SECURITIESPURCHASE AGREEMENT

EX-10.1 6 f8k112316ex10i_enercoreinc.htm FORM OF SECURITIES PURCHASE AGREEMENT, DATED NOVEMBER 23, 2016, BY AND AMONG ENER-CORE, INC. AND CERTAIN INVESTORS SET FORTH THEREIN, INCLUDING THE FORM OF GUARANTY OF ENER-CORE POWER, INC

Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of November 23, 2016, by and among Ener-Core, Inc., a Delaware corporation, with headquarters located at 9400 Toledo Way, Irvine, California 92618 (the “Company”), and the investors listed on the Schedule of Buyers attached hereto (individually, an “Initial Buyer” and collectively, the “Initial Buyers”).

 

WHEREAS:

 

A. The Company and each Buyer is executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”), and Rule 506(b) of Regulation D (“Regulation D”) as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the 1933 Act.

 

B. The Company has authorized a new series of senior secured notes of the Company, in substantially the form attached hereto as Exhibit A (the “Notes”), which Notes shall be convertible into the Company’s common stock, par value $0.0001 per share (the ”Common Stock”), in accordance with the terms of the Notes.

 

C. Each Buyer wishes to purchase, and the Company wishes to sell at the Initial Closing (as defined below), upon the terms and conditions stated in this Agreement, (i) that aggregate principal amount of Notes set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers attached hereto (which aggregate principal amount of Notes for all Buyers shall be $3,555,555.56) (the “Initial Notes”) (the shares of Common Stock issuable pursuant to the terms of the Initial Notes, including, without limitation, upon conversion or otherwise, collectively, the “Initial Conversion Shares”), and (ii) Warrants, in substantially the form attached hereto as Exhibit B (the “Initial Warrants”), representing the right to acquire that number of shares of Common Stock set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers (as exercised, collectively, the “Initial Warrant Shares”).

 

D. Subject to the terms and conditions set forth in this Agreement, any Person (as defined below) that, upon approval of the Company and the Required Holders (as defined below), becomes a Buyer hereunder by duly executing and delivering to the Company a Joinder Agreement (each, a “Joinder Agreement”) in the form attached hereto as Exhibit C (individually, a “Subsequent Buyer” and collectively, the “Subsequent Buyers” and together with the Initial Buyers, individually, a “Buyer” and collectively, the “Buyers”) shall have the right, at the Subsequent Closing to purchase, and require the Company to sell (i) up to $900,000 aggregate principal amount of Notes (the “Subsequent Notes”, and together with the Initial Notes, the “Notes”) (the shares of Common Stock issuable pursuant to the terms of the Subsequent Notes, including, without limitation, upon conversion or otherwise, collectively, the “Subsequent Conversion Shares”, and together with the Initial Conversion Shares, the “Conversion Shares”) and (ii) Warrants, in substantially the form attached hereto as Exhibit B (the “Subsequent Warrants”, and together with the Initial Warrants, the “Warrants”), representing the right to acquire four hundred (400) shares of Common Stock for each $1,000 of principal amount of Subsequent Notes purchased by such Subsequent Buyer on the Subsequent Closing Date (without regard to any limitation on conversion set forth in the Subsequent Notes) (as exercised, collectively, the “Subsequent Warrant Shares”, and together with the Initial Warrants, the “Warrant Shares”).

 

 

E. The Notes will rank senior to all outstanding and future indebtedness of the Company, and its Subsidiaries (as defined below), will be guaranteed by all direct and indirect Subsidiaries (as defined in Section 3(a)) of the Company, currently formed or formed in the future, as evidenced by a Guaranty Agreement, in the form attached hereto as Exhibit D (as amended or modified from time to time in accordance with its terms, the “Guaranty Agreement”), and will be secured by a first priority perfected security interest (subject to Permitted Liens under and as defined in the Notes) in all of the current and future assets of the Company and all direct and indirect Subsidiaries of the Company, except for the “Excluded Assets” (as such term is defined in the Security Agreement), currently formed or formed in the future, as evidenced by that certain Second Amendment to the Pledge and Security Agreement, substantially in the form attached hereto as Exhibit E (as amended or modified from time to time in accordance with its terms, the “Security Amendment Agreement”), which amends that certain Pledge and Security Agreement, dated as of April 23, 2015 by and among the Company and the Collateral Agent attached as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 23, 2015 (as amended prior to the date hereof and by the Second Amendment Agreement and as further amended or modified from time to time in accordance with its terms, the “Security Agreement” and together with the Guaranty Agreement and any ancillary documents related thereto, collectively, the “Security Documents”).

 

F. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement, substantially in the form attached hereto as Exhibit F (the “Registration Rights Agreement”), pursuant to which the Company has agreed to provide certain registration rights with respect to the Registrable Securities (as defined in the Registration Rights Agreement) under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws.

 

G. The Notes, the Conversion Shares, the Warrants and the Warrant Shares collectively are referred to herein as the “Securities”.

 

NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

 

1. PURCHASE AND SALE OF NOTES AND WARRANTS.

 

(a) Purchase of Notes and Warrants.

 

(i) Initial Closing. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6(a) and 7(a) below, the Company shall issue and sell to each Initial Buyer, and each Initial Buyer severally, but not jointly, agrees to purchase from the Company on the Initial Closing Date (as defined below), (x) a principal amount of Initial Notes as is set forth opposite such Initial Buyer’s name in column (3) on the Schedule of Buyers and (y) Initial Warrants to acquire up to that number of Initial Warrant Shares as is set forth opposite such Initial Buyer’s name in column (4) on the Schedule of Buyers (the “Initial Closing”).

 

 

(ii) Subsequent Closing. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 1(c), 6(b) and 7(b) below, the Company shall issue and sell to each Subsequent Buyer, and each Subsequent Buyer severally, but not jointly, agrees to purchase from the Company on the Subsequent Closing Date (as defined below), (x) a principal amount of Subsequent Notes as set forth on the signature page of such Subsequent Buyer attached to such Subsequent Buyer’s Joinder Agreement or in the Subsequent Closing Notice (as defined below), as applicable and (y) Subsequent Warrants to acquire four hundred (400) shares of Common Stock for each $1,000 of principal amount of Subsequent Notes purchased by such Subsequent Buyer on the Subsequent Closing Date (without regard to any limitation on conversion set forth in the Subsequent Notes) (the “Subsequent Closing” and together with the Initial Closing, each a “Closing”).

 

(b) Initial Closing Date. The date and time of the Initial Closing (the “Initial Closing Date”) shall be 10:00 a.m., New York City time, on the date hereof (or such other date and time as is mutually agreed to by the Company and each Initial Buyer) after notification of satisfaction (or waiver) of the conditions to the Initial Closing set forth in Sections 6(a) and 7(b) below, at the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.

 

(c) Subsequent Closing Date.

 

(i) The date and time of the Subsequent Closing (the “Subsequent Closing Date,” and together with the Initial Closing Date, each a “Closing Date” and collectively, the “Closing Dates”) shall be 10:00 a.m., New York City time, on December 12, 2016 (or such earlier date as shall be mutually agreed to by the Company and the Required Holders), subject to satisfaction (or waiver) of the conditions to the Subsequent Closing set forth in Sections 6(b) and 7(b) and the conditions contained in this Section 1(c), at the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022. Any Person approved by the Company and the Required Holders may become a Subsequent Buyer and may purchase Subsequent Notes and Subsequent Warrants by duly executing and delivering a Joinder Agreement to the Company. Any Initial Buyer may also purchase, at such Initial Buyer’s option, Subsequent Notes and Subsequent Warrants by delivering written notice to the Company (each, a “Subsequent Closing Notice”). Notwithstanding anything herein, in a Joinder Agreement or in a Subsequent Closing Notice to the contrary, the number of Subsequent Notes to be purchased by the Subsequent Buyers at the Subsequent Closing shall not exceed $900,000 aggregate principal amount of Subsequent Notes.

 

(ii) The Initial Buyers hereby consent to the transactions contemplated by this Section 1(c).

 

(d) Purchase Price. The aggregate purchase price for the Initial Notes and the Initial Warrants to be purchased by each Buyer at the Initial Closing (the “Initial Purchase Price”) shall be the amount set forth opposite each Initial Buyer’s name in column (5) of the Schedule of Buyers. The aggregate purchase price for the Subsequent Notes and the Subsequent Warrants to be purchased by each Subsequent Buyer at the Subsequent Closing (the “Subsequent Purchase Price” and together with the Initial Purchase Price, the “Purchase Price”) shall be the amount set forth on the signature page of such Subsequent Buyer attached to such Subsequent Buyer’s Joinder Agreement or in the Subsequent Closing Notice (as defined below), as applicable. Each Buyer shall pay $900 for each $1,000 of principal amount of Notes and related Warrants to be purchased by such Buyer at the applicable Closing. The Buyers and the Company agree that the Notes and the Warrants constitute an “investment unit” for purposes of Section 1273(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”). The Buyers and the Company mutually agree that the allocation of the issue price of such investment unit between the Notes and the Warrants in accordance with Section 1273(c)(2) of the Code and Treasury Regulation Section 1.1273-2(h) shall be $145.91 per $1,000 of Purchase Price to be allocated to the Warrants and the balance of each $1,000 of Purchase Price to be allocated to the Notes, and neither the Buyers nor the Company shall take any position inconsistent with such allocation in any tax return or in any judicial or administrative proceeding in respect of taxes.

 

 

(e) Form of Payment.

 

(i) Initial Closing. On the Initial Closing Date, (i) each Initial Buyer shall pay its Initial Purchase Price to the Company for the Initial Notes and the Initial Warrants to be issued and sold to such Initial Buyer at the Initial Closing (less, in the case of Empery Asset Master Ltd. (“Empery”), the amounts withheld pursuant to Section 4(h)), by wire transfer of immediately available funds in accordance with the Company’s written wire instructions and (ii) the Company shall deliver to each Initial Buyer the Initial Notes (allocated in the principal amounts as such Initial Buyer shall request) which such Initial Buyer is then purchasing hereunder along with the Initial Warrants (allocated in the amounts as such Initial Buyer shall request) which such Initial Buyer is purchasing hereunder, in each case duly executed on behalf of the Company and registered in the name of such Initial Buyer or its designee.

 

(ii) Subsequent Closing. On the Subsequent Closing Date, (i) each Subsequent Buyer shall pay its Subsequent Purchase Price to the Company for the Subsequent Notes and the Subsequent Warrants to be issued and sold to such Subsequent Buyer at the Subsequent Closing by wire transfer of immediately available funds in accordance with the Company’s written wire instructions and (ii) the Company shall deliver to each Subsequent Buyer the Subsequent Notes (allocated in the principal amounts as such Subsequent Buyer shall request) which such Subsequent Buyer is then purchasing hereunder along with the Subsequent Warrants (allocated in the amounts as such Subsequent Buyer shall request) which such Subsequent Buyer is purchasing hereunder, in each case duly executed on behalf of the Company and registered in the name of such Subsequent Buyer or its designee.

 

2. BUYER’S REPRESENTATIONS AND WARRANTIES. Each Buyer, severally and not jointly, represents and warrants with respect to only itself that:

 

(a) No Public Sale or Distribution. Such Buyer (i) is acquiring the Notes and the Warrants and (ii) upon issuance of the Conversion Shares pursuant to the terms of the Notes and upon exercise of the Warrants will acquire the Conversion Shares issuable pursuant to the terms of the Notes and the Warrant Shares issuable upon exercise of the Warrants, for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the 1933 Act; provided, however, that by making the representations herein, such Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act. Such Buyer is acquiring the Securities hereunder in the ordinary course of its business. Such Buyer does not presently have any agreement or understanding, directly or indirectly, with any Person (as defined below) to distribute any of the Securities. For purposes of this Agreement, “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

 

 

(b) Accredited Investor Status. Such Buyer is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D. Such Buyer has executed and delivered to the Company a questionnaire (the “Investor Questionnaire”), substantially in the form attached hereto as Exhibit G, which such Buyer represents and warrants is true, correct and complete.

 

(c) Reliance on Exemptions. Such Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Buyer’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire the Securities.

 

(d) Information. Such Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities that have been requested by such Buyer. Such Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if any, or its representatives shall modify, amend or affect such Buyer’s right to rely on the Company’s representations and warranties contained herein. Such Buyer understands that its investment in the Securities involves a high degree of risk and is able to afford a complete loss of such investment. Such Buyer has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities. Such Buyer confirms and agrees that (i) it has independently evaluated the investment risks and the merits of its decision to purchase the Securities, (ii) it has not relied on the advice of, or any representations by, any other Person, other than the Company and its officers and directors, in making such decision, and (iii) no Person, other than the Company and its officers and directors, has any responsibility with respect to the completeness or accuracy of any information or materials furnished to such Buyer in connection with the transactions contemplated hereby.

 

(e) No Governmental Review. Such Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.

 

 

(f) Transfer or Resale. Such Buyer understands that, except as provided in the Registration Rights Agreement: (i) the Securities have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, (B) such Buyer shall have delivered to the Company an opinion of counsel, in form and substance reasonably acceptable to the Company, to the effect that such Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) such Buyer provides the Company with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933 Act (“Rule 144”) or Rule 144A promulgated under the 1933 Act, as amended (or successor rules thereto) (collectively, “Resale Exemptions”); (ii) any sale of the Securities made in reliance on the Resale Exemptions may be made only in accordance with the terms of Rule 144 or Rule 144A, as applicable, and further, if a Resale Exemption is not applicable, any resale of the Securities under circumstances in which the seller (or the Person) through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other Person is under any obligation to register the Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. Notwithstanding the foregoing, the Securities may be pledged in connection with a bona fide margin account or other loan or financing arrangement secured by the Securities and such pledge of Securities shall not be deemed to be a transfer, sale or assignment of the Securities hereunder, and no Buyer effecting a pledge of Securities shall be required to provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction Document (as defined in Section 3(b)), including, without limitation, this Section 2(f).

 

(g) Legends. Such Buyer understands that the certificates or other instruments representing the Notes and the Warrants and, until such time as the resale of the Conversion Shares and the Warrant Shares have been registered under the 1933 Act as contemplated by the Registration Rights Agreement, the stock certificates representing the Conversion Shares and the Warrant Shares, except as set forth below, shall bear any legend as required by the “blue sky” laws of any state and a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates or other instruments):

 

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES [MAY BE CONVERTIBLE] [ARE EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

 

The legend set forth above shall be removed and the Company shall issue a certificate or other instrument without such legend to the holder of the Securities upon which it is stamped or issue to such holder by electronic delivery at the applicable balance account at The Depository Trust Company (“DTC”), if, unless otherwise required by state securities laws, (i) such Securities are registered for resale under the 1933 Act, (ii) in connection with a sale, assignment or other transfer, such holder provides the Company with an opinion of counsel, in form and substance reasonably acceptable to the Company, to the effect that such sale, assignment or transfer of the Securities may be made without registration under the applicable requirements of the 1933 Act, or (iii) the Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A. The Company shall be responsible for the fees of its transfer agent and all DTC fees associated with such issuance.

 

(h) Validity; Enforcement. This Agreement and the Registration Rights Agreement have been duly and validly authorized, executed and delivered on behalf of such Buyer and shall constitute the legal, valid and binding obligations of such Buyer enforceable against such Buyer in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

 

(i) No Conflicts. The execution, delivery and performance by such Buyer of this Agreement and the Registration Rights Agreement and the consummation by such Buyer of the transactions contemplated hereby and thereby will not (i) result in a violation of the organizational documents of such Buyer or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which such Buyer is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to such Buyer, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of such Buyer to perform its obligations hereunder.

 

 

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company represents and warrants to each of the Buyers, as of the date hereof and as of each applicable Closing Date (unless otherwise provided herein), that:

 

(a) Organization and Qualification. Each of the Company and its “Subsidiaries” (which for purposes of this Agreement means any entity in which the Company, directly or indirectly, owns any of the capital stock or holds an equity or similar interest) are entities duly organized and validly existing in good standing under the laws of the jurisdiction in which they are formed, and have the requisite power and authorization to own their properties and to carry on their business as now being conducted. Each of the Company and its Subsidiaries is duly qualified as a foreign entity to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not reasonably be expected to have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any material adverse effect on the business, properties, assets, operations, results of operations, condition (financial or otherwise) or prospects of the Company and its Subsidiaries, taken as a whole, or on the transactions contemplated hereby or on the other Transaction Documents or by the agreements and instruments to be entered into in connection herewith or therewith, or on the authority or ability of the Company to perform its obligations under the Transaction Documents. The Company has no Subsidiaries except as set forth on Schedule 3(a).

 

(b) Authorization; Enforcement; Validity. The Company has the requisite power and authority to enter into and perform its obligations under this Agreement, the Notes, the Warrants, the Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), the Security Documents, any Joinder Agreements and each of the other agreements entered into by the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the “Transaction Documents”) and to issue the Securities in accordance with the terms hereof and thereof. The execution and delivery of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby, including, without limitation, the issuance of the Notes and the Warrants, and the reservation for issuance and the issuance of the Conversion Shares and the reservation for issuance and issuance of Warrant Shares issuable upon exercise of the Warrants have been duly authorized by the Company’s Board of Directors and (other than the filing with the SEC of one or more Registration Statements (as defined in the Registration Rights Agreement) in accordance with the requirements of the Registration Rights Agreement, the filing with the SEC of a Form D and any other filings as may be required by state securities agencies) no further filing, consent, or authorization is required by the Company, its Board of Directors or its stockholders. This Agreement and the other Transaction Documents have been duly executed and delivered by the Company, and constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies. Each of the Subsidiaries party to any of the Transaction Documents has the requisite power and authority to enter into and perform its obligations under such Transaction Documents., as applicable The execution and delivery by the Subsidiaries party to any of the Transaction Documents of such Transaction Documents and the consummation by such Subsidiaries of the transactions contemplated thereby have been duly authorized by such Subsidiaries’ respective boards of directors (or other applicable governing body) and (other than filings as may be required by state securities agencies) no further filing, consent, or authorization is required by such Subsidiaries, their respective boards of directors (or other applicable governing body) or stockholders (or other applicable owners of equity of such Subsidiaries). The Transaction Documents to which any of the Subsidiaries are parties have been duly executed and delivered by such Subsidiaries, and constitute the legal, valid and binding obligations of such Subsidiaries, enforceable against them in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

 

 

(c) Issuance of Securities. The issuance of the Notes and the Warrants are duly authorized and, upon issuance, shall be validly issued and free from all taxes, liens and charges with respect to the issue thereof. As of the applicable Closing, a number of shares of Common Stock shall have been duly authorized and reserved for issuance which equals or exceeds (the “Required Reserved Amount) the sum of (i) the maximum number of Conversion Shares issued and issuable pursuant to the Notes to be issued in such Closing based on the initial Conversion Price (as defined in the Notes) of $2.50 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction occurring after the date hereof and without taking into account any limitations on the issuance thereof pursuant to the terms of the Notes) (the “Initial Conversion Price”) plus (ii) the maximum number of Warrant Shares issued and issuable pursuant to the Warrants to be issued in such Closing, each as of the Trading Day (as defined in the Warrants) immediately preceding the applicable date of determination (without taking into account any limitations on the exercise of the Warrants set forth in the Warrants). As of the date hereof, there are 194,428,192 shares of Common Stock authorized and unissued, of which 1,786,592 are reserved for issuance upon full exercise of all outstanding options and warrants. Upon conversion of the Notes in accordance with the Notes or exercise of the Warrants in accordance with the Warrants, as the case may be, the Conversion Shares and the Warrant Shares, respectively, will be validly issued, fully paid and nonassessable and free from all preemptive or similar rights, taxes, liens and charges with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock. Assuming the accuracy of each of the representations and warranties set forth in Section 2 of this Agreement, the offer and issuance by the Company of the Securities is exempt from registration under the 1933 Act.

