Exhibit
4
NEITHER
THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”)
AND APPLICABLE STATE SECURITIES LAWS AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES AND THE SECURITIES ISSUABLE
UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA
FIDE
MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
TELKONET,
INC.
COMMON
STOCK WARRANT
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Warrant
No. [ ]
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Original
Issue Date: ________, 2007
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FOR
VALUE RECEIVED, TELKONET, INC.,
a Utah
corporation (the “Company”),
hereby
certifies that
[ ] or
its permitted registered assigns (the “Holder”),
is
entitled to purchase from the Company up to a total of
[ ]
shares of common stock, $0.001 par value (the “Common
Stock”),
of
the Company (each such share, a “Warrant
Share”
and all
such shares, the “Warrant
Shares”)
at an
exercise price equal to $4.17 per share (as adjusted from time to time as
provided herein, the “Exercise
Price”),
at
any time and from time to time from and after the Original Issue Date and
through and including ___________, 2012 (the “Expiration
Date”),
and
subject to the following terms and conditions:
This
Warrant is one of a series of warrants issued pursuant to that certain
Securities Purchase Agreement, dated February 1, 2007, by and among the Company
and the Purchasers identified therein (the “Purchase
Agreement”).
All
such warrants are referred to herein, collectively, as the “Warrants.”
1.
Definitions.
In
addition to the terms defined elsewhere in this Warrant, capitalized terms
that
are not otherwise defined herein have the meanings given to such terms in the
Purchase Agreement.
2. List
of Warrant Holders.
The
Company shall register this Warrant, upon records to be maintained by the
Company for that purpose (the “Warrant
Register”),
in the
name of the record Holder (which shall include the initial Holder or, as the
case may be, any registered assignee to which this Warrant is permissibly
assigned hereunder from time to time). The Company may deem and treat the
registered Holder of this Warrant as the absolute owner hereof for the purpose
of any exercise hereof or any distribution to the Holder, and for all other
purposes, absent actual notice to the contrary.
3.
List
of Transfers.
(a) In
addition to the restrictions noted in the legend set forth on the first page
of
this Warrant, this Warrant and the Warrant Shares are subject to the
restrictions on transfer set forth in the Purchase Agreement.
(b) The
Company shall register any such transfer of all or any portion of this Warrant
in the Warrant Register, upon (i) surrender of this Warrant, with the Form
of
Assignment attached hereto duly completed and signed, to the Company at its
address specified herein and (ii) if the Registration Statement is not
effective, (x) delivery of an opinion of counsel reasonably satisfactory to
the
Company, to the effect that the transfer of such portion of this Warrant may
be
made pursuant to an available exemption from the registration requirements
of
the Securities Act and all applicable state securities or blue sky laws and
(y)
delivery by the transferee of a written statement to the Company certifying
that
the transferee is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and making the representations and certifications set forth
in
Section 3.2(b), (c) and (d) of the Purchase Agreement, to the Company at its
address specified in the Purchase Agreement. Upon any such registration or
transfer, a new Warrant to purchase Common Stock, in substantially the form
of
this Warrant (any such new Warrant, a “New
Warrant”),
evidencing the portion of this Warrant so transferred shall be issued to the
transferee and a New Warrant evidencing the remaining portion of this Warrant
not so transferred, if any, shall be issued to the transferring Holder. The
acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance by such transferee of all of the rights and obligations in respect
of
the New Warrant that the Holder has in respect of this Warrant.
4.
Exercise
and Duration of Warrants.
(a)
All
or
any part of this Warrant shall be exercisable by the registered Holder at any
time and from time to time from on or after the Original Issue Date and through
and including the Expiration Date. Subject to Section 4(c) and Section 11
hereof, at 5:00 p.m., New York City time, on the Expiration Date, the portion
of
this Warrant not exercised prior thereto shall be and become void and of no
value and this Warrant shall be terminated and no longer outstanding;
(b) The
Holder may exercise this Warrant by delivering to the Company (i) an exercise
notice, in the form attached hereto (the “Exercise
Notice”),
completed and duly signed, and (ii) if such Holder is not utilizing the cashless
exercise provisions set forth in this Warrant, payment of the Exercise Price
for
the number of Warrant Shares as to which this Warrant is being exercised, and
the date such items are delivered to the Company (as determined in accordance
with the notice provisions hereof) is an “Exercise
Date.”
