ETHOS ENVIRONMENTAL, INC. SECURITY AGREEMENT
This
Security Agreement (the “Agreement”) is made
and entered into as of ______________, by and between Ethos Environmental, Inc.,
a Nevada corporation (the “Debtor” or the
“Company”), and each of the secured parties listed on Exhibit A attached to
this Agreement (each a “Secured Party” and
together the “Secured
Parties”).
RECITALS
WHEREAS,
this Agreement is being executed in connection with the issuance of those
certain Convertible Promissory Notes (the “Notes”) issued by Debtor in favor of
Secured Parties under the terms of that certain Securities Purchase Agreement
dated even herewith, such Notes are intended by the parties hereto to be secured
by those certain assets of the Debtor as more fully set forth
herein.
AGREEMENT
For other
good and valuable consideration, the Debtor hereby agrees with the Secured
Parties as follows:
1. Grant of
Security Interest; Subordination.
(a) To
secure the Debtor’s performance of its obligations to the Secured Parties
pursuant to the Notes (including, without limitation, Debtor’s obligations to
convert the Notes into shares of the Company’s equity securities and to timely
pay the principal amount of, and interest on, the Notes and any other amounts
payable with respect to the Note) (the “Obligations”), the
Debtor hereby grants to the Secured Parties as a whole, and to each individual
Secured Party the undivided percentage interest in the Collateral that is set
forth opposite such Secured Party’s name on Exhibit A (the “Participating
Interest”), a continuing lien on and security interest (the “Security Interest”)
in the following collateral (the “Collateral”):
(1) inventory of the Company’s principal products, “Ethos FR” and/or
“Ethos BC” (collectively the “Products”), (2) raw materials to produce the
Products, or (3) outstanding receivables for Products shipped on or after the
date of this Agreement. For purposes of this Agreement, each unpackaged
unlabeled gallon of Product shall have a deemed fair market value of $35.00 per
gallon.
(b) Each
Secured Party hereto agrees to subordinate the Security Interest in the
Collateral as set forth in Section 1(a) above, should the Company be able to
secure additional financing in the amount of $1,000,000 or more and such
financing is predicated upon, fully or in part, the ability of the Company to
subordinate the Security Interest hereunder.
2. Representations
and Warranties. The Debtor hereby
represents and warrants to the Secured Party that:
(a) Ownership
of Collateral. Except for the Security
Interest granted to the Secured Parties pursuant to this Agreement, the Debtor
has rights in or the power to transfer the Collateral free and clear of any
adverse lien, security interest or encumbrance except as created by this
Security Interest. No financing statements covering any Collateral or any
proceeds thereof are on file in any public office (other than filings listing
Secured Parties as the secured party)
(b) Valid
Security Interest. The Security Interest
granted pursuant to this Agreement will constitute a valid and continuing
perfected security interest in favor of the Secured Parties in the Collateral
for which perfection is governed by the UCC. Such Security Interest will be
prior to all other liens on the Collateral.
(c) Organization
and Good Standing. The Debtor has been duly
incorporated, and is validly existing and in good standing, under the laws of
the State of Nevada and has a Nevada corporate identification number of E
031068-2006-5.
(d) Location,
State of Incorporation and Name of Debtor. Debtor’s chief executive
office is located at ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇.
Debtor’s state of incorporation is Nevada and the exact legal name of the
organization is as set forth in the first paragraph of this
Agreement.
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3. Rights
and Obligations of Secured Parties.
(a) Ratable
Sharing of Collateral. Each Secured Party
acknowledges and it is the intent of the Secured Parties that the Security
Interest granted by Debtor is evidenced by a single Security Agreement and each
Secured Party hereby agrees (and each Secured Party hereby irrevocably advises
and instructs Debtor to recognize) that each Secured Party shall participate in
the percentage of the total amount of any Collateral and proceeds of the
Collateral calculated by multiplying the Debtor’s total Obligations by each
Secured Party’s Participating Interest in the Collateral.
