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EXHIBIT 10.3
SECURITY
AGREEMENT
THIS SECURITY AGREEMENT (the “ Agreement
”), is entered into
and made effective as of May 30, 2008, by and between TELKONET, INC., a Utah
corporation with its principal place of business located at 20374
Seneca Meadows Parkway, Germantown, Maryland 20876 (the “
Company
”), and the undersigned subsidiaries of the Company (each a
“ Guarantor
,” and collectively together with the Company, the “
Grantors
”), in favor YA GLOBAL INVESTMENTS,
L.P. (the “ Secured Party
”).
WHEREAS, in connection with the Securities Purchase
Agreement by and among the Company and the Secured Party of even
date herewith (the “ Securities Purchase
Agreement ”), the Company has agreed, upon the terms
and subject to the conditions of the Securities Purchase Agreement,
to issue to the Secured Party (i) an aggregate original principal
amount of up to $3,500,000 of senior secured convertible debentures
(the “ Convertible
Debentures ”), which shall be convertible into shares
of the Company’s Common Stock (the “ Conversion
Shares ”); and (ii) warrants (the “ Warrants
”) to be exercisable to acquire additional shares of Common
Stock (the “ Warrants
Shares ”) initially in that number of shares of Common
Stock set forth in the Securities Purchase Agreement;
WHEREAS , each of the Guarantors (other than the Company)
has executed and delivered a Guaranty dated the date hereof (the
“ Guaranty
”) in favor of the Secured Party, with respect to the
Company’s obligations under the Securities Purchase
Agreement, the Convertible Debentures, and the Transaction
Documents (as defined below); and
WHEREAS , each of the Guarantors shall receive a direct
benefit from the Secured Party entering into the Securities
Purchase Agreement, the Convertible Debentures, and the Transaction
Documents; and
WHEREAS, it is a condition precedent to the Secured Party
purchasing the Convertible Debentures and Warrants pursuant to the
Securities Purchase Agreement that the Grantors shall have executed
and delivered to the Secured Party this Agreement providing for the
grant to the Secured Party of a security interest in all personal
property of each Grantor to secure all of the Company's obligations
under the “Transaction Documents” (as defined in the
Securities Purchase Agreement) (the “ Transaction
Documents ”) and the Guarantors’ obligations
under the Guaranty, subject to the Intercreditor Agreement between
Secured Party and Thermo Credit, LLC dated as of the date
hereof;
NOW, THEREFORE, in consideration of the promises and the
mutual covenants herein contained, and for other good and valuable
consideration, the adequacy and receipt of which are hereby
acknowledged, the parties hereto hereby agree as
follows:
ARTICLE 1.
DEFINITIONS AND
INTERPRETATIONS
Section
1.1.
Recitals
. The above recitals are true and correct and are
incorporated herein, in their entirety, by this
reference.
Section
1.2.
Interpretations
. Nothing herein expressed or implied is intended or shall be
construed to confer upon any person other than the Secured
Party any right, remedy or claim under or by reason
hereof.
Section
1.3.
Definitions
. Reference is hereby made to the Securities Purchase
Agreement and the Convertible Debentures for a statement of
the terms thereof. All capitalized terms used in
this Agreement and the recitals hereto and not defined herein
shall have the meanings set forth in the Securities Purchase
Agreement, the Convertible Debentures, or in Articles 8 or 9
of the Uniform Commercial Code as in effect from time to time
in the State of New Jersey (the " Code
").
Section
1.4.
Other
Definitions . As used in this Agreement, the
following terms shall have the respective meanings indicated
below, such meanings to be applicable equally to both the
singular and plural forms of such terms:
“
Event of
Default ” shall be deemed to have occurred under
this Agreement upon an Event of Default under and as defined
in the Convertible Debentures, or upon a breach of this
Agreement that is not cured within ten (10) days following
written notice of such breach from the Secured
Party. Notwithstanding anything to the contrary
herein, incurrence of indebtedness by the Company to Thermo
Credit, LLC (“Thermo Credit”) in excess of the
amount set forth in Section 2.1(a) hereof shall be an
immediate Event of Default, with no right of
cure.
