ThermoEnergy Corporation

 

Loan Agreement

(as amended through August 18, 2014)

 

This Agreement is made by and among ThermoEnergy Corporation, a Delaware
corporation (the “Corporation”) and the individuals and entities identified on
Schedule I hereto (each, a “Lender”) as of the 23rd day of June 2014.

 

Whereas each of the Lenders is willing to make a loan to the Corporation on the
terms set forth herein in the minimum principal amount set forth opposite the
name of such Lender on Schedule I hereto;

 

Now, therefore, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Corporation and the Lenders hereby agree as follows:

 

1.            Loans. Each of the Lenders, severally and not jointly, hereby
agrees to make a loan to the Corporation in the minimum principal amount set
forth opposite the name of such Lender on Schedule I hereto (each, a “Loan”).
The Loans shall be evidenced by 12% Secured Promissory Notes in substantially
the form attached hereto as Exhibit A (each, a “Note”) and the Corporation’s
obligations with respect thereto shall be secured by the grant of a lien on
substantially all of the assets of the Corporation in favor of the Lenders
pursuant to a Security Agreement in substantially the form attached hereto as
Exhibit B (the “Security Agreement”). On or before September 15, 2014, each of
the Lenders may, but shall not be obligated to, make one or more additional
loans to the Corporation at such times and in such amounts as such Lender and
the Corporation may agree and all such additional loans shall be deemed to be
Loans for purposes of this Agreement, shall be evidenced by Notes, and shall be
entitled to the all of the benefits of this Agreement and the Security
Agreement; provided, however, that the aggregate principal amount of all such
additional Loans shall not exceed $500,000.

 

2.            Representations and Warranties of the Corporation. The Corporation
hereby represents and warrants to the Lenders as follows:

 

(a)Organization and Qualification. The Corporation is duly incorporated, validly
existing and in good standing under the laws of the State of Delaware, with the
requisite power and authority to own and use its properties and assets and to
carry on its business as currently conducted. The Corporation is not in
violation of any of the provisions of its Certificate of Incorporation or
By-Laws. The Corporation is duly qualified to conduct its business and is in
good standing as a foreign corporation in the Commonwealth of Massachusetts, the
only jurisdiction where the failure to be so qualified or in good standing, as
the case may be, would not, individually or in the aggregate, have or reasonably
be expected to result in a Material Adverse Effect. For purposes of this
Agreement, the term “Material Adverse Effect” shall mean any of (i) a material
and adverse effect on the legality, validity or enforceability of any of this
Agreement, the Notes, or the Security Agreement (collectively, the “Transaction
Documents”), (ii) a material and adverse effect on the results of operations,
assets, prospects, business or condition (financial or otherwise) of the
Corporation, or (iii) a material impairment of the Corporation’s ability to
perform on a timely basis its obligations under any Transaction Document.

 

 

 

 

(b)Authorization; Enforcement. The Corporation has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by
each of the Transaction Documents and otherwise to carry out its obligations
thereunder. The execution and delivery of each of the Transaction Documents by
the Corporation and the consummation by the Corporation of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Corporation and no further action is required by the Corporation in
connection therewith. Each Transaction Document has been (or upon delivery will
have been) duly executed by the Corporation and, when delivered in accordance
with the terms hereof, will constitute the valid and binding obligation of the
Corporation enforceable against the Corporation in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally the enforcement of, creditors’ rights and remedies or by
other equitable principles of general application.

 

(c)No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Corporation and the consummation by the Corporation of the
transactions contemplated thereby do not and will not conflict with or violate
any provision of the Borrower’s Certificate of Incorporation or By-Laws.

 

(d)SEC Reports; Financial Statements. The Corporation has filed all periodic
reports required to be filed by it under the Securities Act of 1933, as amended
(the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) for the twenty-four months preceding the date of this Agreement
(the foregoing materials, being collectively referred to herein as the “SEC
Reports”). As of their respective dates, the SEC Reports complied in all
material respects with the requirements of the Securities Act and the Exchange
Act and the rules and regulations of the Securities and Exchange Commission (the
“SEC”) promulgated thereunder, and none of the SEC Reports, when filed,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Corporation included in the SEC
Reports comply in all material respects with applicable accounting requirements
and the rules and regulations of the SEC with respect thereto as in effect at
the time of filing. Such financial statements have been prepared in accordance
with GAAP applied on a consistent basis during the periods involved and fairly
present in all material respects the financial position of the Corporation and
its consolidated subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of
unaudited statements, to normal, immaterial, year-end audit adjustments.

