Document:

Amended and Restated Security Agreement

 

EXHIBIT 10.2

SECURITY AGREEMENT

This Security Agreement (the “Agreement”) is entered into as of this 4th day of May, 2016 by and between Ecosphere Technologies, Inc., a Delaware corporation (“Ecosphere”), and Brisben Water Solutions LLC (the “Lender” and together with Ecosphere, the “Parties”). The Parties hereby agree as follows:

1.

Creation of Security Interest.  In connection with the issuance by Ecosphere of that certain Amended, Restated and Consolidated Convertible Note, dated as of the date hereof, in the amount of $2,904,000.00 (the “Note”) and as consideration for the Lender’s advance of funds thereunder, Ecosphere hereby grants to the Lender a security interest in the Collateral described in Section 2 to secure the performance or payment of all of the Obligations (as defined below) of Ecosphere under Section 3. The Parties agree that notwithstanding any provision to the contrary contained in any prior agreement between the parties, the entry into each of this Agreement and the Note do not constitute a default or violation of any covenant under any prior agreement of the parties, and it is the intent of the parties that this Agreement shall replace and supersede all prior security agreements made between the parties without affecting the validity or priority of any security interests in the Collateral granted in favor of the Lender under any such prior security agreements to secure the Obligations. 

2.

Collateral.  The collateral of this Agreement (the “Collateral”) consists of the items described on attached Exhibit A, including the Physical Collateral and the Patent Collateral, as defined in Exhibit A. 

3.

Ecosphere's Obligations.

(a)

Obligation to Pay.  Ecosphere shall pay to the Lender $2,904,000 and accrued interest thereon in accordance with the terms of the Note. 

(b)

Additional Obligations.

(i)

Protection of Collateral.  The Physical Collateral:

(A)

will not be misused or abused, but will be maintained in good and operable condition, reasonable wear and tear excepted (except for any loss, damage or destruction which is fully covered by insurance proceeds) and will be repaired, renewed and replaced by Ecosphere, in the exercise of reasonable discretion, shall deem necessary;

(B)

will be insured by Ecosphere in the amount of $750,000 for the Ecos PowerCube® unit and $500,000 for the Ecos GrowCubeTM unit until this Agreement is terminated against all expected risks to which it is exposed, including fire, theft, wind and flood, and those which the Lender may designate, with the policies acceptable to the Lender, payable to the Lender and providing for 30 days' minimum cancellation notice to the Lender, and with certificates evidencing such insurance delivered to the Lender as a condition to advances under the Note; and

(ii)

Protection of Security Interest.

(A)

The Collateral will not be sold, licensed, transferred, encumbered, pledged, or disposed of or be subjected to any unpaid charge, including taxes, or to any subsequent interest of a third person created or suffered by Ecosphere voluntarily or involuntarily, unless the Lender consents in advance in writing to such charge, transfer, disposition or subsequent interest, and

(B)

The Lender has filed Financing Statements and may file additional Financing Statements it deems necessary in places it deems appropriate to protect the security interest under this Agreement against the rights or interests of third persons.

(C)

Any proceeds received by Ecosphere upon the sale, lease, license, assignment, transfer, encumbrance, pledge or other disposition of any of the Collateral or any part thereof shall be paid to Lender when received and applied to the Note until all principal, accrued interest and attorneys’ fees outstanding under the Note are paid in full.  All additional proceeds, if any, from such sale or other disposition shall be retained by Ecosphere.

(iii)

Sale of FNES Interest.  In addition to the Lender’s rights and remedies with respect to the Collateral, to secure the performance or payment of the Obligations, Ecosphere agrees as follows:

(A)

Ecosphere shall not sell, assign, transfer or encumber in any manner Ecosphere’s 30.6% limited liability company ownership interest in Fidelity National Environmental Solutions, LLC (“FNES”, and such 30.6% interest, the “FNES Interest”); and

(B)

In the event Ecosphere is in default of the Note and Lender declares the Note to be immediately due and payable, Ecosphere shall sell the FNES Interest or any part thereof for cash at public or private sale, subject to full compliance with the provisions, including tag-along rights and rights of first refusal, of the Amended and Restated Limited Liability Company Agreement of FNES, as in effect on the date hereof.  To facilitate the sale process, Lender may solicit offers to purchase the FNES Interest.  Such public or private sale shall take place no later than 90 days after the date of default by non-payment.  Ecosphere shall give Lender at least 30 days’ notice of the time and place of any public sale or the time at which any private sale is to be made.  At any sale of the FNES Interest the Lender may be the purchaser of the FNES Interest or any part thereof and shall be entitled to use and apply any sums due it under the Note as a credit on account of the purchase price of the FNES Interest or any part thereof payable at such sale.  All proceeds received by Ecosphere upon sale of the FNES Interest or any part thereof shall be paid to Lender and applied to the Note until all principal, accrued interest and attorneys’ fees outstanding under the Note are paid in full.  All additional proceeds, if any, from the sale shall be retained by Ecosphere.