ARTICLE 2.
PLEDGED
PROPERTY
Section
2.1.
Grant of Security Interest .
(a)
As
collateral security for all of the Obligations (as defined in
Section
2.2 hereof), each Grantor hereby pledges and assigns to
the Secured Party, and grants to the Secured Party for its
benefit, a continuing security interest in and to all personal
property of each Grantor, wherever located and whether now or
hereinafter existing and whether now owned or hereafter
acquired, of every kind and description, tangible or
intangible, including without limitation, all Goods,
Inventory, Equipment, Fixtures, Instruments (including
promissory notes), Documents, Accounts (including
health-care-insurance receivables, and license fees),
Contracts, Contract Rights, Chattel Paper (whether tangible or
electronic), Deposit Accounts (and in and to any deposits or
other sums at any time credited to each such Deposit Account),
Money, Letters of Credit and Letter-of-Credit Rights (whether
or not the letter of credit is evidenced by a writing),
Commercial Tort Claims, Securities and all other Investment
Property, General Intangibles (including payment intangibles
and software),
Farm
Products, all books and records relating to any of the
foregoing, and all supporting obligations, and any and all
proceeds and products of any thereof, including proceeds of
insurance covering any or all of the foregoing, wherever
located, whether now owned, or now due, in which a Grantor has
an interest or the power to transfer rights, or hereafter
acquired, arising, or to become due, or in which a Grantor
obtains an interest, or the power to transfer rights, and as
more particularly described on Exhibit A
attached hereto (collectively, the “Pledged
Property”). Notwithstanding anything to
the contrary in this Agreement, the Company hereby covenants
and agrees that it shall not incur indebtedness in excess of
$2.5 million under the Factoring and Security Agreement (the
“Factoring Agreement”) dated January 25, 2008, by
and between the Company and Thermo Credit, LLC (“Thermo
Credit”), without the prior written
consent of the Secured Party, which consent shall not be
unreasonably withheld, conditioned or delayed.
(b)
Simultaneously with the execution and delivery of this
Agreement, each Grantor shall make, execute, acknowledge,
file, record and deliver to the Secured Party such documents,
instruments, and agreements, including, without limitation,
financing statements, certificates, affidavits and forms as
may, in the Secured Party’s reasonable judgment, be
necessary to effectuate, complete or perfect, or to continue
and preserve, the security interest of the Secured Party in
the Pledged Property.
(c)
Intercreditor Agreement; Acknowledgment of Existing Security
Interest
(i)
The
rights and obligations set forth hereunder are subject to the
letter agreement of even date herewith among the Secured Party
and Thermo Credit, LLC.
(ii)
The
Secured Party acknowledges the validity of the Factoring and
Security Agreement between the Company and Thermo Credit, LLC,
the intent of the signatory parties to structure transactions
thereunder as purchases and sales, the intent of the Company
to grant the first priority perfected security interest set
forth in Sections 2.5 and 8.2, and otherwise, in the Factoring
and Security Agreement, including, but not limited to in
Contracts, Receivables, Records, payments of principal and
interest on Receivables and Contracts, amounts on deposit from
time to time in the Lockbox Account, and all proceeds of any
of the foregoing, and the impact thereof in the Pledged
Property described in this Security
Agreement. (Capitalized terms in this Section
2.1(c)(ii) shall have the definitions set forth in the
Factoring Agreement.) This acknowledgment is not
intended to, and shall not, otherwise modify the rights and
remedies of the parties hereto under this
Agreement.
Section
2.2.
Security for
Obligations . The security interest created
hereby in the Pledged Property constitutes continuing
collateral security for all of the following obligations,
whether now existing or hereinafter incurred (collectively,
the “Obligations”):
(a)
(i)
the
payment by the Company, as and when due and payable (by
scheduled maturity, acceleration, demand or otherwise), of all
amounts from time to time owing by it in respect of the
Convertible Debentures, the other Transaction Documents, or
any other amounts owing by it to the Secured Party, whether or
not now in existence or hereinafter incurred, or (ii) in the
case of any Guarantor, the payment by such Guarantor, as and
when due and payable of all “Guaranteed
Obligations” under (and as defined in) the Guaranty;
and
(b)
the due
performance and observance by the each Grantor of all of its
other obligations from time to time existing in respect of any
of the Transaction Documents, including without limitation,
with respect to any conversion or redemption rights of the
Secured Party under the Convertible Debentures.
