Exhibit 10.1

 

TELKONET, INC.

ETHOSTREAM LLC

 

HERITAGE BANK OF COMMERCE

LOAN AND SECURITY AGREEMENT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This Loan And Security Agreement is entered into as of September 30, 2014, by
and between HERITAGE BANK OF COMMERCE (“Bank”), and TELKONET, INC., a Utah
corporation, and ETHOSTREAM LLC, a Wisconsin limited liability company (each, a
“Borrower”, and collectively, “Borrowers”).

Recitals

Borrowers wish to obtain credit from time to time from Bank, and Bank desires to
extend credit to Borrowers. This Agreement sets forth the terms on which Bank
will advance credit to Borrowers, and Borrowers will repay the amounts owing to
Bank.

Agreement

The parties agree as follows:

1. Definitions and Construction.

1.1 Definitions. As used in this Agreement, the following terms shall have the
following definitions:

“Accounts” means all presently existing and hereafter arising accounts, contract
rights, payment intangibles, and all other forms of obligations owing to a
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by a Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by a Borrower and such Borrower’s Books
relating to any of the foregoing.

“Advance” or “Advances” means a cash advance or cash advances under the
Revolving Facility.

“Affiliate” means, with respect to any Person, any Person that owns or controls
directly or indirectly such Person, any Person that controls or is controlled by
or is under common control with such Person, and each of such Person’s senior
executive officers, directors, and partners.

“Bank Expenses” means all: reasonable costs or expenses (including reasonable
attorneys’ fees and expenses) incurred in connection with the preparation,
negotiation, administration, and enforcement of the Loan Documents; reasonable
Collateral audit fees; and Bank’s reasonable attorneys’ fees and expenses
incurred in amending, enforcing or defending the Loan Documents (including fees
and expenses of appeal), incurred before, during and after an Insolvency
Proceeding, whether or not suit is brought.

“Borrower’s Books” means all of a Borrower’s books and records including:
ledgers; records concerning such Borrower’s assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.

“Borrowing Base” means an amount equal to, as determined by Bank with reference
to the most recent Borrowing Base Certificate delivered by Borrowers, (i) eighty
percent (80%) of Eligible Accounts, plus (ii) the lesser of twenty-five percent
(25%) of Eligible Inventory or Six Hundred Thousand Dollars ($600,000), which
shall not exceed one hundred percent (100%) of Eligible Accounts.

“Business Day” means any day that is not a Saturday, Sunday, or other day on
which banks in the State of California are authorized or required to close.

“Change in Control” shall mean a transaction in which any “person” or “group”
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of a sufficient number
of shares of all classes of stock then outstanding of a Borrower ordinarily
entitled to vote in the election of directors, empowering such “person” or
“group” to elect a majority of the Board of Directors of such Borrower, who did
not have such power before such transaction.

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“Closing Date” means the date of this Agreement.

“Code” means the California Uniform Commercial Code.

“Collateral” means the property described on Exhibit A attached hereto.

“Contingent Obligation” means, as applied to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to (i) any
indebtedness, lease, dividend, letter of credit or other obligation of another;
(ii) any obligations with respect to undrawn letters of credit, corporate credit
cards, or merchant services issued or provided for the account of that Person;
and (iii) all obligations arising under any agreement or arrangement designed to
protect such Person against fluctuation in interest rates, currency exchange
rates or commodity prices; provided, however, that the term “Contingent
Obligation” shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by Bank in good faith; provided, however, that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.

“Copyrights” means any and all copyright rights, copyright applications,
copyright registrations and like protections in each work or authorship and
derivative work thereof.

“Credit Extension” means each Advance or any other extension of credit by Bank
for the benefit of Borrowers hereunder.

“Daily Balance” means the amount of the Obligations owed at the end of a given
day.

“EBITDA” means earnings before interest, taxes, depreciation and amortization
expenses.

“Eligible Accounts” means those Accounts that arise in the ordinary course of a
Borrower’s business that comply with all of Borrowers’ representations and
warranties to Bank set forth in Section 5.4; provided, that standards of
eligibility may be fixed and revised from time to time by Bank in Bank’s
reasonable judgment and upon notification thereof to Borrowers in accordance
with the provisions hereof. Unless otherwise agreed to by Bank, Eligible
Accounts shall not include the following:

(a) Accounts that the account debtor has failed to pay within ninety (90) days
of invoice date;

(b) Accounts with respect to an account debtor, twenty-five percent (25%) of
whose Accounts the account debtor has failed to pay within ninety (90) days of
invoice date;

(c) Accounts with respect to which the account debtor is an officer, employee,
or agent of any Borrower;

(d) Accounts with respect to which goods are placed on consignment, guaranteed
sale, sale or return, sale on approval, bill and hold, demo or promotional, or
other terms by reason of which the payment by the account debtor may be
conditional;

(e) Accounts with respect to which the account debtor is an Affiliate of any
Borrower;

(f) Accounts with respect to which the account debtor does not have its
principal place of business in the United States, except for Eligible Foreign
Accounts;

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(g) Accounts with respect to which the account debtor is the United States or
any department, agency, or instrumentality of the United States, except for
Accounts of the United States if the payee has assigned its payment rights to
Bank, the assignment has been acknowledged under the Assignment of Claims Act of
1940 (31 U.S.C. Section 3727), and such assignment otherwise complies with the
Assignment of Claims Act to Bank’s reasonable satisfaction in the exercise of
its reasonable credit judgment;

(h) Accounts with respect to which a Borrower is liable to the account debtor
for goods sold or services rendered by the account debtor to a Borrower or for
deposits or other property of the account debtor held by a Borrower, but only to
the extent of any amounts owing to the account debtor against amounts owed to
such Borrower;

(i) Accounts with respect to an account debtor, including Subsidiaries and
Affiliates, whose total obligations to Borrowers exceed thirty percent (30%) of
all Eligible Accounts, to the extent such obligations exceed the aforementioned
percentage, except as approved in writing by Bank;

(j) Accounts that have not yet been billed to the account debtor or that relate
to deposits (such as good faith deposits) or other property of the account
debtor held by a Borrower for the performance of services or delivery of goods
which Borrowers have not yet performed or delivered;

(k) Prebillings, retention billings, bonded receivables, or progress billings
(Bank acknowledges that billings for work completed in connection with ongoing
projects as to which additional work needs to be done are not progress
billings);

(l) Accounts with respect to which the account debtor disputes liability or
makes any claim with respect thereto as to which Bank believes, in its sole
discretion, that there may be a basis for dispute (but only to the extent of the
amount subject to such dispute or claim), or is subject to any Insolvency
Proceeding, or becomes insolvent, or goes out of business;

(m) Accounts that are consumer accounts;

(n) Accounts that are reserved for unidentified taxes;

(o) Accounts which Bank reasonably determines to be unsatisfactory for inclusion
as an Eligible Account.

“Eligible Foreign Accounts” means Accounts with respect to which the account
debtor does not have its principal place of business in the United States and
that (i) are supported by one or more letters of credit in an amount and of a
tenor, and issued by a financial institution, acceptable to Bank, (ii) covered
in full by credit insurance satisfactory to Bank, less any deductible, or (iii)
that Bank approves on a case-by-case basis.

“Eligible Inventory” means Inventory that meets the requirements set forth in
Borrowers’ representations and warranties in Section 5.5 and is otherwise
acceptable to Bank in all material respects. Unless otherwise agreed to by Bank,
the following shall not be Eligible Inventory:

(a) consigned Inventory;

(b) slow moving, returned, obsolete and defective goods;

(c) supplies, shipping material, packaging, custom packaging, customized
Inventory with narrow distribution channels;

(d) work in progress, Inventory that is in-transit; and

(e) other Inventory that Bank reasonably determines from time to time to be
ineligible based on age, type, category, quality or quantity.

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“Equipment” means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which a Borrower has any interest.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended,
and the regulations thereunder.

“Event of Default” has the meaning assigned in Section 8.

“GAAP” means generally accepted accounting principles as in effect from time to
time.

“Indebtedness” means (a) all indebtedness for borrowed money or the deferred
purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.

“Insolvency Proceeding” means any proceeding commenced by or against any person
or entity under any provision of the United States Bankruptcy Code, as amended,
or under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extension
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

“Intellectual Property” means all of a Borrower’s right, title, and interest in
and to the following: Copyrights, Trademarks and Patents; all trade secrets, all
design rights, claims for damages by way of past, present and future
infringement of any of the rights included above, all licenses or other rights
to use any of the Copyrights, Patents or Trademarks, and all license fees and
royalties arising from such use to the extent permitted by such license or
rights; all amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents; and all proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.

“Inventory” means all inventory in which a Borrower has or acquires any
interest, including work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of a Borrower, including such inventory as
is temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above, and such Borrower’s Books relating to
any of the foregoing.

“Investment” means any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.

“IRC” means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.

“Lien” means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

“Loan Documents” means, collectively, this Agreement, any note or notes executed
by a Borrower, any guarantees by third parties, all documents and agreements
specified in Section 3.1, and any other agreement entered into in connection
with this Agreement, all as amended or extended from time to time.

