Item
1.01
|
Entry
into a Material Definitive Agreement.
|
November
2016 Financing
On
November 23, 2016, Ener-Core, Inc. (the “Company”) entered into a securities purchase agreement (the “Purchase
Agreement”), pursuant to which it intends to issue to 15 accredited investors (each, an “Investor”) unregistered
convertible senior secured promissory notes in principal amount of approximately $3.6 million (the “Convertible Senior Notes”)
and five-year warrants (each, a “Warrant”) to purchase an aggregate of 1,423,200 shares of the Company’s common
stock, par value $0.0001 per share (“Common Stock”) at an exercise price of $3.00 per share (the “Warrant Shares”),
with aggregate net proceeds to the Company after an original issue discount and Placement Agent (as defined below) fee of approximately
$3.0 million (the “November 2016 Financing”). The Company expects that the initial closing of the November 2016 Financing
will occur on November 29, 2016 (the “Initial Closing Date”). Under the terms of the Purchase Agreement, the Company
may issue up to an additional $900,000 in principal amount of Convertible Senior Notes and related Warrants, on the same terms
as the Investors who purchased Convertible Senior Notes and Warrants on the Initial Closing Date, at a subsequent closing to occur
on or prior to December 12, 2016.
In connection with the November 2016 Financing, the Company will pay a fee of $250,000 to the placement agent for the transaction
(the "Placement Agent").
Securities
Purchase Agreement
Pursuant
to the terms of the Purchase Agreement, the Company agreed to sell and issue the Convertible Senior Notes and Warrants (collectively,
the “Securities”) to the Investors with each Convertible Senior Note to be issued at a 10% original issue discount
and with associated Warrants to purchase 400 shares of Common Stock for each $1,000 of principal amount of Convertible Senior
Notes purchased by such Investor. The Purchase Agreement contains representations, warranties and covenants of the Investors and
the Company that are typical for transactions of this type. The Company agreed to use the proceeds from the sale of the Securities
for working capital and general corporate purposes. The Company also agreed to secure the listing of its Common Stock on a national
securities exchange by no later than December 31, 2017.
Convertible
Senior Secured Notes
The
Convertible Senior Notes will bear no ordinary interest, as the principal amount of the Convertible Senior Notes will include
an original issue discount. Upon an Event of Default (as defined in the Convertible Senior Notes), however, the Notes will bear
interest at a rate of 10% per annum. The Notes will mature on December 31, 2018. The Convertible Senior Notes will rank
pari
passu
with the outstanding convertible senior secured promissory notes of the Company issued in April and May 2015, and rank
senior to the convertible unsecured promissory notes of the Company issued in September 2016 (the “Convertible Junior Notes”),
as more fully set forth in the Subordination and Intercreditor Agreement, as amended to date (as described below). The Convertible
Senior Notes will be convertible at the option of the holder into Common Stock at an exercise price of $2.50 (as subject to adjustment
therein) and will automatically convert into shares of Common Stock on the fifth trading day immediately following the issuance
date of the Convertible Senior Notes on which (i) the Weighted Average Price (as defined in the Convertible Senior Notes) of the
Common Stock for each trading day during a twenty trading day period equals or exceeds $5.00 (as adjusted for any stock dividend,
stock split, stock combination, reclassification or similar transaction) and no Equity Conditions Failure (as defined in the Convertible
Senior Notes) has occurred. The Convertible Senior Notes will also contain a blocker provision that prevents the Company from
effecting a conversion in the event that the holder, together with certain affiliated parties, would beneficially own in excess
of either 4.99% or 9.99%, with such threshold to be determined by the holder prior to issuance, of the shares of Common Stock
outstanding immediately after giving effect to such conversion.
Upon
an Event of Default and delivery to the holder of the Convertible Senior Note of notice thereof, such holder may require the Company
to redeem all or any portion of its Convertible Senior Note at a price equal to 115% of the Conversion Amount (as defined in the
Convertible Senior Notes) being redeemed. Additionally, upon a Change of Control (as defined in the Convertible Senior Notes)
and delivery to the holder of the Convertible Senior Note of notice thereof, such holder may also require the Company to redeem
all or any portion of its Convertible Senior Note at a price equal to 115% of the Conversion Amount being redeemed. Further, at
any time from and after January 1, 2018 and provided that the Company has not received either (i) initial deposits for at least
eight 2 MW Power Oxidizer units or (ii) firm purchase orders totaling not less than $3,500,000 and initial payment collections
of at least $1,600,000, in each case during the period commencing on the issuance date of the Convertible Senior Notes and ending
on December 31, 2017, the holder of the Convertible Senior Note may require the Company to redeem all or any portion of its Convertible
Senior Note at a price equal to 100% of the Conversion Amount being redeemed.