 

(d) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and any of its Subsidiaries parties to any of the Transaction Documents and the consummation by the Company and any of its Subsidiaries of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Notes and the Warrants and reservation for issuance and issuance of the Conversion Shares and the Warrant Shares) will not (i) result in a violation of the Certificate of Incorporation (as defined in Section (3(q)) or Bylaws (as defined in Section (3(q)), any memorandum of association, certificate of incorporation, certificate of formation, bylaws, any certificate of designations or other constituent documents of the Company or any of its Subsidiaries, any capital stock of the Company or any of its Subsidiaries or the articles of association or bylaws of the Company or any of its Subsidiaries or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) in any respect under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including other foreign, federal and state securities laws and regulations and the rules and regulations of the OTCQB (the “Principal Market”) and including all applicable laws of the State of Delaware and any foreign, federal and state laws, rules and regulations) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected.

 

 

(e) Consents. Neither the Company nor any of its Subsidiaries is required to obtain any consent, authorization or order of, or make any filing or registration with (other than the filing with the SEC of one or more Registration Statements in accordance with the requirements of the Registration Rights Agreement, the filing with the SEC of a Form D and any other filings as may be required by any state securities agencies), any court, governmental agency or any regulatory or self-regulatory agency or any other Person in order for it to execute, deliver or perform any of its obligations under or contemplated by the Transaction Documents, in each case in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company or any of its Subsidiaries is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the Initial Closing Date, and the Company and its Subsidiaries are unaware of any facts or circumstances that might prevent the Company or any of its Subsidiaries from obtaining or effecting any of the registration, application or filings pursuant to the preceding sentence. The Company is not in violation of the listing requirements of the Principal Market and has no knowledge of any facts that would reasonably lead to delisting or suspension of the Common Stock in the foreseeable future. The issuance by the Company of the Securities shall not have the effect of delisting or suspending the Common Stock from the Principal Market.

 

(f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company acknowledges and agrees that each Buyer is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby and that no Buyer is (i) an officer or director of the Company or any of its Subsidiaries, (ii) an “affiliate” of the Company or any of its Subsidiaries (as defined in Rule 144) or (iii) to the knowledge of the Company, a “beneficial owner” of more than 10% of the shares of Common Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “1934 Act”)). The Company further acknowledges that no Buyer is acting as a financial advisor or fiduciary of the Company or any of its Subsidiaries (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby, and any advice given by a Buyer or any of its representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to such Buyer’s purchase of the Securities. The Company further represents to each Buyer that the Company’s decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives.

 

 

(g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor any of its Subsidiaries or affiliates, nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Securities. The Company shall be responsible for the payment of any placement agent’s fees, financial advisory fees, or brokers’ commissions (other than for persons engaged by any Buyer or its investment advisor) relating to or arising out of the transactions contemplated hereby, including, without limitation, placement agent fees payable to Oppenheimer & Co. Inc. (the “Placement Agent”) in connection with the sale of the Securities. The Company shall pay, and hold each Buyer harmless against, any liability, loss or expense (including, without limitation, attorney’s fees and out-of-pocket expenses) arising in connection with any such claim. The Company acknowledges that it has engaged the Placement Agent in connection with the sale of the Securities. Other than the Placement Agent, neither the Company nor any of its Subsidiaries has engaged any placement agent or other agent in connection with the sale of the Securities.

 

(h) No Integrated Offering. None of the Company, its Subsidiaries, any of their affiliates, and any Person acting on their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Securities under the 1933 Act, whether through integration with prior offerings or otherwise, or cause this offering of the Securities to require approval of stockholders of the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated. None of the Company, its Subsidiaries, their affiliates and any Person acting on their behalf will take any action or steps referred to in the preceding sentence that would require registration of any of the Securities under the 1933 Act or cause the offering of the Securities to be integrated with other offerings for purposes of any such applicable stockholder approval provisions.

 

(i) Application of Takeover Protections; Rights Agreement. The Company and its board of directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Certificate of Incorporation or the laws of the jurisdiction of its formation which is or could become applicable to any Buyer as a result of the transactions contemplated by this Agreement, including, without limitation, the Company’s issuance of the Securities and any Buyer’s ownership of the Securities. The Company has not adopted a stockholder rights plan or similar arrangement relating to accumulations of beneficial ownership of Common Stock or a change in control of the Company.

 

 

(j) SEC Documents; Financial Statements. Except as disclosed in Schedule 3(j), during the two (2) years prior to the date hereof, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof, and all exhibits included therein and financial statements, notes and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the “SEC Documents”). The Company has delivered to the Buyers or their respective representatives true, correct and complete copies of the SEC Documents not available on the EDGAR system. As of their respective filing dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. As of their respective filing dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (“GAAP”) (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Buyers which is not included in the SEC Documents, including, without limitation, information referred to in Section 2(d) of this Agreement or in the disclosure schedules to this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstance under which they are or were made, not misleading.

 

(k) Absence of Certain Changes. Except as disclosed in Schedule 3(k), since December 31, 2015, there has been no material adverse change and no material adverse development in the business, assets, properties, operations, condition (financial or otherwise), results of operations or prospects of the Company or its Subsidiaries. Except as disclosed in Schedule 3(k), since December 31, 2015, neither the Company nor any of its Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets, individually or in the aggregate, in excess of $100,000 outside of the ordinary course of business or (iii) had capital expenditures, individually or in the aggregate, in excess of $100,000. Neither the Company nor any of its Subsidiaries has taken any steps to seek protection pursuant to any bankruptcy law nor does the Company have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact that would reasonably lead a creditor to do so. The Company and its Subsidiaries, individually and on a consolidated basis, are not as of the date hereof, and after giving effect to the transactions contemplated hereby to occur at any Closing, will not be Insolvent (as defined below). For purposes of this Section 3(k), “Insolvent” means, with respect to any Person, (i) the present fair saleable value of such Person’s assets is less than the amount required to pay such Person’s total Indebtedness (as defined in Section 3(r)), (ii) such Person is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, (iii) such Person intends to incur or believes that it will incur debts that would be beyond its ability to pay as such debts mature or (iv) such Person has unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted.

 

 

(l) No Undisclosed Events, Liabilities, Developments or Circumstances. No event, liability, development or circumstance has occurred or exists, or is contemplated to occur with respect to the Company, its Subsidiaries or their respective business, properties, prospects, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws on a registration statement on Form S-1 filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced.

 

(m) Conduct of Business; Regulatory Permits. Neither the Company nor any of its Subsidiaries is in violation of any term of or in default under any certificate of designations of any outstanding series of preferred stock of the Company (if any), its Certificate of Incorporation or Bylaws or their organizational charter or memorandum of association or certificate of incorporation or articles of association or bylaws, respectively. Neither the Company nor any of its Subsidiaries is in violation of any judgment, decree or order or any statute, ordinance, rule or regulation applicable to the Company or any of its Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct its business in violation of any of the foregoing, except for possible violations which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, the Company is not in violation of any of the rules, regulations or requirements of the Principal Market and has no knowledge of any facts or circumstances that would reasonably lead to delisting or suspension of the Common Stock by the Principal Market in the foreseeable future. Except as set forth in Schedule 3(m), during the two (2) years prior to the date hereof, the Common Stock has been designated for quotation on the Principal Market. Except as set forth in Schedule 3(m), during the two (2) years prior to the date hereof, (i) trading in the Common Stock has not been suspended by the SEC or the Principal Market and (ii) the Company has received no communication, written or oral, from the SEC or the Principal Market regarding the suspension or delisting of the Common Stock from the Principal Market. The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, except where the failure to possess such certificates, authorizations or permits would not have, individually or in the aggregate, a Material Adverse Effect, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.

 

(n) Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor any director, officer, agent, employee or other Person acting on behalf of the Company or any of its Subsidiaries has, in the course of its actions for, or on behalf of, the Company or any of its Subsidiaries (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

 

 

(o) Sarbanes-Oxley Act. Except as disclosed in Schedule 3(o), the Company is in compliance with any and all applicable requirements of the Sarbanes-Oxley Act of 2002, as amended, that are effective as of the date hereof, and any and all applicable rules and regulations promulgated by the SEC thereunder that are effective as of the date hereof.

 

(p) Transactions With Affiliates. Except as set forth on Schedule 3(p), none of the officers, directors or employees of the Company or any of its Subsidiaries is presently a party to any transaction with the Company or any of its Subsidiaries (other than for ordinary course services as employees, officers or directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any such officer, director or employee or, to the knowledge of the Company or any of its Subsidiaries, any corporation, partnership, trust or other entity in which any such officer, director, or employee has a substantial interest or is an officer, director, trustee or partner.

 

(q) Equity Capitalization. As of the date hereof, the authorized capital stock of the Company consists of (i) 200,000,000 shares of Common Stock, of which as of the date hereof, 3,785,216 shares are issued and outstanding, 867,550 shares are reserved for issuance pursuant to the Company’s stock option and purchase plans, 1,513,042 shares are reserved for issuance upon exercise of warrants outstanding and 290,024 shares are reserved for issuance pursuant to securities (other than the aforementioned options, the Notes and the Warrants) exercisable or exchangeable for, or convertible into, Common Stock, (ii) 50,000,000 shares of preferred stock, par value $0.0001 per share, none of which are issued and outstanding as of the date hereof and (iii) there are 2,470,938 shares of Common Stock held by non-affiliates of the Company. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Except as set forth in the SEC Documents or as disclosed in Schedule 3(q), (i) none of the Company’s capital stock is subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any shares of capital stock of the Company or any of its Subsidiaries; (iii) there are no outstanding debt securities, notes, credit agreements, credit facilities or other agreements, documents or instruments evidencing Indebtedness of the Company or any of its Subsidiaries or by which the Company or any of its Subsidiaries is or may become bound; (iv) there are no financing statements securing obligations in any material amounts, either singly or in the aggregate, filed in connection with the Company or any of its Subsidiaries; (v) other than pursuant to the Registration Rights Agreement, there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the 1933 Act; (vi) there are no outstanding securities or instruments of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries; (vii) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities; (viii) the Company does not have any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement; and (ix) the Company and its Subsidiaries have no liabilities or obligations required to be disclosed in the SEC Documents but not so disclosed in the SEC Documents, other than those incurred in the ordinary course of the Company’s or any of its Subsidiary’s’ respective businesses and which, individually or in the aggregate, do not or would not have a Material Adverse Effect. The Company has furnished or made available to the Buyers true, correct and complete copies of the Company’s Certificate of Incorporation, as amended and as in effect on the date hereof (the “Certificate of Incorporation”), and the Company’s Bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and the terms of all securities convertible into, or exercisable or exchangeable for shares of Common Stock and the material rights of the holders thereof in respect thereto.

 

 

(r) Indebtedness and Other Contracts. Except as disclosed on Schedule 3(r), neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined below), (ii) is a party to any contract, agreement or instrument, the violation of which, or default under which, by the other party(ies) to such contract, agreement or instrument could reasonably be expected to result in a Material Adverse Effect, (iii) is in violation of any term of or in default under any contract, agreement or instrument relating to any Indebtedness, except where such violations and defaults would not result, individually or in the aggregate, in a Material Adverse Effect, or (iv) is a party to any contract, agreement or instrument relating to any Indebtedness, the performance of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse Effect. Schedule 3(r) provides a detailed description of the material terms of any such outstanding Indebtedness. For purposes of this Agreement: (x) “Indebtedness” of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred purchase price of property or services, including, without limitation, “capital leases” in accordance with GAAP (other than trade payables entered into in the ordinary course of business consistent with past practice), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with GAAP, consistently applied for the periods covered thereby, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above; and (y) “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any Indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.

 

 

(s) Absence of Litigation. There is no action, suit, proceeding, inquiry or investigation before or by the Principal Market, any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries, the Common Stock or any of the Company’s Subsidiaries or any of the Company’s or its Subsidiaries’ officers or directors, whether of a civil or criminal nature or otherwise, in their capacities as such, except as set forth in Schedule 3(s). The matters set forth in Schedule 3(s) would not reasonably be expected to have a Material Adverse Effect.

 

(t) Insurance. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.

 

(u) Employee Relations.

 

(i) Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or employs any member of a union. The Company and its Subsidiaries believe that their relations with their employees are good. No executive officer (as defined in Rule 501(f) under the 1933 Act) of the Company or any of its Subsidiaries has notified the Company or any such Subsidiary that such officer intends to leave the Company or any such Subsidiary or otherwise terminate such officer’s employment with the Company or any such Subsidiary. No executive officer of the Company or any of its Subsidiaries, to the knowledge of the Company or any of its Subsidiaries, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters.

 

 

(ii) The Company and its Subsidiaries are in compliance with all federal, state, local and foreign laws and regulations respecting labor, employment and employment practices and benefits, terms and conditions of employment and wages and hours, except where failure to be in compliance would not, either individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.

 

(v) Title. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except for Permitted Liens which do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and any of its Subsidiaries. Any real property and facilities held under lease by the Company and any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries.

 

(w) Intellectual Property Rights. The Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, original works of authorship, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and other intellectual property rights and all applications and registrations therefor (“Intellectual Property Rights”) necessary to conduct their respective businesses as now conducted. None of the Company’s Intellectual Property Rights have expired or terminated or have been abandoned or are expected to expire or terminate or are expected to be abandoned, within three years from the date of this Agreement. The Company does not have any knowledge of any infringement by the Company or its Subsidiaries of Intellectual Property Rights of others. There is no claim, action or proceeding being made or brought, or to the knowledge of the Company or any of its Subsidiaries, being threatened, against the Company or any of its Subsidiaries regarding its Intellectual Property Rights. Neither the Company nor any of its Subsidiaries is aware of any facts or circumstances that might give rise to any of the foregoing infringements or claims, actions or proceedings. The Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their Intellectual Property Rights.

 

(x) Environmental Laws. Except as would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect: (i) neither the Company nor its Subsidiaries is in violation of any Environmental Laws (as hereinafter defined), (ii) the Company and its Subsidiaries have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) the Company and its Subsidiaries are in compliance with all terms and conditions of any such permit, license or approval. The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.

 

 

(y) Subsidiary Rights. The Company or one of its Subsidiaries has the unrestricted right to vote, and (subject to limitations imposed by applicable law) to receive dividends and distributions on, all capital securities of its Subsidiaries as owned by the Company or such Subsidiary.

 

(z) Investment Company Status. Neither the Company nor any Subsidiary is, and upon consummation of the sale of the Securities, and for so long any Buyer holds any Securities, will be, an “investment company,” a company controlled by an “investment company” or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment company” as such terms are defined in the Investment Company Act of 1940, as amended.

 

(aa) Tax Status. The Company and each of its Subsidiaries (i) has made or filed all U.S. federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and (iii) has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

 

(bb) Internal Accounting and Disclosure Controls. Except as set forth in Schedule 3(bb) or as set forth in the SEC Documents, the Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset and liability accountability, (iii) access to assets or incurrence of liabilities is permitted only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets and liabilities is compared with the existing assets and liabilities at reasonable intervals and appropriate action is taken with respect to any difference. Except as set forth in Schedule 3(bb) or as set forth in the SEC Documents, the Company maintains disclosure controls and procedures (as such term is defined in Rule 13a-15 under the 1934 Act) that are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC, including, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Company’s management, including its principal executive officer or officers and its principal financial officer or officers, as appropriate, to allow timely decisions regarding required disclosure.

 

 

(cc) Off Balance Sheet Arrangements. There is no transaction, arrangement, or other relationship between the Company and an unconsolidated or other off balance sheet entity that is required to be disclosed by the Company in its 1934 Act filings and is not so disclosed or that otherwise would be reasonably likely to have a Material Adverse Effect.

 

(dd) Ranking of Notes. Except as set forth in Schedule 3(dd), no Indebtedness of the Company or any of its Subsidiaries is senior to or ranks pari passu with the Notes in right of payment, whether with respect of payment of redemptions, interest, damages or upon liquidation or dissolution or otherwise.

 

(ee) Transfer Taxes. On each Closing Date, all stock transfer or other taxes (other than income or similar taxes) that are required to be paid in connection with the sale and transfer of the Securities to be sold to each Buyer hereunder will be, or will have been, fully paid or provided for by the Company, and all laws imposing such taxes will be or will have been complied with.

 

(ff) Manipulation of Price. The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result, or that could reasonably be expected to cause or result, in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) other than the Placement Agent, sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the Securities, or (iii) other than the Placement Agent, paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company.

 

(gg) Acknowledgement Regarding Buyers’ Trading Activity. The Company acknowledges and agrees that (i) none of the Buyers has been asked to agree, nor has any Buyer agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Securities for any specified term; (ii) any Buyer, and counter-parties in “derivative” transactions to which any such Buyer is a party, directly or indirectly, presently may have a “short” position in the Common Stock, and (iii) each Buyer shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction. The Company further understands and acknowledges that one or more Buyers may engage in hedging and/or trading activities at various times during the period that the Securities are outstanding and (b) such hedging and/or trading activities, if any, can reduce the value of the existing stockholders’ equity interest in the Company both at and after the time the hedging and/or trading activities are being conducted. The Company acknowledges that such aforementioned hedging and/or trading activities do not constitute a breach of this Agreement, the Notes, the Warrants or any of the documents executed in connection herewith.