(iv)

Sale of EM Interest.  In addition to the Lender’s rights and remedies with respect to the Collateral, to secure the performance or payment of the Obligations, Ecosphere agrees as follows:

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(A)

Ecosphere shall not sell, assign, transfer or encumber in any manner the 25% limited liability company ownership interest in Ecosphere Mining, LLC (“EM”) which Ecosphere owns and has pledged to the Lender under this Agreement (the “EM Interest”); and

(B)

In the event Ecosphere is in default of the Note and Lender declares the Note to be immediately due and payable, Ecosphere shall sell the EM Interest or any part thereof for cash at public or private sale.  To facilitate the sale process, Lender may solicit offers to purchase the EM Interest.  Such public or private sale shall take place no later than 90 days after the date of default by non-payment.  Ecosphere shall give Lender at least 30 days’ notice of the time and place of any public sale or the time at which any private sale is to be made.  At any sale of the EM Interest, the Lender may be the purchaser of the EM Interest or any part thereof and shall be entitled to use and apply any sums due it under the Note as a credit on account of the purchase price of the EM Interest or any part thereof payable at such sale.  All proceeds received by Ecosphere upon sale of the EM Interest or any part thereof shall be paid to Lender and applied to the Note until all principal, accrued interest and attorneys’ fees outstanding under the Note are paid in full.  All additional proceeds, if any, from the sale shall be retained by Ecosphere.

(v)

Allocation of Ecosphere Revenues.  In addition to the Lender’s rights and remedies with respect to the Collateral, to secure the performance or payment of the Obligations, Ecosphere and its subsidiaries agree that so long as any amounts payable under the Note remain outstanding, Ecosphere and its subsidiaries shall allocate and pay to Lender 5% of all revenues actually received by Ecosphere and its subsidiaries from equipment sales, licensing fees, services and other sources to payment of the Obligations, as prepayments of principal and accrued interest; provided, however, that for the purposes of such calculations, management fees payable to Ecosphere from Sea of Green Systems, Inc. (“SOGS”), which have been accruing at the rate of $25,000 monthly since January 1, 2015 and remain unpaid as of the date hereof (the “Management Fees”), shall not be considered revenues under this Section 3(b)(v).  Provided, further, that SOGS shall not be deemed to be a subsidiary within the meaning of the first sentence of this Section 3(b)(v).  Equipment sales from Ecosphere to SOGS shall be deemed to be revenues of Ecosphere.  To the extent Ecosphere pays the Lender $200,000 under the Note from its receipt of at least $450,000 as a result of a financing transaction related to SOGS engaging in a reverse merger, sums received by SOGS as a result of such reverse merger shall not be deemed to be revenues within the meaning of the first sentence of this Section 3(b)(v).

(vi)

Allocation of Initial Public Offering Proceeds.  In addition to the Lender’s rights and remedies with respect to the Collateral, to secure the performance or payment of the Obligations, Ecosphere and its subsidiaries agree that so long as any amounts payable under the Note remain outstanding, Ecosphere and its subsidiaries shall allocate and pay to Lender 10% of all net proceeds actually received by Ecosphere or its subsidiaries in connection with the closing of an initial public offering of any of its present subsidiaries to payment of the Obligations; provided, however, that for the purposes of such calculations, the Management Fees shall not be considered net proceeds under this Section 3(b)(vi).  For avoidance of doubt, financing proceeds received in connection with a reverse merger shall not be deemed to be an initial public offering.  For purposes of this Section 3(b)(vi), “reverse merger” means a merger, consolidation or share exchange between an Ecosphere subsidiary and another entity which is treated as a reverse merger for accounting purposes.

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4.

Representations, Warranties and Covenants.  

        (a) Ecosphere represents, warrants and covenants to Lender that:

(i)

Ecosphere has good and sufficient title to the Collateral, the FNES Interest and the EM Interest, free and clear of all security interests, liens, encumbrances and claims whatsoever, other than those created in favor of the Lender.

(ii)

No financing statement, notice of lien, security agreement or any other agreement or instrument creating or giving notice of an encumbrance or charge against any of the Collateral, the FNES Interest and the EM Interest is in existence or on file in any public office, except those in favor of Lender.

(iii)

Ecosphere will at all times hereafter keep the Collateral, the FNES Interest and the EM Interest free of all security interests, liens and claims whatsoever, except the security interests, liens and claims in favor of Lender.

(iv)

Ecosphere (i) will, from time to time, on request of Lender, execute such financing statements, statements of assignment, notices and other documents and pay the costs of filing or recording the same in all public offices deemed necessary by Lender and do such other acts as Lender may request to establish and maintain a valid security interest in the Collateral, the FNES Interest and the EM Interest and (ii) authorizes  Lender at Ecosphere’s expense to file any financing statements, or any notices or assignments with the Patent and Trademark Office, relating to the Collateral (without Ecosphere’s signature thereon) which Lender deems appropriate and Ecosphere irrevocably appoints Lender as Ecosphere’s attorney-in-fact to execute any such financing statements and notices or assignments in Ecosphere’s name and to perform all other acts which Lender deems appropriate to perfect and to continue perfection of the security interest created herein.