At
any time after the issuance date of the Convertible Senior Notes, the Company may redeem all or any portion of the then outstanding
principal and accrued and unpaid interest with respect to such principal, at 100% of such aggregate amount; provided, however,
that the aggregate Conversion Amount to be redeemed pursuant to all Convertible Senior Notes must be at least $500,000, or such
lesser amount as is then outstanding. The portion of the Convertible Senior Note(s) to be redeemed shall be redeemed at a price
equal to the greater of (i) 110% of the Conversion Amount of the Convertible Senior Note being redeems and (ii) the product of
(A) the Conversion Amount being redeemed and (B) the quotient determined by dividing (I) the greatest Weighted Average Price (as
defined in the Convertible Senior Notes) of the shares of Common Stock during the period beginning on the date immediately preceding
the date of the notice of such redemption by the Company and ending on the date on which the redemption by the Company occurs
by (II) the lowest Conversion Price (as defined in the Convertible Senior Notes) in effect during such period.
The
Convertible Senior Notes will contain a provision that prevents the Company from entering into or becoming party to a Fundamental
Transaction (as defined in the Convertible Senior Notes) unless the Company’s successor entity assumes all of the Company’s
obligations under the Convertible Secured Notes and the related transaction documents (the “Transaction Documents”)
pursuant to written agreements in form and substance satisfactory to at least a certain number of holders of the Convertible Senior
Notes.
In
connection with the execution of the Purchase Agreement and forthcoming issuance of the Convertible Senior Notes, Ener-Core Power,
Inc., the Company’s wholly-owned subsidiary (the “Subsidiary”), entered into a Guaranty, pursuant to which the
Subsidiary has agreed to guarantee all of the obligations of the Company under the Purchase Agreement, the Convertible Senior
Notes and the Transaction Documents.
Warrants
Each
Warrant will be exercisable immediately in exchange for cash. In addition, unless all of the Warrant Shares that are subject to
an exercise notice with respect to any Warrant are registered for resale pursuant to an effective registration statement and are
issuable without any restrictive legend, such Warrant may also be exercised by way of a cashless exercise. The Warrants will also
provide that the exercise price of each Warrant will be adjusted upon the occurrence of certain events such as stock dividends,
stock splits and other similar events. The Warrants will include a blocker provision that prevents the Company from effecting
any exercise in the event that the holder, together with certain affiliated parties, would beneficially own in excess of either
4.99% or 9.99%, with such threshold to be determined by the holder prior to issuance, of the shares of Common Stock outstanding
immediately after giving effect to such exercise.
The
Warrants will contain a provision that prevents the Company from entering into or becoming party to a Fundamental Transaction
(as defined in the Warrants) unless the Company’s successor entity assumes all of the Company’s obligations under
the Warrants and the related transaction documents pursuant to written agreements in form and substance satisfactory to at least
a certain number of holders of the Warrants.
The
Securities to be issued to the Investors and the underlying shares of Common Stock have not been registered under the Securities
Act of 1933, as amended (the “Securities Act”), or the securities laws of any state, and were offered and will be
sold and issued in reliance on the exemption from registration under the Securities Act provided by Section 4(a)(2) of the Securities
Act and/or Rule 506 of Regulation D promulgated thereunder (“Regulation D”). The shares of Common Stock issuable to
Investors upon conversion of the Convertible Senior Notes (the “Conversion Shares”) and the Warrant Shares issuable
to Investors upon exercise of the Warrants were not registered under the Securities Act, or the securities laws of any state,
and were offered in reliance on the exemption from registration under the Securities Act provided by Section 4(a)(2) of the Securities
Act and/or Rule 506 of Regulation D and may be sold upon exercise pursuant to an available exemption, including Section 4(a)(2)
and Section 3(a)(9) of the Securities Act. Each Investor was an accredited investor (as defined in Rule 501 of Regulation D under
the Securities Act) at the time of the November 2016 Financing.
Registration
Rights Agreement
In
connection with the November 2016 Financing, the Company entered into a Registration Rights Agreement with the Investors (the
“Registration Rights Agreement”) pursuant to which the Company will be required to file one or more registration statements
with the Securities and Exchange Commission to register for resale by the Investors the Shares and Warrant Shares and use its
best efforts to maintain the effectiveness of such registration statement(s). The Company will be required to file the first such
registration statement promptly following the Initial Closing Date, but in no event later than the date that is forty-five (45)
days after the Initial Closing Date. The Company is required to have the registration statement mandated by the Registration Rights
Agreement declared effective by specified deadlines contained in the Registration Rights Agreement.
If
the Company fails to register the required number of securities, including the Conversion Shares and Warrant Shares, pursuant
to the terms of the Registration Rights Agreement, or is unable to maintain a registration statement pursuant to the terms thereof,
the Company is obligated to pay to each holder of securities registrable under such Registration Rights Agreement a cash amount
equal to two percent of the aggregate purchase price of such Investor’s registrable securities, in the manner and subject
to the conditions set forth in such Registration Rights Agreement.