 

(e)Brokerage Fees. No brokerage or finder’s fees or commissions are or will be
payable by the Corporation to any broker, financial advisor or consultant,
finder, placement agent, investment banker, bank or other person with respect to
the transactions contemplated by any of the Transaction Documents. The Lenders
shall have no obligation with respect to any fees or with respect to any claims
(other than such fees or commissions owed by the Lenders pursuant to written
agreements executed by the Lenders which fees or commissions shall be the sole
responsibility of the Lenders) made by or on behalf of other persons for fees
that may be due in connection with the transactions contemplated by the
Transaction Documents.

 

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3.            Representations and Warranties of the Lenders. Each Lender,
severally and not jointly, hereby represents and warrants to the Corporation as
follows, with respect only to herself, himself or itself and not the other
Lenders, that this Agreement has been duly executed by such Lender and
constitutes the valid and legally binding obligation of such Lender, enforceable
against her, him or it in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors’ rights and remedies or by
other equitable principles of general application.

 

4            Use of Proceeds. The proceeds from the Loans shall be used by the
Corporation for general corporate purposes.

 

5.            Subordination of 2013 Loans. The Lenders made loans to the
Corporation in the aggregate principal amount of $4,000,000 (the “2013 Loans”)
pursuant to that certain Loan Agreement dated as of August 22, 2013 by and among
the Corporation and the Lenders (the “2013 Loan Agreement”) and, to secure its
obligations with respect to the 2013 Loans, the Corporation granted to the
Lenders a lien on substantially all of the assets of the Corporation pursuant to
a certain Security Agreement dated as of August 22, 2013 by and among the
Corporation, Empire Capital Partners, L.P., as agent for itself and the other
secured parties, and the Lenders (as secured parties) (the “2013 Security
Agreement”). The parties acknowledge that the Corporation is currently in
financial distress and the Lenders agree that there is greater risk in making
the Loans to the Corporation at this time and forward than there was in making
the 2013 Loans, given the Corporation’s change in financial circumstances, such
that it is justifiable and appropriate that the Lenders who make Loans to the
Corporation pursuant to this Agreement should be repaid first from payments by
or on behalf of the Corporation and that, vis-à-vis the 2013 Loans, all
obligations of the Corporation relating to or arising from the Loans made
pursuant to this Agreement shall be deemed to have priority (the “Senior
Priority Obligations”). Accordingly, the Lenders agree that, to the extent that
payment is made on or after June 20, 2014, by or on behalf of the Corporation
(from any source whatsoever, including, without limitation, payment by a Trustee
appointed under Title 11 of the United States Code, an Assignee for the Benefit
of Creditors under state law, or any other receiver or fiduciary or agent), such
payment(s), whether in cash or other form of property of any kind, shall be
distributed (1) first to the Lenders, in proportion to the respective sum(s)
advanced to the Corporation constituting Senior Priority Obligations, in
repayment of the Senior Priority Obligations until the Senior Priority
Obligations are satisfied in full, and then (2) to the Lenders, in repayment of
the 2013 Loans, repayment of which to the Lenders is hereby subordinated to the
extent provided in this Section 5.

 

6.            Entire Agreement. The Transaction Documents contain the entire
understanding of the parties with respect to the subject matter hereof and
supersede all prior agreements, understandings, discussions and representations,
oral or written, with respect to such matters. No provision of any Transaction
Document may be waived or amended except in a written instrument signed by the
Corporation and by Lenders holding at least 66⅔% of the principal amount of the
then outstanding Notes. No waiver of any default with respect to any provision,
condition or requirement of any of the Transaction Documents shall be deemed to
be a continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement of such Transaction
Document or of any other Transaction Document, nor shall any delay or omission
of any party to exercise any right hereunder in any manner impair the exercise
of any such right. No consideration shall be offered or paid to any Lender to
amend or consent to a waiver or modification of any provision of any Transaction
Document unless the same consideration is also offered to all Lenders.