(v)

Ecosphere will account fully and faithfully for and promptly pay or turn over to Lender proceeds in whatever form received in disposition in any manner of any of the Collateral, the FNES Interest and the EM Interest as provided herein.

(vi)

All information now or hereafter furnished by Ecosphere to Lender relating in any way to the Collateral, the FNES Interest or the EM Interest is and will be true and correct in all material respects as of the date furnished.

(vii)

The FNES Interest and the EM Interest are not represented by a certificate and are “uncertificated securities” under the Uniform Commercial Code as in effect in Delaware.  Ecosphere will, if the FNES Interest or the EM Interest are represented by a certificate, promptly deliver possession of such certificate to Lender.

                   (b) The Lender represents, warrants and covenants to Ecosphere that, in enforcing the Lender’s rights under this Agreement and the Note, the Lender  (and any assignee of the Note) shall never seek to take possession of, nor cause the sale, transfer or other disposition of, nor in any way limit or interfere with the rights of Ecosphere or other parties to, the following:

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(i)

Shares of capital stock of Sea of Green Systems, Inc. (“SOGS”) or any entity which acquires SOGS or  is acquired by SOGS.

(ii)

Limited liability company interests in Ecosphere Development Corporation LLC (“EDC”), or any entity which acquires EDC or is acquired by EDC.

(iii)

Except as explicitly included in the definition of Collateral in Exhibit A, any other agriculture-related asset held directly, or indirectly, by Ecosphere, including the equity interests and assets of subsidiaries of Ecosphere engaged in the agriculture business, including the growing and cultivating of cannabis, and/or licensees to the Patent Collateral within the Agriculture Field of Use (each as defined in Exhibit A). For the avoidance of doubt, the Lender retains full rights to all Collateral described in Exhibit A, and nothing in this section shall be construed to limit the Lender’s rights thereto.

5.

Default.  Any misrepresentation or misstatement in connection with, or non-compliance with or non-performance of the Note or this Agreement shall constitute default under this Agreement.  In addition, Ecosphere shall be in default if (i) bankruptcy or insolvency proceedings are instituted by or against Ecosphere, which proceedings are not dismissed within 30 days; (ii) if Ecosphere makes any assignment for the benefit of creditors, or (iii) if Ecosphere shall default in performance of any agreement with the Lender.  

6.

The Lender's Rights and Remedies.

(a)

The Lender may assign this Agreement, with notice to Ecosphere, and, if the Lender does assign this Agreement, the assignee shall be entitled, upon notifying Ecosphere, to performance of all of Ecosphere's obligations under this Agreement.

(b)

Upon Ecosphere's default, the Lender may exercise its rights of enforcement under the Uniform Commercial Code in force in Delaware and any notice of lien filed with the United States Patent Office and, in conjunction with, addition to or substitution for those rights, at the Lender's discretion, it may:

(i)

To the extent permitted by law, enter upon Ecosphere's premises to take possession of, assemble and collect the Collateral or to render it unuseable.

(ii)

Require Ecosphere to assemble the Collateral and make it available at a place the Lender designates which is mutually convenient, to allow the Lender to take possession or sell, lease, license or otherwise dispose of the Collateral.

(iii)

Waive any default or remedy any default in any reasonable manner without waiving the default remedied and without waiving any other prior or subsequent default.

(iv)

Ecosphere understands that to the extent permitted by law, if Ecosphere fails to meet any of Ecosphere's obligations under this Agreement, the Lender has a right to take possession of the Collateral by all lawful means and to sell, lease, license or otherwise dispose of the Collateral.

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(c) 

Upon default of the Note, the Lender shall have rights to a sale of the EM Interest and/or FNES Interest by Ecosphere, including a right to solicit purchasers, in accordance with Sections 3(b)(iii) and 3(b)(iv).

(d)

With regards to only non-monetary defaults, the Lender will give notice to Ecosphere that Ecosphere is in default hereunder, and Ecosphere shall have 30 days from the date of such notice to cure the non-monetary defaults.  

(e)

The Lender’s remedies are limited to recovering its outstanding principal and accrued interest under the Note, attorneys’ fees and costs incurred in the sale of the Collateral.

7. 

Other Lienholders.  Any person or entity taking a junior encumbrance, or other lien upon the Collateral or any part thereof or any interest therein, shall take said lien subject to the rights of the Lender to amend, modify, extend, renew, enlarge or release the Note, this  Agreement or any other document or instrument evidencing, securing or guaranteeing the Note, including, but not limited to, any amendments, modifications, extensions or renewals that increase the amount outstanding under the Note, in each and every case without obtaining the consent of the holder of such junior lien and without the lien of this Agreement losing its priority over the rights of any such junior lien.  Accordingly, any person or entity taking a junior encumbrance, or other lien upon the Collateral or any part therein or any interest therein, shall take said lien subject to the provisions of the Note and this Agreement, including, but not limited to, the above provision.  Nothing in this Section shall be deemed to authorize any such junior encumbrance or other liens on the Collateral, the FNES Interest and the EM Interest.

 

8.

Severability.  In the event any parts of this Agreement are found to be void, the remaining provisions of this Agreement shall nevertheless be binding with the same effect as though the void parts were deleted.