(b) Event of
Default. If
an Event of Default shall have occurred and is continuing, those Secured
Parties, who are not officers or directors of the Company, holding a majority of
the Participating Interests in the Collateral shall collectively appoint such
person whom shall represent the Secured Parties (the “Secured Party
Representative”) and shall notify the Company and the Secured Party
Representative of such default and direct the Secured Party Representative with
the course of action to take in enforcing the Secured Parties’ rights and
remedies under this Agreement against the Debtor and Collateral including
foreclosing on the Collateral if necessary. In the event of foreclosure on the
Collateral, if the Collateral is not purchased by a third party at a trustees
sale or otherwise as provided under the UCC, the Secured Party Representative
shall cause title to vest in the names of each Secured Party, as tenants in
common, with undivided interests in the Collateral in accordance with its
Participating Interest. The Secured Parties may also direct Secured Party
Representative to exercise any further rights or remedies under this Agreement,
the Purchase Agreement, or Notes; provided, however, that any interest in or
amounts recorded with respect to the Collateral shall be vested in the names of
each Secured Party in accordance herewith. Any proceeds received from any such
foreclosure, remedial action, redemption or receivership proceeding related to
the Collateral shall be shared between the Secured Parties pari passu in a manner
proportionate to their undivided interest in the Collateral at the time of
determination.
(c) Actions
by Secured Parties; Settlement of Claims. All actions by Secured
Parties or decisions effecting the rights of the Secured Parties including any
settlement of claims the Secured Parties may have against Debtor shall only be
effected by those Secured Parties, who are not officers or directors of the
Company, holding a majority of the Participating Interest in the
Collateral.
4. Covenants. The Debtor covenants and
agrees with the Secured Parties that, from and after the date of this Agreement
until the Obligations are paid in full:
(a) Other
Liens. Except for the Security
Interest, the Debtor has rights in or the power to transfer the Collateral and
its title and will be able to do so hereafter free from any adverse lien,
security interest or encumbrance (other than purchase money security interests
that will be discharged upon Debtor’s payment of the purchase price for the
applicable property), and the Debtor will defend the Collateral against the
claims and demands of all persons at any time claiming the same or any interest
therein.
(b) Maintenance
of Records. The Debtor will keep and
maintain at its own expense complete and satisfactory records of the
Collateral.
(c) Inspection
Rights. The
Secured Parties shall have full access during normal business hours, and upon
reasonable prior notice, to all the books, correspondence and other records of
the Debtor relating to the Collateral. The Secured Parties or their
representatives may examine such records and make photocopies or otherwise
take extracts from such records. The Debtor agrees to render to the Secured
Parties, at the Debtor’s expense, such clerical and other assistance as may be
reasonably requested with regard to the exercise of its rights pursuant to this
paragraph.
(d) Compliance
with Laws, etc. The Debtor will comply
in all material respects with all laws, rules, regulations and orders of any
governmental authority applicable to any part of the Collateral or to the
operation of the Debtor’s business; provided, however, that the
Debtor may contest any such law, rule, regulation or order in any reasonable
manner which does not, in the reasonable opinion of the Debtor, adversely affect
the Secured Parties’ rights or the priority of its liens on the
Collateral.
5. Event of
Default; Secured Party’s Appointment as Attorney-in-Fact.