ARTICLE 3.
ATTORNEY-IN-FACT;
PERFORMANCE
Section
3.1.
Secured Party Appointed Attorney-In-Fact .
The
Grantors hereby appoint the Secured Party as its
attorney-in-fact, with full authority in the place and stead
of the Grantor and in the name of the Grantor or otherwise,
exercisable after and during the continuance of an Event of
Default, from time to time in the Secured Party’s
discretion to take any action and to execute any instrument
which the Secured Party may reasonably deem necessary to
accomplish the purposes of this Agreement, including, without
limitation, to (a) receive and collect all instruments made
payable to the Grantor representing any payments in respect of
the Pledged Property or any part thereof and to give full
discharge for the same; (b) demand, collect, receipt for,
settle, compromise, adjust, sue for, foreclose, or realize on
the Pledged Property as and when the Secured Party may
determine, and (c) notify account debtors and obligors on any
Pledged Property to make payments directly to the Secured
Party for the purpose of facilitating the collection of any
debt or obligation owed to any Grantor. The
foregoing power of attorney is a power coupled with an
interest and shall be irrevocable until all Obligations are
paid and performed in full. The Grantors agree that
the powers conferred on the Secured Party hereunder are solely
to protect the Secured Party’s interests in the Pledged
Property and shall not impose any duty upon the Secured Party
to exercise any such powers.
Section
3.2.
Secured Party May Perform .
If
a Grantor fails to perform any agreement contained herein, the
Secured Party, at its option, may itself perform, or cause
performance of, such agreement, and the expenses of the
Secured Party incurred in connection therewith shall be
included in the Obligations secured hereby and payable by such
Grantor under Section 8.3.
ARTICLE 4.
REPRESENTATIONS AND
WARRANTIES
Section
4.1.
Authorization; Enforceability .
Each
of the parties hereto represents and warrants that it has
taken all action necessary to authorize the execution,
delivery and performance of this Agreement and the
transactions contemplated hereby; and upon execution and
delivery, this Agreement shall constitute a valid and binding
obligation of the respective party, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting creditors’ rights or by the principles
governing the availability of equitable remedies.
Section
4.2.
Ownership of Pledged Property .
Each
Grantor represents and warrants that it is the legal and
beneficial owner of the Pledged Property free and clear of any
lien, security interest, option or other charge or encumbrance
(each, a “Lien”) except for the security interest
created by this Agreement and other Permitted
Liens. For purposes of this Agreement,
“Permitted Liens” means: (1) the security interest
created by this Agreement, (2) existing Liens which have been
disclosed by the Company to the Secured Party on Schedule 4.2
attached hereto; (3) inchoate Liens for taxes, assessments or
governmental charges or levies not yet due, as to which the
grace period, if any, related thereto has not yet expired, or
being contested in good faith and by appropriate proceedings
for which adequate reserves have been established in
accordance with GAAP; (4) Liens of carriers, materialmen,
warehousemen, mechanics and landlords and other similar Liens
which secure amounts which are not yet overdue or which are
being contested in good faith by appropriate proceedings for
which adequate reserves have been established in accordance
with GAAP; (5) nonexclusive licenses andsublicenses, leases or
subleases granted to other Persons not materially interfering
with the conduct of the business of the Company; (6) Liens
securing capitalized lease obligations and purchase money
indebtedness incurred solely for the purpose of financing an
acquisition or lease; (7) easements, rights-of-way,
restrictions, encroachments, municipal zoning ordinances and
other similar charges or encumbrances, and minor title
deficiencies, in each case not securing debt and not
materially interfering with the conduct of the business of the
Company and not materially detracting from the value of the
property subject thereto; (8) Liens arising out of the
existence of judgments or awards which judgments or awards do
not constitute an Event of Default; (9) Liens incurred in the
ordinary course of business in connection with workers
compensation claims, unemployment insurance, pension
liabilities and social security benefits and Liens securing
the performance of bids, tenders, leases and contracts in the
ordinary course of business, statutory obligations, surety
bonds, performance bonds and other obligations of a like
nature (other than appeal bonds) incurred in the ordinary
course of business (exclusive of obligations in respect of the
payment for borrowed money); (10) Liens in favor of a banking
institution arising by operation of law encumbering deposits
(including the right of set-off) and contractual set-off
rights held by such banking institution and which are within
the general parameters customary in the banking industry and
only burdening deposit accounts or other funds maintained with
a creditor depository institution; (11) usual and customary
set-off rights in leases and other contracts; and (12) escrows
in connection with acquisitions and dispositions.