9.

Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.  The execution of this Agreement may be by actual or facsimile signature.

10.

Benefit.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their legal representatives, successors and assigns.

11.

Notices and Addresses.  All notices, offers, acceptance and any other acts under this Agreement (except payment) shall be in writing, and shall be sufficiently given if delivered to the addressees in person, by FedEx or similar receipted next business day delivery, or by email followed by overnight next business day delivery as follows:

Lender:

Brisben Water Solutions LLC

23 N. Beach Road

Jupiter Island, FL 33455

Attn:  William Brisben

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with a copy to:

Dinsmore & Shohl LLP

Fifth Third Center

One South Main Street, Suite 1300

Dayton, OH 45402

Attn: Steven R. Watts, Esq.

Email: steve.watts@dinsmore.com

Ecosphere:

3515 SE Lionel Terrace

Stuart, Florida 34997

Attention: Dennis McGuire

Email: dennismcguire1@mac.com

with a copy to:

Nason, Yeager, Gerson, White

& Lioce, P.A.

3001 PGA Boulevard, Suite 305

Palm Beach Gardens, Florida 33410

Attention:  Michael D. Harris

Email:  mharris@nasonyeager.com

or to such other address as any of them, by notice to the other may designate from time to time.  Time shall be counted to, or from, as the case may be, the date of delivery.

12.

Attorneys’ Fees.  In the event that there is any controversy or claim arising out of or relating to this Agreement, or to the interpretation, breach or enforcement thereof, and any action or proceeding is commenced to enforce the provisions of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and expenses (including such fees and costs on appeal).

13.

Oral Evidence.  This Agreement constitutes the entire Agreement between the parties and supersedes all prior oral and written agreements between the parties hereto with respect to the subject matter hereof.  Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, except by a statement in writing signed by the party or parties against which enforcement or the change, waiver, discharge or termination is sought.

14.

Additional Documents.  The parties hereto shall execute such additional instruments as may be reasonably required by their counsel in order to carry out the purpose and intent of this Agreement and to fulfill the obligations of the parties hereunder.

15.

Governing Law.  All claims relating to or arising out of this Agreement, or the breach thereof, whether sounding in contract, tort, or otherwise, shall also be governed by the laws of the State of Delaware without regard to choice of law considerations.

16.

Section or Paragraph Headings.  Section headings herein have been inserted for reference only and shall not be deemed to limit or otherwise affect, in any matter, or be deemed to interpret in whole or in part any of the terms or provisions of this Agreement.

(Signature Page Follows)

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IN WITNESS WHEREOF the parties hereto have set their hand as of the date first above written.

			
	 
	ECOSPHERE:  

	 
	ECOSPHERE TECHNOLOGIES, INC.

	 
	 
	 

	 
	 
	 

	 
	 
	 

	 
	By:  

	/s/ Dennis McGuire

	 
	 
	Dennis McGuire, Chief Executive Officer

	 
	 
	 

	 
	 
	 

	 
	BRISBEN WATER SOLUTIONS LLC

	 
	 
	 

	 
	 
	 

	 
	 
	 

	 
	By:  

	/s/ William Brisben

	 
	 
	William Brisben, Manager

THE UNDERSIGNED subsidiaries of Ecosphere Technologies, Inc. have executed this Agreement solely to acknowledge their obligations under Section 3(b)(v) and (vi).

			
	 
	ECOSPHERE MINING, LLC

	 
	 
	 

	 
	 
	 

	 
	 
	 

	 
	By:  

	/s/ Dennis McGuire

	 
	 
	Dennis McGuire, Chief Executive Officer

	 
	 
	 

	 
	 
	 

	 
	SEA OF GREEN SYSTEMS, INC.

	 
	 
	 

	 
	 
	 

	 
	 
	 

	 
	By:  

	/s/ Corey McGuire

	 
	 
	Corey McGuire, Chief Executive Officer

 

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EXHIBIT A

COLLATERAL

This Security Agreement covers all of the following property of Ecosphere Technologies, Inc. (“Ecosphere”), whether now or hereafter owned, existing, acquired or arising and wherever now or hereafter located (capitalized terms used herein shall have the meaning ascribed to such term under the Uniform Commercial Code as in effect in the State of Delaware and/or as otherwise set forth herein):

(a)

The Ecos PowerCube® unit (with the Ecos GrowCubeTM unit, the “Physical Collateral”) located in Stuart, Florida.

(b)

One completed Ecos GrowCubeTM unit (with the Ecos PowerCube® unit, the “Physical Collateral”) located at 236709 E. Lechelt Road, Kennewick WA 99337-7545.

(c)

Each United States Patent listed on Schedule A-1 hereto (the “Patent Collateral”), to the extent that such patents are used in any global field of use other than the Agriculture Field of Use, as defined on Schedule A-1.

(e)

All warranties, increases, parts, renewals, additions and accessions to, substitutions for, and replacements, products and Proceeds of the foregoing property, and all of Ecosphere's books and records relating to any of the foregoing. Provided, however, that if Ecosphere manufactures any additional Ecos PowerCube® units or Ecos GrowCube® units, they shall not be deemed to be Physical Collateral or subject to this Agreement.