 

(hh) U.S. Real Property Holding Corporation. The Company is not, has never been, and so long as any Securities remain outstanding, shall not become, a U.S. real property holding corporation within the meaning of Section 897 of the Code and the Company shall so certify upon any Buyer’s request.

 

 

(ii) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries or affiliates is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Neither the Company nor any of its Subsidiaries or affiliates owns or controls, directly or indirectly, five percent (5%) or more of the outstanding shares of any class of voting securities or twenty-five percent (25%) or more of the total equity of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or affiliates exercises a controlling influence over the management or policies of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve.

 

(jj) No Additional Agreements. Neither the Company nor any of its Subsidiaries has any agreement or understanding with any Buyer with respect to the transactions contemplated by the Transaction Documents other than as specified in the Transaction Documents.

 

(kk) Disclosure. Except for the transaction contemplated hereby, the Company confirms that neither it nor any other Person acting on its behalf has provided any of the Buyers or their agents or counsel with any information that constitutes or could reasonably be expected to constitute material, nonpublic information. The Company understands and confirms that each of the Buyers will rely on the foregoing representations in effecting transactions in securities of the Company. All disclosure provided to the Buyers regarding the Company, or any of its Subsidiaries, their business and the transactions contemplated hereby, including the disclosure schedules to this Agreement, furnished by or on behalf of the Company is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each press release issued by the Company or any of its Subsidiaries during the twelve (12) months preceding the date of this Agreement did not at the time of release contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed. The Company acknowledges and agrees that no Buyer makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 2.

 

(ll) Shell Company Status. The Company is not, and has not been since July 14, 2013, an issuer identified in Rule 144(i)(1) of the 1933 Act. As of July 14, 2013, the Company filed current “Form 10 information” (as defined in Rule 144 (i)(3)) with the SEC reflecting its status as an entity that was no longer an issuer described in Rule 144(i)(1)(i).

 

(mm) Stock Option Plans. Each stock option granted by the Company was granted (i) in accordance with the terms of the applicable stock option plan of the Company and (ii) with an exercise price at least equal to the fair market value of the Common Stock on the date such stock option would be considered granted under GAAP and applicable law. No stock option granted under the Company’s stock option plan has been backdated. The Company has not knowingly granted, and there is no and has been no policy or practice of the Company to knowingly grant, stock options prior to, or otherwise knowingly coordinate the grant of stock options with, the release or other public announcement of material information regarding the Company or its Subsidiaries or their financial results or prospects.

 

 

(nn) No Disagreements with Accountants and Lawyers. There are no material disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers which could affect the Company’s ability to perform any of its obligations under any of the Transaction Documents. In addition, on or prior to the date hereof, the Company had discussions with its accountants about its financial statements previously filed with the SEC. Based on those discussions, the Company has no reason to believe that it will need to restate any such financial statements or any part thereof.

 

(oo) No Disqualification Events. Except as set forth in Schedule 3(oo), with respect to Securities to be offered and sold hereunder in reliance on Rule 506(b) under the 1933 Act (“Regulation D Securities”), none of the Company, any of its predecessors, any affiliated issuer, any director, executive officer, other officer of the Company participating in the offering hereunder, any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power, nor any promoter (as that term is defined in Rule 405 under the 1933 Act) connected with the Company in any capacity at the time of sale (each, an “Issuer Covered Person” and, together, “Issuer Covered Persons”) is subject to any of the “Bad Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under the 1933 Act (a “Disqualification Event”), except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3). The Company has exercised reasonable care to determine whether any Issuer Covered Person is subject to a Disqualification Event. The Company has complied, to the extent applicable, with its disclosure obligations under Rule 506(e), and has furnished to the Buyers a copy of any disclosures provided thereunder.

 

(pp) Other Covered Persons. The Company is not aware of any Person (other than the Placement Agent) that has been or will be paid (directly or indirectly) remuneration for solicitation of Buyers or potential purchasers in connection with the sale of any Securities.

 

4. COVENANTS.

 

(a) Best Efforts. Each party shall use its best efforts timely to satisfy each of the covenants and the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement.

 

(b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before each Closing Date, take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Securities for sale to the Buyers at such Closing pursuant to this Agreement under applicable securities or “Blue Sky” laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to the Buyers on or prior to the applicable Closing Date. The Company shall make all filings and reports relating to the offer and sale of the Securities required under applicable securities or “Blue Sky” laws of the states of the United States following the applicable Closing Date.

 

 

(c) Reporting Status. Until the date on which the Buyers shall have sold all of the Conversion Shares and Warrant Shares and none of the Notes or Warrants are outstanding (the “Reporting Period”), the Company shall timely file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would no longer require or otherwise permit such termination.

 

(d) Use of Proceeds. The Company will use the proceeds from the sale of the Securities solely for working capital and general corporate purposes.

 

(e) Financial Information. The Company agrees to send the following to each Buyer during the Reporting Period (i) unless the following are filed with the SEC through EDGAR and are available to the public through the EDGAR system, within one (1) Business Day after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, any Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K (or any analogous reports under the 1934 Act) and any registration statements (other than on Form S-8) or amendments filed pursuant to the 1933 Act, (ii) unless the following are filed with the SEC through EDGAR and are available to the public through the EDGAR system, on the same day as the release thereof, facsimile or e-mailed copies of all press releases issued by the Company or any of its Subsidiaries, and (iii) copies of any notices and other information made available or given to the stockholders of the Company generally, contemporaneously with the making available or giving thereof to the stockholders. As used herein, “Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

 

(f) Listing. The Company shall commence trading of its Common Stock on either The New York Stock Exchange, Inc., the NYSE MKT LLC, The NASDAQ Capital Market, The NASDAQ Global Select Market or The Nasdaq Global Market (collectively, the “Qualified Eligible Markets”) no later than December 31, 2017 (the “Listing Deadline”). The Company shall promptly secure the listing of all of the Conversion Shares and the Warrant Shares upon each national securities exchange and automated quotation system, if any, upon which the Common Stock then listed (subject to official notice of issuance) and shall maintain such listing of all Conversion Shares and Warrant Shares from time to time issuable under the terms of the Transaction Documents. The Company shall maintain the authorization for quotation of the Common Stock on the Principal Market or any other Eligible Market (as defined in the Warrants). From and after the Listing Deadline, the Company shall maintain the authorization for quotation of the Common Stock on a Qualified Eligible Market and neither the Company nor any of its Subsidiaries shall take any action which would be reasonably expected to result in the delisting or suspension of the Common Stock on the applicable Qualified Eligible Market. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 4(f).

 

 

(g) Transfer Agent. For so long any Securities are outstanding, the Company shall cause its transfer agent to participate in the Depository Trust Company Fast Automated Securities Transfer Program.

 

(h) Fees. The Company shall reimburse Empery (a Buyer) or its designee(s) (in addition to any other expense amounts paid to any Buyer or its counsel prior to the date of this Agreement) for all costs and expenses incurred in connection with the transactions contemplated by the Transaction Documents (including all legal fees and disbursements in connection therewith, documentation and implementation of the transactions contemplated by the Transaction Documents and due diligence in connection therewith) (hereinafter, collectively, the “Empery Expenses”), which amount may be withheld by such Buyer from its purchase price for any Notes purchased at the Initial Closing to the extent not previously reimbursed by the Company. Notwithstanding the foregoing, in no event will the Empery Expenses reimbursed by the Company pursuant to this Section 4(h) exceed $60,000 without the prior approval from the Company. The Company shall be responsible for the payment of any placement agent’s fees, financial advisory fees, or broker’s commissions (other than for Persons engaged by any Buyer) relating to or arising out of the transactions contemplated hereby, including, without limitation, any fees or commissions payable to the Placement Agent. The Company shall pay, and hold each Buyer harmless against, any liability, loss or expense (including, without limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in connection with any claim relating to any such payment. Except as otherwise set forth in the Transaction Documents, each party to this Agreement shall bear its own expenses in connection with the sale of the Securities to the Buyers.

 

(i) Pledge of Securities. The Company acknowledges and agrees that the Securities may be pledged by a Buyer in connection with a bona fide margin agreement or other loan or financing arrangement that is secured by the Securities. The pledge of Securities shall not be deemed to be a transfer, sale or assignment of the Securities hereunder, and no Buyer effecting a pledge of Securities shall be required to provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction Document, including, without limitation, Section 2(f) hereof; provided that a Buyer and its pledgee shall be required to comply with the provisions of Section 2(f) hereof in order to effect a sale, transfer or assignment of Securities to such pledgee. The Company hereby agrees to execute and deliver such documentation as a pledgee of the Securities may reasonably request in connection with a pledge of the Securities to such pledgee by a Buyer.

 

 

(j) Disclosure of Transactions and Other Material Information. On or before 8:30 a.m., New York City time, on the first (1^st) Business Day after the date hereof, (i) the Company shall issue a press release reasonably acceptable to the Buyers and (ii) file a Current Report on Form 8-K describing the terms of the transactions contemplated by the Transaction Documents in the form required by the 1934 Act and attaching the material Transaction Documents (including, without limitation, this Agreement (and all schedules and exhibits to this Agreement), the form of the Warrants, the form of Notes, the Security Documents and the form of the Registration Rights Agreement as exhibits to such filing (including all attachments, the “8-K Filing”). From and after the filing of the 8-K Filing with the SEC, no Buyer shall be in possession of any material, nonpublic information received from the Company, any of its Subsidiaries or any of their respective officers, directors, affiliates, employees or agents, that is not disclosed in the 8-K Filing. In addition, effective upon the filing of the 8-K Filing, the Company acknowledges and agrees that any and all confidentiality or similar obligations under any agreement, whether written or oral, between the Company, any of its Subsidiaries or any of their respective officers, directors, affiliates, employees or agents, on the one hand, and any of the Buyers or any of their affiliates, on the other hand, shall terminate. The Company shall not, and shall cause each of its Subsidiaries and its and each of their respective officers, directors, affiliates, employees and agents, not to, provide any Buyer with any material, nonpublic information regarding the Company or any of its Subsidiaries from and after the date hereof without the express prior written consent of such Buyer. If a Buyer has, or believes it has, received any such material, nonpublic information regarding the Company or any of its Subsidiaries from the Company, any of its Subsidiaries or any of their respective officers, directors, affiliates, employees or agents, it may provide the Company with written notice thereof. The Company shall, within two (2) Trading Days of receipt of such notice, make public disclosure of such material, nonpublic information. To the extent that the Company delivers any material, non-public information to a Buyer without such Buyer’s consent, the Company hereby covenants and agrees that such Buyer shall not have any duty of confidentiality to the Company, any of its Subsidiaries or any of their respective officers, directors, employees, affiliates or agents with respect to, or a duty not to trade on the basis of, such material, non-public information or any other obligation with respect to such information. Subject to the foregoing, neither the Company, its Subsidiaries nor any Buyer shall issue any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of any Buyer, to make any press release or other public disclosure with respect to such transactions (i) in substantial conformity with the 8-K Filing and contemporaneously therewith and (ii) as is required by applicable law and regulations (provided that in the case of clause (i) each Buyer shall be consulted by the Company in connection with any such press release or other public disclosure prior to its release). Except for the Registration Statement required to be filed pursuant to the Registration Rights Agreement, without the prior written consent of any applicable Buyer, neither the Company nor any of its Subsidiaries or affiliates shall disclose the name of such Buyer in any filing, announcement, release or otherwise.

 

(k) Additional Notes; Variable Securities. So long as any Buyer beneficially owns any Notes, the Company will not issue any Notes (other than to the Buyers as contemplated hereby and Additional Notes (as defined in the Notes)), and the Company shall not issue any other securities that would cause a breach or default under the Notes; provided, however, the Company may amend and restate those certain Senior Secured Notes issued by the Company pursuant to that certain Securities Purchase Agreement, dated as of April 22, 2015 by and among the Company and the investors listed on the signature pages attached thereto (the “April 2015 SPA”) and that certain Securities Purchase Agreement, dated as of May 7, 2015 by and among the Company and the investors listed on the signature pages attached thereto substantially in the form attached hereto as Exhibit A. For so long as any Notes remain outstanding, the Company shall not, in any manner, issue or sell any rights, warrants or options to subscribe for or purchase Common Stock or directly or indirectly convertible into or exchangeable or exercisable for Common Stock at a price which varies or may vary with the market price of the Common Stock, including by way of one or more reset(s) to any fixed price unless the conversion, exchange or exercise price of any such security cannot be less than the then applicable Conversion Price (as defined in the Notes) with respect to the Common Stock into which any Note is convertible or the then applicable Exercise Price (as defined in the Warrants) with respect to the Common Stock into which any Warrant is exercisable.

 

 

(l) Corporate Existence. So long as any Buyer beneficially owns any Securities, the Company shall (i) maintain its corporate existence and (ii) not be party to any Fundamental Transaction (as defined in the Notes) unless the Company is in compliance with the applicable provisions governing Fundamental Transactions set forth in the Notes and the Warrants.

 

(m) Reservation of Shares. So long as any Buyer owns any Securities, the Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, no less than the Required Reserve Amount. If at any time the number of shares of Common Stock authorized and reserved for issuance is not sufficient to meet the Required Reserved Amount, the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including, without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company’s obligations under Section 3(c), in the case of an insufficient number of authorized shares, obtain stockholder approval of an increase in such authorized number of shares, and voting the management shares of the Company in favor of an increase in the authorized shares of the Company to ensure that the number of authorized shares is sufficient to meet the Required Reserved Amount.

 

(n) Conduct of Business. The business of the Company and its Subsidiaries shall not be conducted in violation of any law, ordinance or regulation of any governmental entity, except where such violations would not result, either individually or in the aggregate, in a Material Adverse Effect.

 

(o) Public Information. At any time during the period commencing from the six (6) month anniversary of the Initial Closing Date and ending at such time that all of the Securities, if a registration statement is not available for the resale of all of the Securities, may be sold without restriction or limitation pursuant to Rule 144 and without the requirement to be in compliance with Rule 144(c)(1), if the Company shall (i) fail for any reason to satisfy the requirements of Rule 144(c)(1), including, without limitation, the failure to satisfy the current public information requirement under Rule 144(c) or (ii) if the Company has ever been an issuer described in Rule 144(i)(1)(i) or becomes such an issuer in the future, and the Company shall fail to satisfy any condition set forth in Rule 144(i)(2) (a “Public Information Failure”) then, as partial relief for the damages to any holder of Securities by reason of any such delay in or reduction of its ability to sell the Securities (which remedy shall not be exclusive of any other remedies available at law or in equity), the Company shall pay to each such holder an amount in cash equal to two percent (2.0%) of the aggregate Purchase Price of such holder’s Securities on the day of a Public Information Failure and on every thirtieth day (pro rated for periods totaling less than thirty days) thereafter until the earlier of (i) the date such Public Information Failure is cured and (ii) such time that such public information is no longer required pursuant to Rule 144. The payments to which a holder shall be entitled pursuant to this Section 4(o) are referred to herein as “Public Information Failure Payments.” Public Information Failure Payments shall be paid on the earlier of (I) the last day of the calendar month during which such Public Information Failure Payments are incurred and (II) the third Business Day after the event or failure giving rise to the Public Information Failure Payments is cured. In the event the Company fails to make Public Information Failure Payments in a timely manner, such Public Information Failure Payments shall bear interest at the rate of 1.5% per month (prorated for partial months) until paid in full.

 

 

(p) Notice of Disqualification Events. The Company will notify the Buyers in writing, prior to the applicable Closing Date of (i) any Disqualification Event relating to any Issuer Covered Person and (ii) any event that would, with the passage of time, become a Disqualification Event relating to any Issuer Covered Person.

 

(q) Collateral Agent.

 

(i) Each Buyer hereby (a) appoints Empery Tax Efficient, LP as the collateral agent hereunder and under the Security Documents (in such capacity, the “Collateral Agent”), and (b) authorizes the Collateral Agent (and its officers, directors, employees and agents) to take such action on such Buyer’s behalf in accordance with the terms hereof and thereof. The Collateral Agent shall not have, by reason hereof or pursuant to any Security Documents, a fiduciary relationship in respect of any Buyer. Neither the Collateral Agent nor any of its officers, directors, employees and agents shall have any liability to any Buyer for any action taken or omitted to be taken in connection hereof or the Security Documents except to the extent caused by its own gross negligence or willful misconduct, and each Buyer agrees to defend, protect, indemnify and hold harmless the Collateral Agent and all of its officers, directors, employees and agents (collectively, the “Collateral Agent Indemnitees”) from and against any losses, damages, liabilities, obligations, penalties, actions, judgments, suits, fees, costs and expenses (including, without limitation, reasonable attorneys’ fees, costs and expenses) incurred by such Collateral Agent Indemnitee, whether direct, indirect or consequential, arising from or in connection with the performance by such Collateral Agent Indemnitee of the duties and obligations of Collateral Agent pursuant hereto or any of the Security Documents.

 

(ii) The Collateral Agent shall be entitled to rely upon any written notices, statements, certificates, orders or other documents or any telephone message believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person, and with respect to all matters pertaining to this Agreement or any of the other Transaction Documents and its duties hereunder or thereunder, upon advice of counsel selected by it.

 

(iii) The Collateral Agent may resign from the performance of all its functions and duties hereunder and under the Notes and the Security Documents at any time by giving at least ten (10) Business Days prior written notice to the Company and each holder of the Notes. Such resignation shall take effect upon the acceptance by a successor Collateral Agent of appointment as provided below. Upon any such notice of resignation, the holders of a majority of the outstanding principal amount of Notes shall appoint a successor Collateral Agent. Upon the acceptance of the appointment as Collateral Agent, such successor Collateral Agent shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent, and the retiring Collateral Agent shall be discharged from its duties and obligations under this Agreement, the Notes and the Security Agreement. After any Collateral Agent’s resignation hereunder, the provisions of this Section 4(q) shall inure to its benefit. If a successor Collateral Agent shall not have been so appointed within said ten (10) Business Day period, the retiring Collateral Agent shall then appoint a successor Collateral Agent who shall serve until such time, if any, as the holders of a majority of the outstanding principal amount of Notes appoints a successor Collateral Agent as provided above.

 

 

(iv) The Company hereby covenants and agrees to take all actions as promptly as practicable reasonably requested by either the holders of a majority of the outstanding principal amount of Notes or the Collateral Agent (or its successor), from time to time pursuant to the terms of this Section 4(q), to secure a successor Collateral Agent satisfactory to such requesting part(y)(ies), in their sole discretion, including, without limitation, by paying all fees of such successor Collateral Agent, by having the Company agree to indemnify any successor Collateral Agent and by each of the Company executing a collateral agency agreement or similar agreement and/or any amendment to the Security Documents reasonably requested or required by the successor Collateral Agent.

