INTELLECTUAL PROPERTY SECURITY AGREEMENT

 

 

 

                    INTELLECTUAL PROPERTY SECURITY AGREEMENT

 

     Intellectual  Property  Security  Agreement (this  "Agreement"  dated as of

August  12,  2004,  by  and  among  QT 5,  Inc.,  a  Delaware  corporation  (the

"Company"),  and the  secured  parties  signatory  hereto  and their  respective

endorsees, transferees and assigns (collectively, the "Secured Party").

 

                              W I T N E S S E T H :

 

     WHEREAS,  pursuant  to a  Securities  Purchase  Agreement,  dated  the date

hereof,  between  Company  and the  Secured  Party (the  "Purchase  Agreement"),

Company  has  agreed to issue to the  Secured  Party and the  Secured  Party has

agreed to purchase  from Company  certain of Company's  10% Secured  Convertible

Notes, due two years from the date of issue (the "Notes"), which are convertible

into shares of Company's  Common  Stock,  par value $.001 per share (the "Common

Stock"). In connection therewith,  Company shall issue the Secured Party certain

Common Stock purchase warrants (the "Warrants"); and

 

     WHEREAS,  in order to induce  the  Secured  Party to  purchase  the  Notes,

Company has agreed to execute and  deliver to the Secured  Party this  Agreement

for the  benefit  of the  Secured  Party  and to  grant  to it a first  priority

security interest in certain Intellectual Property (defined below) of Company to

secure the prompt payment, performance and discharge in full of all of Company's

obligations  under the Notes and  exercise  and  discharge  in full of Company's

obligations under the Warrants; and

 

     NOW, THEREFORE, in consideration of the agreements herein contained and for

other good and valuable  consideration,  the receipt and sufficiency of which is

hereby acknowledged, the parties hereto hereby agree as follows:

 

          1.   Defined Terms.  Unless otherwise defined herein,  terms which are

defined in the Purchase Agreement and used herein are so used as so defined; and

the following terms shall have the following meanings:

 

               "Software Intellectual Property" shall mean:

 

               (a)  all software  programs  (including  all source code,  object

code and all related applications and data files),  whether now owned, upgraded,

enhanced, licensed or leased or hereafter acquired by the Company, above;

 

               (b)  all computers and electronic  data  processing  hardware and

firmware associated therewith;

 

               (c)  all  documentation  (including flow charts,  logic diagrams,

manuals, guides and specifications) with respect to such software,  hardware and

firmware described in the preceding clauses (a) and (b); and

 

               (d)  all rights with respect to all of the foregoing,  including,

without limitation, any and all upgrades,  modifications,  copyrights, licenses,

options,   warranties,   service  contracts,   program  services,  test  rights,

maintenance  rights,  support  rights,  improvement  rights,  renewal rights and

indemnifications   and   substitutions,   replacements,   additions,   or  model

conversions of any of the foregoing.

 

 

<PAGE>

 

 

               "Copyrights"  shall mean (a) all  copyrights,  registrations  and

applications  for  registration,   issued  or  filed,  including  any  reissues,

extensions or renewals thereof, by or with the United States Copyright Office or

any similar  office or agency of the United States,  any state  thereof,  or any

other country or political  subdivision  thereof, or otherwise,  including,  all

rights  in  and  to  the  material  constituting  the  subject  matter  thereof,

including, without limitation, any referred to in Schedule B hereto, and (b) any

rights in any material  which is  copyrightable  or which is protected by common

law,  United  States  copyright  laws or  similar  laws or any law of any State,

including, without limitation, any thereof referred to in Schedule B hereto.

 

               "Copyright  License" shall mean any  agreement,  written or oral,

providing for a grant by the Company of any right in any  Copyright,  including,

without limitation, any thereof referred to in Schedule B hereto.

 

               "Intellectual Property" shall means,  collectively,  the Software

Intellectual Property, Copyrights, Copyright Licenses, Patents, Patent Licenses,

Trademarks, Trademark Licenses and Trade Secrets.