(f)

30.6% of the limited liability company interests in Fidelity National Environmental Solutions, LLC, a Delaware limited liability company and Ecosphere’s subsidiary (the “FNES Interest”). 

(g)

25% of the limited liability company interests in Ecosphere Mining, LLC, a Delaware limited liability company and Ecosphere’s subsidiary (the “EM Interest”). 

(h)

All Proceeds received, directly or indirectly, by Ecosphere from the Patent Collateral in any global field of use other than the Agriculture Field of Use, as defined on Schedule A-1. 

Proceeds shall mean and include all proceeds of, and all other profits, products, rents or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or other realization upon collateral, including, without limitation, all licenses, permits, authorizations and applications, all claims of Ecosphere against third parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance in respect of, any collateral, and any condemnation or requisition payments with respect to any collateral, in each case whether now existing or hereafter arising.

 

Schedule A-1

Patent Collateral

1.

Approved U.S. Patent No’s.:

7,699,994;

7,699,988;

7,785,470;

7,943,087;

8,318,027;

8,593,102;

8,721,898;

8,858,064;

8,936,392;

8,906,242;

8,968,577;

8,999,154;

9,034,180; 

9,169,146;

9,266,752;

Patent Application No. 14/162,479 filed January 23, 2014, allowed for issuance April 2016; and

U.S. Patent, when issued, pertaining to Patent Application No. 62/083,747 filed November 24, 2014, relating to the Ecos GrowCubeTM.

and all reissues, continuations, divisions, continuations-in-part, renewals, improvements or extensions thereof.

2.

Exception: The lien on the above U.S. Patents shall exclude the Agriculture Field of Use. For purposes hereof, “Agriculture Field of Use” means and refers to the application of all patents, patents pending, trade secrets, trademarks, “know how” and “show how” related to the Company’s Precision Agriculture line of equipment and nutrient technology developed, or to be developed, by the Company and its subsidiaries to the cultivation of crops on a global basis. For the avoidance of doubt, “crops” shall mean any and all plants, including, but not limited to, food crops, cannabis, grass and ornamental plants.Warrant

 

EXHIBIT 10.3

THIS WARRANT AND THE UNDERLYING SHARES OF COMMON STOCK HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “SECURITIES ACT”), OR ANY OTHER SECURITIES LAWS, HAVE BEEN TAKEN FOR INVESTMENT, AND MAY NOT BE SOLD OR TRANSFERRED OR OFFERED FOR SALE OR TRANSFER UNLESS A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND OTHER APPLICABLE SECURITIES LAWS WITH RESPECT TO SUCH SECURITIES IS THEN IN EFFECT, OR IN THE OPINION OF COUNSEL TO THE ISSUER OF THESE SECURITIES, SUCH REGISTRATION UNDER THE SECURITIES ACT AND OTHER APPLICABLE SECURITIES LAWS IS NOT REQUIRED.

			
	 
	 
	 

	 

	Date: May 4, 2016

	 

$ 0.115 WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK OF ECOSPHERE TECHNOLOGIES, INC.

THIS IS TO CERTIFY that, for value received, Brisben Water Solutions LLC, its successors and assigns (the “Holder”), is entitled to purchase, subject to the terms and conditions hereinafter set forth, 13,547,826 shares of Ecosphere Technologies, Inc., a Delaware corporation (the “Company”) common stock, $0.01 par value per share (“Common Stock”), and to receive certificates for the Common Stock so purchased.  The exercise price of this Warrant is $0.115 per share, subject to adjustment as provided below (the “Exercise Price”). 

The Holder and the Company agree that in lieu of any shares of Common Stock deliverable upon exercise of this Warrant, if the Company does not have sufficient authorized Common Stock to permit partial or full exercise, the Company may issue the Holder an equivalent number, on an as-converted basis, of shares of the Company’s Series C Convertible Preferred Stock (the “Series C”), which converts on the basis of 1,000,000 shares of Common Stock to one share of Series C, in accordance with the Certificate of Designation setting forth the terms of the Series C.

1. Exercise Period and Vesting.  This Warrant is vested and shall be exercisable at any time by the Holder beginning on the date listed above (the “Issuance Date”), and ending at 5:00 p.m., New York, New York time, on the date that is the fifth anniversary of the date of this Warrant (the “Exercise Period”).  This Warrant will terminate automatically and immediately upon the expiration of the Exercise Period. 

2. Exercise of Warrant; Cashless Exercise.  

(a) Exercise.  This Warrant may be exercised, in whole or in part, at any time and from time to time during the Exercise Period.  Such exercise shall be accomplished by tender to the Company of an amount equal to the Exercise Price multiplied by the number of underlying 

shares being purchased (the “Purchase Price”), by wire transfer or by certified check or bank cashier’s check, payable to the order of the Company, or by a cashless exercise as provided in Section 2(b).  As a condition of exercise, the Holder shall where applicable execute a customary investment letter and accredited investor questionnaire.  The Holder’s right to exercise this Warrant is subject to compliance with any applicable laws and rules including Section 5 of the Securities Act of 1933.