(a) Event of
Default. For
purposes of this Agreement, the occurrence of any one of the following events
(each, an “Event of
Default”) shall constitute a default hereunder and under the
Note:
(i) A
material breach of a representation or warranty made by the Debtor under the
Purchase Agreement as of the date thereof;
(ii) The
insolvency of the Debtor, the commission of any act of bankruptcy by the Debtor,
the execution by the Debtor of a general assignment for the benefit of
creditors, the filing by or against the Debtor of a petition in bankruptcy or
any petition for relief under the federal bankruptcy act or the appointment of a
receiver or trustee to take possession of the property or assets of the Debtor;
or
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(b) Powers. The Debtor hereby
appoints the Secured Parties and any officer or agent of the Secured Parties,
with full power of substitution, as its attorney-in-fact with full irrevocable
power and authority in the place of the Debtor and in the name of the Debtor or
its own name, from time to time in the Secured Parties’ discretion so long as an
Event of Default has occurred and is continuing, for the purpose of carrying out
the terms of this Agreement, to take any appropriate action and to authenticate
any instrument which may be necessary or desirable to accomplish the purposes of
this Agreement. Without limiting the foregoing, so long as an Event of Default
has occurred and is continuing, the Secured Parties shall have the right,
without notice to, or the consent of, the Debtor, to do any of the following on
the Debtor’s behalf:
(i) to direct
any party liable for any payment under any of the Collateral to make payment of
any and all amounts due or to become due thereunder directly to the Secured
Parties or as the Secured Parties directs;
(ii) to ask
for or demand, collect, and receive payment of and receipt for, any payments due
or to become due at any time in respect of or arising out of any
Collateral;
(iii) to
commence and prosecute any suits, actions or proceedings at law or in equity in
any court of competent jurisdiction to enforce any right in respect of any
Collateral;
(iv) to defend
any suit, action or proceeding brought against the Debtor with respect to any
Collateral;
(v) to
settle, compromise or adjust any suit, action or proceeding described in
subsection (v) above and to give such discharges or releases in connection
therewith as the Secured Parties may deem appropriate;
(vi) generally,
to sell, transfer, pledge and make any agreement with respect to or otherwise
deal with any of the Collateral and to take, at the Secured Parties’ option and
the Debtor’s expense, any actions which the Secured Parties deem necessary to
protect, preserve or realize upon the Collateral and the Secured Parties’ liens
on the Collateral and to carry out the intent of this Agreement, in each case to
the same extent as if the Secured Parties were the absolute owner of the
Collateral for all purposes.
The
Debtor hereby ratifies whatever actions the Secured Parties shall lawfully do or
cause to be done in accordance with this Section 5. This power of attorney shall
be a power coupled with an interest and shall be irrevocable.
5. No Duty
on Secured Parties’ Part. The powers conferred on
the Secured Parties by this Section 5 are solely to protect the Secured Parties’
interests in the Collateral and shall not impose any duty upon it to exercise
any such powers. The Secured Parties shall be accountable only for amounts that
it actually receives as a result of the exercise of such powers, and neither the
Secured Parties nor any of their officers, directors, employees or agents shall,
in the absence of willful misconduct or gross negligence, be responsible to the
Debtor for any act or failure to act pursuant to this Section 5.
6. Performance
by Secured Parties Debtor’s Obligations. If the Debtor fails to
perform or comply with any of its agreements or covenants contained in this
Agreement and the Secured Parties perform or comply, or otherwise cause
performance or compliance, with such agreement or covenant in accordance with
the terms of this Agreement, then the reasonable expenses of the Secured Parties
incurred in connection with such performance or compliance shall be payable by
the Debtor to the Secured Parties on demand and shall constitute Obligations
secured by this Agreement.
7. Remedies. If an Event of Default
has occurred and is continuing, the Secured Parties may exercise, in addition to
all other rights and remedies granted to it in this Agreement and in any other
instrument or agreement relating to the Obligations, all rights and remedies of
a secured party under the UCC. Without limiting the foregoing, the Secured
Parties, without demand of performance or other demand, presentment, protest,
advertisement or notice of any kind (except any notice required by law) to or
upon the Debtor or any other person (all of which demands, defenses,
advertisements and notices are hereby waived), may in such circumstances
collect, receive, appropriate and realize upon any or all of the Collateral,
and/or may sell, lease, assign, give an option or options to purchase, or
otherwise dispose of and deliver any or all of the Collateral (or contract to do
any of the foregoing), in one or more parcels at a public or private sale or
sales, at any exchange, broker’s board or office of any Secured Party or
elsewhere upon such terms and conditions as the Secured Parties may deem
advisable, for cash or on credit or for future delivery without assumption of
any credit risk. The Secured Parties shall have the right upon any such public
sale or sales and, to the extent permitted by law, upon any such private sale or
sales, to purchase all or any part of the Collateral so sold, free of any right
or equity of redemption in the Debtor, which right or equity is hereby waived or
released. To the extent permitted by applicable law, the Debtor waives all
claims, damages and demands it may acquire against the Secured Parties arising
out of the exercise by the Secured Parties of any of its rights hereunder. If
any notice of a proposed sale or other disposition of Collateral shall be
required by law, such notice shall be deemed reasonable and proper if given at
least five (5) days before such sale or other disposition. The Debtor shall
remain liable for any deficiency if the proceeds of any sale or other
disposition of the Collateral are insufficient to pay the Obligations and the
fees and disbursements of any attorneys employed by the Secured Parties to
collect such deficiency.