 

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7.            Governing Law and Jurisdiction. This Agreement and the rights of
the parties hereunder shall be construed and enforced in accordance with the
laws of the Commonwealth of Massachusetts applicable to agreements executed and
to be performed wholly within such state and without regard to principles of
conflicts of law. Each party irrevocably (a) consents to the jurisdiction of the
federal and state courts situated in Massachusetts in any action that may be
brought for the enforcement of this Agreement, and (b) submits to and accepts,
with respect to its properties and assets, generally and unconditionally, the in
personam jurisdiction of the aforesaid courts, waiving any defense that such
court is not a convenient forum.

 

8.            Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other parties, it being understood that all
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such delivery shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof, notwithstanding any subsequent failure or refusal to
deliver an original signed in ink.

 

9.            Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the parties will attempt to agree upon
a valid and enforceable provision that is a reasonable substitute therefor, and
upon so agreeing, shall incorporate such substitute provision in this Agreement.
If any provision of this Agreement is held to be invalid or unenforceable in any
respect, the validity and enforceability of the remaining terms and provisions
of this Agreement shall not in any way be affected or impaired thereby.

 

[Signature Page follows]

 

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In witness whereof, the Borrower and the Lenders have caused this Agreement to
be duly executed as of the date first above written.

 

ThermoEnergy Corporation   Empire Capital Partners, lp         By: Empire gp,
llc, its General Partner           By: /s/ Gregory M. Landegger   By: /s/ Peter
J. Richards   Gregory M. Landegger     Peter J. Richards   Chief Operating
Officer     Managing Member   and Interim Chief Financial Officer   and        
        By: /s/ Scott A. Fine         Scott A. Fine         Managing Member    
      Empire Capital Partners, ltd   Empire Capital Partners Enhanced Master By:
Empire Capital Management, llc,     Fund, ltd   its Investment Manager   By:
Empire Capital Management, llc,         its Investment Manager By: /s/ Peter J.
Richards         Peter J. Richards   By: /s/ Peter J. Richards   Managing Member
    Managing Member and   and           By: /s/ Scott A. Fine   By: /s/ Scott A.
Fine   Scott A. Fine     Scott A. Fine   Managing Member     Managing Member    
            /s/ Robert S. Trump       Robert S. Trump

 

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ThermoEnergy Corporation

 

Loan Agreement

 

Schedule I

Investor Loan Amount Robert S. Trump $45,000 Empire Capital Partners, LP $19,800
Empire Capital Partners, Ltd. $11,700 Empire Capital Partners Enhanced Master
Fund Ltd. $13,500

  

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Exhibit A

 

Principal Amount:  $__________ June 23, 2014

 

12% SECURED PROMISSORY NOTE

 

For Value Received, ThermoEnergy Corporation, a Delaware corporation (the
“Borrower”), hereby promise to pay to the order of ______________(the “Holder”)
the sum of ___________ Dollars ($__________) (or such lesser amount as may be
then outstanding) together with interest on the unpaid principal hereof from the
date hereof at the rate of twelve percent (12%) per annum, compounded quarterly.

 

The entire principal amount of this Note, plus interest accrued thereon, shall
be due and payable in a single installment (i) on July 11, 2014 or (ii) upon
demand following the occurrence of an Event of Default, as defined below (in
either event, “Maturity”). In the event the Borrower shall not have paid the
outstanding principal balance and accrued interest thereon at Maturity, then
interest shall accrue from and after the date of Maturity at the lower of (i)
eighteen percent (18%) per annum, and (ii) the highest interest rate acceptable
under applicable usury laws, compounded monthly (the “Default Rate”). Interest
shall be calculated on the basis of actual days elapsed and a 360-day year
consisting of four quarters of 90 days each and twelve months of 30 days each.

 

This Note is one of several substantially identical promissory notes issued by
the Borrower pursuant to that certain Loan Agreement dated as of June 23, 2014
by and among the Borrower, the Holder and certain other persons (the “Loan
Agreement”) (which promissory notes, including the Note, are referred to herein
as the “Series Notes”). So long as this Note is outstanding, the Holder shall be
entitled to the benefit of, and subject to the provisions of, the Loan
Agreement.

 

The Borrower and the holders of the Series Notes (including the Holder) have,
contemporaneously herewith, entered into a Security Agreement (the “Security
Agreement”) securing the obligations of the Borrower to the Holder and the other
holders of the Series Notes under such Series Notes, and so long as this Note is
outstanding the Holder shall be entitled to the benefit of, and subject to the
provisions of, the Security Agreement.