(b) Cashless Exercise.  Provided, however, the Holder may exercise this Warrant by surrendering such number of shares of Common Stock or the Series C (or a fractional share of the Series C) received upon exercise of this Warrant with an aggregate Fair Market Value (as defined below) equal to the Purchase Price, as described in the following paragraph (a “Cashless Exercise”). If the Company does not have sufficient authorized Common Stock to permit partial or full exercise, the Holder may acquire one share of the Series C (or a fractional share at the option of the Holder or to the extent required).

If the Holder elects to conduct a Cashless Exercise, the Company shall cause to be delivered to the Holder a certificate or certificates representing the number of shares of Common Stock (or the equivalent number, on an as converted basis, of shares of Series C) computed using the following formula:

	
	 

	X = Y (A-B)

A

Where:

X   = the number of shares of Common Stock to be issued to the Holder;

Y = the portion of the Warrant (in number of shares of Common Stock) being exercised by the Holder (at the date of such calculation);

A = the Fair Market Value (as defined below) of one share of Common Stock; and 

B = Exercise Price (as adjusted to the date of such calculation).

	 

For purposes of this Warrant, Fair Market Value shall mean: (i) if the principal trading market for such securities is a national securities exchange, or the OTCQB (or a similar system then in use), the average of the last five reported sales prices on the principal market the last five trading days immediately prior to such Exercise Date (as defined in Section 2(c) below); or (ii) if (i) is not applicable, and if bid and ask prices for shares of Common Stock are reported by the principal trading market, the average of the high bid and low asked prices so reported for the trading day immediately prior to such Exercise Date.  Notwithstanding the foregoing, if there is no last reported sales price or bid and ask prices, as the case may be, for the day in question, then Fair Market Value shall be determined as of the latest day prior to such day for which such last reported sales price or bid and asked prices, as the case may be, are available, unless such securities have not been traded on an exchange or in the over-the-counter market for 30 or more days immediately prior to the day in question, in which case the Fair Market Value shall be 

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determined in good faith by and reflected in a formal resolution of the board of directors of the Company.  

(c) Upon receipt of the Purchase Price in Section 2(a) or the shares of Common Stock (or Series C) in Section 2(b), together with presentation and surrender to the Company of this Warrant with an executed subscription form in substantially the form attached hereto as Exhibit A (the “Subscription”), the Company will deliver to the Holder, as promptly as possible, a certificate or certificates representing the shares of Common Stock so purchased, registered in the name of the Holder or its transferee (as permitted under Section 3 below).  With respect to any exercise of this Warrant, the Holder will for all purposes be deemed to have become the holder of record of the number of shares of Common Stock (or Series C) purchased hereunder on the date a properly executed Subscription and payment of the Purchase Price is received by the Company (the “Exercise Date”), irrespective of the date of delivery of the certificate evidencing such shares, except that, if the date of such receipt is a date on which the stock transfer books of the Company are closed, such person will be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open.  Fractional shares of Common Stock will not be issued upon the exercise of this Warrant.  In lieu of any fractional shares that would have been issued but for the immediately preceding sentence, the Holder will be entitled to receive cash equal to the current market price of such fraction of a share of Common Stock on the trading day immediately preceding the Exercise Date.  In the event this Warrant is exercised in part, the Company shall issue a New Warrant (defined below) to the Holder covering the aggregate number of shares of Common Stock as to which this Warrant remains exercisable for.  The Company acknowledges and agrees that this Warrant was issued on the Issuance Date.

3. Transferability and Exchange.

(a) This Warrant, and the Common Stock (or Series C) issuable upon the exercise hereof, may not be sold, transferred, pledged or hypothecated unless the Company shall have been provided with an opinion of counsel reasonably satisfactory to the Company that such transfer is not in violation of the Securities Act of 1933 (the “Securities Act”), and any applicable state securities laws.  Subject to the satisfaction of this condition, this Warrant and the underlying shares of Common Stock (or Series C) if not eligible to be sold under Rule 144 of the Securities Act shall be transferable from time to time by the Holders upon written notice to the Company.  If this Warrant is transferred, in whole or in part, the Company may request the transferee to sign an investment letter and shall, upon surrender of this Warrant to the Company, deliver to each transferee a Warrant evidencing the rights of such transferee to purchase the number of shares of Common Stock (or Series C) that such transferee is entitled to purchase pursuant to such transfer.  The Company may place a legend similar to the legend at the top of this Warrant on any replacement Warrant and on each certificate representing shares issuable upon exercise of this Warrant or any replacement Warrants. Only registered Holder may enforce the provisions of this Warrant against the Company.  A transferee of the original registered Holder becomes a registered Holder only upon delivery to the Company of the original Warrant and an original Assignment, substantially in the form set forth in Exhibit B attached hereto.

(b) This Warrant is exchangeable upon its surrender by the Holder to the Company for new Warrants of like tenor and date representing in the aggregate the right to purchase the 

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number of shares purchasable hereunder, each of such new Warrants to represent the right to purchase such number of shares as may be designated by the Holder at the time of such surrender (not to exceed the aggregate number of shares underlying this Warrant).