“Material Adverse Effect” means a material adverse effect on (i) the business
operations, condition (financial or otherwise) or prospects of a Borrower, or
Borrowers and their Subsidiaries taken as a whole or (ii) the ability of
Borrowers to repay the Obligations or otherwise perform their obligations under
the Loan Documents or (iii) the value or priority of Bank’s security interests
in the Collateral.

“Negotiable Collateral” means all letters of credit of which a Borrower is a
beneficiary, notes, drafts, instruments, securities, documents of title, and
chattel paper, and such Borrower’s Books relating to any of the foregoing.

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“Obligations” means all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrowers pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrowers to others that Bank may have obtained by assignment or otherwise.

“Patents” means all patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.

“Periodic Payments” means all installments or similar recurring payments that
Borrowers may now or hereafter become obligated to pay to Bank pursuant to the
terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrowers and Bank.

“Permitted Indebtedness” means:

(a) Indebtedness of Borrowers in favor of Bank arising under this Agreement or
any other Loan Document;

(b) Indebtedness existing on the Closing Date and disclosed in the Schedule;

(c) Indebtedness secured by a lien described in clause (c) of the defined term
“Permitted Liens,” provided (i) such Indebtedness does not exceed the lesser of
the cost or fair market value of the equipment financed with such Indebtedness
and (ii) such Indebtedness does not exceed $100,000 in the aggregate at any
given time; and

(d) Subordinated Debt.

“Permitted Investment” means:

(a) Investments existing on the Closing Date disclosed in the Schedule; and

(b) (i) marketable direct obligations issued or unconditionally guaranteed by
the United States of America or any agency or any State thereof maturing within
one (1) year from the date of acquisition thereof, (ii) commercial paper
maturing no more than one (1) year from the date of creation thereof and
currently having rating of at least A-2 or P-2 from either Standard & Poor’s
Corporation or Moody’s Investors Service, (iii) certificates of deposit maturing
no more than one (1) year from the date of investment therein issued by Bank and
(iv) Bank’s money market accounts.

“Permitted Liens” means the following:

(a) Any Liens existing on the Closing Date and disclosed in the Schedule or
arising under this Agreement or the other Loan Documents;

(b) Liens for taxes, fees, assessments or other governmental charges or levies,
either not delinquent or being contested in good faith by appropriate
proceedings, provided the same have no priority over any of Bank’s security
interests;

(c) Liens (i) upon or in any equipment which was not financed by Bank acquired
or held by a Borrower or any of its Subsidiaries to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;

(d) Liens incurred in connection with the extension, renewal or refinancing of
the indebtedness secured by Liens of the type described in clauses (a) through
(c) above, provided that any extension, renewal or replacement Lien shall be
limited to the property encumbered by the existing Lien and the principal amount
of the indebtedness being extended, renewed or refinanced does not increase.

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“Person” means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.

“Prime Rate” means the variable rate of interest, per annum, that appears in The
Wall Street Journal from time to time, whether or not such announced rate is the
lowest rate available from Bank.

“Responsible Officer” means each of the Chief Executive Officer, the Chief
Operating Officer, the Chief Financial Officer and the Controller of each
Borrower.

“Revolving Facility” means the facility under which Borrowers may request Bank
to issue Advances, as specified in Section 2.1(a) hereof.

“Revolving Line” means a credit extension of up to Two Million Dollars
($2,000,000).

“Revolving Maturity Date” means September 30, 2016.

“Schedule” means the schedule of exceptions attached hereto and approved by
Bank, if any.

“Shares” is one hundred percent (100%) of the issued and outstanding capital
stock, membership units or other securities owned or held of record by a
Borrower or any Subsidiary of Borrower, in any direct or indirect Subsidiary.

“Subordinated Debt” means any debt incurred by Borrower that is subordinated to
the debt owing by Borrower to Bank on terms acceptable to Bank (and identified
as being such by Borrower and Bank).

“Subsidiary” means, as to any Person, a corporation, partnership, limited
liability company or other entity of which shares of stock or other ownership
interests having ordinary voting power (other than stock or such other ownership
interests having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such
corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through one
or more intermediaries (including any Affiliate), or both, by such Person.
Unless the context otherwise requires, each reference to a Subsidiary herein
shall be a reference to a Subsidiary of Borrower.

“Tax Reserve” means the amount that Borrower is estimated to owe in sales and
use taxes, assumed for the purpose of determining availability under Section 2.1
to be the amount stated on the Telkonet, Inc. and Ethostream, LLC Sale/Use Tax
Voluntary Disclosure Agreement Ledger, as revised from time to time.

“Trademarks” means any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of a Borrower connected
with and symbolized by such trademarks.

“Wells Fargo Accounts” has the meaning assigned in Section 6.8.

1.2 Accounting Terms. All accounting terms not specifically defined herein shall
be construed in accordance with GAAP and all calculations made hereunder shall
be made in accordance with GAAP. When used herein, the terms “financial
statements” shall include the notes and schedules thereto.

2. Loan and Terms Of Payment.

2.1 Credit Extensions.

Each Borrower promises to pay to the order of Bank, in lawful money of the
United States of America, the aggregate unpaid principal amount of all Credit
Extensions made by Bank to Borrowers hereunder. Each Borrower shall also pay
interest on the unpaid principal amount of such Credit Extensions at rates in
accordance with the terms hereof.

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(a) Revolving Advances.

(i) Subject to and upon the terms and conditions of this Agreement, Borrowers
may request Advances in an aggregate outstanding amount not to exceed the lesser
of (i) the Revolving Line or (ii) the Borrowing Base, minus in each case the Tax
Reserve. Subject to the terms and conditions of this Agreement, amounts borrowed
pursuant to this Section 2.1(a) may be repaid and reborrowed at any time prior
to the Revolving Maturity Date, at which time all Advances under this Section
2.1(a) shall be immediately due and payable. Borrowers may prepay any Advances
without penalty or premium.

(ii) Whenever a Borrower desires an Advance, such Borrower will notify Bank by
email, facsimile transmission or telephone no later than 2:00 p.m. Pacific Time,
on the Business Day that is one day before the Business Day the Advance is to be
made. Each such notification shall be promptly confirmed by a Borrowing Base
Certificate in substantially the form of Exhibit C hereto. Bank is authorized to
make Advances under this Agreement, based upon instructions received from a
Responsible Officer or a designee of a Responsible Officer, or without
instructions if in Bank’s discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any email or telephonic notice given by a person who Bank reasonably
believes to be a Responsible Officer or a designee thereof, and Borrowers shall
indemnify and hold Bank harmless for any damages or loss suffered by Bank as a
result of such reliance. Bank will credit the amount of Advances made under this
Section to a Borrower’s deposit account at Bank.

2.2 Overadvances. If the aggregate amount of the outstanding Advances exceeds
the lesser of the Revolving Line or the Borrowing Base at any time, Borrowers
shall immediately pay to Bank, in cash, the amount of such excess. If the
aggregate amount of the outstanding Advances with respect to Eligible Inventory
exceeds one hundred percent (100%) of Eligible Accounts at any time, Borrowers
shall immediately pay to Bank, in cash, the amount of such excess.

2.3 Interest Rates, Payments, and Calculations.

(a) Interest Rates. Except as set forth in Section 2.3(b), the Advances shall
bear interest, on the outstanding Daily Balance thereof, at a floating rate
equal to three percent (3.0%) above the Prime Rate.

(b) Late Fee; Default Rate. If any payment is not made within ten (10) days
after the date such payment is due, Borrowers shall pay Bank a late fee equal to
the lesser of (i) five percent (5%) of the amount of such unpaid amount or (ii)
the maximum amount permitted to be charged under applicable law. All Obligations
shall bear interest, from and after the occurrence and during the continuance of
an Event of Default, at a rate equal to five (5) percentage points above the
interest rate applicable immediately prior to the occurrence of the Event of
Default.

(c) Payments. Interest hereunder shall be due and payable on the first business
day of each month during the term hereof. Bank shall, at its option, charge such
interest, all Bank Expenses, and all Periodic Payments against any of Borrowers’
deposit accounts or against the Revolving Line, in which case those amounts
shall thereafter accrue interest at the rate then applicable hereunder. Any
interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate then
applicable hereunder. All payments shall be free and clear of any taxes,
withholdings, duties, impositions or other charges, to the end that Bank will
receive the entire amount of any Obligations payable hereunder, regardless of
source of payment.

(d) Lockbox. Borrowers shall cause all account debtors to wire any amounts owing
to any Borrower to such account (the “Bancontrol Account”) as Bank shall
specify, and to mail all payments made by check to a post office box under
Bank’s control. All invoices shall specify such post office box as the payment
address. Bank shall have sole authority to collect such payments and deposit
them to the Bancontrol Account. If a Borrower receives any amount despite such
instructions, such Borrower shall immediately deliver such payment to Bank in
the form received, except for an endorsement to the order of Bank and, pending
such delivery, shall hold such payment in trust for Bank. Funds from the
Bancontrol Account shall be swept daily by Bank; two Business Days after
clearance of any checks, Bank shall credit all amounts paid into the Bancontrol
Account first, against any amounts outstanding under the Revolving Line, and
then, of any remaining balance of such amount, to Borrower’s operating account.
Borrowers shall enter into such lockbox agreement as Bank shall reasonably
request from time to time. Bank may, at its option, conduct a credit check of
the Account Debtor for each Eligible Account requested by a Borrower for
inclusion in the Borrowing Base. Bank may also verify directly with the
respective account debtors the validity, amount and other matters relating to
the Eligible Accounts, and notify any account debtor of Bank’s security interest
in Borrowers’ Accounts.