The
delivery by (or on behalf of) the Holder of the Exercise Notice and the
applicable Exercise Price as provided above shall constitute the Holder’s
certification to the Company that its representations contained in Section
3.2(b), (c) and (d) of the Purchase Agreement are true and correct as of the
Exercise Date as if remade in their entirety (or, in the case of any transferee
Holder that is not a party to the Purchase Agreement, such transferee Holder’s
certification to the Company that such representations are true and correct
as
to such assignee Holder as of the Exercise Date). The Holder shall not be
required to deliver the original Warrant in order to effect an exercise
hereunder. Execution and delivery of the Exercise Notice shall have the same
effect as cancellation of the original Warrant and issuance of a New Warrant
evidencing the right to purchase the remaining number of Warrant
Shares.
(c) Call
Right.
(i)
If,
following the Effective Date, the closing
price of the Company’s Common Stock for any
15
consecutive Trading Days exceeds $9.00 (the “Threshold Price”, and such 15 day
period, the “Threshold Period”), then the Company will have the right, but not
obligation (the “Call Right”), on prior written notice in accordance with
Section 4(c)(ii) to the Holder, to require the Holder to exercise any or all
of
the unexercised portion of this Warrant for which an Exercise Notice has not
yet
been delivered (the “Call Amount”); provided that the Call Right must be
exercised within 5 Trading Days of the last day of the Threshold
Period.
(ii)
To
exercise this Call Right, the Company shall deliver to the Holder an irrevocable
written notice (a “Call Notice”), indicating the Call Amount. The date that the
Company delivers the Call Notice to the Holder will be referred to as the “Call
Date.” Within 30 Trading Days of receipt of the Call Notice (the “Call Exercise
Period”), the Holder shall exercise this Warrant for the entire Call Amount in
accordance with this Section 4. The date on which the Call Amount is exercised
is referred to herein as the “Forced Exercise Date.” Any unexercised portion of
this Warrant to which the Call Notice does not pertain (the “Remaining Portion”)
will be unaffected by such Call Notice. The Company covenants and agrees that
it
will honor any Exercise Notice with respect to the Call Amount that is tendered
from the Call Date through and including 5:00
p.m., New York City time,
on the
last day of the Call Exercise Period.
(iii)
Notwithstanding anything herein to the contrary, (A) in connection with the
Company’s exercise of a Call Right, the Maximum Percentage limitation on
exercise set forth in Section 11 shall not apply, (B) the Company shall not
be
permitted to exercise the Call Right at
a time
when a registration statement permitting the Holder to resell the Warrant Shares
is required to be effective and is not then effective or the prospectus forming
a part thereof is not then available to the Holder for the resale of the Warrant
Shares,
and (C)
if, after the Call Right is exercised, the stated Expiration Date of this
Warrant would occur prior to the last day of the Call Exercise Period, the
“Expiration Date” hereof shall be extended to last day of the Call Exercise
Period solely to the extent necessary to enable this Warrant to be exercised
for
the Call Amount on the Forced Exercise Date.
5.
Delivery
of Warrant Shares.
(a)
Upon
exercise of this Warrant, the Company shall promptly (but in no event later
than
three Trading Days after the Exercise Date) issue or cause to be issued and
cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate (provided that, if the Registration
Statement is not effective and the Holder directs the Company to deliver a
certificate for the Warrant Shares in a name other than that of the Holder
or an
Affiliate of the Holder, it shall deliver to the Company on the Exercise Date
an
opinion of counsel reasonably satisfactory to the Company to the effect that
the
issuance of such Warrant Shares in such other name may be made pursuant to
an
available exemption from the registration requirements of the Securities Act
and
all applicable state securities or blue sky laws, a certificate for the Warrant
Shares issuable upon such exercise, free of restrictive legends unless a
registration statement covering the resale of the Warrant Shares and naming
the
Holder as a selling stockholder thereunder is not then effective or the Warrant
Shares are not freely transferable without volume restrictions pursuant to
Rule
144(k) under the Securities Act. The Holder, or any Person permissibly so
designated by the Holder to receive Warrant Shares, shall be deemed to have
become the holder of record of such Warrant Shares as of the Exercise Date.
If
the Warrant Shares can be issued without restrictive legends, the Company shall,
upon the written request of the Holder, use its best efforts to deliver, or
cause to be delivered, Warrant Shares hereunder electronically through the
Depository Trust and Clearing Corporation or another established clearing
corporation performing similar functions, if available; provided, that, the
Company may, but will not be required to, change its transfer agent if its
current transfer agent cannot deliver Warrant Shares electronically through
the
Depository Trust and Clearing Corporation.