4. Adjustments to Exercise Price and Number of Shares Subject to Warrant.  The Exercise Price and the number of shares of Common Stock (or Series C) purchasable upon the exercise of this Warrant are subject to adjustment from time to time upon the occurrence of any of the events specified in this Section 4.  For the purpose of this Section 4, “Common Stock” means shares now or hereafter authorized of any class of common stock of the Company, however designated, that has the right to participate in any distribution of the assets or earnings of the Company without limit as to per share amount (excluding, and subject to any prior rights of, any class or series of preferred stock).

(a) In case the Company shall (i) pay a dividend or make a distribution in shares of Common Stock to holders of shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares, or (iv) issue by reclassification of its shares of Common Stock other securities of the Company, then the Exercise Price in effect at the time of the record date for such dividend or on the effective date of such subdivision, combination or reclassification, and/or the number and kind of securities issuable on such date, shall be proportionately adjusted so that the Holder of the Warrant thereafter exercised shall be entitled to receive the aggregate number and kind of shares of Common Stock (or such other securities other than Common Stock) of the Company, at the same aggregate Exercise Price, that, if such Warrant had been exercised immediately prior to such date, the Holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, distribution, subdivision, combination or reclassification.  Such adjustment shall be made successively whenever any event listed above shall occur. 

(b) In case the Company shall fix a record date for the making of a distribution to all holders of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the surviving corporation) of cash, evidences of indebtedness or assets, or subscription rights or warrants, the Exercise Price to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the Fair  Market Value  per share of Common Stock on such record date, less the amount of cash so to be distributed or the Fair Market Value (as determined in good faith by, and reflected in a formal resolution of, the board of directors of the Company) of the portion of the assets or evidences of indebtedness so to be distributed, or of such subscription rights or warrants, applicable to one share of Common Stock, and the denominator of which shall be the  Fair Market Value per share of Common Stock.  Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Exercise Price shall again be adjusted to be the Exercise Price which would then be in effect if such record date had not been fixed.  When determining Fair Market Value of the Company’s Common Stock, Fair Market Value  shall mean:  (i) if the principal trading market for such securities is a national securities exchange including The Nasdaq Stock Market, or the OTCQB (or a similar system then in use), the last reported sales price on the principal market the trading day immediately prior to such 

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record date; or (ii) if subsection (i) is not  applicable, and if bid and ask prices for shares of Common Stock are reported by the principal trading market or the OTC Markets, the average of the high bid and low ask prices so reported for the trading day immediately prior to such record date.  Notwithstanding the foregoing, if there is no last reported sales price or bid and ask prices, as the case may be, for the day in question, then Fair Market Value  shall be determined as of the latest day prior to such day for which such last reported sales price or bid and ask prices, as the case may be, are available, unless such securities have not been traded on an exchange or in the over-the-counter market for 30 or more days immediately prior to the day in question, in which case the Fair Market Price shall be determined in good faith by, and reflected in a formal resolution of, the board of directors of the Company.

(c) Notwithstanding any provision herein to the contrary, no adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Exercise Price; provided, however, that any adjustments which by reason of this Section 4(c) are not required to be made shall be carried forward and taken into account in any subsequent adjustment.  All calculations under this Section 4 shall be made to the nearest cent or the nearest one-hundredth of a share, as the case may be.

(d)  In the event that at any time, as a result of an adjustment made pursuant to Section 4(a) above, the Holder of any Warrant thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock (or Series C), thereafter the number of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock (or Series C) contained in this Section 4, and the other provisions of this Warrant shall apply on like terms to any such other shares.

(e) If the Company merges or consolidates into or with another corporation or entity, or if another corporation or entity merges into or with the Company (excluding such a merger in which the Company is the surviving or continuing corporation and which does not result in any reclassification, conversion, exchange, or cancellation of the outstanding shares of Common Stock (or Series C)), or if all or substantially all of the assets or business of the Company are sold or transferred to another corporation, entity, or person, then, as a condition to such consolidation, merger, or sale (any a “Transaction”), lawful and adequate provision shall be made whereby the Holder shall have the right from and after the Transaction to receive, upon exercise of this Warrant and upon the terms and conditions specified herein and in lieu of the shares of the Common Stock (or Series C) that would have been issuable if this Warrant had been exercised immediately before the Transaction, such shares of stock, securities, or assets as the Holder would have owned immediately after the Transaction if the Holder had exercised this Warrant immediately before the effective date of the Transaction.

(f) In case any event shall occur as to which the other provisions of this Section 4 are not strictly applicable but the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof, then, in each such case, the Company shall effect such adjustment, on a basis consistent with the 

5

essential intent and principles established in this Section 4, as may be necessary to preserve, without dilution, the purchase rights represented by this Warrant.

5. Registration Rights.  

(a) No Registration Under the Securities Act. Issuance of this Warrant has not been registered under the Securities Act.  When exercised, the stock certificates shall bear the following legend unless one year has elapsed since the date of issuance of this Warrant.