 

(v) The Company agrees to pay the Collateral Agent, by wire transfer of immediately available funds in accordance with the Collateral Agent’s written wire instructions, a quarterly agency fee of $10,000 within three (3) Business Days following the end of each calendar quarter that the Collateral Agent acted as collateral agent in accordance with this Section 4(q) and the Security Documents during such calendar quarter.

 

(r) Additional Issuances and Registrations of Securities. From the date hereof until the Trigger Date (as defined below), the Company will not, directly or indirectly (A) file any registration statement with the SEC or file any amendment or supplement thereto, or grant any registration rights to any Person that can be exercised prior to the earlier of such time as set forth above, other than pursuant to the Registration Rights Agreement, (B) except for the issuance of Excluded Securities (as defined below), offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition of) any of its or its Subsidiaries’ debt, equity or equity equivalent securities, including without limitation any debt, preferred stock or other instrument or security that is, at any time during its life and under any circumstances, convertible into or exchangeable or exercisable for Common Stock or Common Stock Equivalents or (C) be party to any solicitations, negotiations or discussions with regard to the foregoing. As used herein, (w) “Trigger Date” means the date that is ninety (90) days after the earlier of (x) the date that one or more Registration Statement(s) covering the resale of all Registrable Securities has been declared effective by the SEC and (y) the date all the Conversion Shares and Warrant Shares are eligible for sale without restriction or limitation pursuant to Rule 144 and without the requirement to be in compliance with Rule 144(c)(1) (or any successor thereto) promulgated under the 1933 Act. For purposes of this Section 4(r), the following definitions shall apply; (v) “Approved Stock Plan” means any employee benefit plan which has been approved by the Board of Directors of the Company, pursuant to which the Company’s securities may be issued to any employee, officer or director for services provided to the Company, (w)”Common Stock Equivalents” means, collectively, Options and Convertible Securities; (x) “Convertible Securities” means any stock or securities (other than Options) convertible into or exercisable or exchangeable for shares of Common Stock; (y) “Excluded Securities” means any shares of Common Stock or Options (as defined below) issued or issuable: (i) in connection with any Approved Stock Plan, (ii) upon conversion of the Notes or exercise of the Warrants; provided, that the terms of such Notes and Warrants are not amended, modified or changed on or after the date hereof, (iii) upon exercise of any Options or Convertible Securities which are outstanding on the day immediately preceding the date hereof; provided, that the terms of such Options or Convertible Securities are not amended, modified or changed on or after the Subscription Date (other than pursuant to the amendment and restatement of certain notes of the Company issued during April 2015 and May 2015 contemplated to occur contemporaneously with the issuance of the Notes and Warrants, and (iv) pursuant to that certain purchase agreement dated September 1, 2016 or upon exercise of such additional Options, and (z) “Options” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.

 

 

(s) Pledges of Intellectual Property Rights. The Company hereby agrees that it shall not pledge, mortgage, encumber or otherwise permit the Intellectual Property Rights to be subject to any lien, security interest, encumbrances, or charge (such actions hereinafter referred to collectively as “Pledge”) any of its Intellectual Property Rights except for Pledges related to current commercial development agreements as listed on Schedule 4(s) or for future commercial development agreements entered into in the ordinary course of business. The Company hereby further agrees: (a) to promptly notify the Collateral Agent of any such future commercial development agreements (but only if the Collateral Agent executes a confidentiality agreement with respect to any material, non-public information regarding or related to such commercial development agreements prior to its receipt of any such material, non-public information), and (b) to amend Schedule 4(s) in connection with such additional Pledges, with the approval of the Collateral Agent, which approval shall not be unreasonably withheld.

 

(t) Legal Opinion. On or prior to ten (10) Business Days after the Initial Closing Date, the Company shall cause its outside legal counsel to deliver to each Buyer legal opinions in form and substance reasonably acceptable to the Required Holders.

 

(u) Closing Documents. On or prior to January 13, 2017, the Company agrees to deliver, or cause to be delivered, to each Buyer and Schulte Roth & Zabel LLP a complete closing set of the executed Transaction Documents, Securities and any other documents required to be delivered to any party pursuant to Section 7 hereof or otherwise.

 

5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

 

(a) Register. The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to each holder of Securities), a register for the Notes and the Warrants in which the Company shall record the name and address of the Person in whose name the Notes and the Warrants have been issued (including the name and address of each transferee), the principal amount of Notes held by such Person, the number of Conversion Shares issuable pursuant to the terms of the Notes and the number of Warrant Shares issuable upon exercise of the Warrants held by such Person. The Company shall keep the register open and available at all times during business hours for inspection of any Buyer or its legal representatives.

 

 

(b) Transfer Agent Instructions. The Company shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, in the form of Exhibit H attached hereto (the “Irrevocable Transfer Agent Instructions”) to issue certificates or credit shares to the applicable balance accounts at DTC, registered in the name of each Buyer or its respective nominee(s), for the Conversion Shares and the Warrant Shares issued at each Closing or pursuant to the terms of the Notes or exercise of the Warrants in such amounts as specified from time to time by each Buyer to the Company upon conversion of the Notes or exercise of the Warrants. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5(b), and stop transfer instructions to give effect to Section 2(f) hereof, will be given by the Company to its transfer agent, and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the other Transaction Documents. If a Buyer effects a sale, assignment or transfer of the Securities in accordance with Section 2(f), the Company shall permit the transfer and shall promptly instruct its transfer agent to issue one or more certificates or credit shares to the applicable balance accounts at DTC in such name and in such denominations as specified by such Buyer to effect such sale, transfer or assignment. In the event that such sale, assignment or transfer involves the Conversion Shares or the Warrant Shares sold, assigned or transferred pursuant to an effective registration statement or pursuant to Rule 144, the transfer agent shall issue such Securities to the Buyer, assignee or transferee, as the case may be, without any restrictive legend. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to a Buyer. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5(b) will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5(b), that a Buyer shall be entitled, in addition to all other available remedies, to an order and/or injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required.

 

6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

 

(a) The obligation of the Company hereunder to issue and sell the Initial Notes and the related Initial Warrants to each Initial Buyer at the Initial Closing is subject to the satisfaction, at or before the Initial Closing Date, of each of the following conditions, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion by providing each Initial Buyer with prior written notice thereof:

 

(i) Such Initial Buyer shall have executed each of the Transaction Documents to which it is a party and the Investor Questionnaire and delivered the same to the Company.

 

  

(ii) Such Initial Buyer shall have delivered its Initial Purchase Price to the Company (less, in the case of Empery, any amounts withheld pursuant to Section 4(h)), for the Initial Notes and the related Initial Warrants being purchased by such Initial Buyer at the Initial Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company.

 

(iii) The representations and warranties of such Initial Buyer shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or material adverse effect, which shall be true and correct in all respects) as of the date when made and as of the Initial Closing Date as though made at that time (except for representations and warranties that speak as of a specific date which shall be true and correct as of such specified date), and such Initial Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Initial Buyer at or prior to the Initial Closing Date.

 

(b) The obligation of the Company hereunder to issue and sell the Subsequent Notes and the related Subsequent Warrants to each Subsequent Buyer at the Subsequent Closing is subject to the satisfaction, at or before the Subsequent Closing Date, of each of the following conditions, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion by providing each Subsequent Buyer with prior written notice thereof:

 

(i) Such Subsequent Buyer shall have executed the Investor Questionnaire and delivered the same to the Company.

 

(ii) Such Subsequent Buyer shall have executed either (x) a Joinder Agreement or (y) a Subsequent Closing Notice and delivered the same to the Company.

 

(iii) Such Subsequent Buyer shall have delivered its Subsequent Purchase Price to the Company for the Subsequent Notes and the related Subsequent Warrants being purchased by such Subsequent Buyer at the Subsequent Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company.

 

(iv) The representations and warranties of such Subsequent Buyer shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or material adverse effect, which shall be true and correct in all respects) as of the date when made and as of the Subsequent Closing Date as though made at that time (except for representations and warranties that speak as of a specific date which shall be true and correct as of such specified date), and such Subsequent Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Subsequent Buyer at or prior to the Subsequent Closing Date.

 

 

7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

 

(a) The obligation of each Initial Buyer hereunder to purchase the Initial Notes and the related Initial Warrants at the Initial Closing is subject to the satisfaction, at or before the Initial Closing Date, of each of the following conditions, provided that these conditions are for each Initial Buyer’s sole benefit and may be waived by such Initial Buyer at any time in its sole discretion by providing the Company with prior written notice thereof:

 

(i) The Company and each of its Subsidiaries shall have duly executed and delivered to such Initial Buyer each of the following documents to which it is a party: (A) each of the Transaction Documents, (B) the Initial Notes (allocated in such principal amounts as such Initial Buyer shall request), being purchased by such Initial Buyer at the Initial Closing pursuant to this Agreement and (C) the related Initial Warrants (allocated in such amounts as such Initial Buyer shall request) being purchased by such Initial Buyer at the Initial Closing pursuant to this Agreement.

 

(ii) [Intentionally Omitted]

 

(iii) The Company shall have delivered to such Initial Buyer a copy of the Irrevocable Transfer Agent Instructions, in the form of Exhibit H attached hereto, which instructions shall have been delivered to and acknowledged in writing by the Company’s transfer agent.

 

(iv) The Company shall have delivered to such Initial Buyer a certificate evidencing the formation and good standing of the Company and each of its Subsidiaries in such entity’s jurisdiction of formation issued by the Secretary of State (or comparable office) of such jurisdiction, as of a date within ten (10) days of the Initial Closing Date.

 

(v) The Company shall have delivered to such Initial Buyer a certificate evidencing the Company’s and each of its Subsidiaries’ qualification as a foreign corporation and good standing issued by the Secretary of State (or comparable office) of each jurisdiction in which the Company and its Subsidiaries conduct business, as of a date within ten (10) days of the Initial Closing Date.

 

(vi) The Company shall have delivered to such Initial Buyer a certificate, executed by the Secretary of the Company and dated as of the Initial Closing Date, as to (i) the resolutions consistent with Section 3(b) as adopted by the Company’s and each of its Subsidiaries’ Board of Directors in a form reasonably acceptable to such Initial Buyer, (ii) the Certificate of Incorporation of the Company and each of its Subsidiaries and (iii) the Bylaws of the Company and each of its Subsidiaries, each as in effect at the Initial Closing, in the form attached hereto as Exhibit I.

 

(vii) The representations and warranties of the Company shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which shall be true and correct in all respects) as of the date when made and as of the Initial Closing Date as though made at that time (except for representations and warranties that speak as of a specific date which shall be true and correct as of such specified date) and the Company shall have performed, satisfied and complied in all respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Initial Closing Date. Such Initial Buyer shall have received a certificate, executed by the Chief Executive Officer of the Company, dated as of the Initial Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Initial Buyer in the form attached hereto as Exhibit J.

 

 

(viii) The Common Stock (I) shall be designated for quotation or listed on the Principal Market and (II) shall not have been suspended, as of the Initial Closing Date, by the SEC or the Principal Market from quotation on the Principal Market nor shall suspension by the SEC or the Principal Market have been threatened, as of the Initial Closing Date, either (A) in writing by the SEC or the Principal Market or (B) by falling below the minimum listing maintenance requirements of the Principal Market.

 

(ix) The Company shall have obtained all governmental, regulatory or third party consents and approvals, if any, necessary for the sale of the Securities.

 

(x) Each of the Company’s Subsidiaries shall have executed and delivered to such Buyer the Guaranty Agreement.

 

(xi) The Collateral Agent shall have received (x) the First Amendment to the Subordination and Intercreditor Agreement, in the form attached hereto as Exhibit K-1 (the “September Subordination Agreement”), which amends that certain Subordination and Intercreditor Agreement dated as of September 1, 2016 by and among Longboard Capital Advisors LLC, the Company, Ener-Core Power, Inc., Anthony Tang, as a Senior Lender (as defined therein) and Empery Tax Efficient, LP in its capacity as collateral agent for the Senior Note Lenders (as defined therein) and (x) the First Amendment to the Subordination and Intercreditor Agreement, in the form attached hereto as Exhibit K-2 (the “October Subordination Agreement”), which amends that certain Subordination and Intercreditor Agreement dated as of November 2, 2015 by and among Anthony Tang, the Company and Empery Tax Efficient, LP in its capacity as collateral agent for the Senior Lenders (as defined therein), in each case, duly executed and delivered by all parties thereto.

 

(xii) The Collateral Agent shall have received the Security Amendment Agreement, duly executed by the Company and each of its Subsidiaries, together with the original stock certificates representing all of the equity interests and all promissory notes required to be pledged thereunder, accompanied by undated stock powers and allonges executed in blank and other proper instruments of transfer.

 

(xiii) The Company shall have delivered to such Initial Buyer such other documents relating to the transactions contemplated by this Agreement as such Initial Buyer or its counsel may reasonably request.

 

 

(b) The obligation of each Subsequent Buyer hereunder to purchase the Subsequent Notes and the related Subsequent Warrants at the Subsequent Closing is subject to the satisfaction, at or before the Subsequent Closing Date, of each of the following conditions, provided that these conditions are for each Subsequent Buyer’s sole benefit and may be waived by such Subsequent Buyer at any time in its sole discretion by providing the Company with prior written notice thereof:

 

(i) The Company and each of its Subsidiaries shall have duly executed and delivered to such Subsequent Buyer each of the following documents to which it is a party: (A) each of the Transaction Documents, (B) the Subsequent Notes (allocated in such principal amounts as such Subsequent Buyer shall request) being purchased by such Subsequent Buyer at the Subsequent Closing pursuant to this Agreement and such Subsequent Buyer’s Joinder Agreement and (C) the related Subsequent Warrants (allocated in such amounts as such Subsequent Buyer shall request) being purchased by such Subsequent Buyer at the Subsequent Closing pursuant to this Agreement.

 

(ii) If applicable, the Company shall have duly executed and delivered to such Subsequent Buyer the Joinder Agreement of such Subsequent Buyer.

 

(iii) The Company shall have delivered to such Subsequent Buyer a copy of the Irrevocable Transfer Agent Instructions, in the form of Exhibit H attached hereto, which instructions shall have been delivered to and acknowledged in writing by the Company’s transfer agent.

 

(iv) The Company shall have delivered to such Subsequent Buyer a certificate evidencing the formation and good standing of the Company and each of its Subsidiaries in such entity’s jurisdiction of formation issued by the Secretary of State (or comparable office) of such jurisdiction, as of a date within ten (10) days of the Initial Closing Date, and a bringdown of such certificate(s) as of a date within ten (10) days of the Subsequent Closing Date.

 

(v) The Company shall have delivered to such Subsequent Buyer a certificate evidencing the Company’s and each of its Subsidiaries’ qualification as a foreign corporation and good standing issued by the Secretary of State (or comparable office) of each jurisdiction in which the Company and its Subsidiaries conduct business, as of a date within ten (10) days of the Initial Closing Date, and a bringdown of such certificate(s) as of a date within ten (10) days of the Subsequent Closing Date.

 

(vi) The Company shall have delivered to such Subsequent Buyer a certificate, executed by the Secretary of the Company and dated as of the Subsequent Closing Date, as to (i) the resolutions consistent with Section 3(b) as adopted by the Company’s and each of its Subsidiaries’ Board of Directors in a form reasonably acceptable to such Subsequent Buyer, (ii) the Certificate of Incorporation of the Company and each of its Subsidiaries and (iii) the Bylaws of the Company and each of its Subsidiaries, each as in effect at the Subsequent Closing, in the form attached hereto as Exhibit I.

 

(vii) The representations and warranties of the Company shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which shall be true and correct in all respects) as of the date when made and as of the Subsequent Closing Date as though made at that time (except for representations and warranties that speak as of a specific date which shall be true and correct as of such specified date) and the Company shall have performed, satisfied and complied in all respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Subsequent Closing Date. Such Subsequent Buyer shall have received a certificate, executed by the Chief Executive Officer of the Company, dated as of the Subsequent Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Subsequent Buyer in the form attached hereto as Exhibit J.

 

 

(viii) The Common Stock (I) shall be designated for quotation or listed on the Principal Market and (II) shall not have been suspended, as of the Subsequent Closing Date, by the SEC or the Principal Market from quotation on the Principal Market nor shall suspension by the SEC or the Principal Market have been threatened, as of the Subsequent Closing Date, either (A) in writing by the SEC or the Principal Market or (B) by falling below the minimum listing maintenance requirements of the Principal Market.

 

(ix) The Company shall have obtained all governmental, regulatory or third party consents and approvals, if any, necessary for the sale of the Securities.

 

(x) Each of the Company’s Subsidiaries shall have executed and delivered to such Buyer the Guaranty Agreement.

 

(xi) The Collateral Agent shall have received (x) the First Amendment to the Subordination and Intercreditor Agreement, in the form attached hereto as Exhibit K-1 (the “September Subordination Agreement”), which amends that certain Subordination and Intercreditor Agreement dated as of September 1, 2016 by and among Longboard Capital Advisors LLC, the Company, Ener-Core Power, Inc., Anthony Tang, as a Senior Lender (as defined therein) and Empery Tax Efficient, LP in its capacity as collateral agent for the Senior Note Lenders (as defined therein) and (x) the First Amendment to the Subordination and Intercreditor Agreement, in the form attached hereto as Exhibit K-2 (the “October Subordination Agreement”), which amends that certain Subordination and Intercreditor Agreement dated as of November 2, 2015 by and among Anthony Tang, the Company and Empery Tax Efficient, LP in its capacity as collateral agent for the Senior Lenders (as defined therein), in each case, duly executed and delivered by all parties thereto.

 

(xii) The Collateral Agent shall have received the Security Amendment Agreement, duly executed by the Company and each of its Subsidiaries, together with the original stock certificates representing all of the equity interests and all promissory notes required to be pledged thereunder, accompanied by undated stock powers and allonges executed in blank and other proper instruments of transfer.

 

(xiii) The Company shall have delivered to such Subsequent Buyer such other documents relating to the transactions contemplated by this Agreement as such Subsequent Buyer or its counsel may reasonably request.

 

8. TERMINATION. In the event that the Initial Closing shall not have occurred with respect to an Initial Buyer on or before five (5) Business Days from the date hereof due to the Company’s or such Initial Buyer’s failure to satisfy the conditions set forth in Sections 6(a) and 7(a) above (and the nonbreaching party’s failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the option to terminate this Agreement with respect to such breaching party at the close of business on such date by delivering a written notice to that effect to each other party to this Agreement and without liability of any party to any other party; provided, however, that if this Agreement is terminated pursuant to this Section 8, the Company shall remain obligated to reimburse Empery or its designee(s), as applicable, for the expenses described in Section 4(h) above.