 

This Note may be prepaid, in whole or in part, at any time without premium or
penalty; provided, however, that no Series Note may be prepaid unless
simultaneous with such prepayment, the same portion of all outstanding Series
Notes are also prepaid. Partial prepayments shall be credited first to accrued
and unpaid interest, and the balance, if any, shall reduce principal.

 

The entire unpaid principal amount of this Note, together with interest thereon
shall, on written notice from the Holder, forthwith become and be due and
payable if any one or more Events of Default shall have occurred (for any reason
whatsoever and whether such happening shall be voluntary or involuntary or be
affected or come about by operation of law pursuant to or in compliance with any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) and be continuing.

 

The occurrence of any one or more of the following events or conditions shall
constitute an “Event of Default” under this Note:

 

 

 

 

(i)          The Borrower’s failure to make any payment of principal or interest
or any other sums within fifteen (15) days of the date when due under any Series
Note; or

 

(ii)         Any representation or warranty or other statement made by the
Borrower in the Loan Agreement or the Security Agreement proves to have been
false or misleading in any material respect when made or furnished; or

 

(iii)        Breach of or failure in the due observance or performance in any
material respect of any covenant, condition or agreement on the part of the
Borrower to be observed or performed pursuant to this Note, the Loan Agreement
or the Security Agreement, and the failure to cure (if curable) any such breach
or failure within ten (10) days after receipt of written notice thereof from the
Holder; or

 

(iv)        If the Borrower shall (a) apply for or consent to the appointment of
a receiver, trustee or liquidator of all or a substantial part of any of its
assets; (b) be unable, or admit in writing its inability, to pay its debts as
they mature; (c) file or permit the filing of any petition, case arrangement,
reorganization, or the like under any insolvency or bankruptcy law, or the
adjudication of it as a bankrupt, or the making of an assignment for the benefit
of creditors or the consenting to any form or arrangement for the satisfaction,
settlement or delay of debt or the appointment of a receiver for all or any part
of its properties; or (d) any action shall be taken by the Borrower for the
purpose of effecting any of the foregoing; or

 

(v)         If an order, judgment or decree shall be entered, or a case shall be
commenced, against the Borrower, without its application, approval or consent by
any court of competent jurisdiction, approving a petition or permitting the
commencement of a case seeking reorganization or liquidation of the Borrower or
appointing a receiver, trustee or liquidator of the Borrower, or of all or a
substantial part of the assets of the Borrower, and the Borrower, by any act,
indicate its approval thereof, consent thereto, or acquiescence therein, or such
order, judgment, decree or case shall continue unstayed and in effect for any
period of thirty (30) consecutive days or an order for relief in connection
therewith shall be entered; or

 

(vi)        If the Borrower shall dissolve or liquidate, or be dissolved or
liquidated, or cease to legally exist, or, without the prior written consent of
the holders of Series Notes representing at least 66⅔% in aggregate outstanding
principal amount of the Series Notes, merge or consolidate, or be merged or
consolidated, with or into any other corporation.

 

All payment obligations arising under this Note are subject to the express
condition that at no time shall the Borrower be obligated or required to pay
interest at a rate which could subject the Holder to either civil or criminal
liability as a result of being in excess of the maximum rate which the Borrower
is permitted by law to contract or agree to pay. If, by the terms of this Note,
the Borrower is at any time required or obligated to pay interest at a rate in
excess of such maximum rate, the applicable rate of interest shall be deemed to
be immediately reduced to such maximum rate, and interest thus payable shall be
computed at such maximum rate, and the portion of all prior interest payments in
excess of such maximum rate shall be applied and shall be deemed to have been
payments in reduction of principal.

 

No failure or delay on the part of the Holder in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing hereunder are cumulative to, and not exclusive of,
any rights or remedies otherwise available.