“The securities represented by this certifi­cate have not been registered under the Securities Act of 1933 (the “Securities Act”), and may not be offered for sale or sold except pursuant to (i) an effective registration statement under the Securities Act, or (ii) an opinion of counsel to the issuer of these securities that an exemption from registration under the Securities Act is available.”

6. Reservation of Shares.  The Company agrees at all times to reserve and hold available out of its authorized but unissued shares of Common Stock the number of shares of Common Stock issuable upon the full exercise of this Warrant.  The Company further covenants and agrees that all shares of Common Stock that may be delivered upon the exercise of this Warrant will, upon delivery, be fully paid and nonassessable and free from all taxes, liens and charges with respect to the purchase thereof hereunder.  Provided, however, the Holder acknowledges that as of the Issuance Date, the Company does not have sufficient authorized Common Stock to permit full exercise of this Warrant.  At such time as the Company has sufficient authorized Common Stock, this Warrant shall only be exercisable for Common Stock.

7. Notices to Holder.  Upon any adjustment of the Exercise Price (or number of shares of Common Stock (or Series C) issuable upon the exercise of this Warrant) pursuant to Section 4, the Company shall promptly thereafter cause to be given to the Holder written notice of such adjustment.  Such notice shall include the Exercise Price (and/or the number of shares of Common Stock (or Series C) issuable upon the exercise of this Warrant) after such adjustment, and shall set forth in reasonable detail the Company’s method of calculation and the facts upon which such calculations were based.  Where appropriate, such notice shall be given in advance and included as a part of any notice required to be given under the other provisions of this Section 7. 

In the event of (a) any fixing by the Company of a record date with respect to the holders of any class of securities of the Company for the purpose of determining which of such holders are entitled to dividends or other distributions, or any rights to subscribe for, purchase or otherwise acquire any shares of capital stock of any class or any other securities or property, or to receive any other right, (b) any capital reorganization of the Company, or reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of the assets or business of the Company to, or consolidation or merger of the Company with or into, any other entity or person, or (c) any voluntary or involuntary dissolution or winding up of the Company, then and in each such event the Company will give the Holder a written notice specifying, as the case may be (i) the record date for the purpose of such dividend, distribution, or right, and stating the amount and character of such dividend, distribution, or right; or (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, 

6

merger, conveyance, dissolution, liquidation, or winding up is to take place and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such capital stock or securities receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other securities) for securities or other property deliverable upon such event.  Any such notice shall be given at least 10 days prior to the earliest date therein specified.

8. No Rights as a Shareholder.  This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company, nor to any other rights whatsoever except the rights herein set forth. Provided, however, the Company shall not enter into any merger agreement in which it is not the surviving entity, or sell all or substantially all of its assets unless the Company shall have first provided the Holder with 20 days’ prior written notice.

9. Additional Covenants of the Company.  For so long as the Common Stock is listed for trading or trades on any national securities exchange or is quoted on any over the counter market, the Company shall, upon issuance of any shares of Common Stock for which this Warrant is exercisable, at its expense, promptly obtain and maintain the listing or qualifications for trading or quotation of such shares to the extent required.

The Company shall comply with the reporting requirements of Sections 13 and 15(d) of the Securities Exchange Act of 1934 for so long as and to the extent that such requirements apply to the Company.

The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant.  Without limiting the generality of the foregoing, the Company (a) shall comply with Section 6 of this Agreement and have available sufficient shares of Common Stock to be issued from time to time upon exercise of this Warrant except as provided in Section 6, (b) will not increase the par value of any shares of Common Stock issuable upon exercise of this Warrant above the amount payable therefor upon such exercise, and (c) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable stock. 

10. Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the Company, the Holder and their respective successors and permitted assigns.

11. Notices.  The Company agrees to maintain a ledger of the ownership of this Warrant (the “Ledger”).  Any notice hereunder shall be given by Federal Express or other overnight delivery service for delivery on the next business day if to the Company, at its principal executive office and, if to the Holder, to his address shown in the Ledger of the Company; provided, however, that either the Company or the Holder may at any time on three days’ written notice to the other designate or substitute another address where notice is to be given.  Notice shall be deemed given and received after a Federal Express or other overnight delivery service is delivered to the carrier. 

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12. Severability.  Every provision of this Warrant is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the remainder of this Warrant.

13. Governing Law.  This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to the principles of choice of laws thereof.

14. Attorneys’ Fees.  In any action or proceeding brought to enforce any provision of this Warrant, the prevailing party shall be entitled to recover reasonable attorneys’ fees in addition to its costs and expenses and any other available remedies.

15. Entire Agreement.  This Warrant (including the Exhibits attached hereto) constitutes the entire understanding between the Company and the Holder with respect to the subject matter hereof, and supersedes all prior negotiations, discussions, agreements and understandings relating to such subject matter.

[Signature Page Attached]

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officer as of the date first set forth above.

			
	 
	Ecosphere Technologies, Inc.

	 
	 
	 

	 
	 
	 

	 
	 
	 

	 
	By:

	/s/ Dennis McGuire

	 
	 
	Dennis McGuire, Chief Executive Officer

	 
	 
	 

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