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SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the
“
Agreement ”),
is
entered into and made effective as of _______ __, 2008, by and
between
Wherify Wireless, Inc. a
Delaware corporation with its principal place of business located
at 63 Bovet Road, #521, San Mateo, California 94402-3104 (the
“
Company ”),
and the undersigned subsidiaries of the Company (each a
“
Guarantor ,”
and collectively together with the Company, the “
Grantors ”),
in favor of persons named on
Schedule 1 of
the Securities Purchase Agreement (as defined below)
(the
“
Secured Party ”).
WHEREAS, in
connection with the Bridge Note and Warrant 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 sell to the
Secured Party (i) an aggregate original principal amount of up to
$800,000 of senior secured convertible bridge notes (the
“
Bridge Notes ”),
and (ii) warrants (“
Warrants ”)
to purchase shares of the Company’s common stock
(“
Common Stock ”);
and
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 Bridge
Notes, and the Transaction Documents (as defined in the Securities
Purchase Agreement); and
WHEREAS ,
each of the Guarantors shall receive a direct benefit from the
Secured Party entering into the Securities Purchase Agreement, the
Bridge Notes, and the Transaction Documents including among other
things and without limitation, the working capital required to
maintain the intellectual property of the Guarantor;
and
WHEREAS, it
is a condition precedent to the Secured Party purchasing the Bridge
Notes 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 (i) Transaction
Documents and (ii) the Guarantors’ obligations under the
Guaranty;
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 Bridge
Notes 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 Bridge Notes, 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 the
failure by the Company to perform, observe, or comply with any of
the covenants, agreements, terms or conditions set forth herein or
the occurrence of an event of default under the Bridge Notes
or an event of default in any of the Transaction Documents,
including but not limited to a termination of the Forbearance
Agreement.
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 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 ”).
(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.
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
Bridge Notes (including interest thereon) and the other
Transaction Documents, , 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, exercise or
redemption rights of the Secured Party under the Bridge Notes
and the Warrants.
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) to facilitate collection, the Secured Party
may notify account debtors and obligors on any Pledged
Property to make payments directly to the Secured Party. 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) 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) existing 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) existing Liens securing capitalized lease
obligations and purchase money indebtedness incurred solely for the
purpose of financing an acquisition or lease; (6) 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; (7) existing Liens arising out of the
existence of judgments or awards which judgments or awards do not
constitute an Event of Default; (8) existing 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); and (9) existing 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.
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. Unless
otherwise provided herein, the Grantors will not remove any
Pledged Property from such locations without the express prior
written consent of the Secured Party except in the ordinary
course of business.
Section
4.4
Location, State of Incorporation and Name of Grantors
.
Each
Grantor’s principal place of business (and where its
assets are kept if different), 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 hereto is a result of an
Intercreditor Agreement dated ______, 2008 by and among the
Company, the Secured Party and YA Global Investments, L.P. and
shall be a first priority security interest subject to no
other Liens. 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
jointly and severally liable for the deficiency, together with
interest thereon at the increased rate as specified in the
Bridge Notes 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.
Section
5.3 Cross
Default.
Each
Grantor hereby acknowledges and agrees that any default or
Event of Default under this Agreement or under any Transaction
Document shall constitute an Event of Default under each other
Transaction Document.
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 reasonably necessary (and/or requested by the Secured
Party) (i) to maintain Grantor’s due organization,
valid existence and good standing under the laws of its state
of incorporation, and (ii) to preserve and keep in full
force and effect all qualifications, licenses and
registrations in those jurisdictions in which the failure to
do so would have a Material Adverse Effect (as defined below);
and (b) each Grantor shall not do, or cause to be done,
any act impairing the Grantor’s corporate power or
authority (i) to carry on the Grantor’s business as
now conducted, and (ii) to execute or deliver this
Agreement or any other document delivered in connection
herewith, including, without limitation, any UCC-1 Financing
Statements required by the Secured Party (which other
loan instruments collectively shall be referred to as the
“
Loan Instruments ”) to
which it is or will be a party, or perform any of its obligations
hereunder or thereunder. For purpose of this Agreement, the term
“
Material Adverse Effect ”
shall mean any material and adverse affect whether individually or
in the aggregate, upon (a) the Grantor’s assets,
business, operations, properties or condition, financial or
otherwise; (b) the Grantor’s ability to make payment as
and when due of all or any part of the Obligations; or (c) the
Pledged Property.
Section
6.2.
Financial Statements and Reports .
Each
Grantor shall furnish to the Secured Party within a reasonable
time such financial data as the Secured Party may reasonably
request.
Section
6.3.
Accounts and Reports .
Each
Grantor shall maintain a standard system of accounting in
accordance with generally accepted accounting principles
consistently applied (“
GAAP ”)
and provide, at its sole expense, to the Secured Party the
following:
(a)
as
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