or any of the
Collateral; (vii) to notify, or to require the Grantor to notify, the account
debtors obligated on any or all of the Accounts Receivable to make payment
thereof directly to the Lender; and (viii) to use, sell, assign, transfer,
pledge, make any agreement with respect to or otherwise deal with all or any of
the Collateral, and to do all other acts and things necessary to carry out the
purposes of this Agreement, as fully and completely as though the Lender were
the absolute owner of the Collateral for all purposes; provided,
however,
that nothing herein contained shall be construed as requiring or obligating the
Lender to make any commitment or to make any inquiry as to the nature or
sufficiency of any payment received by the Lender or to present or file any
claim or notice, or to take any action with respect to the Collateral or any
part thereof or the moneys due or to become due in respect thereof or any
property covered thereby, and no action taken by the Lender or omitted to be
taken with respect to the Collateral or any part thereof shall give rise to any
defense, counterclaim or offset in favor of the Grantor or to any claim or
action against the Lender in the absence of the gross negligence or willful
misconduct of the Lender.  It is understood and agreed that the
appointment of the Lender as the agent of the Grantor for the purposes set forth
above in this Section 14 is coupled with an interest and is
irrevocable.  The

    
      
         

      

      
        9

        
          
 

      

      
         

      

    

    provisions
of this Section 14 shall in no event relieve the Grantor of any of its
obligations hereunder or under the Loan Documents with respect to the Collateral
or any part thereof or impose any obligation on the Lender to proceed in any
particular manner with respect to the Collateral or any part thereof, or in any
way limit the exercise by the Lender of any other or further right which it may
have on the date of this Agreement or hereafter, whether hereunder or by law or
otherwise.

     

    14)           Remedies
upon Default.  Upon the occurrence and during the continuance
of an Event of Default, the Grantor agrees to deliver each item of Collateral to
the Lender on demand, and it is agreed that the Lender shall have the right to
take any or all of the following actions at the same or different times: with or
without legal process and with or without previous notice or demand for
performance, to take possession of the Collateral and without liability for
trespass (except for actual damage caused by the Lender’s gross negligence or
willful misconduct) to enter any premises where the Collateral may be located
for the purpose of taking possession of or removing the Collateral and,
generally, to exercise any and all rights afforded to a secured party under, and
subject to its obligations contained in, the Uniform Commercial Code as in
effect in California or any other applicable state law.  Without
limiting the generality of the foregoing, the Grantor agrees that the Lender
shall have the right, subject to the mandatory requirements of applicable law,
to sell or otherwise dispose of all or any part of the Collateral, at public or
private sale or at any broker’s board or on any securities exchange, for cash,
upon credit or for future delivery as the Lender shall deem
appropriate.  Each such purchaser at any such sale shall hold the
property sold absolutely free from any claim or right on the part of the
Grantor, and the Grantor hereby waives (to the extent permitted by law) all
rights of redemption, stay and appraisal which the Grantor now has or may at any
time in the future have under any rule of law or statute now existing or
hereafter enacted. Without limiting the foregoing, upon the occurrence and
during the continuance of an Event of Default, immediately upon Lender’s demand
Grantor shall transfer all Cash, including but not limited to all proceeds of
Collateral, to Lender, and shall execute all documents reasonably requested by
Lender to effectuate an assignment of all of Grantor’s deposit accounts and
account balances to Lender at any and all financial institutions at which such
deposits exist at the time of such demand.

     

    15)           The
Lender shall give the Grantor ten (10) days’ written notice (which the Grantor
agrees is reasonable notice) of the Lender’s intention to make any sale of
Collateral.  Such notice, in the case of a public sale, shall state
the time and place for such sale and, in the case of a sale at a broker’s board
or on a securities exchange, shall state the board or exchange at which such
sale is to be made and the day on which the Collateral, or portion thereof, will
first be offered for sale at such board or exchange.  Any such public
sale shall be held at such time or times within ordinary business hours and at
such place or places as the Lender may fix and state in the notice (if any) of
such sale.  At any such sale, the Collateral, or portion thereof, to
be sold may be sold in one lot as an entirety or in separate parcels, as the
Lender may (in its sole and absolute discretion) determine.  The
Lender shall not be obligated to make any sale of any Collateral if it shall
determine not to do so, regardless of the fact that notice of sale of such
Collateral shall have been given.  The Lender may, without notice or
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for
sale, and such sale may, without further notice, be made at the time and place
to which the same was so adjourned.  In case any sale of all or any
part of the Collateral is made on credit or for future delivery, the Collateral
so sold may be retained by the