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(e) Computation. In the event the Prime Rate is changed from time to time
hereafter, the applicable rate of interest hereunder shall be increased or
decreased, effective as of the day the Prime Rate is changed, by an amount equal
to such change in the Prime Rate. All interest chargeable under the Loan
Documents shall be computed on the basis of a three hundred sixty (360) day year
for the actual number of days elapsed.

2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank
shall credit a wire transfer of funds, check or other item of payment to such
deposit account or Obligation as a Borrower specifies. After the occurrence of
an Event of Default, the receipt by Bank of any wire transfer of funds, check,
or other item of payment shall be immediately applied to conditionally reduce
Obligations, but shall not be considered a payment on account unless such
payment is of immediately available federal funds or unless and until such check
or other item of payment is honored when presented for payment. Notwithstanding
anything to the contrary contained herein, any wire transfer or payment received
by Bank after 12:00 noon Pacific Time shall be deemed to have been received by
Bank as of the opening of business on the immediately following Business Day.
Whenever any payment to Bank under the Loan Documents would otherwise be due
(except by reason of acceleration) on a date that is not a Business Day, such
payment shall instead be due on the next Business Day, and additional fees or
interest, as the case may be, shall accrue and be payable for the period of such
extension.

2.5 Fees. Borrowers shall pay to Bank the following:

(a) Facility Fees. On the Closing Date, a facility fee with respect to the
Revolving Facility equal to Ten Thousand Dollars ($10,000) which shall be
nonrefundable;

(b) Renewal Fee. On the first anniversary of the Closing Date, a renewal fee
equal to Ten Thousand Dollars ($10,000) which shall be nonrefundable; and

(c) Bank Expenses. On the Closing Date, all Bank Expenses incurred through the
Closing Date, including reasonable attorneys’ fees and expenses and, after the
Closing Date, all Bank Expenses, including reasonable attorneys’ fees and
expenses, as and when they are incurred by Bank.

2.6 Term. This Agreement shall become effective on the Closing Date and, subject
to Section 12.8, shall continue in full force and effect for so long as any
Obligations remain outstanding or Bank has any obligation to make Credit
Extensions under this Agreement, or until the Revolving Maturity Date.
Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an Event of
Default. Notwithstanding termination, Bank’s Lien on the Collateral shall remain
in effect for so long as any Obligations are outstanding.

3. Conditions of Loans.

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3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to
make the initial Credit Extension is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, the
following:

(a) this Agreement;

(b) a certificate of the Secretary of each Borrower with respect to incumbency
and resolutions authorizing the execution and delivery of this Agreement;

(c) UCC National Form Financing Statements (one for each Borrower);

(d) an intellectual property security agreement;

(e) a subordination agreement executed by each holder of Subordinated Debt in a
form acceptable to Bank (Dynamic Ratings and Wisconsin Department of Commerce);

(f) receipt of a payoff letter from Bridge Bank N.A. concerning outstanding
Indebtedness of Borrower due to such bank; and evidence satisfactory to Bank in
its sole determination that any Lien securing obligations of Borrower to Bridge
Bank N.A. (or any successor thereto) have been terminated or released;

(g) evidence satisfactory to Bank in its sole determination that any Lien
securing obligations of Borrower to General Electric Capital Corporations (or
any successor thereto) have been terminated or released;

(h) account control agreements pursuant to Section 6.8 and 7.7, if any;

(i) landlord waiver (20800 Swenson Drive, Suite 175, Waukesha, WI 53186);

(j) certificate(s) of insurance with corresponding endorsements naming Bank as
loss payee and additional insured;

(k) payment of the fees and Bank Expenses then due specified in Section 2.5
hereof;

(l) current financial statements of Borrowers;

(m) a copy of Form 8821 in respect of payroll tax;

 

(n) an audit of the Collateral, the results of which shall be satisfactory to
Bank;

(o) establishment of the Bancontrol Account and lockbox arrangements; and

(p) such other documents, and completion of such other matters, as Bank may
reasonably deem necessary or appropriate.

3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to
make each Credit Extension, including the initial Credit Extension, is further
subject to the following conditions:

(a) timely receipt by Bank of the Payment/Advance Form as provided in Section
2.1;

(b) the representations and warranties contained in Section 5 shall be true and
correct in all material respects on and as of the date of such Payment/Advance
Form and on the effective date of each Credit Extension as though made at and as
of each such date, and no Event of Default shall have occurred and be
continuing, or would exist after giving effect to such Credit Extension. The
making of each Credit Extension shall be deemed to be a representation and
warranty by Borrowers on the date of such Credit Extension as to the accuracy of
the facts referred to in this Section 3.2; and

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(c) in Bank’s sole discretion, there has not been any material impairment in the
Accounts, general affairs, management, results of operation, financial condition
or the prospect of repayment of the Obligations, or there has not been any
material adverse deviation by Borrowers from the most recent business plan of
Borrowers presented to and accepted by Bank.

3.3 Post-Closing Covenant. By October 10, 2014, Borrower shall deliver to Bank a
warrant to purchase stock in substantially the form agreed to between Borrower
and Bank as of the Closing Date.

4. Creation of Security Interest.

4.1 Grant of Security Interest. Each Borrower grants and pledges to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrowers of each of
its covenants and duties under the Loan Documents. Such security interest
constitutes a valid, first priority security interest in the presently existing
Collateral, and will constitute a valid, first priority security interest in
Collateral acquired after the date hereof.

4.2 Delivery of Additional Documentation Required. Each Borrower shall from time
to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue the
perfection of Bank’s security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents. Each
Borrower from time to time may deposit with Bank specific time deposit accounts
to secure specific Obligations. Each Borrower authorizes Bank to hold such
balances in pledge and to decline to honor any drafts thereon or any request by
a Borrower or any other Person to pay or otherwise transfer any part of such
balances for so long as the Obligations are outstanding.

4.3 Right to Inspect. Bank (through any of its officers, employees, or agents)
shall have the right, upon reasonable prior notice, from time to time during
Borrowers’ usual business hours but no more than twice a year (unless an Event
of Default has occurred and is continuing), to inspect each Borrower’s Books and
to make copies thereof and to check, test, and appraise the Collateral in order
to verify each Borrower’s financial condition or the amount, condition of, or
any other matter relating to, the Collateral.

5. Representations and Warranties.

Each Borrower represents and warrants as follows:

5.1 Due Organization and Qualification. Each Borrower and each Subsidiary is a
corporation duly existing under the laws of its state of incorporation and
qualified and licensed to do business in any state in which the conduct of its
business or its ownership of property requires that it be so qualified.

5.2 Due Authorization; No Conflict. The execution, delivery, and performance of
the Loan Documents are within each Borrower’s powers, have been duly authorized,
and are not in conflict with nor constitute a breach of any provision contained
in each Borrower’s Articles of Incorporation or Bylaws, nor will they constitute
an event of default under any material agreement to which a Borrower is a party
or by which a Borrower is bound. No Borrower is in default under any material
agreement to which it is a party or by which it is bound.

5.3 No Prior Encumbrances. Each Borrower has good and marketable title to its
property, free and clear of Liens, except for Permitted Liens.

5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide existing
obligations. The property and services giving rise to such Eligible Accounts has
been delivered or rendered to the account debtor or to the account debtor’s
agent for immediate and unconditional acceptance by the account debtor. No
Borrower has received notice of actual or imminent Insolvency Proceeding of any
account debtor that is included in any Borrowing Base Certificate as an Eligible
Account.

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5.5 Merchantable Inventory. All Inventory is in all material respects of good
and marketable quality, free from all material defects, except for Inventory for
which adequate reserves have been made. For any item of Inventory consisting of
“Eligible Inventory” to be considered as part of the Borrowing Base, such
Inventory (a) consists of finished goods, in good and salable condition, which
is not perishable, returned, consigned, obsolete, not sellable, damaged, or
defective, and is not comprised of demonstrative or custom inventory, works in
progress, packaging or shipping materials, or supplies; (b) has been
manufactured in compliance with the Fair Labor Standards Act and meets all
applicable governmental standards; (c) is not subject to any Liens, except the
first priority Liens granted in favor of Bank under this Agreement; and (d) is
located at Borrowers’ headquarters or such other Borrower-operated facility as
to which Bank has received a landlord waiver, inventory holder’s acknowledgment
or other waiver or written acknowledgment in form satisfactory to Bank (except
that Inventory subject to a contract between a Borrower and a customer under
which contract such Borrower retains ownership of such Inventory (“Offsite
Inventory”), may be located at such customer’s location provided that such
Offsite Inventory does not exceed $300,000 in the aggregate at any time).