 

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All questions concerning the construction, validity, enforcement and
interpretation of this Agreement shall be governed by and construed and enforced
in accordance with the internal laws of the Commonwealth of Massachusetts,
without regard to the principles of conflicts of law thereof. Each party agrees
that any action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened. (a “Proceeding”) concerning the interpretation,
enforcement and of the transactions contemplated by this Note shall be commenced
exclusively in the state or federal courts sitting in, or having jurisdiction
over, Boston, Massachusetts (the “Massachusetts Courts”). Each party hereto
hereby irrevocably submits to the exclusive jurisdiction of the Massachusetts
Courts for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein, and hereby
irrevocably waives, and agrees not to assert in any Proceeding, any claim that
it is not personally subject to the jurisdiction of any such Massachusetts
Court, or that such Proceeding has been commenced in an improper or inconvenient
forum. If either party shall commence a Proceeding to enforce any provisions of
this Note, then the prevailing party in such Proceeding shall be reimbursed by
the other party for its reasonable attorneys’ fees and other costs and expenses
incurred with the investigation, preparation and prosecution of such Proceeding.

 

THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO
A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR
IN CONNECTION WITH THIS NOTE. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR
THE HOLDER TO ACCEPT THIS NOTE.

 

This Note may be amended or supplemented, or any provision hereof waived, only
if all of the other Series Notes are amended or supplemented or provisions
thereof waived in like manner and only if such amendment, supplement or waiver
is approved by the written agreement of the Borrower and of the holders of
Series Notes representing at least 66⅔% in aggregate outstanding principal
amount of the Series Notes.

 

This Note shall be binding upon the Borrower and its successors and assigns, and
shall inure to the benefit of the Holder and its successors and assigns. The
Borrower may not assign any of its obligations under this Note without the
consent of the Holder.

 

If default is made in the payment of this Note, the Borrower shall pay the
Holder hereof reasonable costs of collection, including reasonable attorneys’
fees, regardless of whether the Holder commenced litigation in order to enforce
its rights under this Note.

 

In witness whereof, the Borrower has caused this Note to be executed and
delivered by its duly authorized Chief Operating Officer and Interim Chief
Financial Officer as of the 23rd day of June 2014.

 

  ThermoEnergy Corporation         By:       Gregory M. Landegger     Chief
Operating Officer     and Interim Chief Financial Officer

 

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Exhibit B

 

ThermoEnergy Corporation

 

Security Agreement

 

This Security Agreement (this “Agreement”) is dated as of June 23, 2014, and is
entered into by and among ThermoEnergy Corporation, a Delaware corporation
having its principal place of business in Worcester, Massachusetts (the
“Borrower”) and the persons and entities named on Schedule I hereto
(collectively, the “Secured Parties) and Empire Capital Partners, LP, one of the
Secured Parties, as agent for itself and the other Secured Parties (the
“Agent”). Capitalized terms not otherwise defined herein are used as defined in
the Massachusetts Uniform Commercial Code on the date of this Agreement (the
“UCC”).

 

Whereas, the Borrower is, on or about the date hereof, executing and delivering
to the Secured Parties a series of 12% Secured Promissory Notes of even date
herewith in the initial aggregate principal amount of $90,000 (the “Notes”); and

 

Whereas, the Secured Parties have, as a condition to the making of the loans
evidenced by the Notes, required that the Borrower execute and deliver to the
Secured Parties a security agreement in substantially the form hereof; and

 

Whereas, the Borrower wishes to grant a security interest in favor of the
Secured Parties as herein provided;

 

Now, therefore, in consideration of the promises contained herein and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

 

I.           Grant of Security Interest. The Borrower hereby grants and
otherwise pledges to the Secured Parties a continuing security interest in all
of the present and future rights, title and interests of the Borrower in and to
the following property, and each item thereof, all whether now or hereafter
existing, or owned or acquired by the Borrower, or now or hereafter arising or
due or to become due, wherever such property may be located, together with all
substitutions for, replacements of, additions to, accessions to, and products,
Proceeds and records of any and all of the following (collectively, the
“Collateral”):

 

1. all Accounts; 2. all Inventory; 3. all Equipment; 4. all Fixtures; 5. all
Contracts; 6. all Chattel Papers; 7. all Documents; 8. all Instruments; 9. all
Investment Property; 10. all Deposit Accounts; 11. all General Intangibles;

 

 

 

 

12. all Supporting Obligations 13. all Commercial Tort Claims; 14. all
Intellectual Property; and 15. all other items of tangible and intangible
personal property of any and every kind and description which are not otherwise
described herein.