(b)
If by
the close of the third Trading Day after delivery of an Exercise Notice, the
Company fails to deliver to the Holder a certificate representing the required
number of Warrant Shares in the manner required pursuant to Section 5(a), and
if
after such third Trading Day and prior to the receipt of such Warrant Shares,
the Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant
Shares which the Holder anticipated receiving upon such exercise (a
“Buy-In”),
then
the Company shall, within three Trading Days after the Holder’s request and in
the Holder’s sole discretion, either (1) pay in cash to the Holder an amount
equal to the Holder’s total purchase price (including brokerage commissions, if
any) for the shares of Common Stock so purchased (the “Buy-In
Price”),
at
which point the Company’s obligation to deliver such certificate (and to issue
such Warrant Shares) shall terminate or (ii) promptly honor its obligation
to
deliver to the Holder a certificate or certificates representing such Warrant
Shares and pay cash to the Holder in an amount equal to the excess (if any)
of
the Buy-In Price over the product of (A) such number of Warrant Shares, times
(B) the closing bid price on the date of the event giving rise to the Company’s
obligation to deliver such certificate.
(c)
To
the
extent permitted by law, the Company’s obligations to issue and deliver Warrant
Shares in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any
waiver or consent with respect to any provision hereof, the recovery of any
judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company or
any
violation or alleged violation of law by the Holder or any other Person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of
Warrant Shares. Nothing herein shall limit a Holder’s right to pursue any other
remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with
respect to the Company’s failure to timely deliver certificates representing
shares of Common Stock upon exercise of the Warrant as required pursuant to
the
terms hereof.
6.
Charges,
Taxes and Expenses.
Issuance and delivery of certificates for shares of Common Stock upon exercise
of this Warrant shall be made without charge to the Holder for any issue or
transfer tax, withholding tax, transfer agent fee or other incidental tax or
expense in respect of the issuance of such certificates, all of which taxes
and
expenses shall be paid by the Company; provided,
however,
that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the registration of any certificates for Warrant
Shares or Warrants in a name other than that of the Holder. The Holder shall
be
responsible for all other tax liability that may arise as a result of holding
or
transferring this Warrant or receiving Warrant Shares upon exercise hereof.
7.
Replacement
of Warrant.
If this
Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
hereof, or in lieu of and substitution for this Warrant, a New Warrant, but
only
upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction and customary and reasonable indemnity (which shall not
include a surety bond), if requested. Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable third-party costs as the Company may
prescribe. If a New Warrant is requested as a result of a mutilation of this
Warrant, then the Holder shall deliver such mutilated Warrant to the Company
as
a condition precedent to the Company’s obligation to issue the New Warrant.
8.
Reservation
of Warrant Shares.
The
Company covenants that it will at all times reserve and keep available out
of
the aggregate of its authorized but unissued and otherwise unreserved Common
Stock, solely for the purpose of enabling it to issue Warrant Shares upon
exercise of this Warrant as herein provided, the number of Warrant Shares which
are then issuable and deliverable upon the exercise of this entire Warrant,
free
from preemptive rights or any other contingent purchase rights of persons other
than the Holder (taking into account the adjustments and restrictions of
Section
9).
The
Company covenants that all Warrant Shares so issuable and deliverable shall,
upon issuance and the payment of the applicable Exercise Price in accordance
with the terms hereof, be duly and validly authorized, issued and fully paid
and
nonassessable.
9.
Certain
Adjustments.
The
Exercise Price and number of Warrant Shares issuable upon exercise of this
Warrant are subject to adjustment from time to time as set forth in this
Section
9.
(a) Stock
Dividends and Splits.
If the
Company, at any time while this Warrant is outstanding, (i) pays a stock
dividend on its Common Stock or otherwise makes a distribution on any class
of
capital stock that is payable in shares of Common Stock, (ii) subdivides
outstanding shares of Common Stock into a larger number of shares, or (iii)
combines outstanding shares of Common Stock into a smaller number of shares,
then in each such case the Exercise Price shall be multiplied by a fraction
of
which the numerator shall be the number of shares of Common Stock outstanding
immediately before such event and of which the denominator shall be the number
of shares of Common Stock outstanding immediately after such event. Any
adjustment made pursuant to clause (i) of this paragraph shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution, and any adjustment pursuant to clause
(ii) or (iii) of this paragraph shall become effective immediately after the
effective date of such subdivision or combination.
(b)
Pro
Rata Distributions.