5.6 Intellectual Property. Each Borrower is the sole owner of its Intellectual
Property, except for non-exclusive licenses granted by Borrowers to its
customers in the ordinary course of business. Each of the Patents is valid and
enforceable, and no part of the Intellectual Property has been judged invalid or
unenforceable, in whole or in part, and no claim has been made that any part of
the Intellectual Property violates the rights of any third party. Except as set
forth in the Schedule, Borrowers’ rights as a licensee of intellectual property
do not give rise to more than five percent (5%) of its gross revenue in any
given month, including without limitation revenue derived from the sale,
licensing, rendering or disposition of any product or service. No Borrower is a
party to, or bound by, any agreement that restricts the grant by such Borrower
of a security interest in such Borrower’s rights under such agreement.

5.7 Name; Location of Chief Executive Office. Except as disclosed in the
Schedule, no Borrower has done business under any name other than that specified
on the signature page hereof; or, in the past five (5) years, changed its
jurisdiction of formation, corporate structure, organizational type, or any
organizational number assigned by its jurisdiction. The chief executive office
of Borrowers is located at the address indicated in Section 10 hereof. Except as
disclosed on the Schedule and Offsite Inventory, all Borrowers’ Inventory and
Equipment is located only at the location set forth in Section 10 hereof.

5.8 Litigation. Except as set forth in the Schedule, there are no actions or
proceedings pending by or against any Borrower or any Subsidiary before any
court or administrative agency.

5.9 No Material Adverse Change in Financial Statements. All consolidated and
consolidating financial statements related to Borrowers and any Subsidiary that
Bank has received from Borrowers fairly present in all material respects
Borrowers’ financial condition as of the date thereof and Borrowers’
consolidated and consolidating results of operations for the period then ended.
There has not been a material adverse change in the consolidated or the
consolidating financial condition of Borrowers since the date of the most recent
of such financial statements submitted to Bank.

5.10 Solvency, Payment of Debts. Each Borrower is solvent and able to pay its
debts (including trade debts) as they mature.

5.11 Regulatory Compliance. Each Borrower and each Subsidiary have met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA, and no event has occurred resulting from a Borrower’s failure
to comply with ERISA that could result in such Borrower’s incurring any material
liability. No Borrower is an “investment company” or a company “controlled” by
an “investment company” within the meaning of the Investment Company Act of
1940. No Borrower is engaged principally, or as one of the important activities,
in the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulations T and U of the Board of
Governors of the Federal Reserve System). Each Borrower and each Subsidiary have
complied with all the provisions of the Federal Fair Labor Standards Act. No
Borrower and or its Subsidiary have violated any material statutes, laws,
ordinances or rules applicable to it.

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5.12 Environmental Condition. None of a Borrower’s or any Subsidiary’s
properties or assets has ever been used by a Borrower or any Subsidiary or, to
the best of Borrowers’ knowledge, by previous owners or operators, in the
disposal of, or to produce, store, handle, treat, release, or transport, any
hazardous waste or hazardous substance other than in accordance with applicable
law; to the best of Borrowers’ knowledge, none of Borrowers’ properties or
assets has ever been designated or identified in any manner pursuant to any
environmental protection statute as a hazardous waste or hazardous substance
disposal site, or a candidate for closure pursuant to any environmental
protection statute; no lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned by a
Borrower or any Subsidiary; and neither Borrowers nor any Subsidiary has
received a summons, citation, notice, or directive from the Environmental
Protection Agency or any other federal, state or other governmental agency
concerning any action or omission by a Borrower or any Subsidiary resulting in
the releasing, or otherwise disposing of hazardous waste or hazardous substances
into the environment.

5.13 Taxes. Each Borrower and each Subsidiary has filed or caused to be filed
all material tax returns required to be filed, and have paid, or have made
adequate provision for the payment of, all taxes reflected therein.

5.14 Investments. No Borrower nor any Subsidiary owns any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments. There are no material assets in Telkonet Communications, Inc. A
list of Borrower’s Subsidiaries is set forth on the Schedule.

5.15 Operating, Depository and Investment Accounts. None of Borrower’s nor any
Subsidiary’s property is maintained or invested with a Person other than Bank,
except as set forth on the Schedule.

5.16 Full Disclosure. No representation, warranty or other statement made by
Borrowers in any certificate or written statement furnished to Bank contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained in such certificates or statements not
misleading.

6. Affirmative Covenants.

Each Borrower shall do all of the following:

6.1 Good Standing. Each Borrower shall maintain its and each of its
Subsidiaries’ corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which it is
required under applicable law. Each Borrower shall maintain, and shall cause
each of its Subsidiaries to maintain, in force all licenses, approvals and
agreements, the loss of which could have a Material Adverse Effect.

6.2 Government Compliance. Each Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrowers shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect.

6.3 Financial Statements, Reports, Certificates. Borrowers shall deliver the
following to Bank:

(a) semi-monthly (twice per month) within five (5) days of the 15th day and last
day of each month, aged listings of accounts receivable, together with a
Borrowing Base Certificate signed by a Responsible Officer in substantially the
form of Exhibit C hereto;

(b) within ten (10) days after the last day of each month, aged listings of
accounts payable, together with a deferred revenue listing and Inventory report;

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(c) as soon as available, but in any event within forty-five (45) days after the
end of each quarter, a Borrower prepared consolidated and consolidating balance
sheet, income, and cash flow statement covering Borrowers’ consolidated and
consolidating operations during such quarter (“Financial Statements”), prepared
in accordance with GAAP, consistently applied, in a form acceptable to Bank
along with a Compliance Certificate signed by a Responsible Officer in
substantially the form of Exhibit D hereto;

(d) as soon as available, but in any event within one hundred twenty (120) days
after the end of Borrowers’ fiscal year, audited consolidated and consolidating
financial statements of Borrowers prepared in accordance with GAAP, consistently
applied, together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank;

(e) as soon as available, but in any event within fifteen (15) days after
filing, Borrowers’ annual federal tax returns including all schedules and
exhibits thereto;

(f) as soon as available, but in any event no later than thirty (30) days prior
to the beginning of Borrowers’ next fiscal year, annual operating projections
(including income statements, balance sheets and cash flow statements presented
in a monthly format) for the upcoming fiscal year, in form and substance
reasonably satisfactory to Bank,

(g) copies of all statements, reports and notices sent or made available
generally by a Borrower to its security holders or to any holders of
Subordinated Debt a;

(h) promptly upon receipt of notice thereof, a report of any legal actions
pending or threatened against a Borrower or any Subsidiary that could result in
damages or costs to such Borrower or any Subsidiary of Fifty Thousand Dollars
($50,000) or more, or any commercial tort claim (as defined in the Code)
acquired by any Borrower;

(i) within ten (10) days after the last day of each month, bank statements
listing the balances and activity in Borrowers’ Wells Fargo Accounts;

(j) as soon as available, but in any event within 45 days after the end of each
quarter, a list of Offsite Inventory; and

(k) such budgets, sales projections, operating plans, other financial
information including information related to the verification of Borrowers’
Accounts as Bank may reasonably request from time to time.

6.4 Audits. Bank shall have a right from time to time hereafter to audit each
Borrower’s Accounts and appraise Collateral at Borrowers’ expense, provided that
such audits will be conducted no more often than every six (6) months unless an
Event of Default has occurred and is continuing.

6.5 Inventory; Returns. Borrowers shall keep all Inventory in good and
marketable condition, free from all material defects except for Inventory for
which adequate reserves have been made. Returns and allowances, if any, as
between Borrowers and their account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrowers, as they exist at the
time of the execution and delivery of this Agreement. Borrowers shall promptly
notify Bank of all returns and recoveries and of all disputes and claims, where
the return, recovery, dispute or claim involves more than Fifty Thousand Dollars
($50,000).

6.6 Taxes. Each Borrower shall make, and shall cause each Subsidiary to make,
due and timely payment or deposit of all material federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute and
deliver to Bank, on demand, appropriate certificates attesting to the payment or
deposit thereof; and each Borrower will make, and will cause each Subsidiary to
make, timely payment or deposit of all material tax payments and withholding
taxes required of it by applicable laws, including, but not limited to, those
laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and
federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that such Borrower or a Subsidiary has made such
payments or deposits; provided that such Borrower or a Subsidiary need not make
any payment if the amount or validity of such payment is contested in good faith
by appropriate proceedings and is reserved against (to the extent required by
GAAP) by Borrowers.

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6.7 Insurance.

(a) Each Borrower, at its expense, shall keep the Collateral insured against
loss or damage by fire, theft, explosion, sprinklers, and all other hazards and
risks, and in such amounts, as ordinarily insured against by other owners in
similar businesses conducted in the locations where each Borrower’s business is
conducted on the date hereof. Each Borrower shall also maintain insurance
relating to such Borrower’s business, ownership and use of the Collateral in
amounts and of a type that are customary to businesses similar to such
Borrower’s.

(b) All such policies of insurance shall be in such form, with such companies,
and in such amounts as are reasonably satisfactory to Bank. All such policies of
property insurance shall contain a lender’s loss payable endorsement, in a form
satisfactory to Bank, showing Bank as an additional loss payee thereof, and all
liability insurance policies shall show the Bank as an additional insured and
shall specify that the insurer must give at least twenty (20) days notice to
Bank before canceling its policy for any reason. Upon Bank’s request, Borrowers
shall deliver to Bank certified copies of such policies of insurance and
evidence of the payments of all premiums therefor. All proceeds payable under
any such policy shall, at the option of Bank, be payable to Bank to be applied
on account of the Obligations.

