ITEM
1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
Securities
Purchase Agreement, Secured Promissory Notes and Warrants
Commencing
on June 8, 2016 (the “Initial Closing Date”) and June 9, 2016 (“Second Closing Date”), QuantumSphere,
Inc., a Nevada corporation (the “Registrant”), entered into a Securities Purchase Agreement (the “June 2016
Securities Purchase Agreement”) with certain accredited investors (collectively, the “Investors”) pursuant to
which the Registrant issued Six Hundred Seventy-Five Thousand Six Hundred and Twenty-Five Dollars ($675,625) of 5% Secured Promissory
Notes (the “June 2016 Notes”) with detachable common stock purchase warrants (the “June 2016 Warrants”).
The $675,625 of June 2016 Notes consists of (i) Five Hundred Thousand Dollars ($500,000) of cash investments; (ii) on the Second
Closing Date, an existing noteholder exchanged an outstanding promissory note and represented by the Note Exchange Agreement
attached hereto, in the original principal amount of Seventy-Five Thousand Dollars ($75,000) that was to mature on July 15, 2016,
(iii) legal fees of Twelve Thousand Five Hundred Dollars ($12,500) and (iv) original issue discount (“OID”) of $88,125,
which equates to 15% of $587,500.
The
June 2016 Notes shall bear simple interest at the rate of five percent (5%) per annum and will mature on the four (4) month anniversary
of issuance.. The default interest rate on the June 2016 Notes is fifteen percent (15%) per annum. All interest shall accrue and
be payable at maturity in the form of cash. The June 2016 Notes are not convertible, unless an event of default occurs thereunder.
In the event of a default, the June 2016 Notes, including all original principal, accrued interest and default interest, may be
converted into shares of common stock of the Registrant at the following conversion rate: 60% multiplied by the volume-weighted
average price (“VWAP”) of the common stock on the OTCQB (or if not reported, as calculated by the holder in good faith)
during the thirty (30) consecutive trading day period immediately preceding the trading day that the company receives a notice
of conversion from investor.
In
connection with the June 2016 Notes, the Investors shall also be issued June 2016 Warrants. The June 2016 Warrants shall consist
of one and one-half (1.5) shares of common stock, exercisable at the price per share of the Registrant’s next equity financing,
for every one dollar ($1.00) of original principal amount of June 2016 Notes.
Pursuant
to the terms of the Security Agreement entered into by and between the Registrant and the Investors (the “Security Agreement”),
the June 2016 Notes are secured by all of the assets of the Registrant, including, without limitation, all tangible and intangible
assets (collectively, the “Assets”). Pursuant to the terms of the Intercreditor & Collateral Agent Agreement entered
into by and between the Registrant and the Investors (the “Intercreditor Agreement”), the Investors received a security
interest (the “Security Interest”) in the Assets of the Registrant that is junior, or subordinated, to the senior
security interest of Novus Capital Group, LLC, a Delaware limited liability company (“Novus”), the Registrant’s
senior secured lender.
The
Security Interest in the Assets of the Registrant will be evidenced by the filing of a financing statement on Form UCC-1 with
the California Secretary of State and the filing of the IP Security Agreement, attached herewith, with the United States Patent
& Trademark Office.
Pursuant
to a Pledge Agreement, by and between the Investors and Kevin Maloney and Gregory Hrncir, the June 2016 Notes are secured by a
pledge of 100% of the common shares, options and warrants held by Messrs. Maloney and Hrncir, our chief executive officer and
chief strategy officer, respectively. The pledge of Messrs. Maloney and Hrncir consists, on a collective basis, of (i) 318,138
shares of common stock, (ii) stock options to purchase an aggregate of 2,290,700 shares of common stock under the Registrant’s
2014 equity incentive plan (2,057,362 shares of which are vested, and 233,338 shares of which are subject to satisfaction of vesting
conditions), and (iii) warrants to purchase an aggregate of 1,000,000 shares of common stock (fully vested),
Pursuant
to the terms of the Registration Rights Agreement entered into by and between the Registrant and the Investors (the “Registration
Rights Agreement”), the Investors received piggyback registration rights with respect to all equity securities issued in
conjunction with (i) the conversion of the June 2016 Notes (not applicable unless an event of default occurs), and (ii) the exercise
of the June 2016 Warrants (collectively, the “Registrable Securities”).
The
foregoing description of the June 2016 Securities Purchase Agreement, the June 2016 Notes, the June 2016 Warrants, the Pledge
Agreement, the Security Agreement, the Registration Rights Agreement and the Intercreditor Agreement and the transactions contemplated
thereby do not purport to be complete and are qualified in their entireties by reference to the December 2015 Note Purchase Agreement
which is attached hereto as Exhibit 10.1 and incorporated by reference herein. The form of the December 2015 Notes, the December
2015 Warrants, Security Agreement, Registration Rights Agreements and Intercreditor are included as exhibits to the December 2015
Note Purchase Agreement and attached hereto to Exhibit 10.1.
The
foregoing description of the June 2016 Notes and June 2016 Warrants and the transactions contemplated thereby do not purport to
be complete and are qualified in their entireties by reference to Exhibits 10.1, 10.2, 10.3 and 10.4, each of which are attached
hereto and all of which are incorporated herein their entirety by this reference.