 

II.          Security for Obligations. This Agreement secures, and the
Collateral is collateral security for the prompt payment in full (including,
without limitation, amounts that would become due but for the filing of a
petition in bankruptcy) of, all amounts when due under the Notes, as well as the
Borrower’s performance and observance of all covenants contained herein and in
the Notes (the “Obligations”).

 

III.         Agent as Agent of Secured Parties.

 

A.          The Agent shall serve and act as agent for all Secured Parties and
shall take such action on their behalf under the provisions of this Agreement
and shall exercise such powers and perform such duties as are expressly
delegated to the Agent by the terms of this Agreement, together with such powers
as are reasonably incidental thereto. Notwithstanding any provision to the
contrary contained elsewhere in this Agreement, the Agent shall not have any
duties or responsibilities except those expressly set forth herein.

 

B.          The Secured Parties, the Agent and the Borrower acknowledge and
agree that each Note is secured by a security interest in the Collateral and
that the priorities of the security interests which secure each Secured Party’s
respective Note and its or his rights in and to the Collateral which secures
such Notes shall at all times be equal and that each Secured Party shall share
and be equal in priority and rights with the other Secured Parties in proportion
to the then outstanding principal amounts of, plus the accrued but unpaid
interest on, their respective Notes.

 

C.           In the event that an Event of Default occurs, and a Secured Party
gives the Agent notice thereof, the Agent shall immediately thereafter (i) give
written notice of the Event of Default to all Secured Parties, and (ii) commence
enforcement, collection (including judicial or nonjudicial foreclosure) or
similar proceeding with respect to the Collateral; provided that while the Agent
may take immediate action in its discretion in order to attempt to preserve the
rights of the Secured Parties hereunder, the Agent (a) shall not be required to
take any action hereunder unless and until, if requested by the Agent, the Agent
receives direction from 66⅔% in interest of the Secured Parties (determined on
the basis of the outstanding principal amounts of the Notes), and (b) shall take
such all such actions to enforce this Agreement and to realize upon, collect and
dispose of the Collateral or any portion thereof as may be directed by 66⅔% in
interest of the Secured Parties; provided that the Agent shall not be required
to take any action that is contrary to law or to the terms of this Agreement, or
that would subject it or any of its employees or agents to liability.

 

D.          The Agent acknowledges and agrees that this Agreement and the terms
and provisions hereof are solely for the benefit of the Secured Parties and
shall not benefit in any way any other person or entity, including, without
limitation, the Borrower or any of its guarantors. Nothing in this Agreement is
intended to affect, limit or in any way diminish the security interests which
the Secured Parties claim in the assets of the Borrower insofar as the rights of
the Borrowers and third parties are concerned. The Agent, on behalf of all
Secured Parties, specifically reserves any and all of their respective rights,
security interests and rights to assert security interests against the Borrowers
and any third parties, including guarantors.

 

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E.           The Borrower, the Secured Parties and the Agent acknowledge and
agree that each Secured Party’s respective rights and priorities with respect to
the Collateral shall exist and be enforceable against the Collateral only by the
Agent on behalf of all Secured Parties in accordance with the terms hereof,
independent of the time or order of attachment or perfection of such Secured
Party’s respective security interest, or the time or order of filing of
financing statements. The subordinations, agreements and priorities set forth in
this Agreement shall remain in full force and effect regardless of whether any
Secured Party in the future seeks to rescind, amend, terminate or reform, by
liquidation or otherwise, its or his respective agreements with the Borrower.

 

F.           The Borrower, the Secured Parties and the Agent acknowledge and
agree that the indebtedness and payment obligations of the Borrower with respect
to each Note shall be of equal priority, no Note shall have a priority of
payment over or be subordinate to any other Note, and any and all property,
Proceeds or other payments received by the Agent in connection with its
enforcement of the Secured Parties’ security interests as contemplated herein
shall be applied promptly by the Agent to the payment to the Secured Parties
pari passu of all outstanding amounts owed under their respective Notes.

 

G.           Subject to the shared priority and respective rights of the Secured
Parties set forth in this Agreement, the Agent, on behalf of the Secured
Parties, shall be entitled to obtain loss payee endorsements and additional
insured status with respect to any and all policies of insurance now or
hereafter obtained by the Borrower insuring against casualty or other loss to
any property of the Borrower in which any Secured Party may have a security
interest, and, in connection therewith, may file claims, settle disputes, make
adjustments and take any and all other action otherwise then permitted to each
Secured Party with regard thereto, which it may deem advisable with respect to
any assets of the Borrower.