 

 

9. MISCELLANEOUS.

 

(a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, 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 suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement 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 HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

(b) Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile or “.pdf” electronic format signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile or “.pdf” electronic format signature.

 

(c) Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.

 

(d) Severability. If any provision of this Agreement is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Agreement so long as this Agreement as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).

 

 

(e) Entire Agreement; Amendments. This Agreement and the other Transaction Documents supersede all other prior oral or written agreements between the Buyers, the Company, their affiliates and Persons acting on their behalf with respect to the matters discussed herein, and this Agreement, the other Transaction Documents and the instruments referenced herein and therein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of at least a majority of the aggregate number of the Conversion Shares and the Warrant Shares issued or issuable under the Notes (calculated using the Initial Conversion Price) and Warrants (without regard to any limitation on conversion or exercise set forth therein) and shall include Empery so long as Empery or any of its affiliates holds any Securities (the “Required Holders”); provided that any such amendment or waiver that complies with the foregoing but that disproportionately, materially and adversely affects the rights and obligations of any Buyer relative to the comparable rights and obligations of the other Buyers shall require the prior written consent of such adversely affected Buyer; provided, further, that the provisions of Section 4(q) cannot be amended without the additional prior written approval of the Collateral Agent or its successor. Any amendment or waiver effected in accordance with this Section 9(e) shall be binding upon each Buyer and holder of Securities and the Company. No such amendment shall be effective to the extent that it applies to less than all of the Buyers or holders of Securities. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents unless the same consideration (other than the reimbursement of legal fees) also is offered to all of the parties to the Transaction Documents, holders of Notes or holders of the Warrants, as the case may be. The Company has not, directly or indirectly, made any agreements with any Buyers relating to the terms or conditions of the transactions contemplated by the Transaction Documents except as set forth in the Transaction Documents. Without limiting the foregoing, the Company confirms that, except as set forth in this Agreement, no Buyer has made any commitment or promise or has any other obligation to provide any financing to the Company or otherwise.

 

 

(f) Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); (iii) upon receipt, if sent by e-mail (provided that such sent e-mail is kept on file (whether electronically or otherwise) by the sending party and the sending party does not immediately receive an automatically generated message from the recipient’s e-mail server that such e-mail could not be delivered to such recipient) or (iv) one Business Day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses, facsimile numbers and e-mail addresses for such communications shall be:

 

If to the Company:

 

Ener-Core, Inc. 

9400 Toledo Way
Irvine, California 92618

Telephone:    ###-###-####

Facsimile:     ###-###-####
Attention:     Mr. Domonic J. Carney, CFO

Email:           ***@***

 

With a copy (for informational purposes only) to:

 

K&L Gates LLP

1 Park Plaza, 12th Floor

Irvine CA 92614

Telephone:    ###-###-####

Facsimile:     ###-###-####

Attention:     Shoshannah D. Katz, Esq.

Email:           ***@***

 

If to the Transfer Agent:

 

VStock Transfer, LLC.

18 Lafayette Place

Woodmere, New York 11598
Telephone:    ###-###-####

Facsimile:      ###-###-####

Attention:     Yoel Goldfeder

E-mail:           ***@***

 

If to the Placement Agent (for informational purposes only) to:

  

Sichenzia Ross Ference Kesner LLP

61 Broadway, 32nd Floor

New York, NY 10006

Telephone:    ###-###-####

Facsimile:      ###-###-####

Attention:     Gregory Sichenzia

E-mail:          ***@***
 

 

If to a Buyer, to its address, facsimile number and e-mail address set forth on the Schedule of Buyers, with copies to such Buyer’s representatives as set forth on the Schedule of Buyers,

 

with a copy (for informational purposes only) to:

 

Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Telephone:    ###-###-####
Facsimile:      ###-###-####
Attention:     Eleazer N. Klein, Esq.
E-mail:          ***@***

 

or to such other address, facsimile number and/or e-mail address and/or to the attention of such other Person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender’s facsimile machine or e-mail containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by an overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight courier service in accordance with clause (i), (ii) or (iv) above, respectively. A copy of the e-mail transmission containing the time, date and recipient e-mail address shall be rebuttable evidence of receipt by e-mail in accordance with clause (iii) above.

 

(g) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Notes or the Warrants. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Required Holders, including by way of a Fundamental Transaction (unless the Company is in compliance with the applicable provisions governing Fundamental Transactions set forth in the Notes and the Warrants). A Buyer may assign some or all of its rights hereunder without the consent of the Company, in which event such assignee shall be deemed to be a Buyer hereunder with respect to such assigned rights.

 

(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except that each Indemnitee shall have the right to enforce the obligations of the Company with respect to Section 9(k).

 

(i) Survival. Unless this Agreement is terminated under Section 8, the representations and warranties of the Company and the Buyers contained in Sections 2 and 3, and the agreements and covenants set forth in Sections 4, 5 and 9 shall survive each Closing. Each Buyer shall be responsible only for its own representations, warranties, agreements and covenants hereunder.

 

 

(j) Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby, including without limitation taking such reasonable action as is necessary or desirable to perfect a security interest in the Company’s or one or more of its Subsidiaries’ Intellectual Property. Also, without limiting the generality of the requirements of the Company set forth in the Transaction Documents, the Company hereby covenants and agrees to provide prompt notice to the Collateral Agent upon the issuance of any patents in the name of the Company or any of their Subsidiaries anywhere in the world.

 

(k) Indemnification. In consideration of each Buyer’s execution and delivery of the Transaction Documents and acquiring the Securities thereunder and in addition to all of the Company’s other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless each Buyer and each other holder of the Securities and all of their stockholders, partners, members, officers, directors, employees and direct or indirect investors and any of the foregoing Persons’ agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the “Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby or (c) any cause of action, suit or claim brought or made against such Indemnitee by a third party (including for these purposes a derivative action brought on behalf of the Company) and arising out of or resulting from (i) the execution, delivery, performance or enforcement of the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Securities, (iii) any disclosure made by such Buyer pursuant to Section 4(j), or (iv) the status of such Buyer or holder of the Securities as an investor in the Company pursuant to the transactions contemplated by the Transaction Documents. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities that is permissible under applicable law. Except as otherwise set forth herein, the mechanics and procedures with respect to the rights and obligations under this Section 9(k) shall be the same as those set forth in Section 6 of the Registration Rights Agreement.

 

 

(l) No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

 

(m) Remedies. Each Buyer and each holder of the Securities shall have all rights and remedies set forth in the Transaction Documents and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law. Any Person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Furthermore, the Company recognizes that in the event that it fails to perform, observe, or discharge any or all of its obligations under the Transaction Documents, any remedy at law may prove to be inadequate relief to the Buyers. The Company therefore agrees that the Buyers shall be entitled to seek temporary and permanent injunctive relief in any such case without the necessity of proving actual damages and without posting a bond or other security.

 

(n) Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever any Buyer exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then such Buyer may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.

 

(o) Payment Set Aside. To the extent that the Company makes a payment or payments to the Buyers hereunder or pursuant to any of the other Transaction Documents or the Buyers enforce or exercise their rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other Person under any law (including, without limitation, any bankruptcy law, foreign, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

 

(p) Independent Nature of Buyers’ Obligations and Rights. The obligations of each Buyer under any Transaction Document are several and not joint with the obligations of any other Buyer, and no Buyer shall be responsible in any way for the performance of the obligations of any other Buyer under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Buyer pursuant hereto or thereto, shall be deemed to constitute the Buyers as, and the Company acknowledges that the Buyers do not so constitute, a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Buyers are in any way acting in concert or as a group, and the Company shall not assert any such claim with respect to such obligations or the transactions contemplated by the Transaction Documents and the Company acknowledges that the Buyers are not acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. The Company acknowledges and each Buyer confirms that it has independently participated in the negotiation of the transaction contemplated hereby with the advice of its own counsel and advisors. Each Buyer shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be necessary for any other Buyer to be joined as an additional party in any proceeding for such purpose.

 

[Signature Pages Follow]

 

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Securities Purchase Agreement to be duly executed as of the date first written above.

 

	COMPANY:
	ENER-CORE, INC.
	By:
		Name: Alain J. Castro
		Title: Chief Executive Officer

 

 

 

 

 

 

 

[Signature Page to Securities Purchase Agreement]

 

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Securities Purchase Agreement to be duly executed as of the date first written above.

 

	INITIAL BUYER:
	By:
		Name:
		Title:

 

 

 

SCHEDULE OF BUYERS

 

(1)		(2)		(3)		(4)		(5)		(6)
Buyer		Address and Facsimile Number		Aggregate Principal Amount of Notes		Number of Warrant Shares		Purchase Price		Legal Representative’s Address and Facsimile Number

 

 

 

EXHIBITS

 

Exhibit A	Form of Notes
Exhibit B	Form of Warrants
Exhibit C	Form of Joinder Agreement
Exhibit D	Form of Guaranty Agreement
Exhibit E	Form of Security Amendment Agreement
Exhibit F	Form of Registration Rights Agreement
Exhibit G	Form of Investor Questionnaire
Exhibit H	Form of Irrevocable Transfer Agent Instructions
Exhibit I	Form of Secretary’s Certificate
Exhibit J	Form of Officer’s Certificate
Exhibit K-1	Form of September Subordination Agreement
Exhibit K-2	Form of October Subordination Agreement

 

SCHEDULES

 

Schedule 3(a)	Subsidiaries
Schedule 3(j)	SEC Documents
Schedule 3(k)	Absence of Certain Changes
Schedule 3(m)	Regulatory Permits
Schedule 3(o)	Sarbanes-Oxley Act
Schedule 3(p)	Transactions with Affiliates
Schedule 3(q)	Equity Capitalization
Schedule 3(r)	Indebtedness and Other Contracts
Schedule 3(s)	Absence of Litigation
Schedule 3(bb)	Internal Accounting and Disclosure Controls
Schedule 3(dd)	Ranking of Notes
Schedule 3(oo)	No Disqualification Events
Schedule 4(s)	Pledges of Intellectual Property Rights

 

 

EXHIBIT A

 

Form of Notes

  

[Omitted]

 

EXHIBIT B

 

Form of Warrants

 

[Omitted]

 

 

 

EXHIBIT C

 

Form of Joinder Agreement

 

 

 

JOINDER AGREEMENT

 

Reference is hereby made to: (i) that certain Securities Purchase Agreement by and among Ener-Core, Inc., a Delaware corporation, with headquarters located at 9400 Toledo Way, Irvine, California 92618 (the “Company”), and the Initial Buyers (as defined therein), dated as of November 23, 2016, attached hereto as Exhibit A (the “Securities Purchase Agreement”); and (ii) that certain Registration Rights Agreement by and among the Company the Buyers (as defined therein), dated as of November 23, 2016, attached hereto as Exhibit B (the “Registration Rights Agreement”). Capitalized terms not defined herein shall be as defined in the Securities Purchase Agreement.

 

(a) The party signatory hereto as the “Subsequent Buyer” (the “Subsequent Buyer”) desires to purchase Subsequent Notes for the Subsequent Purchase Price, as set forth under the signature line of the Subsequent Buyer attached hereto. The date of the Subsequent Closing (the “Subsequent Closing Date”) shall occur on December 12, 2016 (or such earlier date as shall be mutually agreed to by the Company and the Required Holders).

 

(b) The Subsequent Buyer acknowledges, represents and warrants that it has reviewed the Securities Purchase Agreement, and subject to the satisfaction (or waiver) of the conditions of Sections 1(c), 6(b), and 7(b), as of the Subsequent Closing Date, the Subsequent Buyer shall be a “Buyer” and a “Subsequent Buyer”, in each case as defined in the Securities Purchase Agreement, with all the rights and obligations of a “Buyer” and a “Subsequent Buyer” set forth therein, including, without limitation, as set forth in Section 4(q) thereof.

 

(c) Having read the representations in Section 2 of the Securities Purchase Agreement, the Subsequent Buyer hereby makes the representations and warranties contained in Section 2 of the Securities Purchase Agreement, as set forth therein, to the Company as of the date hereof and as of the Subsequent Closing Date.

 

(d) With regards to the Company’s representations and warranties in Section 3 of the Securities Purchase Agreement, the Company hereby makes the representations and warranties contained in Section 3 of the Securities Purchase Agreement, as set forth therein, to the Subsequent Buyer as of the date hereof and as of the Subsequent Closing Date, as modified or affected by the schedules attached hereto as Attachment 1.

 

(e) The Subsequent Buyer acknowledges, represents and warrants that it has reviewed the Registration Rights Agreement, and subject to the satisfaction (or waiver) of the conditions of Sections 1(c), 6(b), and 7(b), as of the Subsequent Closing Date, the Subsequent Buyer shall be a “Buyer”, as defined in the Registration Rights Agreement, with all the rights and obligations of a “Buyer” set forth therein.

 

(f) This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile or “.pdf” electronic format signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile or “.pdf” electronic format signature.

 

(g) All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, 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 suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement 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 HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

[Signature Page Follows]

 

 

IN WITNESS WHEREOF, the Subsequent Buyer and the Company have caused their respective signature page to this Agreement to be duly executed, in counterparts, as of the date set forth below.

 

	SUBSEQUENT BUYER:
	By:
		Name:
		Title:
	Aggregate Principal Amount of Subsequent Notes Purchased:
	Number of Warrant Shares:
	Purchase Price:
	Address:
	Attention:
	Facsimile:
	Telephone:
	Email:

 

Accepted by:

 

COMPANY:
ENER-CORE, INC.
By:
	Name: Alain J. Castro
	Title: Chief Executive Officer

 

 

EXHIBITS

 

Exhibit A:	Securities Purchase Agreement
Exhibit B:	Registration Rights Agreement
Attachment 1:	Disclosure Schedules to Securities Purchase Agreement

 

 

EXHIBIT D

  

Form of Guaranty Agreement

 

 

GUARANTY

 

GUARANTY, dated as of November 23, 2016, made by each of the undersigned (each a “Guarantor”, and collectively, the “Guarantors”), in favor of the “Buyers” (as defined below) party to the Securities Purchase Agreement referenced below.

 

W I T N E S S E T H :

 

WHEREAS, Ener-Core, Inc., a Delaware corporation (the ”Company”), each party listed as a “Buyer” on the Schedule of Buyers attached to the Securities Purchase Agreement and each “Subsequent Buyer”, if any, that is party to a joinder agreement with respect to the Securities Purchase Agreement (each a “Buyer”, and collectively, the “Buyers”) are parties to that certain Securities Purchase Agreement, dated as of November 23, 2016 (the “Securities Purchase Agreement”), pursuant to which, among other things, the Buyers shall purchase from the Company certain senior secured convertible “Notes” (as defined in the Securities Purchase Agreement) (collectively, the “Notes”);

 

WHEREAS, the Buyers have requested, and the Guarantors have agreed, that the Guarantors shall execute and deliver to the Buyers, a guaranty guaranteeing all of the obligations of the Company under the Securities Purchase Agreement, the Notes and the other “Transaction Documents” (as defined in the Securities Purchase Agreement, the “Transaction Documents”);

 

WHEREAS, pursuant to a Pledge and Security Agreement, dated as of April 22, 2015 (as the same has been, and may be, amended from time to time, the “Security Agreement”), the Company and the Guarantors have granted to Empery Tax Efficient, LP, as collateral agent for the Buyers (in such capacity, the “Collateral Agent”), a security interest in and lien on selected assets to secure their respective obligations under this Guaranty, the Securities Purchase Agreement, the Notes and the other Transaction Documents; and

 

WHEREAS, each Guarantor has determined that the execution, delivery and performance of this Guaranty directly benefits, and is in the best interest of, such Guarantor.

 

NOW, THEREFORE, in consideration of the premises and the agreements herein and for other consideration, the sufficiency of which is hereby acknowledged, each Guarantor hereby agrees with each Buyer as follows:

 

1. Definitions. Reference is hereby made to the Securities Purchase Agreement and the Notes for a statement of the terms thereof. All terms used in this Guaranty, which are defined in the Securities Purchase Agreement or the Notes and not otherwise defined herein, shall have the same meanings herein as set forth therein.

 

2. Guaranty. The Guarantors, jointly and severally, hereby unconditionally and irrevocably, guaranty (a) the punctual payment, as and when due and payable, by stated maturity or otherwise, of all obligations and any other amounts now or hereafter owing by the Company in respect of the Securities Purchase Agreement, the Notes and the other Transaction Documents, including, without limitation, all interest that accrues after the commencement of any proceeding commenced by or against any the Company or any Guarantor under any provision of the Bankruptcy Code (Chapter 11 of Title 11 of the United States Code) or under any other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, or extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief (an “Insolvency Proceeding”), whether or not the payment of such interest is unenforceable or is not allowable due to the existence of such Insolvency Proceeding, and all fees, commissions, expense reimbursements, indemnifications and all other amounts due or to become due under any of the Transaction Documents, and any and all expenses (including reasonable counsel fees and expenses) reasonably incurred by the Buyers or the Collateral Agent in enforcing any rights under this Guaranty (such obligations, to the extent not paid by the Company, being the “Guaranteed Obligations”) and (b) the punctual and faithful performance, keeping, observance and fulfillment by the Company of all of the agreements, conditions, covenants and obligations of the Company contained in the Securities Purchase Agreement, the Notes and the other Transaction Documents. Without limiting the generality of the foregoing, each Guarantor’s liability hereunder shall extend to all amounts that constitute part of the Guaranteed Obligations and would be owed by the Company to the Buyers under the Securities Purchase Agreement and the Notes but for the fact that they are unenforceable or not allowable due to the existence of an Insolvency Proceeding involving any Guarantor or the Company (each, a “Transaction Party”).