If the
Company, at any time while this Warrant is outstanding, distributes to all
holders of Common Stock (i) evidences of its indebtedness, (ii) any security
(other than a distribution of Common Stock covered by the preceding paragraph),
(iii) rights or warrants to subscribe for or purchase any security, or (iv)
any
other asset (in each case, “Distributed
Property”),
then,
upon any exercise of this Warrant that occurs after the record date fixed for
determination of stockholders entitled to receive such distribution, the Holder
shall be entitled to receive, in addition to the Warrant Shares otherwise
issuable upon such exercise (if applicable), the Distributed Property that
such
Holder would have been entitled to receive in respect of such number of Warrant
Shares had the Holder been the record holder of such Warrant Shares immediately
prior to such record date.
(c) Fundamental
Transactions.
If, at
any time while this Warrant is outstanding (i) the Company effects any merger
or
consolidation of the Company with or into another Person, in which the Company
is not the survivor, (ii) the Company effects any sale of all or substantially
all of its assets in one or a series of related transactions, (iii) any tender
offer or exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to tender or exchange
their shares for other securities, cash or property, or (iv) the Company effects
any reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively converted into or exchanged
for other securities, cash or property (each, a “Fundamental
Transaction”),
then
the Holder shall have the right thereafter to receive, upon exercise of this
Warrant, the same amount and kind of securities, cash or property as it would
have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental Transaction,
the holder of the number of Warrant Shares then issuable upon exercise in full
of this Warrant (the “Alternate
Consideration”).
The
Company shall not effect any such Fundamental Transaction unless prior to or
simultaneously with the consummation thereof, any successor to the Company,
surviving entity or the corporation purchasing or otherwise acquiring such
assets or other appropriate corporation or entity shall assume the obligation
to
deliver to the Holder, such Alternate Consideration as, in accordance with
the
foregoing provisions, the Holder may be entitled to purchase, and the other
obligations under this Warrant. The provisions of this paragraph (c) shall
similarly apply to subsequent transactions analogous to a Fundamental
Transaction.
(d)
Number
of Warrant Shares.
Simultaneously with any adjustment to the Exercise Price pursuant to paragraph
(a) of this Section 9, the number of Warrant Shares that may be purchased upon
exercise of this Warrant shall be increased or decreased proportionately, so
that after such adjustment the aggregate Exercise Price payable hereunder for
the adjusted number of Warrant Shares shall be the same as the aggregate
Exercise Price in effect immediately prior to such adjustment.
(e)
Subsequent
Equity Sales.
(i)
Except as provided in subsection (e)(iii) hereof, if and whenever the Company
shall issue or sell, or is, in accordance with any of subsections (e)(ii)(l)
through (e)(ii)(4) hereof, deemed to have issued or sold, any shares of Common
Stock for no consideration or for a consideration per share less than (x) the
Exercise Price in effect immediately prior to the time of such issue or sale,
or
(y) the bid price for the Common Stock on the applicable Trading Market at
the
time of such issue or sale, then and in each such case (a “Trigger
Issuance”)
effective
as of the close of business on the effective date of the Trigger Issuance the
then-existing Exercise Price shall be reduced to the lowest price per share
at
which any share of Common Stock was issued or sold or deemed to be issued or
sold in such Trigger Issuance; provided,
however,
that in
no event shall the Exercise Price after giving effect to such Trigger Issuance
be greater than the original Exercise Price.
For
purposes of this subsection (e), “Additional Shares of Common Stock” shall mean
all shares of Common Stock issued by the Company or deemed to be issued pursuant
to this subsection (e), other than Excluded Issuances (as defined in subsection
(e)(iii) hereof).
(ii) For purposes of this subsection 9(d), the following
subsections (e)(ii)(l) to (e)(ii)(4) shall also be applicable:
(1)
Issuance
of Rights or Options.
In case
at any time the Company shall in any manner grant (directly and not by
assumption in a merger or otherwise) any warrants or other rights to subscribe
for or to purchase, or any options for the purchase of, Common Stock or any
stock or security convertible into or exchangeable for Common Stock (such
warrants, rights or options being called “Options” and such convertible or
exchangeable stock or securities being called “Convertible Securities”) whether
or not such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such Options or upon the conversion
or
exchange of such Convertible Securities (determined by dividing (i) the sum
(which sum shall constitute the applicable consideration) of (x) the total
amount, if any, received or receivable by the Company as consideration for
the
granting of such Options, plus (y) the aggregate amount of additional
consideration payable to the Company upon the exercise of all such Options,
plus
(z), in the case of such Options which relate to Convertible Securities, the
aggregate amount of additional consideration, if any, payable upon the issue
or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of Common Stock issuable upon
the exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options) shall be
less
than the Exercise Price in effect immediately prior to the time of the granting
of such Options, then the total number of shares of Common Stock issuable upon
the exercise of such Options or upon conversion or exchange of the total amount
of such Convertible Securities issuable upon the exercise of such Options shall
be deemed to have been issued for such price per share as of the date of
granting of such Options or the issuance of such Convertible Securities and
thereafter shall be deemed to be outstanding for purposes of adjusting the
Exercise Price. Except as otherwise provided in subsection 9(e)(ii)(3), no
adjustment of the Exercise Price shall be made upon the actual issue of such
Common Stock or of such Convertible Securities upon exercise of such Options
or
upon the actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.