Section
4.3.
Location of
Pledged Property .
The
Pledged Property is or will be kept at the address(es) of each
Grantor set forth on the signature pages hereof, or such other
locations as the Grantors have given the Secured Party written
notice prior to the date hereof, and, unless otherwise
provided herein, the Grantors will not remove any Pledged
Property from such locations without the prior written consent
of the Secured Party which consent shall not be unreasonably
withheld.
Section
4.4.
Location, State
of Incorporation and Name of Grantors .
Each
Grantor’s principal place of business, state of
organization, organization identification number, and exact
legal name is as set forth on each such Grantor’s
signature page to this Agreement.
Section
4.5.
Priority of
Security Interest .
The
security interest granted to the Secured Party hereunder shall
be a first priority security interest subject to no other
Liens, except as to the extent set forth in the Intercreditor
Agreement between Thermo Credit, LLC and the Secured Party
dated as of the date hereof. Except for the
Permitted Liens, no financing statement covering any of the
Pledged Property or any proceeds thereof is on file in any
public office.
ARTICLE 5.
DEFAULT;
REMEDIES
Section
5.1.
Method of Realizing Upon the Pledged Property: Other
Remedies .
If
any Event of Default shall have occurred and be
continuing:
(a)
The
Secured Party may exercise in respect of the Pledged Property,
in addition to any other rights and remedies provided for
herein or otherwise available to it, all of the rights and
remedies of a secured party upon default under the Code
(whether or not the Code applies to the affected Pledged
Property), and also may (i) take absolute control of the
Pledged Property, including, without limitation, transfer into
the Secured Party's name or into the name of its nominee or
nominees (to the extent the Secured Party has not theretofore
done so) and thereafter receive, for the benefit of the
Secured Party, all payments made thereon, give all consents,
waivers and ratifications in respect thereof and otherwise act
with respect thereto as though it were the outright owner
thereof, (ii) require each Grantor to assemble all or
part of the Pledged Property as directed by the Secured Party
and make it
available
to the Secured Party at a place or places to be designated by
the Secured Party that is reasonably convenient to both
parties, and the Secured Party may enter into and occupy any
premises owned or leased by a Grantor where the Pledged
Property or any part thereof is located or assembled for a
reasonable period in order to effectuate the Secured Party's
rights and remedies hereunder or under law, without obligation
to the Grantor in respect of such occupation, and
(iii) without notice except as specified below and
without any obligation to prepare or process the Pledged
Property for sale, (A) sell the Pledged Property or any
part thereof in one or more parcels at public or private sale,
at any of the Secured Party's offices or elsewhere, for cash,
on credit or for future delivery, and at such price or prices
and upon such other terms as the Secured Party may deem
commercially reasonable and/or (B) lease, license or
dispose of the Pledged Property or any part thereof upon such
terms as the Secured Party may deem commercially
reasonable. Each Grantor agrees that, to the extent
notice of sale or any other disposition of the Pledged
Property shall be required by law, at least ten (10) days'
notice to the Grantor of the time and place of any public sale
or the time after which any private sale or other disposition
of the Pledged Property is to be made shall constitute
reasonable notification. The Secured Party shall
not be obligated to make any sale or other disposition of any
Pledged Property regardless of notice of sale having been
given. The Secured Party may adjourn any public or
private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further
notice, be made at the time and place to which it was so
adjourned. Each Grantor hereby waives any claims
against the Secured Party arising by reason of the fact that
the price at which the Pledged Property may have been sold at
a private sale was less than the price which might have been
obtained at a public sale or was less than the aggregate
amount of the Obligations, even if the Secured Party accepts
the first offer received and does not offer such Pledged
Property to more than one offeree, and waives all rights that
the Grantor may have to require that all or any part of such
Pledged Property be marshaled upon any sale (public or
private) thereof. Each Grantor hereby acknowledges
that (i) any such sale of the Pledged Property by the
Secured Party may be made without warranty, (ii) the
Secured Party may specifically disclaim any warranties of
title, possession, quiet enjoyment or the like, and
(iii) such actions set forth in clauses (i) and (ii)
above shall not adversely affect the commercial reasonableness
of any such sale of Pledged Property.