 

H.           Neither the Agent nor any officer or agent thereof shall be liable
to the Borrower or the Secured Parties for monetary damages for any action taken
or omitted to be taken by the Agent except for liability (i) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law or (ii) for any transaction from which the Agent or such
officer or agent thereof derived an improper personal benefit.

 

I.           The Borrower shall indemnify and hold harmless the Agent for any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements (including reasonable
attorneys’ fees) of any kind whatsoever which may be imposed on, incurred by or
asserted against the Agent in connection with or in any way arising out of this
Agreement; provided, however, that the Borrower shall not be liable to the Agent
for any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from the
Agent’s gross negligence or willful misconduct as determined by a final judgment
of a court of competent jurisdiction. The Borrower shall upon demand pay to the
Agent the amount of any and all reasonable expenses, including the reasonable
fees and expenses of its counsel and of any experts and agents, that the Agent
may incur in connection with (i) the administration of this Agreement, (ii) the
custody, preservation, use or operation 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 Agent or the Secured Parties hereunder, or (iv) the
failure by the Borrower to perform or observe any of the provisions hereof. In
the event the Borrower fails to comply with its obligations under this Section
3(i), after commercially practicable efforts by the Agent to obtain such
compliance, each of the Secured Parties agrees to contribute and pay to the
Agent its or his pro rata share of all such obligations

 

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IV.          Representations, Warranties and Covenants. The Borrower represents,
warrants and covenants as follows:

 

A.           The Borrower is a corporation existing and in good standing under
the laws of the State of Delaware.

 

B.           The Borrower is duly empowered and authorized to enter into and
perform its obligations under this Agreement and all other instruments and
transactions contemplated hereby or relating hereto. The Borrower is duly
empowered and authorized to own and to grant security interests in the
Collateral. The execution, delivery and performance by the Borrower of this
Agreement, of the Notes and of all other instruments contemplated hereby do not
and will not violate any law or any provision of, nor be grounds for
acceleration under, any agreement, indenture, note or instrument which is
binding upon the Borrower, including without limitation, the Borrower’s
Certificate of Incorporation, By-Laws and any other loan or security agreements
to which the Borrower is a party or by which the Borrower or its property is
bound.

 

C.           Assuming the due filing of a financing statement in proper form
with the Secretary of State of the State of Delaware, the security interest
granted to the Secured Parties pursuant to this Agreement is a valid, perfected
security interest in the that portion of the Collateral in which a security
interest may be perfected by filing under the UCC.

 

D.           The Borrower shall not hereafter transfer, assign or otherwise
dispose of the Collateral, except in the ordinary course of business, without
the Agent’s prior written consent. The Borrower shall not create, permit or
suffer to exist, and shall take such other action as is necessary to remove, any
claim to or interest in the Collateral, and shall defend the right, title and
interest of the Secured Parties in and to the Collateral against all claims and
demands of all persons and entities at any time claiming the same or any
interest therein.

 

V.            Agent’s Appointment as Attorney-in-Fact. The Borrower hereby
irrevocably constitutes and appoints, from and after the occurrence of a default
by the Borrower in the Obligations, the Agent and any officer or agent thereof,
with full power of substitution, as the Borrower’s true and lawful
attorney-in-fact with full irrevocable power and authority in the place and
stead of the Borrower and in the name of the Borrower or in the Agent’s own name
as agent hereunder for the Secured Parties, from time to time in the Agent’s
discretion, for the purpose of carrying out the terms of this Agreement, to take
any and all appropriate action and to execute any and all documents and
instruments that may be necessary or desirable to accomplish the purposes of
this agreement and, without limiting the generality of the foregoing, hereby
grant to the Agent the power and right, on behalf of the Borrower, without
notice to or assent by the Borrower to execute, file and record all such
financing statements, certificates of title and other certificates of
registration and operation and similar documents and instruments as the Agent
may deem necessary or desirable to protect, perfect and validate the Secured
Parties’ security interest.

 

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The Borrower hereby ratifies all that such attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable so long as any amount of principal or accrued
interest under the Notes remains unpaid.