(2)
Issuance
of Convertible Securities.
In case
the Company shall in any manner issue (directly and not by assumption in a
merger or otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the sum (which sum
shall constitute the applicable consideration) of (x) the total amount
received or receivable by the Company as consideration for the issue or sale
of
such Convertible Securities, plus (y) the aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (ii) the total number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities) shall be less
than the Exercise Price in effect immediately prior to the time of such issue
or
sale, then the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued for such price per share as of the date of the issue or sale
of
such Convertible Securities and thereafter shall be deemed to be outstanding
for
purposes of adjusting the Exercise Price, provided that (a) except as
otherwise provided in subsection 9(e)(ii)(3), no adjustment of the Exercise
Price shall be made upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities and (b) no further
adjustment of the Exercise Price shall be made by reason of the issue or sale
of
Convertible Securities upon exercise of any Options to purchase any such
Convertible Securities for which adjustments of the Exercise Price have been
made pursuant to the other provisions of subsection 9(e).
(3)
Change
in Option Price or Conversion Rate.
Upon
the happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in subsection 9(e)(ii)(l) hereof,
the additional consideration, if any, payable upon the conversion or exchange
of
any Convertible Securities referred to in subsections 9(e)(ii)(l) or
9(e)(ii)(2), or the rate at which Convertible Securities referred to in
subsections 9(e)(ii)(l) or 9(e)(ii)(2) are convertible into or exchangeable
for
Common Stock shall change at any time (including, but not limited to, changes
under or by reason of provisions designed to protect against dilution), the
Exercise Price in effect at the time of such event shall forthwith be readjusted
to the Exercise Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the case may
be,
at the time initially granted, issued or sold. On the termination of any Option
for which any adjustment was made pursuant to this subsection 9(e) or any
right to convert or exchange Convertible Securities for which any adjustment
was
made pursuant to this subsection 9(e) (including without limitation upon
the redemption or purchase for consideration of such Convertible Securities
by
the Company), the Exercise Price then in effect hereunder shall forthwith be
changed to the Exercise Price which would have been in effect at the time of
such termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such termination, never been
issued.
(4)
Consideration
for Stock.
In case
any shares of Common Stock, Options or Convertible Securities shall be issued
or
sold for cash, the consideration received therefor shall be deemed to be the
gross amount received by the Company therefor. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company shall be deemed to be the fair value of such
consideration as determined in good faith by the Board of Directors of the
Company. In case any Options shall be issued in connection with the issue and
sale of other securities of the Company, together comprising one integral
transaction in which no specific consideration is allocated to such Options
by
the parties thereto, such Options shall be deemed to have been issued for such
consideration as determined in good faith by the Board of Directors of the
Company. If Common Stock, Options or Convertible Securities shall be issued
or
sold by the Company and, in connection therewith, other Options or Convertible
Securities (the “Additional Rights”) are issued, then the consideration received
or deemed to be received by the Company shall be reduced by the fair market
value of the Additional Rights (as determined using the Black-Scholes option
pricing model or another method mutually agreed to by the Company and the
Holder). The Board of Directors of the Company shall respond promptly, in
writing, to an inquiry by the Holders as to the fair market value of the
Additional Rights. In the event that the Board of Directors of the Company
and
the Holder are unable to agree upon the fair market value of the Additional
Rights, the Company and the Holder shall jointly select an appraiser, who is
experienced in such matters. The decision of such appraiser shall be final
and
conclusive, and the cost of such appraiser shall be borne evenly by the Company
and the Holder.