(b)
Any cash
held by the Secured Party as Pledged Property and all cash
proceeds received by the Secured Party in respect of any sale
of or collection from, or other realization upon, all or any
part of the Pledged Property shall be applied (after payment
of any amounts payable to the Secured Party pursuant to
Section 8.3 hereof) by the Secured Party against, all or any
part of the Obligations in such order as the Secured Party
shall elect, consistent with the provisions of the Securities
Purchase Agreement. Any surplus of such cash or
cash proceeds held by the Secured Party and remaining after
the indefeasible payment in full in cash of all of the
Obligations shall be paid over to whomsoever shall be lawfully
entitled to receive the same or as a court of competent
jurisdiction shall direct.
(c)
In the
event that the proceeds of any such sale, collection or
realization are insufficient to pay all amounts to which the
Secured Party is legally entitled, each Grantor shall be
liable for the deficiency, together with interest thereon at
the rate specified in the Convertible Debentures for interest
on overdue principal thereof or such other rate as shall be
fixed by applicable law, together with the costs of collection
and the reasonable fees, costs, expenses and other client
charges of any attorneys employed by the Secured Party to
collect such deficiency.
(d)
Each
Grantor hereby acknowledges that if the Secured Party complies
with any applicable state, provincial, or federal law
requirements in connection with a disposition of the Pledged
Property, such compliance will not adversely affect the
commercial reasonableness of any sale or other disposition of
the Pledged Property.
(e)
The
Secured Party shall not be required to marshal any present or
future collateral security (including, but not limited to,
this Agreement and the Pledged Property) for, or other
assurances of payment of, the Obligations or any of them or to
resort to such collateral security or other assurances of
payment in any particular order, and all of the Secured
Party's rights hereunder and in respect of such collateral
security and other assurances of payment shall be cumulative
and in addition to all other rights, however existing or
arising. To the extent that the Grantor lawfully
may, each Grantor hereby agrees that it will not invoke any
law relating to the marshaling of collateral which might cause
delay in or impede the enforcement of the Secured Party's
rights under this Agreement or under any other instrument
creating or evidencing any of the Obligations or under which
any of the Obligations is outstanding or by which any of the
Obligations is secured or payment thereof is otherwise
assured, and, to the extent that it lawfully may, the Company
hereby irrevocably waives the benefits of all such
laws.
Section
5.2.
Duties Regarding Pledged Property .
The
Secured Party shall have no duty as to the collection or
protection of the Pledged Property or any income thereon or as
to the preservation of any rights pertaining thereto, beyond
the safe custody and reasonable care of any of the Pledged
Property actually in the Secured Party’s
possession.
ARTICLE 6.
AFFIRMATIVE
COVENANTS
So
long as any of the Obligations shall remain outstanding,
unless the Secured Party shall otherwise consent in
writing:
Section
6.1.
Existence, Properties, Etc.
(a)
Each
Grantor shall do, or cause to be done, all things, or proceed
with due diligence with any actions or courses of action, that
may be
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