 

               "Obligations"  means all of the Company's  obligations under this

Agreement  and the  Notes,  in each case,  whether  now or  hereafter  existing,

voluntary or involuntary, direct or indirect, absolute or contingent, liquidated

or  unliquidated,  whether or not jointly owed with  others,  and whether or not

from time to time  decreased or  extinguished  and later  decreased,  created or

incurred,  and all or any portion of such  obligations or  liabilities  that are

paid,  to the  extent all or any part of such  payment  is avoided or  recovered

directly  or  indirectly  from the  Secured  Party as a  preference,  fraudulent

transfer  or  otherwise  as  such  obligations  may  be  amended,  supplemented,

converted, extended or modified from time to time.

 

               "Patents"  shall mean (a) all letters patent of the United States

or any other country or any political  subdivision thereof, and all reissues and

extensions thereof,  including,  without limitation,  any thereof referred to in

Schedule B hereto,  and (b) all  applications  for letters  patent of the United

States and all divisions, continuations and continuations-in-part thereof or any

other country or any political subdivision,  including,  without limitation, any

thereof referred to in Schedule B hereto.

 

               "Patent  License" shall mean all  agreements,  whether written or

oral, providing for the grant by the Company of any right to manufacture, use or

sell any  invention  covered by a Patent,  including,  without  limitation,  any

thereof referred to in Schedule B hereto.

 

               "Security  Agreement" shall mean the a Security Agreement,  dated

the date hereof between Company and the Secured Party.

 

               "Trademarks"   shall  mean  (a)  all  trademarks,   trade  names,

corporate names, company names, business names, fictitious business names, trade

styles,  service marks, logos and other source or business identifiers,  and the

goodwill  associated  therewith,  now existing or hereafter adopted or acquired,

 

 

                                      -2-

<PAGE>

 

 

all  registrations  and recordings  thereof,  and all applications in connection

therewith,  whether in the United States  Patent and Trademark  Office or in any

similar  office or agency of the United  States,  any state thereof or any other

country or any political subdivision thereof, or otherwise,  including,  without

limitation,  any thereof referred to in Schedule B hereto, and (b) all reissues,

extensions or renewals thereof.

 

               "Trademark  License" shall mean any  agreement,  written or oral,

providing  for the  grant by the  Company  of any  right  to use any  Trademark,

including, without limitation, any thereof referred to in Schedule B hereto.

 

               "Trade Secrets" shall mean common law and statutory trade secrets

and all other confidential or proprietary or useful information and all know-how

obtained by or used in or  contemplated  at any time for use in the  business of

the Company (all of the foregoing being  collectively  called a "Trade Secret"),

whether or not such Trade Secret has been reduced to a writing or other tangible

form,  including all documents and things embodying,  incorporating or referring

in any way to such Trade Secret, all Trade Secret licenses, including each Trade

Secret license referred to in Schedule B hereto,  and including the right to sue

for  and to  enjoin  and  to  collect  damages  for  the  actual  or  threatened

misappropriation  of any Trade Secret and for the breach or  enforcement  of any

such Trade Secret license.

 

          2.   Grant of Security  Interest.  In accordance  with Section 3(m) of

the Security Agreement,  to secure the complete and timely payment,  performance

and  discharge  in  full,  as the case may be,  of all of the  Obligations,  the

Company  hereby,   unconditionally   and   irrevocably,   pledges,   grants  and

hypothecates  to the  Secured  Party,  a  continuing  security  interest  in,  a

continuing  first lien upon, an unqualified  right to possession and disposition

of and a right of set-off against,  in each case to the fullest extent permitted

by law, all of the Company's  right,  title and interest of whatsoever  kind and

nature in and to the Intellectual Property (the "Security Interest").

 

          3.   Representations and Warranties. The Company hereby represents and

warrants, and covenants and agrees with, the Secured Party as follows:

 

               (a)  The Company has the requisite  corporate power and authority

to  enter  into  this  Agreement  and  otherwise  to carry  out its  obligations

thereunder.  The  execution,  delivery  and  performance  by the Company of this

Agreement and the filings  contemplated therein have been duly authorized by all

necessary action on the part of the Company and no further action is required by

the Company. This Agreement constitutes a legal, valid and binding obligation of

the Company  enforceable in accordance with its terms,  except as enforceability

may be limited by bankruptcy, insolvency, reorganization,  moratorium or similar

laws affecting the enforcement of creditor's rights generally.