(iii) Notwithstanding the foregoing, no adjustment will be
made under this paragraph (e) in respect of: (i) the issuance of securities
upon
the exercise or conversion of any Common Stock or Convertible Securities
convertible into or exercisable or exchangeable for shares of Common Stock,
including, but not limited to, rights, warrants or options to subscribe for
or
purchase shares of Common Stock or Convertible Securities (collectively, “Common
Stock Equivalents”) issued by the Company prior to the date hereof, (ii) the
grant of Common Stock Equivalents under any duly authorized Company stock
option, restricted stock plan or stock purchase plan whether now existing or
hereafter approved by the Company and its stockholders in the future stock
issuable thereunder, the terms set forth therein, or the exercise price set
forth therein) and the issuance of Common Stock in respect thereof, (iii) the
issuance of up to 25,000 shares of Common Stock in the aggregate since the
original issue date of this Warrant, (iv) the issuance of securities in
connection with a Strategic Transaction, (v) the issuance of securities to
vendors, or (vi) the issuance of securities in a transaction described in
Section 9(a) or 9(b). For purposes of this paragraph, a “Strategic Transaction”
means a transaction or relationship in which (1) the Company issues shares
of
Common Stock to a Person which the Board of Directors of the Company determined
in good faith is, itself or through its Subsidiaries, an operating company
in a
business synergistic with the business of the Company (or a shareholder thereof)
and (2) the Company expects to receive benefits in addition to the investment
of
funds, but shall not include (x) a transaction in which the Company is issuing
securities primarily for the purpose of raising capital or to a Person whose
primary business is investing in securities or (y) issuances to
lenders.
Notwithstanding
any other provisions in this Section 9 to the contrary, if a reduction in the
Exercise Price pursuant to Section 9(e)(i) would require the Company to obtain
stockholder approval of the transactions contemplated by the Purchase Agreement
pursuant to a national stock exchange and such stockholder approval has not
been
obtained, (i) the Exercise Price shall be reduced to the maximum extent that
would not require stockholder approval under such Rule, and (ii) the Company
shall use its commercially reasonable efforts to obtain such stockholder
approval as soon as reasonably practicable, including by calling a special
meeting of stockholders to vote on such Exercise Price adjustment. This
provision shall not restrict the number of shares of Common Stock which a Holder
may receive or beneficially own in order to determine the amount of securities
or other consideration that such Holder may receive in the event of a
transaction contemplated by Section 9 of this Warrant.
(e)
Calculations.
All
calculations under this Section
9
shall be
made to the nearest cent or the nearest 1/100th
of a
share, as applicable. The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account of
the
Company, and the disposition of any such shares shall be considered an issue
or
sale of Common Stock.
(f)
Notice
of Adjustments.
Upon
the occurrence of each adjustment pursuant to this Section
9,
the
Company at its expense will, at the written request of the Holder, promptly
compute such adjustment in accordance with the terms of this Warrant and prepare
a certificate setting forth such adjustment, including a statement of the
adjusted Exercise Price and adjusted number or type of Warrant Shares or other
securities issuable upon exercise of this Warrant (as applicable), describing
the transactions giving rise to such adjustments and showing in detail the
facts
upon which such adjustment is based. Upon written request, the Company will
promptly deliver a copy of each such certificate to the Holder and to the
Company’s Transfer Agent.
(g)
Notice
of Corporate Events.
If,
while this Warrant is outstanding, the Company (i) declares a dividend or any
other distribution of cash, securities or other property in respect of its
Common Stock, including without limitation any granting of rights or warrants
to
subscribe for or purchase any capital stock of the Company or any Subsidiary,
(ii) authorizes or approves, enters into any agreement contemplating or solicits
stockholder approval for any Fundamental Transaction or (iii) authorizes the
voluntary dissolution, liquidation or winding up of the affairs of the Company,
then, except if such notice and the contents thereof shall be deemed to
constitute material non-public information, the Company shall deliver to the
Holder a notice describing the material terms and conditions of such transaction
at least 10 Trading Days prior to the applicable record or effective date on
which a Person would need to hold Common Stock in order to participate in or
vote with respect to such transaction, and the Company will take all reasonable
steps to give Holder the practical opportunity to exercise this Warrant prior
to
such time; provided,
however,
that
the failure to deliver such notice or any defect therein shall not affect the
validity of the corporate action required to be described in such notice.
10.
Payment
of Exercise Price.
The
Holder may pay the Exercise Price in one of the following manners:
(a)
Cash
Exercise.
The
Holder may deliver immediately available funds; or
(b)
Cashless
Exercise.
If an
Exercise Notice is delivered at a time when a registration statement permitting
the Holder to resell the Warrant Shares is required to be effective and is
not
then effective or the prospectus forming a part thereof is not then available
to
the Holder for the resale of the Warrant Shares, then the Holder may notify
the
Company in such Exercise Notice of its election to utilize cashless exercise,
in
which event the Company shall issue to the Holder the number of Warrant Shares
determined as follows:
X
= Y
((A-B)/A)
where:
X
= the
number of Warrant Shares to be issued to the Holder.