First
Amendment to Subordination and Intercreditor Agreement (September 2016)
On
November 23, 2016, the Company entered into a First Amendment to Subordination and Intercreditor Agreement, dated as of November
2, 2015, (the “First Amendment to November Subordination Agreement”) which amends that certain Subordination and Intercreditor
Agreement, dated as of November 2, 2015 (the “November Subordination Agreement”), to provide that the Convertible
Senior Notes issued pursuant to the Purchase Agreement, as well as the convertible senior notes (the “2015 Notes”)
issued pursuant to that certain securities purchase agreement dated as of April 22, 2015 (the “April 2015 SPA”) and
that certain securities purchase agreement dated as of May 7, 2015 (the “May 2015 SPA”), as amended and restated to
date, will rank
pari passu
as “Senior Note Debt” (as defined in the November Subordination Agreement).
First
Amendment to Subordination and Intercreditor Agreement (November 2015)
On
November 23, 2016, the Company entered into a First Amendment to Subordination and Intercreditor Agreement, dated as of September
1, 2016 (the “First Amendment to September Subordination Agreement”), which amends that certain Subordination and
Intercreditor Agreement, dated as of September 1, 2016 (the “September Subordination Agreement”), to provide that
the Convertible Senior Notes issued pursuant to the Purchase Agreement, as well as the 2015 Notes issued pursuant to the April
2015 SPA and May 2015 SPA, as amended and restated to date, will rank
pari passu
as “Senior Note Debt” (as
defined in the September Subordination Agreement).
Second
Amendment to Pledge and Security Agreement
On
November 23, 2016, the Company entered into a Second Amendment to Pledge and Security Agreement dated as of April 23, 2015 (the
“Security Amendment Agreement”), which amends that certain Pledge and Security Agreement dated as of April 23, 2015
(the “Security Agreement”), to provide for the grant by the Company and the Subsidiary (collectively, the “Grantors”),
to the Investors of a security interest in all personal property (subject to certain exceptions specified therein) of the Grantors
to secure all of the Company’s obligations to such Investors, such that the Investors and the holders of the 2015 Notes
will each have a first priority perfected security interest in all of the current and future assets of the Company and direct
and indirect subsidiaries of the Company, except for the Excluded Assets (as defined in the Security Agreement)
Amendment
Agreements
On
November 23, 2016, the Company and certain investors holding 2015 Notes executed amendment agreements (the “Amendment Agreements”)
to amend and restate the 2015 Notes in order to (i) provide that the 2015 Notes will rank
pari passu
with the Convertible
Senior Notes and (ii) adjust the terms of such 2015 Notes, including without limitation the initial conversion price per share,
to conform to the Convertible Secured Notes. Additionally, the Amendment Agreements provide that the exercise price of certain
warrants held by the investors holding 2015 Notes will be adjusted to $3.00 per share. The Amendment Agreements are binding upon
all of the issued 2015 Notes pursuant to the terms thereof.
First
Amendments to Securities Purchase Agreement (September 2016)
On
November 23, 2016, the Company and certain investors holding Convertible Junior Notes executed First Amendments (the “November
Amendments”) to the Securities Purchase Agreement dated September 1, 2016 (the “September 2016 SPA”) to (i)
extend the deadline for the Company to commence trading on a Qualified Eligible Market (as defined in the September 2016 SPA)
to no later than December 31, 2017; and (ii) reduce the exercise price of certain warrants held by the investors holding Convertible
Junior Notes to $3.00 per share.
First
Amendments to Convertible Junior Notes
On
November 23, 2016, the Company and certain investors holding Convertible Junior Notes executed First Amendments (the “Convertible
Junior Notes Amendments”) to such Convertible Junior Notes to reduce the initial conversion price per share of such Convertible
Junior Notes to $2.50 and adjust certain definitions. The Convertible Junior Notes Amendments are binding upon all of the issued
Convertible Junior Notes pursuant to the terms thereof.
The
forms of Securities Purchase Agreement, Registration Rights Agreement, First Amendment to September Subordination Agreement, First
Amendment to November Subordination Agreement, Security Amendment Agreement and November Amendments are attached as Exhibits 10.1,
10.2, 10.3, 10.4, 10.5 and 10.6, respectively, to this Current Report on Form 8-K and are incorporated herein by reference. The
forms of Convertible Senior Note, Warrant, Amendment Agreement and Convertible Junior Note Amendments are attached as Exhibits
4.1, 4.2, 4.3 and 4.4, respectively, to this Current Report on Form 8-K and are also incorporated herein by reference. The foregoing
descriptions of these agreements and instruments do not purport to be complete and are qualified in their entirety by reference
to such exhibits.