    
      
         

      

      
        10

        
          
 

      

      
         

      

    

    Lender
until the sale price is paid by the purchaser or purchasers thereof, but the
Lender shall not incur any liability in case any such purchaser or purchasers
shall fail to take up and pay for the Collateral so sold and, in case of any
such failure, such Collateral may be sold again upon like notice. At any public
sale made pursuant to this Section 14, the Lender may bid for or purchase, free
(to the extent permitted by law) from any right of redemption, stay or appraisal
on the part of the Grantor (all said rights being also hereby waived and
released to the extent permitted by law), with respect to the Collateral or any
part thereof offered for sale and the Lender may make payment on account thereof
by using any claim then due and payable to the Lender from the Grantor as a
credit against the purchase price, and the Lender may, upon compliance with the
terms of sale, hold, retain and dispose of such property without further
accountability to the Grantor therefore.  For purposes hereof, a
written agreement to purchase the Collateral or any portion thereof shall be
treated as a sale thereof; the Lender shall be free to carry out such sale and
purchase pursuant to such agreement, and the Grantor shall not be entitled to
the return of the Collateral or any portion thereof subject thereto,
notwithstanding the fact that after the Lender shall have entered into such an
agreement all Events of Default shall have been remedied and the Obligations
paid in full.  As an alternative to exercising the power of sale
herein conferred upon it, the Lender may proceed by a suit or suits at law or in
equity to foreclose this Agreement and to sell the Collateral or any portion
thereof pursuant to a judgment or decree of a court or courts having competent
jurisdiction or pursuant to a proceeding by a court-appointed
receiver.

     

    16)           Application
of Proceeds.  The proceeds of any collection or sale of
Collateral, as well as any Collateral consisting of cash, shall be applied by
the Lender as follows:

     

    a)           
FIRST, to the payment of all reasonable costs and expenses incurred by the
Lender in connection with such collection or sale or otherwise in connection
with this Agreement or any of the Obligations, including, but not limited to,
all court costs and the reasonable fees and expenses of its agents and legal
counsel, the repayment of all advances made by the Lender hereunder on behalf of
the Grantor and any other reasonable costs or expenses incurred in connection
with the exercise of any right or remedy hereunder;

     

    b)           
SECOND, to the payment in full of principal and interest in respect of the Loan
then outstanding;

     

    c)           
THIRD, to the payment in full of all Obligations (other than those referred to
above) owed to the Lender; and

     

    d)           
FOURTH, to the Grantor, its successors and assigns, or as a court of competent
jurisdiction may otherwise direct.

     

    17)          Upon
any sale of the Collateral by the Lender (including, without limitation,
pursuant to a power of sale granted by statute or under a judicial proceeding),
the receipt of the Lender or of the officer making the sale shall be a
sufficient discharge to the purchaser or purchasers of the Collateral so sold
and such purchaser or purchasers shall not be obligated to see to the
application of any part of

    
      
         

      

      
        11

        
          
 

      

      
         

      

    

    the
purchase money paid over to the Lender or such officer or be answerable in any
way for the misapplication thereof.

     

    18)           Locations
of Collateral; Place of Business.

     

    a)          
 The Grantor hereby represents and warrants that all the Collateral is
located in California.  The Grantor agrees not to establish, or permit
to be established, any other location for Collateral unless all filings under
the Uniform Commercial Code as in effect in any state or otherwise which are
required by this Agreement or the Loan Documents to be made with respect to the
Collateral have been made and the Lender has a valid, legal and perfected
security interest in the Collateral.

     

    b)        
   The Grantor agrees not to change, or permit to be changed, the
location of its chief executive office unless all filings under the Uniform
Commercial Code or otherwise which are required by this Agreement or the Loan
Documents to be made have been made and the Lender has a valid, legal and
perfected security interest.