Y
= the
number of Warrant Shares with respect to which this Warrant is being exercised.
A
= the
average of the closing price of the Company’s Common Stock for the five Trading
Days immediately prior to (but not including) the Exercise Date.
B
= the
Exercise Price.
For
purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have commenced,
on
the date this Warrant was originally issued.
11.
Limitations
on Exercise.
Notwithstanding anything to the contrary contained herein, the number of Warrant
Shares that may be acquired by the Holder upon any exercise of this Warrant
(or
otherwise in respect hereof) shall be limited to the extent necessary to insure
that, following such exercise (or other issuance), the total number of shares
of
Common Stock then beneficially owned by such Holder and its Affiliates and
any
other Persons whose beneficial ownership of Common Stock would be aggregated
with the Holder’s for purposes of Section 13(d) of the Exchange Act, does not
exceed 9.999% (the “Maximum
Percentage”)
of the
total number of issued and outstanding shares of Common Stock (including for
such purpose the shares of Common Stock issuable upon such exercise). For such
purposes, beneficial ownership shall be determined in accordance with Section
13(d) of the Exchange Act and the rules and regulations promulgated thereunder.
Each delivery of an Exercise Notice hereunder will constitute a representation
by the Holder that it has evaluated the limitation set forth in this Section
and
determined that issuance of the full number of Warrant Shares requested in
such
Exercise Notice is permitted under this Section. The Company’s obligation to
issue shares of Common Stock in excess of the limitation referred to in this
Section shall be suspended (and, except as provided below, shall not terminate
or expire notwithstanding any contrary provisions hereof) until such time,
if
any, as such shares of Common Stock may be issued in compliance with such
limitation; provided, that, if, as of 5:00 p.m., New York City time, on the
Expiration Date, the Company has not received written notice that the shares
of
Common Stock may be issued in compliance with such limitation, the Company’s
obligation to issue such shares shall terminate. This provision shall not
restrict the number of shares of Common Stock which a Holder may receive or
beneficially own in order to determine the amount of securities or other
consideration that such Holder may receive in the event of a Fundamental
Transaction as contemplated in Section 9 of this Warrant. By written notice
to
the Company, the Holder may waive the provisions of this Section but any such
waiver will not be effective until the 61st
day
after such notice is delivered to the Company, nor will any such waiver effect
any other Holder. This provision shall not apply to Holders who as of the
Closing Date beneficially own in excess of 10% of the total number of issued
and
outstanding shares of Common Stock.
12.
No
Fractional Shares.
No
fractional Warrant Shares will be issued in connection with any exercise of
this
Warrant. In lieu of any fractional shares which would, otherwise be issuable,
the Company shall pay cash equal to the product of such fraction multiplied
by
the closing price of one Warrant Share as reported by the applicable Trading
Market on the Exercise Date.
13.
Notices.
Any and
all notices or other communications or deliveries hereunder (including, without
limitation, any Exercise Notice) shall be in writing and shall be deemed given
and effective on the earliest of (i) the date of transmission, if such notice
or
communication is delivered via facsimile at the facsimile number specified
in
this Section prior to 5:00 p.m. (New York City time) on a Trading Day, (ii)
the
next Trading Day after the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile number specified in this Section
on
a day that is not a Trading Day or later than 5:00 p.m. (New York City time)
on
any Trading Day, (iii) the Trading Day following the date of mailing, if sent
by
nationally recognized overnight courier service, or (iv) upon actual receipt
by
the party to whom such notice is required to be given. The addresses for such
notices or communications shall be: if to the Company, to Telkonet, Inc., 20374
Seneca Meadows Parkway, Germantown, Maryland, Attn: Chief Financial Officer
or
to facsimile number (240) 912-1939 (or such other address as the Company shall
indicate in writing in accordance with this Section) or (ii) if to the Holder,
to the address or facsimile number appearing on the Warrant Register (or such
other address as the Company shall indicate in writing in accordance with this
Section).
14.
Warrant
Agent.
The
Company shall serve as warrant agent under this Warrant. Upon 30 days’ notice to
the Holder, the Company may appoint a new warrant agent. Any corporation into
which the Company or any new warrant agent may be merged or any corporation
resulting from any consolidation to which the Company or any new warrant agent
shall be a party or any corporation to which the Company or any new warrant
agent transfers substantially all of its corporate trust or shareholders
services business shall be a successor warrant agent under this Warrant without
any further act. Any such successor warrant agent shall promptly cause notice
of
its succession as warrant agent to be mailed (by first class mail, postage
prepaid) to the Holder at the Holder’s last address as shown on the Warrant
Register.