 

 

3. Guaranty Absolute; Continuing Guaranty; Assignments.

 

(a) The Guarantors, jointly and severally, guaranty that the Guaranteed Obligations will be paid strictly in accordance with the terms of the Transaction Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Buyers with respect thereto. The obligations of each Guarantor under this Guaranty are independent of the Guaranteed Obligations, and a separate action or actions may be brought and prosecuted against any Guarantor to enforce such obligations, irrespective of whether any action is brought against any Transaction Party or whether any Transaction Party is joined in any such action or actions. The liability of any Guarantor under this Guaranty shall be irrevocable, absolute and unconditional irrespective of, and each Guarantor hereby irrevocably waives, to the extent permitted by law, any defenses it may now or hereafter have in any way relating to, any or all of the following:

 

(i) any lack of validity or enforceability of any Transaction Document or any agreement or instrument relating thereto;

 

(ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations, or any other amendment or waiver of or any consent to departure from any Transaction Document, including, without limitation, any increase in the Guaranteed Obligations resulting from the extension of additional credit to any Transaction Party or otherwise;

 

(iii) any taking, exchange, release or non-perfection of any collateral with respect to the Guaranteed Obligations, or any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Guaranteed Obligations; or

 

(iv) any change, restructuring or termination of the corporate, limited liability company or partnership structure or existence of any Transaction Party.

 

 

This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by any Buyer or any other Person upon the insolvency, bankruptcy or reorganization of any Transaction Party or otherwise, all as though such payment had not been made.

 

(b) This Guaranty is a continuing guaranty and shall (i) remain in full force and effect until the complete conversion of all of the Company’s obligations under the Notes to equity securities of the Company and/or indefeasible payment in full in cash of all obligations under the Notes (together with any matured indemnification obligations as of the date of such conversion and/or payment, but excluding any inchoate or unmatured contingent indemnification obligations) and payment of all other amounts payable under this Guaranty (excluding any inchoate or unmatured contingent indemnification obligations) and (ii) be binding upon each Guarantor and its respective successors and assigns. This Guaranty shall inure to the benefit of and be enforceable by the Buyers and their respective successors, and permitted pledgees, transferees and assigns. Without limiting the generality of the foregoing sentence, any Buyer may pledge, assign or otherwise transfer all or any portion of its rights and obligations under and subject to the terms of any Transaction Document to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Buyer herein or otherwise, in each case as provided in the Securities Purchase Agreement or such Transaction Document. Notwithstanding the foregoing and for the avoidance of doubt, this Guaranty will expire and each Guarantor will be released from its obligation hereunder upon the complete conversion of all of the Company’s obligations under the Notes to equity securities of the Company and/or indefeasible payment in full in cash of all obligations under the Notes (together with any matured indemnification obligations as of the date of such conversion and/or payment, but excluding any inchoate or unmatured contingent indemnification obligations) and payment of all other amounts payable under this Guaranty (excluding any inchoate or unmatured contingent indemnification obligations).

 

4. Waivers. To the extent permitted by applicable law, each Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and this Guaranty and any requirement that the Buyers or the Collateral Agent exhaust any right or take any action against any Transaction Party or any other Person or any Collateral (as defined in the Security Agreement). Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated herein and that the waiver set forth in this Section 4 is knowingly made in contemplation of such benefits. The Guarantors hereby waive any right to revoke this Guaranty, and acknowledge that this Guaranty is continuing in nature and applies to all Guaranteed Obligations, whether existing now or in the future.

 

5. Subrogation. No Guarantor may exercise any rights that it may now or hereafter acquire against any Transaction Party or any other guarantor that arise from the existence, payment, performance or enforcement of any Guarantor’s obligations under this Guaranty, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of the Buyers or the Collateral Agent against any Transaction Party or any other guarantor or any Collateral (as defined in the Security Agreement), whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from any Transaction Party or any other guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security solely on account of such claim, remedy or right, unless and until the complete conversion of all of the Company’s obligations under the Notes to equity securities of the Company and/or indefeasible payment in full in cash of all obligations under the Notes (together with any matured indemnification obligations as of the date of such conversion and/or payment, but excluding any inchoate or unmatured contingent indemnification obligations) and payment of all other amounts payable under this Guaranty (excluding any inchoate or unmatured contingent indemnification obligations). If any amount shall be paid to a Guarantor in violation of the immediately preceding sentence at any time prior to the later of the payment in full in cash of the Guaranteed Obligations and all other amounts payable under this Guaranty, such amount shall be held in trust for the benefit of the Buyers and shall forthwith be paid ratably to the Buyers to be credited and applied to the Guaranteed Obligations and all other amounts payable under this Guaranty, whether matured or unmatured, in accordance with the terms of the Transaction Documents, or to be held as collateral for any Guaranteed Obligations or other amounts payable under this Guaranty thereafter arising. If (a) any Guarantor shall make payment to the Buyers of all or any part of the Guaranteed Obligations, and (b) the Buyers receive the complete conversion of all of the Company’s obligations under the Notes to equity securities of the Company and/or indefeasible payment in full in cash of all obligations under the Notes (together with any matured indemnification obligations as of the date of such conversion and/or payment, but excluding any inchoate or unmatured contingent indemnification obligations) and payment of all other amounts payable under this Guaranty (excluding any inchoate or unmatured contingent indemnification obligations), the Buyers will, at such Guarantor’s request and expense, execute and deliver to such Guarantor appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to such Guarantor of an interest in the Guaranteed Obligations resulting from such payment by such Guarantor.

 

 

6. Representations, Warranties and Covenants.

 

(a) Each Guarantor hereby represents and warrants as of the date first written above as follows:

 

(i) Each Guarantor (A) is a corporation, limited liability company or limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization as set forth on the signature pages hereto, (B) has all requisite corporate, limited liability company or limited partnership power and authority to conduct its business as now conducted and as presently contemplated and to execute and deliver this Guaranty and each other Transaction Document to which the Guarantor is a party, and to consummate the transactions contemplated hereby and thereby and (C) is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or in which the transaction of its business makes such qualification necessary except where the failure to be so qualified would not result in a Material Adverse Effect.

 

(ii) The execution, delivery and performance by each Guarantor of this Guaranty and each other Transaction Document to which such Guarantor is a party (A) have been duly authorized by all necessary corporate, limited liability company or limited partnership action, (B) do not and will not contravene its charter or by-laws, its limited liability company or operating agreement or its certificate of partnership or partnership agreement, as applicable, or any applicable law or any contractual restriction binding on the Guarantor or its properties do not and will not result in or require the creation of any lien (other than pursuant to any Transaction Document) upon or with respect to any of its properties, and (C) do not and will not result in any default, noncompliance, suspension, revocation, impairment, forfeiture or nonrenewal of any material permit, license, authorization or approval applicable to it or its operations or any of its properties.

 

 

(iii) No authorization or approval or other action by, and no notice to or filing with, any governmental authority is required in connection with the due execution, delivery and performance by the Guarantor of this Guaranty or any of the other Transaction Documents to which the Guarantor is a party (other than expressly provided for in any of the Transaction Documents).

 

(iv) Each of this Guaranty and the other Transaction Documents to which the Guarantor is or will be a party, when delivered, will be, a legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, suretyship or other similar laws and equitable principles (regardless of whether enforcement is sought in equity or at law).

 

(v) There is no pending or, to the best knowledge of the Guarantor, threatened action, suit or proceeding against the Guarantor or to which any of the properties of the Guarantor is subject, before any court or other governmental authority or any arbitrator that (A) if adversely determined, could reasonably be expected to have a Material Adverse Effect or (B) relates to this Guaranty or any of the other Transaction Documents to which the Guarantor is a party or any transaction contemplated hereby or thereby.

 

(vi) The Guarantor (A) has read and understands the terms and conditions of the Securities Purchase Agreement, the Notes and the other Transaction Documents, and (B) now has and will continue to have independent means of obtaining information concerning the affairs, financial condition and business of the Company and the other Transaction Parties, and has no need of, or right to obtain from the Collateral Agent or any Buyer, any credit or other information concerning the affairs, financial condition or business of the Company or the other Transaction Parties that may come under the control of the Collateral Agent or any Buyer.

 

(b) The Guarantor covenants and agrees that until the complete conversion of all of the Company’s obligations under the Notes to equity securities of the Company and/or indefeasible payment in full in cash of all obligations under the Notes (together with any matured indemnification obligations as of the date of such conversion and/or payment, but excluding any inchoate or unmatured contingent indemnification obligations) and payment of all other amounts payable under this Guaranty (excluding any inchoate or unmatured contingent indemnification obligations), it will comply with each of the covenants (except to the extent applicable only to a public company) which are set forth in Section 4 of the Securities Purchase Agreement as if the Guarantor were a party thereto.

 

 

7. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, the Collateral Agent and any Buyer may, and is hereby authorized to, at any time and from time to time, without notice to the Guarantors (any such notice being expressly waived by each Guarantor) and to the fullest extent permitted by law, set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by any Buyer to or for the credit or the account of any Guarantor against any and all obligations of the Guarantors now or hereafter existing under this Guaranty or any other Transaction Document, irrespective of whether or not Collateral Agent or any Buyer shall have made any demand under this Guaranty or any other Transaction Document and although such obligations may be contingent or unmatured. Collateral Agent and each Buyer agrees to notify the relevant Guarantor promptly after any such set-off and application made by such Buyer, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Collateral Agent or any Buyer under this Section 7 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Collateral Agent or such Buyer may have under this Guaranty or any other Transaction Document in law or otherwise.

 

8. Notices, Etc. All notices and other communications provided for hereunder shall be in writing and shall be mailed (by overnight mail or by certified mail, postage prepaid and return receipt requested), telecopied, sent via electronic mail, sent via overnight courier or delivered, if to any Guarantor, to the address for such Guarantor set forth on the signature page hereto, or if to any Buyer, to it at its respective address set forth in the Securities Purchase Agreement; or as to any Person at such other address as shall be designated by such Person in a written notice to such other Person complying as to delivery with the terms of this Section 8. All such notices and other communications shall be effective (i) if mailed (by certified mail, postage prepaid and return receipt requested), when received or three Business Days after deposited in the mails, whichever occurs first; (ii) if telecopied, when transmitted and confirmation is received, provided it is transmitted during regular business hours on a Business Day and, if not, on the next Business Day; (iii) if sent via electronic mail, when transmitted (provided that such sent electronic mail is kept on file (whether electronically or otherwise) by the sending party and the sending party does not immediately receive an automatically generated message from the recipient’s electronic mail server that such electronic mail could not be delivered to such recipient), (d) if sent via overnight courier service, one Business Day after deposit with an overnight courier service, or (iii) if delivered by hand, upon delivery, provided it is delivered during regular business hours on a Business Day and, if not, on the next Business Day.

 

9. CONSENT TO JURISDICTION; SERVICE OF PROCESS AND VENUE. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY OR ANY OTHER TRANSACTION DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK IN THE COUNTY OF NEW YORK OR OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH GUARANTOR HEREBY IRREVOCABLY ACCEPTS IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE BUYERS TO SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST EACH GUARANTOR IN ANY OTHER JURISDICTION. ANY GUARANTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE JURISDICTION OR LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT ANY GUARANTOR HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, EACH GUARANTOR HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS GUARANTY AND THE OTHER TRANSACTION DOCUMENTS.

 

 

10. WAIVER OF JURY TRIAL, ETC. EACH GUARANTOR HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS GUARANTY OR THE OTHER TRANSACTION DOCUMENTS, OR UNDER ANY AMENDMENT, WAIVER, CONSENT, INSTRUMENT, DOCUMENT OR OTHER AGREEMENT DELIVERED OR WHICH IN THE FUTURE MAY BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH THIS GUARANTY OR THE OTHER TRANSACTION DOCUMENTS, AND AGREES THAT ANY SUCH ACTION, PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. EACH GUARANTOR CERTIFIES THAT NO OFFICER, REPRESENTATIVE, AGENT OR ATTORNEY OF ANY BUYER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT ANY BUYER WOULD NOT, IN THE EVENT OF ANY ACTION, PROCEEDING OR COUNTERCLAIM, SEEK TO ENFORCE THE FOREGOING WAIVERS. EACH GUARANTOR HEREBY ACKNOWLEDGES THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BUYERS ENTERING INTO THE OTHER TRANSACTION DOCUMENTS.

 

11. Taxes.

 

(a) All payments made by any Guarantor hereunder or under any other Transaction Document shall be made in accordance with the terms of the respective Transaction Document and shall be made without set-off, counterclaim, deduction or other defense. All such payments shall be made free and clear of and without deduction for any present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding taxes imposed on the net income of any Buyer by the jurisdiction in which such Buyer is organized or where it has its principal lending office (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities, collectively or individually, “Taxes”). If any Guarantor shall be required to deduct or to withhold any Taxes from or in respect of any amount payable hereunder or under any other Transaction Document:

 

(i) the amount so payable shall be increased to the extent necessary so that after making all required deductions and withholdings (including Taxes on amounts payable to any Buyer pursuant to this sentence) each Buyer receives an amount equal to the sum it would have received had no such deduction or withholding been made,

 

 

(ii) such Guarantor shall make such deduction or withholding,

 

(iii) such Guarantor shall pay the full amount deducted or withheld to the relevant taxation authority in accordance with applicable law, and

 

(iv) as promptly as possible thereafter, such Guarantor shall send the Buyers an official receipt (or, if an official receipt is not available, such other documentation as shall be satisfactory to the Buyers, as the case may be) showing payment.  In addition, each Guarantor agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or from the execution, delivery, registration or enforcement of, or otherwise with respect to, this Agreement or any other Transaction Document (collectively, “Other Taxes”).

 

(b) Each Guarantor hereby indemnifies and agrees to hold the Collateral Agent and each Buyer (each an “Indemnified Party”) harmless from and against Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 11) paid by any Indemnified Party  as a result of any payment made hereunder or from the execution, delivery, registration or enforcement of, or otherwise with respect to, this Agreement or any other Transaction Document, and any liability (including penalties, interest and expenses for nonpayment, late payment or otherwise) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted.  This indemnification shall be paid within 30 days from the date on which such Buyer makes written demand therefor, which demand shall identify the nature and amount of such Taxes or Other Taxes.

 

(c) If any Guarantor fails to perform any of its obligations under this Section 11, such Guarantor shall indemnify the Collateral Agent and each Buyer for any taxes, interest or penalties that may become payable as a result of any such failure. The obligations of the Guarantors under this Section 11 shall survive the termination of this Guaranty and the payment of the Obligations and all other amounts payable hereunder.

 

12. Miscellaneous.

 

(a) Each Guarantor will make each payment hereunder in lawful money of the United States of America and in immediately available funds to each Buyer, at such address specified by such Buyer from time to time by notice to the Guarantors.

 

(b) Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Required Holders (as defined in the Securities Purchase Agreement). Any amendment or waiver effected in accordance with this Section 12 shall be binding upon each Buyer and holder of Securities and the Company.

 

 

(c) No failure on the part of the Collateral Agent or any Buyer to exercise, and no delay in exercising, any right hereunder or under any other Transaction Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder or under any Transaction Document preclude any other or further exercise thereof or the exercise of any other right. The rights and remedies of the Collateral Agent and the Buyers provided herein and in the other Transaction Documents are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law. The rights of the Collateral Agent and the Buyers under any Transaction Document against any party thereto are not conditional or contingent on any attempt by the Collateral Agent or any Buyer to exercise any of their respective rights under any other Transaction Document against such party or against any other Person.

 

(d) Any provision of this Guaranty that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

 

(e) This Guaranty shall (i) be binding on each Guarantor and its respective successors and assigns, and (ii) inure, together with all rights and remedies of the Collateral Agent and the Buyers hereunder, to the benefit of the Collateral Agent and the Buyers and their respective successors, transferees and assigns. Without limiting the generality of clause (ii) of the immediately preceding sentence, the Collateral Agent and any Buyer may assign or otherwise transfer its rights and obligations under the Securities Purchase Agreement or any other Transaction Document to any other Person in accordance with the terms thereof, and such other Person shall thereupon become vested with all of the benefits in respect thereof granted to the Collateral Agent or such Buyer, as the case may be, herein or otherwise. None of the rights or obligations of any Guarantor hereunder may be assigned or otherwise transferred without the prior written consent of each Buyer.

 

(f) This Guaranty reflects the entire understanding of the transaction contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, entered into before the date hereof.

 

(g) Section headings herein are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.

 

(h) This Guaranty may be executed by each party hereto on a separate counterpart, each of which when so executed and delivered shall be an original, but all of which together shall constitute one agreement. Delivery of an executed counterpart by facsimile or other method of electronic transmission shall be equally effective as delivery of an original executed counterpart.

 

(i) This Guaranty shall be governed by and construed in accordance with the law of the State of New York applicable to contracts made and to be performed therein without regard to conflict of law principles.

 

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

 

 

IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be executed by its respective duly authorized officer, as of the date first above written.

 

	ENER-CORE POWER, INC., a Delaware corporation
	By:
	Name:	Alain J. Castro
	Title:	Chief Executive Officer
	Address for Notices:
	9400 Toledo Way
	Irvine, California 92618
	Attention: Mr. Domonic J. Carney
	Facsimile: (949) 616-3399
	Email: ***@***

 

 

EXHIBIT E

 

Form of Security Amendment Agreement

 

[Omitted]

 

 

EXHIBIT F

 

Form of Registration Rights Agreement

 

[Omitted]

 

 

EXHIBIT G

 

Form of Investor Questionnaire

 

 

Ener-Core, Inc.

ACCREDITED INVESTOR QUESTIONNAIRE 

PLEASE READ CAREFULLY

 

This investor questionnaire is being submitted by the undersigned to Ener-Core, Inc., a Delaware corporation (“Issuer”) in order to determine whether the undersigned qualifies as an “accredited investor” under Regulation D promulgated under the Securities Act of 1933 (the “Securities Act”). The undersigned understands that Issuer will rely upon the accuracy and completeness of the information provided in this questionnaire in determining whether certain issuances of securities of Issuer may qualify for an exemption from the registration requirements of the Securities Act. Please return your completed questionnaire and executed signature page hereto with your signature page to the Securities Purchase Agreement.

 

I. Accredited Investor: The undersigned hereby represents and warrants that the undersigned is an “accredited investor” under Regulation D promulgated under the Securities Act. o (please check box if you are an accredited investor)

 

The undersigned is an “accredited investor” for one of the following reasons (check whichever applies):

 

Individuals. If the undersigned is a natural person (ignoring any revocable grantor trust), then the undersigned hereby represents and warrants as follows (check whichever applies):

 

☐

The undersigned is a director, executive officer, or general partner of the Issuer, or a director, executive officer, or general partner of a general partner of the Issuer.

 

☐

The undersigned has a net worth (either individually or jointly with the undersigned’s spouse) in excess of $1,000,000 (see calculation guidance below).

 

☐

The undersigned (i) either (A) had an individual annual income (exclusive of spousal income) in excess of $200,000 or (B) had a joint income with the undersigned’s spouse in excess of $300,000 in each of the two preceding tax years, and (ii) reasonably expects to have the same income level (individually or jointly, as applicable) in the current tax year (see calculation guidance below).