 

               (b)  The Company  represents and warrants that it has no place of

business or offices where its  respective  books of account and records are kept

(other than  temporarily  at the offices of its  attorneys  or  accountants)  or

places where the Intellectual Property is stored or located, except as set forth

on Schedule A attached hereto;

 

 

                                      -3-

<PAGE>

 

 

               (c)  The Company is the sole owner of the  Intellectual  Property

(except for non-exclusive licenses granted by the Company in the ordinary course

of business),  free and clear of any liens,  security  interests,  encumbrances,

rights or claims,  and is fully authorized to grant the Security Interest in and

to pledge the Intellectual Property. There is not on file in any governmental or

regulatory  authority,   agency  or  recording  office  an  effective  financing

statement,  security agreement,  license or transfer or any notice of any of the

foregoing  (other than those that have been filed in favor of the Secured  Party

pursuant  to this  Agreement)  covering  or  affecting  any of the  Intellectual

Property.  So long as this Agreement  shall be in effect,  the Company shall not

execute  and shall  not  knowingly  permit  to be on file in any such  office or

agency any such financing  statement or other document or instrument  (except to

the extent filed or recorded in favor of the Secured Party pursuant to the terms

of this Agreement), except for a financing statement covering assets acquired by

the Company after the date hereof,  provided that the value of the  Intellectual

Property  covered by this Agreement along with the Collateral (as defined in the

Security Agreement) is equal to at least 150% of the Obligations.

 

               (d)  The Company shall at all times maintain its books of account

and records  relating to the  Intellectual  Property at its  principal  place of

business and its Intellectual  Property at the locations set forth on Schedule A

attached hereto and may not relocate such books of account and records unless it

delivers  to the  Secured  Party at least 30 days prior to such  relocation  (i)

written notice of such  relocation  and the new location  thereof (which must be

within the United  States) and (ii) evidence that the necessary  documents  have

been filed and  recorded and other steps have been taken to perfect the Security

Interest to create in favor of the Secured Party valid, perfected and continuing

first  priority  liens in the  Intellectual  Property  to the extent they can be

perfected through such filings.

 

               (e)  This Agreement creates in favor of the Secured Party a valid

security  interest  in  the  Intellectual  Property  securing  the  payment  and

performance of the Obligations and, upon making the filings required  hereunder,

a perfected first priority security  interest in such  Intellectual  Property to

the extent that it can be perfected through such filings.

 

               (f)  Upon request of the Secured Party, the Company shall execute

and deliver any and all agreements,  instruments,  documents,  and papers as the

Secured Party may request to evidence the Secured Party's  security  interest in

the  Intellectual  Property  and the  goodwill  and general  intangibles  of the

Company relating thereto or represented thereby, and the Company hereby appoints

the Secured Party its attorney-in-fact to execute and file all such writings for

the  foregoing  purposes,  all acts of such attorney  being hereby  ratified and

confirmed;  such power being coupled with an interest is  irrevocable  until the

Obligations have been fully satisfied and are paid in full.

 

               (g)  The  execution,  delivery and  performance of this Agreement

does not  conflict  with or cause a breach or default,  or an event that with or

without the  passage of time or notice,  shall  constitute  a breach or default,

under any  agreement  to which the Company is a party or by which the Company is

bound.  No  consent  (including,  without  limitation,  from  stock  holders  or

creditors  of the Company) is required for the Company to enter into and perform

its obligations hereunder.

 

 

                                      -4-

<PAGE>

 

 

               (h)  The  Company  shall at all  times  maintain  the  liens  and

Security  Interest  provided for hereunder as valid and perfected first priority

liens and security interests in the Intellectual Property to the extent they can

be perfected by filing in favor of the Secured  Party until this  Agreement  and

the Security  Interest  hereunder  shall  terminate  pursuant to Section 11. The

Company  hereby  agrees to defend  the same  against  any and all  persons.  The

Company shall safeguard and protect all Intellectual Property for the account of

the Secured Party. Without limiting the generality of the foregoing, the Company

shall  pay  all  fees,  taxes  and  other  amounts  necessary  to  maintain  the

Intellectual Property and the Security Interest hereunder, and the Company shall

obtain and furnish to the Secured  Party from time to time,  upon  demand,  such

releases  and/or  subordinations  of claims and liens  which may be  required to

maintain the priority of the Security Interest hereunder.