15.
Miscellaneous.
(a)
This
Warrant shall be binding on and inure to the benefit of the parties hereto
and
their respective successors and assigns. Subject to the preceding sentence,
nothing in this Warrant shall be construed to give to any Person other than
the
Company and the Holder any legal or equitable right, remedy or cause of action
under this Warrant. This Warrant may be amended only in writing signed by the
Company and the Holder, or their successors and assigns.
(b)
All
questions concerning the construction, validity, enforcement and interpretation
of this Warrant shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York, without regard to the
principles of conflicts of law thereof. Each party agrees that all legal
proceedings concerning the interpretations, enforcement and defense of this
Warrant and the transactions herein contemplated (“Proceedings”)
(whether brought against a party hereto or its respective Affiliates, employees
or agents) shall be commenced exclusively in the New York Courts. Each party
hereto hereby irrevocably submits to the exclusive jurisdiction of the New
York
Courts for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein, and hereby
irrevocably waives, and agrees not to assert in any Proceeding, any claim that
it is not personally subject to the jurisdiction of any New York Court, or
that
such Proceeding has been commenced in an improper or inconvenient forum. Each
party hereto hereby irrevocably waives personal service of process and consents
to process being served in any such Proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Warrant
and
agrees that such service shall constitute good and sufficient service of process
and notice thereof. Nothing contained herein shall be deemed to limit in any
way
any right to serve process in any manner permitted by law. Each party hereto
hereby irrevocably waives, to the fullest extent permitted by applicable law,
any and all right to trial by jury in any legal proceeding arising out of or
relating to this Warrant or the transactions contemplated hereby. If either
party shall commence a Proceeding to enforce any provisions of this Warrant,
then the prevailing party in such Proceeding shall be reimbursed by the other
party for its attorney’s fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such Proceeding.
(c)
The
headings herein are for convenience only, do not constitute a part of this
Warrant and shall not be deemed to limit or affect any of the provisions hereof.
(d)
In
case
any one or more of the provisions of this Warrant shall be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Warrant shall not in any way be affected or
impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
(e)
Prior
to
exercise of this Warrant, the Holder hereof shall not, by reason of by being
a
Holder, be entitled to any rights of a stockholder with respect to the Warrant
Shares
[SIGNATURE
PAGE FOLLOWS]
IN
WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by
its
authorized officer as of the date first indicated above.
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TELKONET,
INC.
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By:
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Name:
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Title:
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EXERCISE
NOTICE
TELKONET,
INC.
WARRANT
DATED _______________, 2007
Ladies
and Gentlemen:
(1) The
undersigned hereby elects to purchase _________ shares of Common Stock pursuant
to the above-referenced Warrant. Capitalized terms used herein and not otherwise
defined herein have the respective meanings set forth in the Warrant.
(2) The
Holder intends that payment of the Exercise Price shall be made as (check
one):
oCash
Exercise under Section 10
oCashless
Exercise under Section 10
(3) If
the
Holder has elected a Cash Exercise, the holder shall pay the sum of $_______ to
the Company in accordance with the terms of the Warrant.
(4) Pursuant
to this Exercise Notice, the Company shall deliver to the Holder _____________
Warrant Shares in accordance with the terms of the Warrant.
(5) By
its
delivery of this Exercise Notice, the undersigned represents and warrants to
the
Company that in giving effect to the exercise evidenced hereby the Holder will
not beneficially own in excess of the number of shares of Common Stock (as
determined in accordance with Section 13(d) of the Securities Exchange Act
of
1934) permitted to be owned under Section 11 of this Warrant to which this
notice relates.
TELKONET,
INC.
WARRANT
ORIGINALLY ISSUED ___________, 2007
WARRANT
NO. _____________
FORM
OF ASSIGNMENT
[To
be
completed and signed only upon transfer of Warrant]
FOR
VALUE
RECEIVED, the undersigned hereby sells, assigns and transfers unto
the
right represented by the within Warrant to purchase
shares
of Common Stock to which the within Warrant relates and appoints
attorney
to transfer said right on the books of the Company with full power of
substitution in the premises.
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Dated:
___________________ ,
_________
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__________________________________________________
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(Signature
must conform in all respects to name of holder
as
specified on the face of the Warrant)
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__________________________________________________
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Address
of Transferee
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__________________________________________________
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__________________________________________________
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In
the presence of:
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____________________________________
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