 

The term “net worth” means the excess of total assets over total liabilities. In calculating “net worth,” the Investor must exclude the value of the Investor’s principal residence as an asset. The value of the principal residence should be calculated as the fair market value of the residence, less any debt secured by such residence. To the extent that the amount of debt secured by the primary residence exceeds the fair market value of such residence, this excess amount of debt should be considered a liability for purposes of calculating net worth. The term “individual income” means adjusted gross income, as reported for federal income tax purposes, less any income attributable to a spouse or property owned by a spouse, increased by the amount (if not attributable to a spouse or property owned by a spouse) of any tax-exempt shares received, losses claimed as a partner in an entity treated as a partnership for tax purposes, any deduction claimed for depletion, any deduction for long term capital gains. The term “joint income” is defined in the same manner as “individual income,” except that income attributable to a spouse or property owned by a spouse is included.

 

 

Trusts. If the undersigned is a trust, then the undersigned hereby represents and warrants that the undersigned is (check whichever applies):

 

	☐	A revocable trust (such as a living trust) or a trust formed for the purpose of acquiring the securities and for which, in either case, each grantor is an accredited investor. Indicate each grantor and the category that describes how each such grantor itself is qualified as an “accredited investor”:

 

☐

A trust which has total assets in excess of $5,000,000, not formed for the specific purpose of acquiring securities, whose purchase is directed by a “sophisticated person” within the meaning of Regulation D who has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the proposed investment.

 

Entities. If the undersigned is a corporation, partnership, limited liability company or trust, then the undersigned hereby represents and warrants that the undersigned is (check whichever applies):

 

☐

an employee benefit plan within the meaning of the Employment Retirement Income Security Act of 1974, as amended (“ERISA”), if either:

 

a.

the investment decision is made by a plan fiduciary, as defined in ERISA § 3(21), that is a bank, savings and loan association, insurance company or registered investment adviser,

 

b.

an employee benefit plan with total assets in excess of $5,000,000, or

 

c.

a self-directed plan with investment decisions made solely by persons who are accredited investors as defined in Rule 501(a) promulgated under the Securities Act.

 

☐

one of the following entities, not formed for the specific purpose of acquiring securities and having total assets in excess of $5,000,000:

 

a.

an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended;

 

b.

a corporation, partnership, or limited liability company; or

 

c.

a Massachusetts or similar business trust.

 

☐

a bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act, whether acting in its individual or a fiduciary capacity.

 

 

☐

a broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended.

 

☐

an insurance company as defined in Section 2(13) of the Securities Act.

 

☐

an investment company registered under the Investment Company Act of 1940 (the “Investment Company Act”), or a business development company as defined in Section 2(a)(48) of the Investment Company Act.

 

☐

a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958.

 

☐

a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions for the benefit of its employees with total assets in excess of $5,000,000.

 

☐

a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940, as amended.

 

	☐	An entity in which all of the equity owners are “accredited investors” under any of the above categories (including the categories for individuals and trusts listed in the preceding Sections 1(a) and 1(b)). If the undersigned belongs to this investor category only, list the equity owners of the undersigned, and the “accredited investor” category which each such equity owner satisfies:

 

If the Issuer needs to verify my status as an accredited investor or has any questions with respect to such status, I hereby consent to request that the Issuer contact:

 

Name:
Firm name:
Email:
Telephone:
Address:

Relationship to accredited investor:

  

II. Not an Accredited Investor: The undersigned hereby represents and warrants that the undersigned does NOT meet one of the foregoing tests and does not qualify as an “accredited investor” under Regulation D promulgated under the Securities Act. o (please check box if you are not an accredited investor)

 

Signature Page Follows

 

 

The undersigned has/have executed this Accredited Investor Questionnaire effective as of the date set forth below.

 

	FOR INDIVIDUALS
	By:
		Signature
	Name:
	Date:
	By:
		Signature
	Name:
	Date:

  

 

NOTE: IF YOU ARE PURCHASING SHARES WITH YOUR SPOUSE, YOU MUST BOTH SIGN THIS SIGNATURE PAGE.

IF YOU ARE PURCHASING SHARES WITH ANOTHER PERSON NOT YOUR SPOUSE, YOU MUST EACH FILL OUT A SEPARATE QUESTIONNAIRE.

 

	FOR ENTITIES
	Name of Entity (i.e., corporation, partnership, trust, LLC etc.)
	By:
		Signature
	Name:
	Title:
	Date:

 

 

EXHIBIT H

 

Form of Irrevocable Transfer Agent Instructions

 

 

TRANSFER AGENT INSTRUCTIONS

 

ENER-CORE, INC.

 

November 23, 2016

 

VStock Transfer, LLC

18 Lafayette Place

Woodmere, New York 11598
Telephone: (212) 828-8436

Facsimile: (646) 536-3179

Attention: Yoel Goldfeder

E-mail: ***@***

 

Ladies and Gentlemen:

 

Reference is made to that certain Securities Purchase Agreement, dated as of November 23, 2016 (the “Agreement”), by and among Ener-Core, Inc., a Delaware corporation (the “Company”), the investors named on each Buyer’s signature page to the Agreement and the Schedule of Buyers attached thereto and the investors, if any, party to a joinder agreement with respect to the Agreement (collectively, the “Holders”), pursuant to which the Company is issuing to the Holders: (i) convertible senior secured promissory notes (the “Notes”), which Notes shall be convertible into shares of common stock of the Company, par value $0.0001 per share (the “Common Stock”) and (ii) warrants (the “Warrants”), which are exercisable to purchase shares of Common Stock.

 

This letter shall serve as our irrevocable authorization and direction to you (provided that you are the transfer agent of the Company at such time):

 

(i)

to issue shares of Common Stock upon conversion of the Notes (the “Conversion Shares”) to or upon the order of a Holder from time to time upon delivery to you of a properly completed and duly executed Conversion Notice, in the form attached hereto as Exhibit I, which has been acknowledged by the Company as indicated by the signature of a duly authorized officer of the Company thereon; and

 

(ii)

to issue shares of Common Stock upon exercise of the Warrants (the “Warrant Shares”) to or upon the order of a Holder from time to time upon delivery to you of a properly completed and duly executed Exercise Notice, in the form attached hereto as Exhibit II, which has been acknowledged by the Company as indicated by the signature of a duly authorized officer of the Company thereon.

 

You acknowledge and agree that so long as you have previously received (a) a written legal opinion from the Company’s legal counsel that either (i) a registration statement covering resales of the Conversion Shares and/or Warrant Shares has been declared effective by the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), or (ii) sales of the Conversion Shares and/or the Warrant Shares may be made in conformity with Rule 144 under the Securities Act (“Rule 144”) and (b) if applicable, a copy of such registration statement, then within three (3) business days of your receipt of a notice of transfer, Conversion Notice or Exercise Notice, you shall issue the certificates representing the Conversion Shares and/or the Warrant Shares, as applicable, registered in the names of such transferees, and such certificates shall not bear any legend restricting transfer of the Conversion Shares and/or the Warrant Shares thereby and should not be subject to any stop-transfer restriction; provided, however, that if such Conversion Shares and Warrant Shares are not registered for resale under the Securities Act or able to be sold under Rule 144, then the certificates for such Conversion Shares and/or Warrant Shares shall bear the following legend:

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN FORM AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

[Remainder of page left blank intentionally. Signatures follow.]

 

 

Please execute this letter in the space indicated to acknowledge your agreement to act in accordance with these instructions. Should you have any questions concerning this matter, please contact me at ###-###-####.

 

	Very truly yours,
	ENER-CORE, INC.
	By:
	Name:	Domonic J. Carney
	Title:	Chief Financial Officer

 

THE FOREGOING INSTRUCTIONS ARE ACKNOWLEDGED AND AGREED TO
this ___ day of November, 2016
VSTOCK TRANSFER, LLC
By:
Name:	Yoel Goldfeder
Title:	Chief Executive Officer

 

Enclosures

 

 

 

 

 

Signature Page to Transfer Agent Instructions

 

 

EXHIBIT I

 

CONVERSION NOTICE

 

ENER-CORE, inc.

 

Reference is made to the convertible unsecured promissory note (the “Note”) issued to the undersigned by Ener-Core, Inc., a Delaware corporation (the “Company”). In accordance with and pursuant to the Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of the Note indicated below into shares of Common Stock par value $0.0001 per share (the “Common Stock”) of the Company, as of the date specified below.

 

Date of Conversion:
Aggregate Conversion Amount to be converted:

 

Please confirm the following information:

 

Conversion Price:
Number of shares of Common Stock to be issued:

 

Please issue the Common Stock into which the Note is being converted in the following name and to the following address:

 

Issue to:
Facsimile Number and E-mail Address:
Authorization:
By:
Title:
Dated:

 

Account Number (if book entry transfer):
Transaction Code Number (if book entry transfer):
Installment Amounts to be reduced and amount of reduction:

  

 

Exhibit I

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice and hereby directs VStock Transfer, LLC to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated November 23, 2016 from the Company and acknowledged and agreed to by VStock Transfer, LLC.

 

	ENER-CORE, INC.
	By:
	Name:
	Title:

 

 

EXHIBIT II

 

EXERCISE NOTICE

 

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

 

ENER-CORE, inc.

  

The undersigned holder hereby exercises the right to purchase _________________ of the shares of Common Stock (“Warrant Shares”) of Ener-Core, Inc., a Delaware corporation (the “Company”), evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.

 

1.       Form of Exercise Price. The Holder intends that payment of the Exercise Price shall be made as:

 

____________ a “Cash Exercise” with respect to _________________ Warrant Shares; and/or

 

____________ a “Cashless Exercise” with respect to _______________ Warrant Shares.

 

2.       Payment of Exercise Price. In the event that the holder has elected a Cash Exercise with respect to some or all of the Warrant Shares to be issued pursuant hereto, the holder shall pay the Aggregate Exercise Price in the sum of $___________________ to the Company in accordance with the terms of the Warrant.

 

3.       Delivery of Warrant Shares. The Company shall deliver to the holder __________ Warrant Shares in accordance with the terms of the Warrant.

 

Date: _______________ __, ______

 

Name of Registered Holder
By:
	Name:
	Title:

 

 

 ACKNOWLEDGMENT

 

The Company hereby acknowledges this Exercise Notice and hereby directs VStock Transfer, LLC to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated November 23, 2016 from the Company and acknowledged and agreed to by VStock Transfer, LLC.

 

	ENER-CORE, INC.
	By:
	Name:
	Title:

 

 

 

 

EXHIBIT I

 

Form of Secretary’s Certificate

 

 

 

 

SECRETARY’S CERTIFICATE

 

Pursuant to Section 7(vi) of the Securities Purchase Agreement, dated as of November 23, 2016 (the “Purchase Agreement”), by and among Ener-Core, Inc., a Delaware corporation (the “Company”), the investors set forth on the Schedule of Buyers attached to the Purchase Agreement and the investors, if any, party to a joinder agreement with respect to the Purchase Agreement (each, a “Buyer” and collectively, the “Buyers”), Domonic J. Carney, the Secretary of the Company, hereby certifies, in his capacity as an officer of the Company and as an officer of Ener-Core Power, Inc., a Delaware corporation (the “Subsidiary”), and not individually, on behalf of the Company and the Subsidiary, respectively, that:

 

1. Attached hereto as Exhibit A are true, correct and complete copies of resolutions duly adopted by the Board of Directors (the “Board”) of the Company and the Board of Directors (the “Subsidiary Board”) of the Subsidiary (collectively, the “Board Resolutions”), approving the matters contemplated by Section 3(b) of the Purchase Agreement. Such resolutions have not been amended, modified, supplemented, annulled or revoked and are in full force and effect in the form adopted, and are the only resolutions adopted by the Board and the Subsidiary board or by any committee of or designated by the Board and Subsidiary Board relating to (i) the transactions contemplated by the Board Resolutions, and (ii) the transaction agreements identified in the Board Resolutions. All members of the Board and Subsidiary Board were, at the time of their approval of the resolutions attached hereto as Exhibit A, respectively, and have been at all times thereafter, duly elected, qualified, and acting directors of the Company and the Subsidiary, respectively.

 

2. Attached hereto as Exhibit B are true, correct and complete copies of the Certificate of Incorporation of the Company, as currently in effect (the “Certificate”), and the Certificate of Incorporation of the Subsidiary, as currently in effect (the “Subsidiary Certificate”). The Certificate has not been amended subsequent to September 3, 2015, and no action has been taken by the Company, its stockholders, directors, or officers to authorize or effect any further amendment or modification to such Certificate, and the Subsidiary Certificate has not been amended subsequent to June 28, 2013, and no action has been taken by the Subsidiary, its stockholders, directors, or officers to authorize or effect any further amendment or modification to such Subsidiary Certificate.

 

3. Attached hereto as Exhibit C are true, correct and complete copies of the Bylaws of the Company, as currently in effect (the “Bylaws”), and the Bylaws of the Subsidiary, as currently in effect (the “Subsidiary Bylaws”). The Bylaws have not been amended subsequent to September 3, 2015, and no action has been taken by the Company, its stockholders, directors, or officers to authorize or effect any further amendment or modification to such Bylaws, and the Subsidiary Bylaws have not been amended subsequent to August 1, 2012, and no action has been taken by the Subsidiary, its stockholders, directors, or officers to authorize or effect any further amendment or modification to such Subsidiary Bylaws.

 

4. Each person listed below has been duly elected or appointed to the position(s) indicated opposite his name and is duly authorized to sign the Securities Purchase Agreement and each of the Transaction Documents on behalf of the Company, and the signature appearing opposite such person’s name below is such person’s genuine signature.

 

Name		Position		Signature
Alain J. Castro		Chief Executive Officer

 

5. Each person listed below has been duly elected or appointed to the position(s) indicated opposite his name and is duly authorized to sign each of the Transaction Documents of which the Subsidiary is a party on behalf of the Subsidiary, and the signature appearing opposite such person’s name below is such person’s genuine signature.

 

Name		Position		Signature
Alain J. Castro		Chief Executive Officer

 

Capitalized terms contained herein and not otherwise defined shall be interpreted in accordance with their meaning in the Purchase Agreement.

 

 

[Signature Page Follows]

 

 

IN WITNESS WHEREOF, the undersigned has signed his name to this Secretary’s Certificate this November __, 2016.

 

	By:
	Name:	Domonic J. Carney
	Title:	Secretary

 

I, Alain Castro, Chief Executive Officer, hereby certify that Domonic J. Carney is the duly elected, qualified and acting Secretary of the Company and that the signature set forth above is his true signature.

 

	By:
	Name:	Alain Castro
	Title:	Chief Executive Officer

 

 

EXHIBIT J

 

Form of Officer’s Certificate

 

 

 

COMPLIANCE CERTIFICATE

 

Pursuant to Section 7(vii) of the Securities Purchase Agreement, dated as of November 23, 2016 (the “Purchase Agreement”), by and among Ener-Core, Inc., a Delaware corporation (the “Company”), the investors set forth on the Schedule of Buyers attached to the Purchase Agreement and the investors, if any, party to a joinder agreement with respect to the Purchase Agreement (each, a “Buyer” and collectively, the “Buyers”), Alain J. Castro, the Chief Executive Officer of the Company, hereby certifies, in his capacity as an officer of the Company and not individually, on behalf of the Company and to the best of his knowledge after a reasonable investigation that:

 

1. The representations and warranties of the Company contained in Section 3 of the Purchase Agreement are true and correct in all material respects (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which shall be true and correct in all respects) as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date which shall be true and correct as of such specified date).

 

2. The Company has performed, satisfied and complied in all respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Closing Date.

 

Capitalized terms contained herein and not otherwise defined shall be interpreted in accordance with their meaning in the Purchase Agreement.

 

[Signature Page Follows]

 

 

IN WITNESS WHEREOF, the undersigned has signed his name to this Compliance Certificate this November __, 2016.

 

	By:
	Name:	Alain J. Castro
	Title:	Chief Executive Officer

 

 

EXHIBIT K-1

 

Form of September Subordination Agreement

 

[Omitted]

 

 

EXHIBIT K-2

 

Form of October Subordination Agreement

 

[Omitted]

 

 

DISCLOSURE SCHEDULES TO SECURITIES PURCHASE AGREEMENT

 

(Note: Capitalized terms used herein and not otherwise defined shall have the definitions ascribed to such terms in the Securities Purchase Agreement.)

 

Schedule 2.1(d)

(Information)

 

From May 18, 2015 until March 30, 2016, Erik Helenek, a Managing Director of the Placement Agent, served as a member of the Company’s Board of Directors. Mr. Helenek was paid an annual fee of $40,000 and on May 18, 2015, the Company issued Mr. Helenek an option to purchase 6,000 shares of Common Stock at an exercise price per share of $9.50, with 1/4 of the grant vesting on May 18, 2016 and 1/48 of the grant vesting ratably each month thereafter. No portion of the option granted was vested upon Mr. Helenek’s resignation. For additional information regarding Mr. Helenek’s departure, see Current Report on Form 8-K filed April 5, 2016 (EDGAR Link), incorporated by reference herein. Subject to final approval of the Board of Directors, and in exchange for his unpaid financial market advice and direction prior to his appointment as a director as well as his continued advice after his resignation, the Company intends to issue Mr. Helenek a warrant to purchase 1,500 shares of common stock at an exercise price of not less than $5.00, exercisable for three years from the date of Mr. Helenek’s resignation.

 

Schedule 3(a)

(Subsidiaries)

 

Ener-Core Power, Inc., a Delaware corporation

 

Schedule 3(j)

(SEC Documents; Financial Statements)

 

None.

 

Schedule 3(k)

(Absence of Certain Changes)

 

Since December 31, 2015, capital expenditures, individually or in the aggregate, in excess of $100,000:

 

●

In 2015, the Company had capitalized approximately $318,000 into fixed assets for payments made to Dresser-Rand in 2015 related to advance deposits and monthly lease payments for a leased turbine to be used in the Full Scale Acceptance Test (“FSAT”) unit. The Company had anticipated using that turbine after completion of testing and either selling or leasing the completed FSAT Powerstation. The turbine was returned to Dresser-Rand in August 2016 at which time it was determined that the leased turbine was not going to be incorporated into the finished Powerstation. We expect to recover some or all of the advance payments written off. However, due to uncertainty surrounding the amount and likelihood of the recovery of the advance payments, during the preparation of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2016, it was determined that the $318,000 capitalized in 2015 should be written off to expense. Any recovery will be accounted for prospectively as an expense reduction or an addition to fixed assets, or inventory, as appropriate, with a corresponding gain for the amount of the recovery. GAAP accounting precludes recording a contingent gain for this recovery based on information available as of November 10, 2016. The Company capitalized approximately $655,000 into fixed assets for additional expenditures and costs associated with the FSAT unit between January 1, 2015 and September 30, 2016.