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8. Private Sale and Compliance
with Law.
(a) Secured
Parties shall not incur any liability as a result of the sale of Collateral, or
any part thereof, at any private sale conducted in a commercially reasonable
manner. Debtor hereby waives any claim against Secured Parties arising by reason
of the fact that the price at which Collateral may have been sold at such a
private sale conducted in a commercially reasonable manner 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 Secured Parties accept the first
offer received and does not offer Collateral to more than one
offeree.
(b) Debtor
agrees that in any sale of any of the Collateral whenever an event of default
hereunder shall have occurred and be continuing, Lender is hereby authorized to
comply with any limitation or restriction in connection with such sale as it may
be advised by counsel is necessary in order to avoid any violation of applicable
law or in order to obtain any required approval of the sale or of the purchaser
by any governmental regulatory authority or official, and Debtor further agrees
that such compliance shall not result in such sale being considered or deemed
not to have been made in a commercially reasonable manner, nor shall Secured
Parties be liable or accountable to Debtor for any discount allowed by reason of
the fact that such Collateral is sold in compliance with any such limitation or
restriction.
9. Application
of Payments with Respect to the Collateral. In the event of any
foreclosure, sale or other disposition of or realization in any manner upon any
of the Collateral, all monies or other property collected or received by the
Secured Parties or their representatives or counsel with respect to the
Collateral, in excess of the amount paid to discharge liens upon the Collateral
(if any), shall be distributed by the Secured Parties as follows:
(a) First: to
the ratable, pari passu
payment of any advances made by any of the Secured Parties to satisfy any
lien or other claim that may impair the Collateral, ratably according to the
total amounts owing to the respective Secured Party as a result of such
advances;
(b) Second:
to the Secured Parties and their representatives and counsel in the amount of,
and to apply to, the payment of reasonable costs and expenses incurred by
Secured Parties representatives and counsel in connection with the
administration and enforcement of the foreclosed upon Collateral, as the case
may be, including the reasonable fees and out-of-pocket expenses of counsel
employed by the Secured Parties to the extent that such fees, advances, costs
and expenses, shall not previously have been paid or reimbursed to the Secured
Parties; and
(c) Third: to
each Secured Party, pari
passu, in a manner proportionate to its Participating Interests in the
Collateral at the time of determination until all indebtedness and other
obligations owed by Debtor under the Notes have been satisfied in full, then any
excess amount to Debtor.
10. Limitation
on Duties Regarding Preservation of Collateral. The Secured Parties’
sole duty with respect to the custody, safekeeping and preservation of the
Collateral, under Section 9-207 of the UCC or otherwise, shall be to deal with
it in the same manner as the Secured Parties deal with similar property for
their own account. Neither the Secured Parties nor any of their directors,
officers, employees or agents shall be liable for failure to demand, collect or
realize upon all or any part of the Collateral or for any delay in doing so or
shall be under any obligation to sell or otherwise dispose of any Collateral
upon the request of the Debtor or otherwise.
11. Powers
Coupled with an Interest. All authorizations and
agencies contained in this Agreement with respect to the Collateral are
irrevocable and are powers coupled with an interest.