6.8 Operating, Depository and Investment Accounts. Each Borrower shall maintain
and shall cause each of its Subsidiaries to maintain its primary depository,
operating, and investment accounts with Bank. For each account that a Borrower
maintains outside of Bank, such Borrower shall cause the applicable bank or
financial institution at or with which any such account is maintained to execute
and deliver an account control agreement or other appropriate instrument in form
and substance satisfactory to Bank. Notwithstanding the foregoing, Borrowers may
maintain their two existing accounts (numbers ***6732 and ***5599) held at Wells
Fargo Bank, N.A. (the “Wells Fargo Accounts”) provided that the balance in the
Wells Fargo Accounts does not exceed $50,000 in the aggregate at any time.

6.9 Financial Covenants. Borrowers shall maintain the following covenants
levels:

(a) Asset Coverage Ratio. Borrowers shall maintain a minimum ratio of
unrestricted cash maintained at Bank plus all Eligible Accounts to all
Obligations owing to Bank of at least 1.25 to 1.00, measured on a monthly basis.

(b) 2014 EBITDA. Borrowers shall achieve an EBITDA of at least $50,000 for the
fiscal quarter ending September 30, 2014 and at least $25,000 for the combined
fiscal quarters ending September 30, 2014 and December 31, 2014.

 

(c) Future EBITDA. On or before November 30 of each year, Borrowers and Bank
shall agree upon mutually agreeable EBITDA covenant levels for Section 6.9(b)
for the next calendar year; it being understood that EBITDA shall be measured
year to date.  For example, EBITDA for the first quarter of 2015 shall be EBITDA
for the period January 1, 2015 through and including March 31, 2015 and EBITDA
for the second quarter of 2015 shall be EBITDA for the period January 1, 2015
through and including June 30, 2015. If Bank and Borrowers do not, on or before
January 15, 2015, establish a mutually acceptable EBITDA level in respect of the
covenant set forth in Section 6.9(b) for 2015, then the Revolving Maturity Date
shall be February 15, 2015.

 

6.10 Intellectual Property Rights.

(a) Protect, defend and maintain the validity and enforceability of its
Intellectual Property; (ii) promptly advise Bank in writing of material
infringements of its Intellectual Property; and (iii) not allow any Intellectual
Property material to a Borrower’s business to be abandoned, forfeited or
dedicated to the public .

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(b) Borrowers shall promptly give Bank written notice of any applications or
registrations of intellectual property rights filed with the United States
Patent and Trademark Office, including the date of such filing and the
registration or application numbers, if any. Borrowers shall (i) give Bank not
less than 30 days prior written notice of the filing of any applications or
registrations with the United States Copyright Office, including the title of
such intellectual property rights to be registered, as such title will appear on
such applications or registrations, and the date such applications or
registrations will be filed, and (ii) prior to the filing of any such
applications or registrations, shall execute such documents as Bank may
reasonably request for Bank to maintain its perfection in such intellectual
property rights to be registered by any Borrower, and upon the request of Bank,
shall file such documents simultaneously with the filing of any such
applications or registrations. Upon filing any such applications or
registrations with the United States Copyright Office, Borrowers shall promptly
provide Bank with (i) a copy of such applications or registrations, without the
exhibits, if any, thereto, (ii) evidence of the filing of any documents
requested by Bank to be filed for Bank to maintain the perfection and priority
of its security interest in such intellectual property rights, and (iii) the
date of such filing.

(c) Bank may audit any Borrower’s Intellectual Property to confirm compliance
with this Section, provided such audit may not occur more often than once per
year, unless an Event of Default has occurred and is continuing. Bank shall have
the right, but not the obligation, to take, at Borrowers’ sole expense, any
actions that a Borrower is required under this Section to take but which such
Borrower fails to take, after 15 days’ notice to Borrowers. Borrowers shall
reimburse and indemnify Bank for all reasonable costs and reasonable expenses
incurred in the reasonable exercise of its rights under this Section.

6.11 Further Assurances. At any time and from time to time Borrowers shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.

7. Negative Covenants.

No Borrower will do any of the following:

7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of
(collectively, a “Transfer”), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than: (i) Transfers of Inventory
in the ordinary course of business; (ii) Transfers of non-exclusive licenses and
similar arrangements for the use of the property of a Borrower or its
Subsidiaries in the ordinary course of business; or (iii) Transfers of worn-out
or obsolete Equipment which was not financed by Bank.

7.2 Change in Business; Change in Control or Executive Office. Engage in any
business, or permit any of its Subsidiaries to engage in any business, other
than the businesses currently engaged in by Borrowers and any business
substantially similar or related thereto (or incidental thereto); experience a
change in a Responsible Officer without providing prompt notice to Bank, or
cease to conduct business in the manner conducted by Borrowers as of the Closing
Date; or suffer or permit a Change in Control; or without thirty (30) days prior
written notification to Bank, relocate its chief executive office or state of
incorporation or change its legal name; or without Bank’s prior written consent,
change the date on which its fiscal year ends.

7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.

7.4 Indebtedness. Create, incur, guarantee, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.

7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect
to any of its property, or assign or otherwise convey any right to receive
income, including the sale of any Accounts, or permit any of its Subsidiaries so
to do, except for Permitted Liens, or enter into any agreement with any Person
other than Bank not to grant a security interest in, or otherwise encumber, any
of its property, or permit any Subsidiary to do so.

15

 

7.6 Distributions. Pay any dividends or make any other distribution or payment
on account of or in redemption, retirement or purchase of any capital stock, or
permit any of its Subsidiaries to do so, except that Borrower may repurchase the
stock of former employees pursuant to stock repurchase agreements as long as an
Event of Default does not exist prior to such repurchase or would not exist
after giving effect to such repurchase, and the aggregate amount of such
repurchase does not exceed $100,000 in any fiscal year.

7.7 Investments. Directly or indirectly acquire or own, or make any Investment
in or to any Person, or permit any of its Subsidiaries so to do, other than
Permitted Investments; or maintain or invest any of its property with a Person
other than Bank or permit any of its Subsidiaries to do so unless such Person
has entered into an account control agreement with Bank in form and substance
satisfactory to Bank; or suffer or permit any Subsidiary to be a party to, or be
bound by, an agreement that restricts such Subsidiary from paying dividends or
otherwise distributing property to a Borrower.

7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to
exist any material transaction with any Affiliate of Borrowers except for
transactions that are in the ordinary course of such Borrower’s business, upon
fair and reasonable terms that are no less favorable to such Borrower than would
be obtained in an arm’s length transaction with a non-affiliated Person.

7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or
permit any of its Subsidiaries to make any such payment, except in compliance
with the terms of such Subordinated Debt, or amend any provision contained in
any documentation relating to the Subordinated Debt without Bank’s prior written
consent.

7.10 Inventory and Equipment. Store the Inventory or the Equipment with a
bailee, warehouseman, or other third party unless the third party has been
notified of Bank’s security interest and Bank (a) has received an acknowledgment
from the third party that it is holding or will hold the Inventory or Equipment
for Bank’s benefit or (b) is in pledge possession of the warehouse receipt,
where negotiable, covering such Inventory or Equipment. Store or maintain any
Equipment or Inventory at a location other than the location set forth in
Section 10 of this Agreement, provided Borrowers may maintain property with a
value not to exceed $25,000 at 10200 Innovation Drive, Suite 300, Milwaukee, WI
without an acknowledgement from the landlord of Bank’s security interest.

7.11 Compliance. Become an “investment company” or be controlled by an
“investment company,” within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect, or a material
adverse effect on the Collateral or the priority of Bank’s Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.

8. Events of Default.

Any one or more of the following events shall constitute an Event of Default by
Borrowers under this Agreement:

8.1 Payment Default. If Borrowers fail to pay, when due, any of the Obligations;

8.2 Covenant Default.

(a) If a Borrower fails to perform any obligation under Section 6.9 or violates
any of the covenants contained in Section 7 of this Agreement; or

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(b) If a Borrower fails to comply with Section 6.1, 6.2, and/or 6.3 and fails to
cure such default within ten (10) Business Days from the date Bank notifies such
Borrower of such default (provided that Borrowers shall have only two (2) cure
periods per calendar year in respect of Section 6.2); or

(c) If a Borrower fails or neglects to perform or observe any other material
term, provision, condition, covenant contained in this Agreement, in any of the
Loan Documents, or in any other present or future agreement between such
Borrower and Bank and as to any default under such other term, provision,
condition or covenant that can be cured, has failed to cure such default within
ten days after such a Borrower receives notice thereof or any officer of such
Borrower becomes aware thereof; provided, however, that if the default cannot by
its nature be cured within the ten day period or cannot after diligent attempts
by such Borrower be cured within such ten day period, and such default is likely
to be cured within a reasonable time, then such Borrower shall have an
additional reasonable period (which shall not in any case exceed 30 days) to
attempt to cure such default, and within such reasonable time period the failure
to have cured such default shall not be deemed an Event of Default but no Credit
Extensions will be made.