 

 

Schedule 3(m)

(Regulatory Permits)

 

None.

 

Schedule 3(o)

(Sarbanes-Oxley Act)

 

None, other than as disclosed in the Form 10-K for the year ended December 31, 2015, as updated on Forms 10-Q for the quarterly periods ended March 31, 2016, June 30, 2016 and September 30, 2016, and as described in Schedule 3(aa) below.

 

Schedule 3(p)

(Transactions with Affiliates)

 

None.

 

Schedule 3(q)

(Equity Capitalization)

 

(ii)

Outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any shares of capital stock of the Company or any of its Subsidiaries.

 

See Schedule 2.1(d) disclosure.

 

Pursuant to the terms of that certain Securities Purchase Agreement (the “September Purchase Agreement”), dated as of September 1, 2016, by and among the Company, Longboard Capital Advisors LLC, in its capacity as agent for the investors in their capacity as unsecured creditors, and the investors listed on the Schedule of Buyers attached thereto (each, a “September Investor”), each September Investor is entitled to receive additional warrants (the “September Additional Warrants”) to purchase 50 shares of Common Stock for each $1,000 of principal amount of the convertible unsecured notes issued pursuant to such September Purchase Agreement at an exercise price of $4.00 per share on each of the 61st, 91st, 121st and 151st days after the closing of the sales pursuant to the September Purchase Agreement (each such date, an “Additional Warrant Date”), which occurred on September 1, 2016, but only in the event the Company has not consummated a further financing consisting of the issuance of Common Stock and warrants for aggregate gross proceeds of at least $3,000,000 prior to such respective Additional Warrant Date. On November 1, 2016, the Company issued September Additional Warrants to purchase an aggregate of 62,500 shares of Common Stock at an exercise price of $4.00 per share.

 

 

(iii)

Outstanding debt securities, notes, credit agreements, credit facilities or other agreements, documents or instruments evidencing Indebtedness of the Company or any of its Subsidiaries or by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any shares of capital stock of the Company or any of its Subsidiaries.

 

Subject to final approval of the Board of Directors, the Company has engaged MZ Consulting to provide investor relations services to the Company at a cost of $10,000 per month for the first three months, with a monthly rate review after three months of service, pursuant to the terms of a consulting agreement that provides that the Company may choose to satisfy its payment obligations thereunder by remitting to MZ a mix of cash and unregistered shares of Common Stock to satisfy the monthly payment.

 

(iv)

Financing statements securing obligations in any material amounts, either singly or in the aggregate, filed in connection with the Company or any of its Subsidiaries.

 

UCC Statements have been filed for the Company’s 2015 Notes and Backstop Security Support Agreement, dated November 2, 2015 (the “Backstop Security Agreement”), and may have been filed in conjunction with its capital lease obligations.

 

(v)

Other than pursuant to the Registration Rights Agreement, agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the 1933 Act.

 

Pursuant to the terms of the September Purchase Agreement, each September Investor has the right to request that the Company register (i) the shares issuable upon conversion of such September Investor’s convertible unsecured notes, (ii) the shares issuable upon exercise of the warrants purchased by such September Investor pursuant to the September Purchase Agreement and (iii) the shares issuable upon exercise of the Additional Warrants held by such September Investor on the earlier of (A) the conversion of at least fifty percent of the then outstanding (x) principal, (y) accrued and unpaid interest with respect to such principal and (y) accrued and unpaid late charges, if any, with respect to such principal and interest, under the then outstanding Senior Notes (as defined below), or (B) the consummation of a private offering of its securities resulting in gross proceeds, inclusive of proceeds received pursuant to the September Purchase Agreement, to the Company of at least $4,000,000.

 

Liabilities or obligations required to be disclosed in the SEC Documents but not so disclosed in the SEC Documents, other than those incurred in the ordinary course of the Company’s or any of its Subsidiary’s’ respective businesses and which, individually or in the aggregate, do not or would not have a Material Adverse Effect

 

See Schedule 3(k) disclosure.

 

 

Schedule 3(r)

(Indebtedness and Other Contracts)

 

Convertible Unsecured Notes payable consisted of the following as of September 30, 2016 (unaudited):

 

		Notes				Debt Discount				Offering Costs				Net Total
September 1, 2016		$	1,250,000			$	(553,000	)		$	(20,000	)		$	677,000
Amortization of debt discount and deferred financing costs			—				46,000				2,000				1,537,000
Ending balance—September 30, 2016			1,250,000				(507,000	)			(18,000	)			725,000
Less: Current Portion		$	(1,250,000	)		$	507,000			$	18,000			$	(725,000	)
Long Term Portion		$	—			$	—			$	—			$	—

  

On September 1, 2016, we entered into a securities purchase agreement and related note agreements and warrant agreements whereby we issued unsecured convertible promissory notes (the “Junior Notes”) and detachable five-year warrants to purchase an aggregate of 124,999 shares of the Company’s common stock at an exercise price of $4.00 per share (the “September 2016 Financing”). The Company received total gross proceeds of $1,250,000, less transaction expenses of $20,000 consisting of legal costs for net proceeds of $1,230,000. The Junior Notes bear interest at a rate of 12% per annum and mature on September 1, 2017, however such maturity date shall be concurrently extended with the consummation of the transactions contemplated by the current securities purchase agreement and the related amendments agreements for the Senior Notes (as defined below). In connection with the September 2016 Financing, on September 1, 2016, the Company and its wholly-owned subsidiary, Ener-Core Power, Inc. also entered into a Subordination and Intercreditor Agreement with the investors, an investor who has agreed to serve as subordinated agent, a senior lender with respect to a letter of credit for the benefit of the Company, and the collateral agent for certain senior noteholders.

 

The terms of the Junior Notes and the related warrants, including the related agreements, are described in the Company’s Current Report on Form 8-K, filed September 2, 2016 (EDGAR Link), incorporated by reference herein.

 

Leases Payable

 

Capital leases payable consisted of the following:

 

		December 31, 2015				December 31, 2014
Capital lease payable to De Lange Landon secured by forklift, 10.0% interest, due on October 1, 2018, monthly payment of $452.		$	13,000			$	17,000
Capital lease payable to Dell Computers secured by computer equipment, 15.09% interest, due on November 16, 2016, monthly payment of $592.			6,000				12,000
Capital lease payable to Dell Computers secured by computer equipment, 15.09% interest, due on December 15, 2016, monthly payment of $590.			6,000				12,000
Capital lease payable to Dell Computers secured by computer equipment, 15.09% interest, due on January 3, 2017, monthly payment of $405.			5,000				8,000
Capital lease payable to Dell Computers secured by computer equipment, 15.09% interest, due on January 3, 2017, monthly payment of $394.			10,000				—
Total capital leases			401,000				49,000

 

 

		September 30, 2016				December 31, 2015
		(unaudited)
Capital lease payable to De Lange Landon secured by forklift, 10.0% interest, due on October 1, 2018, monthly payment of $452.		$	10,000			$	13,000
Capital lease payable to Dell Computers secured by computer equipment, 15.09% interest, due on November 16, 2016, monthly payment of $592.			1,000				6,000
Capital lease payable to Dell Computers secured by computer equipment, 15.09% interest, due on December 15, 2016, monthly payment of $590.			2,000				6,000
Capital lease payable to Dell Computers secured by computer equipment, 15.09% interest, due on January 3, 2017, monthly payment of $405.			2,000				5,000
Capital lease payable to Dell Computers secured by computer equipment, 15.09% interest, due on January 3, 2017, monthly payment of $394.			6,000				10,000
Total capital leases			21,000				40,000

 

The Company is obligated to enter into a performance bond of $2,100,000 (the “Bond”) payable for the benefit of Dresser-Rand in order to secure performance on delivery of two Power Oxidizer units. The Bond is required within 45 days of the placement of an order for the Power Oxidizer units. On November 2, 2015, the Company satisfied this obligation by the creation of the Backstop Security Agreement. For detailed terms of the Backstop Security and related documents, see the Company’s Current Report on Form 8-K filed November 3, 2015 (EDGAR Link), incorporated by reference herein.

 

The Company leases certain assets, primarily computer equipment under agreements expiring in 2017. The total amount of the capital leases is approximately $21,000.

 

The Company leases office and research locations under operating leases which expires December 31, 2016 for the office location and is month-to-month for our research location. Combined monthly rent is $27,500.

 

The Company has entered into an operating lease to rent a Dresser-Rand turbine in order to build a prototype. The lease payments began with the commissioning of the turbine with the prototype system in Q1 2016 and consist of $9,000 per month payments. As described above in Schedule 3(k), in August 2016, the turbine was returned and the lease payments ended.

  

Senior Secured Notes

 

Convertible Secured Notes payable consisted of the following as of September 30, 2016 (unaudited):

 

		Notes				Debt Discount				Offering Costs				Net Total
Ending balance—December 31, 2015		$	5,000,000			$	(791,000	)		$	(99,000	)		$	4,110,000
Amortization of debt discount and deferred financing costs			—				2,186,000				74,000				2,260,000
Additional debt discount—March warrants			—				(1,497,000	)			—				(1,497,000	)
Additional debt discount—February warrants			—				(148,000	)			—				(148,000	)
Additional debt discount—warrant modification			—				(206,000	)			—				(206,000	)
Ending balance—September 30, 2016			5,000,000				(456,000	)			(25,000	)			4,519,000
Less: Current Portion		$	(5,000,000	)		$	456,000			$	25,000			$	(4,519,000	)
Long Term Portion		$	—			$	—			$	—			$	—

 

 

The Company has outstanding senior secured notes issued pursuant to (x) that certain Securities Purchase Agreement, dated as of April 22, 2015 by and among the Company and the investors listed on the signature pages thereto, as amended from time to time (the “April 2015 Notes”), and (y) that certain Securities Purchase Agreement, dated as of May 7, 2015 by and among the Company and the investors listed on the signature pages thereto, as amended from time to time (the “May 2015 Notes” and, together with the April 2015 Notes, the “Senior Notes”), which have been amended a number of times, and are being amended and restated concurrent with the closing of the current notes transaction. The terms of the Senior Notes, as amended to date (prior to the anticipated amendment and restatement), including the related securities purchase agreements, and the related pledge, guaranty and intercreditor agreements, are described in the following Current Reports on Form 8-K, incorporated by reference herein:

 

	●	Filed April 23, 2015 (EDGAR Link)
	●	Filed May 7, 2015 (EDGAR Link)
	●	Filed October 23, 2015 (EDGAR Link)
	●	Filed November 3, 2015 (EDGAR Link)
	●	Filed November 25, 2015 (EDGAR Link)
	●	Filed December 11, 2015 (EDGAR Link)
	●	Filed December 31, 2015 (EDGAR Link)
	●	Filed April 5, 2016 (EDGAR Link)
	●	Filed September 2, 2016 (EDGAR Link)
	●	Filed October 24, 2016 (EDGAR Link)

 

The Company and the holders of the Senior Notes intend to amend and restated the terms of such Senior Notes in connection with the execution of the Securities Purchase Agreement and the consummation of the transactions contemplated thereby.

 

The Company has approximately $2,000,000 in trade accounts payable as of November 14, 2016.

 

Schedule 3(s)

(Litigation)

 

On June 13, 2016, SAIL Venture Partners LLC, SAIL Capital Management LLC and all SAIL affiliates owning shares of the Company (collectively, “SAIL”) filed a Schedule 13D in which it set forth various complaints and demands with respect to the Company (EDGAR Link). The Company has disputed all such complaints and demands (EDGAR Link).

 

 

On September 23, 2016 AMTRA ENGINEERING B.V. filed a civil lawsuit (Case number 30-2016-00877078-CU-BC-CJC) in the Superior Court, County of Orange, California against Ener-Core Power, Inc. alleging breach of contract and breach of warranty. To date, the Company has not been legally served on this matter. The lawsuit is due to a billing dispute surrounding a contractor for the Attero 250Kw unit delivered in June 2014 to the Netherlands. The Company has accrued $50,000 for this disputed amount as of December 31, 2015 based solely on billings received. In the event of service, the Company believes it has a substantial defense including proper jurisdiction, will dispute all demands, and has a counter-claim against the contractor for $30,000.

 

Schedule 3(bb)

(Internal Accounting and Disclosure Controls)

 

As of December 31, 2015, as updated on September 30, 2016 the Company’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).

 

Based on such evaluation, the disclosure controls and procedures of the Company and the Subsidiary as of December 31, 2015 were ineffective at the reasonable assurance level due to the following material weaknesses in internal control over financial reporting:

 

1.

We do not have full and complete written documentation of our internal control policies and procedures, primarily for controls related to our inventory procurement and management. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

2.

We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

3.

For the year ending December 31, 2015, we did not have a sufficient, integrated purchasing and accounting system to allow for proper tracking, control and costing of our prototype KG2 Powerstation costs carried as a fixed asset and Powerstations currently under construction for sale and carried in inventory. Although we believe that our costing is accurate, based on additional review and procedures, to the extent we sell additional units, we will need to enhance our controls over our inventory systems. Management evaluated the impact of our failure to have adequate inventory accounting systems, coupled with the risk associated with costing our inventory, and the expected future activity for our inventory costing system and has concluded that the control deficiency that resulted represented a material weakness.

 

4.

For the year ending December 31, 2014 we did not have a majority of our Directors considered to be independent Directors. Until December 1, 2014, we had a majority of our Board of Directors considered to be not independent. Between December 1, 2014 and May 18, 2015 our Board was split evenly between independent Directors and non-independent Directors. Management evaluated the impact of our failure to have a fully independent Board of Directors, on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

 

5.

For the year ending December 31, 2014 and until July 2015, our Audit Committee consisted of the Chairman of the committee only. Until July 2015 we did not have a formal Compensation Committee or Nominating and Corporate Governance Committee. Management evaluated the impact of our failure to have an adequate Audit Committee and an internal audit function on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

6.

For the year ending December 31, 2015, management concluded that the Company’s management information systems and information technology internal control design was deficient because the potential for unauthorized access to certain information systems and software applications existed during 2015 in several departments, including corporate accounting. Additionally, certain key controls for maintaining the overall integrity of systems and data processing were not properly designed and operating effectively. These deficiencies increased the likelihood of potential material errors in our financial reporting. Management evaluated the impact of our failure to have adequate information technology controls, on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

Between January 1, 2016 and September 30, 2016 the Company’s management updated portions of control deficiency points #1 and #3 above to partially remediate the control deficiency and fully remediated control deficiencies 4, and 5. However, as of September 30, 2016, based on the control deficiencies remaining, the Company’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2016, the Company’s disclosure controls and procedures were ineffective at the reasonable assurance level. Such conclusion is due to the presence of material weaknesses in internal control over financial reporting. The Company’s management anticipates that its disclosure controls and procedures will remain ineffective until such material weaknesses are remediated.

 

Schedule 3(dd)

(Ranking of Notes)

 

The Senior Notes and the Notes issuable pursuant to this transaction shall rank pari passu. The rights granted pursuant to the Backstop Agreement, are subject to a subordination and intercreditor agreement, and the Junior Notes are subordinated to all such senior obligations pursuant to another subordination and intercreditor agreement.

 

 

Schedule 3(oo)

(No Disqualification Events)

 

Oppenheimer & Co. Inc. is serving as placement agent in connection with the current offering (the “Placement Agent”); pursuant to Rule 506(e), the Company discloses that:

 

1.

On February 26, 2010, the Placement Agent entered into a Consent Order with the Massachusetts Securities Division (the “Division”). The Order concerned alleged violations of the Massachusetts Uniform Securities Act with respect to Oppenheimer’s sale of auction rate securities. The order found that the Placement Agent violated Section 204(a)(2)(G) of Chapter 110A of Massachusetts General Laws. The Placement Agent was required to buy back illiquid auction rate securities from investors and pay hearing costs in an amount totaling $250,000.

 

2.

On July 9, 2007, the Placement Agent entered into a Consent Order with the Division. The Order alleged that the Placement Agent failed to supervise a registered representative who engaged in unlawful activities. The Division alleged that the Placement Agent made false and misleading filings to the Division during the course of its investigation of the matters addressed in the Order and accordingly violated Massachusetts General Laws, Chapter 110A, Section 404. The Placement Agent was required to pay a fine of $1,000,000, make restitution to the investor, cease and desist from further violations and retain an independent consultant.

 

3.

On January 27, 2015, the Placement Agent entered into an order with the SEC pursuant to which the Placement Agent was censured and agreed to (i) pay $10 million, comprised of $4,168,400 in disgorgement, $753,471 in prejudgment interest and $5,078,129 in civil penalties; (ii) cease and desist from committing or causing any violations of Sections 15(a) and 17(a) of the 1934 Act and Rules 17a-3 and 17a-8 adopted thereunder and of Section 5 of the 1933 Act; and (iii) retain an independent consultant over a five-year period to conduct a review of the Placement Agent’s policies and procedures as they relate to compliance with Section 5 of the 1933 Act, the Bank Secrecy Act, the Patriot Act, the Placement Agent’s AML program and the proper recognition of liabilities and expenses associated with foreign entities trading on behalf of customers and U.S. customers trading through foreign financial institutions. This settlement was based on the Placement Agent’s conduct relating to two separate customer accounts. The first account involved aiding and abetting a customer’s violation of the broker-dealer registration requirements under the 1934 Act, failure to file Suspicious Activity Reports to report potential misconduct by this customer and failure to properly report, withhold and recognize backup withholding taxes. The second account involved failure to respond to red flags and conduct an inquiry into whether a customer’s unregistered sales of penny stocks were exempt from 1933 Act registration requirements and failure to reasonably supervise with a view toward detecting and preventing violations of the registration provisions. The Placement Agent also agreed to pay an additional $10 million in civil penalties to settle a parallel action by the Treasury Department’s Financial Crimes Enforcement Network. The Placement Agent received an SEC order granting waiver of disqualification under Rule 506(d)(1)(ii) on January 27, 2015.

 

Schedule 4(s)

Pledges of Intellectual Property Rights

 

None, except as provided below:

 

●

Commercial License Agreement, dated November 14, 2014, between Ener-Core Power, Inc. and Dresser-Rand

 

●

Commercial and Manufacturing License Agreement, dated June 29, 2016, between Ener-Core Power, Inc. and Dresser-Rand Company

 

 

 

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