 

               (i)  The  Company  will  not   transfer,   pledge,   hypothecate,

encumber,  license (except for non-exclusive  licenses granted by the Company in

the  ordinary  course of  business),  sell or  otherwise  dispose  of any of the

Intellectual Property without the prior written consent of the Secured Party.

 

               (j)  The  Company  shall,  within  ten  (10)  days  of  obtaining

knowledge thereof,  advise the Secured Party promptly,  in sufficient detail, of

any substantial  change in the Intellectual  Property,  and of the occurrence of

any  event  which  would  have a  material  adverse  effect  on the value of the

Intellectual Property or on the Secured Party's security interest therein.

 

               (k)  The  Company   shall  permit  the  Secured   Party  and  its

representatives and agents to inspect the Intellectual Property at any time, and

to make  copies of records  pertaining  to the  Intellectual  Property as may be

requested by the Secured Party from time to time.

 

               (l)  The  Company  will take all steps  reasonably  necessary  to

diligently pursue and seek to preserve,  enforce and collect any rights, claims,

causes  of  action  and  accounts  receivable  in  respect  of the  Intellectual

Property.

 

               (m)  The  Company  shall  promptly  notify the  Secured  Party in

sufficient detail upon becoming aware of any attachment,  garnishment, execution

or other legal process levied against any Intellectual Property and of any other

information  received by the Company that may materially affect the value of the

Intellectual  Property,  the Security Interest or the rights and remedies of the

Secured Party  hereunder.

 

               (n)  All information heretofore,  herein or hereafter supplied to

the  Secured  Party  by  or on  behalf  of  the  Company  with  respect  to  the

Intellectual  Property is accurate and  complete in all material  respects as of

the date furnished.

 

               (o)  Schedule  A  attached  hereto  contains a list of all of the

subsidiaries of Company.

 

               (p)  Schedule B attached  hereto  includes all Licenses,  and all

Patents and Patent Licenses,  if any, owned by the Company in its own name as of

the date  hereof.  Schedule  B hereto  includes  all  Trademarks  and  Trademark

 

 

                                      -5-

<PAGE>

 

 

Licenses,  if any,  owned by the Company in its own name as of the date  hereof.

Schedule B hereto includes all Copyrights and Copyright Licenses,  if any, owned

by the Company in its own name as of the date hereof. Schedule B hereto includes

all Trade Secrets and Trade Secret Licenses,  if any, owned by the Company as of

the date hereof. To the best of the Company's knowledge,  each License,  Patent,

Trademark,   Copyright  and  Trade  Secret  is  valid,  subsisting,   unexpired,

enforceable and has not been abandoned.  Except as set forth in Schedule B, none

of such  Licenses,  Patents,  Trademarks,  Copyrights  and Trade  Secrets is the

subject of any  licensing or franchise  agreement.  To the best of the Company's

knowledge,   no  holding,   decision  or  judgment  has  been  rendered  by  any

Governmental  Body which would  limit,  cancel or question  the  validity of any

License,  Patent,  Trademark,  Copyright  and  Trade  Secrets  .  No  action  or

proceeding  is pending (i) seeking to limit,  cancel or question the validity of

any License,  Patent,  Trademark,  Copyright or Trade Secret,  or (ii) which, if

adversely  determined,  would have a material adverse effect on the value of any

License, Patent, Trademark,  Copyright or Trade Secret. The Company has used and

will continue to use for the duration of this Agreement, proper statutory notice

in  connection  with  its use of the  Patents,  Trademarks  and  Copyrights  and

consistent  standards  of quality in products  leased or sold under the Patents,

Trademarks and Copyrights.

 

               (q)  With respect to any Intellectual Property:

 

                    (i)  such  Intellectual  Property is subsisting  and has not

                         been adjudged invalid or unenforceable,  in whole or in

                         part;

 

                    (ii) such Intellectual Property is valid and enforceable;

 

                    (iii)the  Company  has  made  all   necessary   filings  and

                         recordations   to   protect   its   interest   in  such

                         Intellectual Property,  including,  without limitation,

                         recordations