     

    19)           Security
Interest Absolute.  All rights of the Lender hereunder, the
Security Interest, and all obligations of the Grantor hereunder, shall be
absolute and unconditional irrespective of (i) any lack of validity or
enforceability of the Loan Documents, any other agreement with respect to any of
the Obligations or any other agreement or instrument relating to any of the
foregoing, (ii) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other amendment or waiver
of or consent to any departure from the Loan Documents, or any other agreement
or instrument, (iii) any exchange, release or non-perfection of any other
Collateral, or any release or amendment or waiver of or consent to or departure
from any guarantee, for all or any of the Obligations, or (iv) any other
circumstance which might otherwise constitute a defense available to, or
discharge of, the Grantor or any other obligor in respect of the Obligations or
in respect of this Agreement.

     

    20)           No
Waiver.  No failure on the part of the Lender to exercise, and
no delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy by the Lender preclude any other or further exercise thereof or
the exercise of any other right, power or remedy.  All remedies
hereunder are cumulative and are not exclusive of any other remedies provided by
law.  The Lender shall not be deemed to have waived any rights
hereunder or under any other agreement or instrument unless such waiver shall be
in writing and signed by such parties.

     

    21)           Lender
Appointed Attorney-in-Fact.  The Grantor hereby appoints the
Lender its attorney-in-fact solely for the purpose of carrying out the
provisions of this Agreement and taking any action and executing any instrument
which the Lender may deem necessary or advisable to accomplish the purposes
hereof, which appointment is irrevocable and coupled with an
interest.

     

    22)           Lender’s
Fees and Expenses.  The Grantor shall be obligated to, upon
demand, pay to the Lender the amount of any and all reasonable expenses,
including the reasonable fees and expenses of

    
      
         

      

      
        12

        
          
 

      

      
         

      

    

    its
counsel and of any experts or agents which the Lender may incur in connection
with (i) the administration of this Agreement, (ii) the custody or
preservation of, or the sale of, collection from, or other realization upon, any
of the Collateral, (iii) the exercise or enforcement of any of the rights of the
Lender hereunder, or (iv) the failure by the Grantor to perform or observe any
of the provisions hereof.  In addition, the Grantor indemnifies and
holds the Lender harmless from and against any and all liability incurred by the
Lender hereunder or in connection herewith, unless such liability shall be due
to the gross negligence or willful misconduct of the Lender.  Any such
amounts payable as provided hereunder or thereunder shall be additional
Obligations secured hereby and by the other Security Documents.

     

    23)           Binding
Agreement; Assignments.  This Agreement, and the terms,
covenants and conditions hereof, shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns, except that
the Grantor shall not be permitted to assign this Agreement or any interest
herein or in the Collateral, or any part thereof, or any cash or property held
by the Lender as Collateral under this Agreement, except as contemplated by this
Agreement or the Loan Documents.

     

    24)           Governing
Law.  (a) This Agreement shall be construed in accordance with
and governed by the laws of the state of California, except to the extent that
the validity or perfection of the security interest hereunder, or remedies
hereunder, which shall be governed by the appropriate jurisdiction relating to
the specific Collateral itself.  Venue for any action under this
Agreement or any of the Loan Documents shall be in the Superior Court located in
Santa Monica, California.  The prevailing party in any dispute arising
hereunder shall be entitled to recover all of its reasonable attorney’s fees and
costs of defense, prosecution or litigation.  The Grantor hereby
expressly and irrevocably submits to the jurisdiction of the state and federal
courts of the State of California, city of Los Angeles (and Santa Monica
specifically for state court), for the purpose of any such litigation as set
forth above and irrevocably agrees to be bound by any final judgment rendered
thereby in connection with such litigation.  The Grantor further
irrevocably consents to the service of process by registered mail, postage
prepaid, or by personal service within or without the State of
California.  The Grantor hereby expressly and irrevocably waives, to
the fullest extent permitted by law, any objection which it may have or
hereafter may have to the laying of venue of any such litigation brought in any
such court referred to above and any claim that any such litigation has been
brought in any inconvenient forum.  To the extent that the Grantor has
or hereafter may acquire any immunity from jurisdiction of any court or from any
legal process (whether through service or notice, attachment prior to judgment,
attachment in aid of execution or otherwise) with respect to itself or its
property, the Grantor hereby irrevocably waives such immunity in respect of its
obligations under this agreement and the other Loan Documents.

     

    (b)           Waiver
of Jury Trial.  The parties hereby knowingly, voluntarily and
intentionally waive any rights they may have to a trial by jury in respect of
any litigation based hereon, or arising out of, under, or in connection with,
this agreement, or any course of conduct, course of dealing, statements (whether
oral or written) or actions of any of the parties hereto.