8.3 Material Adverse Effect. If there occurs any circumstance or circumstances
that could have a Material Adverse Effect;

8.4 Attachment. If any material portion of a Borrower’s assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if a Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any part of its business affairs, or if a judgment or other claim
becomes a lien or encumbrance upon any material portion of a Borrower’s assets,
or if a notice of lien, levy, or assessment is filed of record with respect to
any of a Borrower’s assets by the United States Government, or any department,
agency, or instrumentality thereof, or by any state, county, municipal, or
governmental agency, and the same is not paid within ten (10) days after any
Borrower receives notice thereof, provided that none of the foregoing shall
constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by such Borrower
(provided that no Credit Extensions will be required to be made during such cure
period);

8.5 Insolvency. If a Borrower becomes insolvent, or if an Insolvency Proceeding
is commenced by a Borrower, or if an Insolvency Proceeding is commenced against
any Borrower and is not dismissed or stayed within thirty (30) days (provided
that no Credit Extensions will be made prior to the dismissal of such Insolvency
Proceeding);

8.6 Other Agreements. If there is a default or other failure to perform in any
agreement to which a Borrower is a party or by which it is bound resulting in a
right by a third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of Fifty Thousand Dollars
($50,000) or which could have a Material Adverse Effect;

8.7 Subordinated Debt. If any Borrower makes any payment on account of
Subordinated Debt, except to the extent the payment is allowed under any
subordination agreement entered into with Bank;

8.8 Judgments. If a judgment or judgments for the payment of money in an amount,
individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000)
shall be rendered against any Borrower and shall remain unsatisfied and unstayed
for a period of ten (10) days (provided that no Credit Extensions will be made
prior to the satisfaction or stay of such judgment); or

8.9 Misrepresentations. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate delivered to Bank by any Responsible Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or any
other Loan Document; or.

9. Bank’s Rights and Remedies.

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9.1 Rights and Remedies. Upon the occurrence and during the continuance of an
Event of Default, Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are authorized
by Borrowers:

(a) Declare all Obligations, whether evidenced by this Agreement, by any of the
other Loan Documents, or otherwise, immediately due and payable (provided that
upon the occurrence of an Event of Default described in Section 8.5, all
Obligations shall become immediately due and payable without any action by
Bank);

(b) Cease advancing money or extending credit to or for the benefit of Borrowers
under this Agreement or under any other agreement between Borrowers and Bank;

(c) Make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral. Each Borrower
agrees to assemble the Collateral if Bank so requires, and to make the
Collateral available to Bank as Bank may designate. Each Borrower authorizes
Bank to enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or lien which in Bank’s determination
appears to be prior or superior to its security interest and to pay all expenses
incurred in connection therewith. With respect to any of a Borrower’s owned
premises, each Borrower hereby grants Bank a license to enter into possession of
such premises and to occupy the same, without charge, in order to exercise any
of Bank’s rights or remedies provided herein, at law, in equity, or otherwise;

(d) Set off and apply to the Obligations any and all (i) balances and deposits
of any Borrower held by Bank, or (ii) indebtedness at any time owing to or for
the credit or the account of a Borrower held by Bank;

(e) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale,
advertise for sale, and sell (in the manner provided for herein) the Collateral.
Bank is hereby granted a license or other right, solely pursuant to the
provisions of this Section 9.1, to use, without charge, each Borrower’s labels,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank’s
exercise of its rights under this Section 9.1, Borrowers’ rights under all
licenses and all franchise agreements shall inure to Bank’s benefit;

(f) Dispose of the Collateral by way of one or more contracts or transactions,
for cash or on terms, in such manner and at such places (including each
Borrower’s premises) as Bank determines is commercially reasonable, and apply
any proceeds to the Obligations in whatever manner or order Bank deems
appropriate;

(g) Bank may credit bid and purchase at any public sale; and

(h) Any deficiency that exists after disposition of the Collateral as provided
above will be paid immediately by Borrowers.

9.2 Power of Attorney. Effective only upon the occurrence and during the
continuance of an Event of Default, each Borrower hereby irrevocably appoints
Bank (and any of Bank’s designated officers, or employees) as such Borrower’s
true and lawful attorney to:(a) send requests for verification of Accounts or
notify account debtors of Bank’s security interest in the Accounts; (b) notify
all account debtors with respect to the Accounts to pay Bank directly; (c) sign
a Borrower’s name on any invoice or bill of lading relating to any Account,
drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (d) make, settle, and
adjust all claims under and decisions with respect to a Borrower’s policies of
insurance; (e) demand, collect, receive, sue, and give releases to any account
debtor for the monies due or which may become due upon or with respect to the
Accounts and to compromise, prosecute, or defend any action, claim, case or
proceeding relating to the Accounts; (f) settle and adjust disputes and claims
respecting the accounts directly with account debtors, for amounts and upon
terms which Bank determines to be reasonable; (g) sell, assign, transfer,
pledge, compromise, discharge or otherwise dispose of any Collateral; (h)
receive and open all mail addressed to a Borrower for the purpose of collecting
the Accounts; (i) endorse either Borrower’s name on any checks or other forms of
payment or security that may come into Bank’s possession; (j) execute on behalf
of a Borrower any and all instruments, documents, financing statements and the
like to perfect Bank’s interests in the Accounts and Collections and file, in
its sole discretion, one or more financing or continuation statements and
amendments thereto, relative to any of the Collateral; and (k) do all acts and
things necessary or expedient, in furtherance of any such purposes; provided
however Bank may exercise such power of attorney with respect to any actions
described in clause (j) above, regardless of whether an Event of Default has
occurred. The appointment of Bank as each Borrower’s attorney in fact, and each
and every one of Bank’s rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank’s obligation to provide Credit Extensions hereunder is terminated.

18

 

9.3 Accounts Collection. In addition to the foregoing, at any time after the
occurrence of an Event of Default, Bank may notify any Person owing funds to
Borrowers of Bank’s security interest in such funds and verify the amount of
such Account. Each Borrower shall collect all amounts owing to Borrowers for
Bank, receive in trust all payments as Bank’s trustee, and immediately deliver
such payments to Bank in their original form as received from the account
debtor, with proper endorsements for deposit.

9.4 Bank Expenses. If Borrowers fail to pay any amounts or furnish any required
proof of payment due to third persons or entities, as required under the terms
of this Agreement, then Bank may do any or all of the following after reasonable
notice to Borrowers: (a) make payment of the same or any part thereof; (b) set
up such reserves under a loan facility in Section 2.1 as Bank deems necessary to
protect Bank from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type discussed in Section 6.6 of this
Agreement, and take any action with respect to such policies as Bank deems
prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.

9.5 Bank’s Liability for Collateral. So long as Bank complies with reasonable
banking practices, Bank shall not in any way or manner be liable or responsible
for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto
occurring or arising in any manner or fashion from any cause; (c) any diminution
in the value thereof; or (d) any act or default of any carrier, warehouseman,
bailee, forwarding agency, or other person whomsoever. All risk of loss, damage
or destruction of the Collateral shall be borne by Borrowers.

9.6 Remedies Cumulative. Bank’s rights and remedies under this Agreement, the
Loan Documents, and all other agreements shall be cumulative. Bank shall have
all other rights and remedies not inconsistent herewith as provided under the
Code, by law, or in equity. No exercise by Bank of one right or remedy shall be
deemed an election, and no waiver by Bank of any Event of Default on Borrowers’
part shall be deemed a continuing waiver. No delay by Bank shall constitute a
waiver, election, or acquiescence by it. No waiver by Bank shall be effective
unless made in a written document signed on behalf of Bank and then shall be
effective only in the specific instance and for the specific purpose for which
it was given.

9.7 Demand; Protest. Each Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrowers may in any way be liable.

10. Notices.

Unless otherwise provided in this Agreement, all notices or demands by any party
relating to this Agreement or any other agreement entered into in connection
herewith shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by a recognized overnight delivery
service, certified mail, postage prepaid, return receipt requested, or by email
or telefacsimile to Borrowers or to Bank, as the case may be, at its addresses
set forth below:

19

 

 

If to any Borrower:c/o TELKONET, INC.

20800 Swenson Drive, Suite 175

Waukesha, WI 53186

Attn: Gene Mushrush

FAX: (____) _______________
Email: gmushrush@telkonet.com

 

If to Bank:HERITAGE BANK OF COMMERCE

150 South Almaden Blvd.

San Jose, California 95113

Attn: Mike Hansen

FAX:___________________

Email: Mike.Hansen@herbank.com

The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other.

11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of California, without regard to principles of
conflicts of law. Each Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWERS AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

If the jury waiver set forth in this Section is not enforceable, then any
dispute, controversy or claim arising out of or relating to this Agreement, the
Loan Documents or any of the transactions contemplated therein shall be settled
by judicial reference pursuant to Code of Civil Procedure Section 638 et seq.
before a referee sitting without a jury, such referee to be mutually acceptable
to the parties or, if no agreement is reached, by a referee appointed by the
Presiding Judge of the California Superior Court for Santa Clara County. This
Section shall not restrict a party from exercising remedies under the Code or
from exercising pre-judgment remedies under applicable law.