 

The powers conferred upon the Agent hereunder are solely to protect the
interests of the Secured Parties in the Collateral and shall not impose any duty
upon the Agent to exercise any such powers. The Agent shall be accountable only
for amounts that the Agent actually receives as a result of the exercise of such
powers and neither the Agent nor any of its partners, officers, directors,
employees or agents shall be responsible to the Borrowers or the other Secured
Parties for any act or failure to act, except for the Agent’s own gross
negligence or willful misconduct.

 

VI.          Remedies. If a default by the Borrower in the Obligations shall
have occurred and be continuing (an “Event of Default”), the Agent shall have
all of the rights and remedies which secured parties may have under the UCC or
other applicable law or at equity, and may do, at its option, one or more of the
following, with or without further notice to the Borrower:

 

A.           Accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable;

 

B.           Appropriate, set off and apply to any or all of the Obligations,
any or all Collateral in such manner as the Agent may determine; and/or

 

C.            Foreclose the security interest created under this Agreement or
under any other agreement relating to the Collateral by any procedure permitted
under the UCC, with or without judicial process.

 

VII.         Termination of Security Interest. The Secured Parties’ security
interest in the Collateral shall be extinguished when the Borrower completes
performance of all Obligations.

 

VIII.        Governing Law; Venue. This Agreement and the rights of the parties
shall be construed and enforced in accordance with the laws of the Commonwealth
of Massachusetts applicable to agreements executed and to be performed wholly
within such state and without regard to principles of conflicts of law. Each
party irrevocably (a) consents to the jurisdiction of the federal and state
courts situated in or having jurisdiction over Boston, Massachusetts in any
action that may be brought for the enforcement of this Agreement, and (b)
submits to and accepts, with respect to its properties and assets, generally and
unconditionally, the in personam jurisdiction of the aforesaid courts, waiving
any defense that such court is not a convenient forum In any such litigation to
the extent permitted by applicable law, each party waives personal service of
any summons, complaint or other process, and agrees that the service thereof may
be made either (i) in the manner for giving of notices provided in the Notes or
(ii) in any other manner permitted by law.

 

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IX.          Severability. In case any provision in or obligation under this
Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation and in any other jurisdiction,
shall not in any way be affected or impaired thereby.

 

X.           General. No Secured Party shall be deemed to have waived any of its
respective rights hereunder or under any other agreement, instrument or paper
signed by the Borrower unless such waiver be in writing and signed by the Agent
(with respect to the Secured Parties’ rights and interest under the Notes or
under this Agreement) or by such Secured Party (with respect to any other
rights). No delay or omission on the part of the Agent in exercising any right
shall operate as a waiver of such right or any other right. All of the Secured
Parties’ rights and remedies, whether evidenced hereby or by any other
agreement, instrument or paper, shall be cumulative and may be exercised
singularly or concurrently. The provisions hereof shall, as the case may
require, bind or inure to the benefit of, the respective heirs, successors,
legal representatives and assigns of the Borrower, the Agent and the Secured
Parties.

 

XI.          Amendments. This Agreement may be amended or modified only by a
written instrument executed by each party hereto.

 

XII.         Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and together shall
constitute one and the same instrument.

 

[Signature Page follows]

 

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In witness whereof, the Borrower, the Agent and the other Secured Parties have
caused this Agreement to be duly executed as of the date first above written.

 

    For itself and as Agent for the other Secured Parties: ThermoEnergy
Corporation           Empire Capital Partners, lp By       By: Empire gp, llc,
its General Partner   Gregory M. Landegger         Chief Operating Officer   By
    and Interim Chief Financial Officer     Peter J. Richards         Managing
Member     and           By         Scott A. Fine       Managing Member      
Empire Capital Partners, ltd   Empire Capital Partners Enhanced Master Fund, ltd
By: Empire Capital Management, llc,     its Investment Manager   By: Empire
Capital Management, llc,         its Investment Manager By           Peter J.
Richards   By     Managing Member     Managing Member and   and           By   
  By      Scott A. Fine     Scott A. Fine   Managing Member     Managing Member
                Robert S. Trump

 

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ThermoEnergy Corporation

 

Security Agreement

 

Schedule I

 

Secured Parties

 

Robert S. Trump

Empire Capital Partners, LP

Empire Capital Partners, Ltd.

Empire Capital Partners Enhanced Master Fund Ltd.

 

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