    
      
         

      

      
        13

        
          
 

      

      
         

      

    

    25)           Notices.  All
communications and notices hereunder shall be in writing and given as provided
in the Loan Documents.

     

    26)           Severability.  In
case any one or more of the provisions contained in this Agreement should be
invalid, illegal or unenforceable the remaining provisions contained herein
shall not in any way be affected or impaired.

     

    27)           Section
Headings.  Section headings used herein are for convenience
only and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.

     

    28)           Counterparts.  This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
but one instrument.  This Agreement shall be effective when a
counterpart which bears the signature of the Grantor shall have been delivered
to the Lender.

     

    29)           Termination.  This
Agreement and the Security Interest shall terminate when all the Obligations
have been fully and indefeasibly paid in cash, at which time the Lender shall
execute and deliver to the Grantor all Uniform Commercial Code termination
statements and similar documents which the Grantor shall reasonably request to
evidence such termination; provided,
however,
that all indemnities of the Grantor contained in this Agreement shall survive,
and remain operative and in full force and effect regardless of, the termination
of this Agreement.

     

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

     

     

    
      
        	 	MATERIAL
      TECHNOLOGIES, INC.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Robert
      Bernstein	 
	 	 	Robert
      Bernstein	 
	 	 	Chairman
      and Chief Executive Officer	 
	 	 	 	 
	 	 	 	 
	 	KREUZFELD
      LTD.	 
	 	 	 	 
	 	By: 	 	 
	 	 	Name:
      Markus Winkler	 
	 	 	Title:   sole
      officer	 

      

    

                                              

            

              
 

      

    

    
      
         

      

      
        14

        
          
 

      

      
         

      

    

    EXHIBIT
A

     

    Collateral

     

    All
rights, title, claims and interests of every kind and character of Material
Technologies, Inc., a Delaware corporation, and any of its subsidiaries (the
“Debtor”), or any of them (whether tangible, intangible, choate, inchoate,
legal, direct, indirect, possessory, nonpossessory, vested, nonvested,
beneficial or equitable) in any assets, property or property rights now or at
any time hereafter owned, held, used or acquired by Debtor whether in the name
of any of them or in any fictitious business name or in any other name, and
whether or not particularly described herein, including without limitation: all
cash, inventory, accounts receivable, new and used finished goods, products,
merchandise, work in process, raw materials, parts, supplies, accessories,
attachments whether or not held for sale, lease, use or consumption and any
property classified as inventory by the Uniform Commercial Code (“UCC”),
machinery, equipment, tools, dies molds, furniture, general intangibles, as that
term is defined by said UCC, good will, trademarks, trade names, service names
and marks, licenses, patents rights, copyrights, inventions, negotiable and
non-negotiable instruments and documents, things in action and all other rights,
privileges and franchises, all rights under any leases (including without
limitation any lease of any of Debtor’s business premises) whether of real or
personal property and whether as landlord, tenant, or otherwise, chattel paper,
accounts, deposit accounts, and instruments, as those terms are defined by the
UCC, condemnation or insurance recoveries, rents, royalties, profits,
certificated and uncertificated securities, treasury stock, commercial paper,
business records and reports, documents, claims, commission, contracts, causes
of action, suits, rights of offset or recoupment, fixtures, as that term is
defined by said UCC, and all products and proceeds (as defined in said UCC),
accessions, additions, increases, repairs to, improvements and replacements of
each of the foregoing items of Collateral.  Further, “Collateral”
shall also mean all rights, title, claims and interests of every kind and
character of Debtor under any name (whether tangible, intangible, choate,
inchoate, legal, direct, indirect, possessory, nonpossessory, vested, nonvested,
beneficial or equitable) in the common stock and/or other debt or equity
interests and/or other interests in any corporation or in any other partnership
or other legal entity involved in which the Debtor has an interest now or at any
time hereafter owed, held, used or acquired.  “Collateral”
shall also include all products and proceeds (as defined in said UCC),
accessions, additions, increases, repairs to, improvements and replacements of
each of the foregoing items of Collateral.

     

     

    
      
        	 	MATERIAL
      TECHNOLOGIES, INC.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Robert
      Bernstein 	 
	 	 	Robert
      Bernstein	 
	 	 	Chairman
      and Chief Executive Officer	 
	 	 	 	 

      

       

       

       

       

    

    
 

    
      
         

      

      
        15

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