12. General Provisions.

12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit
of the respective successors and permitted assigns of each of the parties;
provided, however, that neither this Agreement nor any rights hereunder may be
assigned by any Borrower without Bank’s prior written consent, which consent may
be granted or withheld in Bank’s sole discretion. Bank shall have the right
without the consent of or notice to Borrowers to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank’s
obligations, rights and benefits hereunder.

12.2 Indemnification. Each Borrower shall defend, indemnify and hold harmless
Bank and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Agreement; and (b) all
losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a
result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrowers whether under this Agreement, or
otherwise (including without limitation reasonable attorneys’ fees and
expenses), except for losses caused by Bank’s gross negligence or willful
misconduct.

20

 

12.3 Time of Essence. Time is of the essence for the performance of all
obligations set forth in this Agreement.

12.4 Severability of Provisions. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.

12.5 Correction of Loan Documents. Bank may correct patent errors and fill in
any blanks in this Agreement and the other Loan Documents consistent with the
agreement of the parties.

12.6 Amendments in Writing, Integration. Neither this Agreement nor the Loan
Documents can be amended or terminated orally. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties hereto with respect to the subject matter of this Agreement and the Loan
Documents, if any, are merged into this Agreement and the Loan Documents.

12.7 Counterparts. This Agreement may be executed in any number of counterparts
and by different parties on separate counterparts, each of which, when executed
and delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute but one and the same Agreement. In the event that any
signature is delivered by facsimile transmission or by e-mail delivery of a
“.pdf” format data file, such signature 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 or “.pdf”
signature page were an original thereof. Notwithstanding the foregoing,
Borrowers shall deliver all original signed documents requested by Bank no later
than ten (10) Business Days following the Closing Date.

12.8 Survival. All covenants, representations and warranties made in this
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding or Bank has any obligation to make Credit Extensions to
Borrowers. The obligations of Borrowers to indemnify Bank with respect to the
expenses, damages, losses, costs and liabilities described in Section 12.2 shall
survive until all applicable statute of limitations periods with respect to
actions that may be brought against Bank have run.

12.9 Confidentiality. In handling any confidential information Bank and all
employees and agents of Bank, including but not limited to accountants, shall
exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrowers, (ii) to prospective transferees or purchasers of any
interest in the loans, provided that they are similarly bound by confidentiality
obligations, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank and (v) as Bank may
determine in connection with the enforcement of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.

12.10 Patriot Act Notice. Bank hereby notifies Borrowers that, pursuant to the
requirements of the USA Patriot Act, Title III of Pub. L. 107-56 (signed into
law on October 26, 2001) (the “ Patriot Act”), it is required to obtain, verify
and record information that identifies the Borrowers, which information includes
names and addresses and other information that will allow Bank, as applicable,
to identify the Borrowers in accordance with the Patriot Act.

13. CO-BORROWERS.

13.1 Co-Borrowers. Borrowers are jointly and severally liable for the
Obligations and Bank may proceed against one Borrower to enforce the Obligations
without waiving its right to proceed against the other Borrower. This Agreement
and the Loan Documents are a primary and original obligation of each Borrower
and shall remain in effect notwithstanding future changes in conditions,
including any change of law or any invalidity or irregularity in the creation or
acquisition of any Obligations or in the execution or delivery of any agreement
between Bank and any Borrower. Each Borrower shall be liable for existing and
future Obligations as fully as if all of the Credit Extensions were advanced to
such Borrower. Bank may rely on any certificate or representation made by any
Borrower as made on behalf of, and binding on, all Borrowers, including without
limitation Advance Request Forms and Compliance Certificates. Each Borrower
appoints each other Borrower as its agent with all necessary power and authority
to give and receive notices, certificates or demands for and on behalf of all
Borrowers, to act as disbursing agent for receipt of any Advances on behalf of
each Borrower and to apply to Bank on behalf of each Borrower for Advances, any
waivers and any consents. This authorization cannot be revoked, and Bank need
not inquire as to one Borrower’s authority to act for or on behalf of another
Borrower.

21

 

13.2 Subrogation and Similar Rights. Notwithstanding any other provision of this
Agreement or any other Loan Document, each Borrower irrevocably waives, until
all obligations are paid in full and Bank has no further obligation to make
Credit Extensions to Borrowers, all rights that it may have at law or in equity
(including, without limitation, any law subrogating a Borrower to the rights of
Bank under the Loan Documents) to seek contribution, indemnification, or any
other form of reimbursement from any other Borrower, or any other Person now or
hereafter primarily or secondarily liable for any of the Obligations, for any
payment made by a Borrower with respect to the Obligations in connection with
the Loan Documents or otherwise and all rights that it might have to benefit
from, or to participate in, any security for the Obligations as a result of any
payment made by a Borrower with respect to the Obligations in connection with
the Loan Documents or otherwise. Any agreement providing for indemnification,
reimbursement or any other arrangement prohibited under this Section shall be
null and void. If any payment is made to a Borrower in contravention of this
Section, such Borrower shall hold such payment in trust for Bank and such
payment shall be promptly delivered to Bank for application to the Obligations,
whether matured or unmatured.

13.3 Waivers of Notice. Each Borrower waives, to the extent permitted by law,
notice of acceptance hereof; notice of the existence, creation or acquisition of
any of the Obligations; notice of an Event of Default except as set forth
herein; notice of the amount of the Obligations outstanding at any time; notice
of any adverse change in the financial condition of any other Borrower or of any
other fact that might increase a Borrower’s risk; presentment for payment;
demand; protest and notice thereof as to any instrument; and all other notices
and demands to which Borrower would otherwise be entitled by virtue of being a
co-borrower or a surety. Each Borrower waives any defense arising from any
defense of any other Borrower, or by reason of the cessation from any cause
whatsoever of the liability of any other Borrower. Bank’s failure at any time to
require strict performance by any Borrower of any provision of the Loan
Documents shall not waive, alter or diminish any right of Bank thereafter to
demand strict compliance and performance therewith. Each Borrower also waives
any defense arising from any act or omission of Bank that changes the scope of
Borrower’s risks hereunder. Each Borrower hereby waives any right to assert
against Bank any defense (legal or equitable), setoff, counterclaim, or claims
that such Borrower individually may now or hereafter have against another
Borrower or any other Person liable to Bank with respect to the Obligations in
any manner or whatsoever.

13.4 Subrogation Defenses. Until all Obligations are paid in full and Bank has
no further obligation to make Credit Extensions to Borrowers, each Borrower
hereby waives any defense based on impairment or destruction of its subrogation
or other rights against any other Borrower and waives all benefits which might
otherwise be available to it under California Civil Code Sections 2809, 2810,
2819, 2839, 2845, 2848, 2849, 2850, 2899, and 3433 and California Code of Civil
Procedure Sections 580a, 580b, 580d and 726, as those statutory provisions are
now in effect and hereafter amended, and under any other similar statutes now
and hereafter in effect.

13.5 Right to Settle, Release.

(a) The liability of Borrowers hereunder shall not be diminished by (i) any
agreement, understanding or representation that any of the Obligations is or was
to be guaranteed by another Person or secured by other property, or (ii) any
release or unenforceability, whether partial or total, of rights, if any, which
Bank may now or hereafter have against any other Person, including another
Borrower, or property with respect to any of the Obligations.

22

 

(b) Without notice to any given Borrower and without affecting the liability of
any given Borrower hereunder, Bank may (i) compromise, settle, renew, extend the
time for payment, change the manner or terms of payment, discharge the
performance of, decline to enforce, or release all or any of the Obligations
with respect to any other Borrower by written agreement with such other
Borrower, (ii) grant other indulgences to another Borrower in respect of the
Obligations, (iii) modify in any manner any documents relating to the
Obligations with respect to any other Borrower by written agreement with such
other Borrower, (iv) release, surrender or exchange any deposits or other
property securing the Obligations, whether pledged by a Borrower or any other
Person, or (v) compromise, settle, renew, or extend the time for payment,
discharge the performance of, decline to enforce, or release all or any
obligations of any guarantor, endorser or other Person who is now or may
hereafter be liable with respect to any of the Obligations.

13.6 Subordination. All indebtedness of a Borrower now or hereafter arising held
by another Borrower, except as disclosed in the attached Schedule, is
subordinated to the Obligations and the Borrower holding the indebtedness shall
take all actions reasonably requested by Bank to effect, to enforce and to give
notice of such subordination.

[signature page follows]

23

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.

 

“Borrowers”

 

TELKONET, INC.