12. No
Waiver; Cumulative Remedies. The Secured Parties
shall not by any act (except by a written instrument pursuant to Section 14(f)
hereof), delay, indulgence, omission or otherwise be deemed to have waived any
right or remedy hereunder or to have acquiesced in any default under the Notes
or in any breach of any of the terms and conditions of this Agreement. No
failure to exercise, nor any delay in exercising, on the part of the Secured
Parties, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the Secured Parties of any
right or remedy under this Agreement on any one occasion shall not be construed
as a bar to any right or remedy which the Secured Parties would otherwise have
on any subsequent occasion. The rights and remedies provided in this Agreement
are cumulative, may be exercised singly or concurrently and are not exclusive of
any rights or remedies provided by law.
13. Termination
of Security Interest. Upon satisfaction of the
Debtor’s obligations pursuant to the Note, or conversion of the Notes into
shares of the Company’s equity securities pursuant to the terms of the Notes,
the security interest granted herein shall terminate and all rights to the
Collateral shall revert to the Debtor. Upon any such termination, the Secured
Parties shall authenticate and deliver to the Debtor such documents as the
Debtor may reasonably request to evidence such termination.
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14. Miscellaneous.
(a) Successors
and Assigns. The terms and conditions
of this Agreement shall be binding upon the Debtor and its successors and
assigns, as well as all persons who become bound as a debtor to this Agreement
and inure to the benefit of the Secured Parties and their successors and
assigns. Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.
(b) Governing
Law. This
Agreement and all acts and transactions pursuant hereto and the rights and
obligations of the parties hereto shall be governed, construed and interpreted
in accordance with the laws of the State of California, without giving effect to
principles of conflicts of law.
(c) Counterparts. This Agreement may be
executed in two or more counterparts, each of which shall be deemed an original
and all of which together shall constitute one instrument.
(d) Titles
and Subtitles. The titles and subtitles
used in this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement.
(e) Notices. Any notice required
or permitted by this Agreement shall be in writing and shall be deemed
sufficient upon receipt, when delivered personally or by courier, overnight
delivery service or confirmed facsimile, or 48 hours after being deposited in
the U.S. mail as certified or registered mail with postage prepaid, if such
notice is addressed to the party to be notified at such party’s address or
facsimile number as set forth below or as subsequently modified by written
notice.
(f) Amendments
and Waivers. Any term of this
Agreement may be amended with the written consent of the parties or their
respective successors and assigns. Any amendment or waiver effected in
accordance with this Section 11(f) shall be binding upon the parties and their
respective successors and assigns.
(g) Severability. If one or more
provisions of this Agreement are held to be unenforceable under applicable law,
the parties agree to renegotiate such provision in good faith, in order to
maintain the economic position enjoyed by each party as close as possible to
that under the provision rendered unenforceable. In the event that the parties
cannot reach a mutually agreeable and enforceable replacement for such
provision, then (i) such provision shall be excluded from this Agreement, (ii)
the balance of the Agreement shall be interpreted as if such provision were so
excluded and (iii) the balance of the Agreement shall be enforceable in
accordance with its terms.
(h) Entire
Agreement. This Agreement, and the
documents referred to herein constitute the entire agreement between the parties
hereto pertaining to the subject matter hereof, and any and all other written or
oral agreements existing between the parties hereto concerning such subject
matter are expressly canceled.
IN WITNESS WHEREOF, the Debtor
and Secured Party have caused this Agreement to be duly executed and delivered
as of the date first above written.
DEBTOR:
By: ______________________
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▇▇▇▇▇▇▇▇▇▇▇, CEO
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[SIGNATURE
PAGES OF SECURED PARTY TO FOLLOW]
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IN
WITNESS WHEREOF, the parties have executed this Security Agreement as of the
date first written above.
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By:
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Name:
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(print)
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Title:
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c/o:
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Street:
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Attention:
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[SIGNATURE
PAGE TO SECURITY AGREEMENT]
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EXHIBIT
A
SCHEDULE
OF SECURED PARTIES
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Name
and Address of Secured Party
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Original
Principal Amount
of
Note
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Participating
Interest in Collateral in %
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TOTAL
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100%
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