 

By:/s/ Gene Mushrush

Name: Gene Mushrush

Title: Chief Financial Officer

 

 

ETHOSTREAM LLC

 

By:/s/ Jason Tienor

Name: Jason Tienor

Title: ManagingMember

 

 

 

 

“Bank”

 

HERITAGE BANK OF COMMERCE

By: /s/ Mike Hansen

Name: Mike Hansen

Title Senior Vice President and Manager

 

 

 

24

 

DEBTOR:       TELKONET, INC. and ETHOSTREAM LLC

 

SECURED PARTY:       HERITAGE BANK OF COMMERCE

EXHIBIT A

COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT

All personal property of each Borrower (herein referred to as “Borrower” or
“Debtor”) whether presently existing or hereafter created or acquired, and
wherever located, including, but not limited to:

(a) all accounts (including health-care-insurance receivables), chattel paper
(including tangible and electronic chattel paper), commercial tort claims,
deposit accounts, securities accounts, documents (including negotiable
documents), equipment (including all accessions and additions thereto), general
intangibles (including payment intangibles and software), goods (including
fixtures), instruments (including promissory notes), inventory (including all
goods held for sale or lease or to be furnished under a contract of service, and
including returns and repossessions), investment property (including securities
and securities entitlements), letter of credit rights, money, and all of
Debtor’s books and records with respect to any of the foregoing, and the
computers and equipment containing said books and records;

(b) any and all cash proceeds and/or noncash proceeds of any of the foregoing,
including, without limitation, insurance proceeds, and all supporting
obligations and the security therefor or for any right to payment. All terms
above have the meanings given to them in the California Uniform Commercial Code,
as amended or supplemented from time to time.

 

 

 

Exhibit B

ADVANCE/PAYDOWN FORM

 

[Bank to provide to borrowers]

 

 

 

 

 

 [ex1001_image1.jpg]

 

 

 

 

 

 

 

 

 

 

 

 

The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and HERITAGE BANK OF COMMERCE.

Each Borrower hereby requests funding in the amount of ____________________ in
accordance with this Borrowing Base Certificate. All representations and
warranties of Borrowers stated in the Loan and Security Agreement are true,
correct, and complete in all material respects as of the date of this Borrowing
Base Certificate; provided that those representations and warranties expressly
referring to another date shall be true, correct, and complete in all material
respects as of such date.

                                                                               
By (Authorized Signer):   Title:         Date:                                  
                    By (Authorized Signer):   Title:         Date:              
                                                    By (Authorized Signer):  
Title:         Date:                                                            
          Reviewed by Bank:     Title:         Date:                            
                                           

 

                        Bank Use Only:   Borrowing Base Update:   BBC status:
BBC expired - Do not Fund       Date of BBC:   Total Borrowing Capacity:    
Reviewed by:       BBC expiration date:   Outstanding Balance:     Approved by:
      Current date:     Remaining Availability:     Posted by:                  
              Loan Advance: Loan Payment:   Reporting in Compliance?   Yes /  No
Type of Payment:   Overadvance / Per client’s request   Covenant in Compliance?
  Yes /  No               If out of Compliance, what is the violation?          
                  Outstanding Loan Balance:   $0 Outstanding Loan Balance:    
$0   Amount of Advance: (Must be equal or less than BBC Availability)   $0
Amount of Payment:     $0   Loan Account #:   New Loan Account #:       New  
Deposit to DDA: Acct #:   $0 Account to be charged: Acct #:   $0  

New Outstanding Loan Balance:

 

  $0

New Outstanding Loan Balance:

 

    $0                                                                  

 

 

EXHIBIT D
COMPLIANCE CERTIFICATE

TO:HERITAGE BANK OF COMMERCE

FROM: TELKONET, INC. and ETHOSTREAM LLC

 

The undersigned authorized officer of TELKONET, INC. on behalf of all Borrowers,
hereby certifies that in accordance with the terms and conditions of the Loan
and Security Agreement between Borrowers and Bank (the “Agreement”), (i) each
Borrower is in complete compliance for the period ending _______________ with
all required covenants except as noted below and (ii) all representations and
warranties of each Borrower stated in the Agreement are true and correct as of
the date hereof. Attached herewith are the required documents supporting the
above certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.

Please indicate compliance status by circling Yes/No under “Complies” column.

Reporting Covenant Required Complies     Borrower prepare Financial Statements
Quarterly within 45 days Yes No   Compliance Certificate Quarterly within 45
days Yes No   Wells Fargo bank statements Monthly within 10 days Yes No   A/P
Agings + Inventory Report Monthly within 10 days Yes No   A/R Agings
Semi-monthly (2x per month) within 5 days Yes No   Borrowing Base Certificate
Semi-monthly (2x per month) within 5 days Yes No   Annual Financial Statements
(CPA Audited) Annual within 120 days Yes No   Annual financial projections and
budget Annual within 30 days before FYE Yes No   Federal Tax Returns Annual,
within 15 days of filing Yes No   10K and 10Q (as applicable) Yes No   A/R Audit
Initial and semi-annual Yes No   IP Notices As required under 6.10 Yes No      
    Financial Covenant Required Actual Complies                Asset Coverage
Ratio (monthly) 1.25 : 1.00 _____: 1.00 Yes No    EBITDA See Agreement _________
Yes No  

 

 

          Comments Regarding Exceptions:  See Attached. BANK USE ONLY      
Received by: Sincerely, AUTHORIZED SIGNER       Date:     Verified: SIGNATURE
AUTHORIZED SIGNER         Date: TITLE  

 

Compliance Status      Yes   No DATE                      

 

 

 

SCHEDULE OF EXCEPTIONS

Permitted Indebtedness (Section 1.1)

None.

 

Permitted Investments (Section 1.1)

None.

 

Permitted Liens (Section 1.1)

None.

 

Inbound Licenses (Section 5.6)

None.

 

Prior Names (Section 5.7)

None.

 

Litigation (Section 5.8)

None.

Subsidiaries (Section 5.14)

Telkonet, Inc. owns 100% of the stock of Telkonet Communications, Inc.
Ethostream LLC has no Subsidiaries.

Operating, Depository and Investment Accounts (Section 5.16)

The Wells Fargo Accounts.

 

 

 

 

INCUMBENCY CERTIFICATION

Borrower: TELKONET, INC.

 

I, the undersigned Secretary of TELKONET, INC. (the “Corporation”), HEREBY
CERTIFIES that the Corporation is organized and existing under and by virtue of
the laws of the State of Utah.

I FURTHER CERTIFY that attached hereto as Attachments 1, 2 and 3 are true and
complete copies of the Articles of Incorporation, as amended (the “Articles”),
the Bylaws of the Corporation (the “Bylaws”) and the Unanimous Written Consent
in Lieu of Special Meeting of the Board of Directors (the “Resolutions”)
regarding the asset based loan transaction with Heritage Bank of Commerce, N.A.,
each of which is in full force and effect on the date hereof.

I FURTHER CERTIFY that there have been no changes to the Articles, the Bylaws or
the Resolutions since the date thereof.

I FURTHER CERTIFY that, in accordance with the Resolutions, any one (1) of the
following named officers, employees, or agents of the Corporation, whose actual
signatures are shown below, are authorized to empowered to do all acts
authorized pursuant to the Resolutions:

NAMES POSITION ACTUAL SIGNATURES       James Tienor Chief Executive Officer /s/
Jason Tienor       Gene Mushrush Chief Financial Officer /s/ Gene Mushrush      
           

IN WITNESS WHEREOF, I have hereunto set my hand on September 30, 2014 and attest
that the signatures set opposite the names listed above are their genuine
signatures.

    CERTIFIED AND ATTESTED BY:          

 

By: /s/Gene Mushrush

   

 

Name: Gene Mushrush

   

 

Title: Secretary

     

 

 

 

 

ATTACHMENT 1

Articles of Incorporation, as amended

[attached hereto]

 

 

 

 

ATTACHMENT 2

Bylaws of the Corporation

[attached hereto]

 

 

ATTACHMENT 3

Unanimous Written Consent in Lieu of Special Meeting of the Board of Directors

[attached hereto]

 

 

 

LIMITED LIABILITY COMPANY RESOLUTIONS AND INCUMBENCY CERTIFICATION

Borrower: ETHOSTREAM LLC

 

I, the undersigned [Managing Member] of ETHOSTREAM, LLC (the “Company”), HEREBY
CERTIFY that the Company is organized and existing under and by virtue of the
laws of the State of Wisconsin.

I FURTHER CERTIFY that attached hereto as Attachments 1, 2 and 3 are true and
complete copies of the Articles of Organization (the “Articles”), the Operating
Agreement of the Company (the “Operating Agreement”) and the Unanimous Written
Consent in Lieu of Special Meeting of the Members (the “Resolutions”) regarding
the asset based loan transaction with Heritage Bank of Commerce, N.A., each of
which is in full force and effect on the date hereof.

I FURTHER CERTIFY that there have been no changes to the Articles, the Operating
Agreement or the Resolutions since the date thereof.

I FURTHER CERTIFY that, in accordance with the Resolutions, the Managing Member,
whose actual signature is shown below, is authorized and empowered to do all
acts authorized pursuant to the Resolutions:

NAMES POSITION ACTUAL SIGNATURES       James Tienor Managing Member /s/ Jason
Tienor                                                          

 

IN WITNESS WHEREOF, I have hereunto set my hand on September 30, 2014 and attest
that the signatures set opposite the names listed above are their genuine
signatures.

    CERTIFIED AND ATTESTED BY:          

 

By: /s/ Jason Tienor

   

 

Name: Jason Tienor

   

 

Title: Managing Member

     

 

 

 

 

ATTACHMENT 1

Articles of Organization, as amended

[attached hereto]

 

 

 

 

ATTACHMENT 2

Operating Agreement

[attached hereto]

 

 

ATTACHMENT 3

Resolutions

[attached hereto]