Item 1.01
|
Entry into a Material Definitive Agreement.
|
September 2017 Financing
On September 19, 2017,
Ener-Core, Inc. (the “Company”) entered into a securities purchase agreement (the “Purchase Agreement”),
pursuant to which it intends to issue to 10 accredited investors (each, an “Investor”) unregistered convertible senior
secured promissory notes in principal amount of approximately $555,555.56 (the “Convertible Senior Notes”) and five-year
warrants (each, a “Warrant”) to purchase an aggregate of 222,222 shares of the Company’s common stock, par value
$0.0001 per share (“Common Stock”) at an exercise price of $1.50 per share (the “Warrant Shares”), with
aggregate gross proceeds to the Company of approximately $500,000 (the “September 2017 Financing”). The closing of
the September 2017 Financing occurred on September 19, 2017.
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.
Convertible Senior 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 Convertible Senior Notes will bear interest
at a rate of 10% per annum. The Convertible Senior 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 2015, May 2015
and December 2016, 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 September Subordination Agreement (as defined below), as amended to date.
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. In addition, the Convertible Senior Notes will be convertible, via approved
exchange in lieu of cash consideration in connection with a subsequent issuance by the Company of equity securities for cash consideration
(a “Next Equity Financing”), into the securities of the Company to be issued in such Next Equity Financing, provided
the Lead Investor (as defined in the Convertible Senior Notes) elects to participate in such Next Equity Financing. 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 First Amendment to Guaranty, which amends that certain Guaranty,
dated as of November 23, 2016, 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 September 2017 Financing.
Second Amendment to Subordination and
Intercreditor Agreement (November 2015)
On September 19, 2017,
the Company entered into a Second Amendment to Subordination and Intercreditor Agreement (the “Second Amendment to November
Subordination Agreement”) which amends that certain Subordination and Intercreditor Agreement, dated as of November 2, 2015,
as amended on November 23, 2016 (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/or restated to date, and the convertible
senior notes (the “2016 Notes”) issued pursuant to that certain securities purchase agreement dated as of November
23, 2016 (the “2016 SPA” and the transaction, the “November 2016 Financing”), as amended to date, will
rank
pari passu
as “Senior Note Debt” (as defined in the November Subordination Agreement).
Second Amendment to Subordination and
Intercreditor Agreement (September 2016)
On September 19, 2017,
the Company entered into a Second Amendment to Subordination and Intercreditor Agreement (the “Second Amendment to September
Subordination Agreement”), which amends that certain Subordination and Intercreditor Agreement, dated as of September 1,
2016, as amended on November 23, 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/or restated to date, and the 2016 Notes issued pursuant to the 2016 SPA, as amended to date, will rank
pari passu
as “Senior Note Debt” (as defined in the September Subordination Agreement).
Third Amendment to Pledge and Security
Agreement
On September 19, 2017,
the Company entered into a Third Amendment to Pledge and Security Agreement (the “Security Amendment Agreement”), which
amends that certain Pledge and Security Agreement dated as of April 23, 2015, as amended to date (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 and 2016 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 Agreement and Waivers
On September 19, 2017,
the Company and certain investors holding 2015 Notes and 2016 Notes executed amendment agreement and waivers (“2015 Amendment
Agreements” and “2016 Amendment Agreements”, respectively, and together, the “Amendment Agreements”)
to amend the 2015 Notes and 2016 Notes in order to provide that the 2015 Notes and 2016 Notes will rank
pari passu
with
the Convertible Senior Notes. The 2015 Amendment Agreements also amend each of the April 2015 SPA and May 2015 SPA to extend the
deadline for the Company to commence trading on a Qualified Eligible Market (as defined in each of the April 2015 SPA and May 2015
SPA, respectively) to no later than December 31, 2017, in conformity with prior amendments to the Company’s outstanding agreements
with its debtholders. Additionally, the Amendment Agreements provide for waivers of certain obligations of the Company under the
2015 Notes and 2016 Notes, including the Company’s obligation to file and maintain an effective registration statement with
respect to the 2016 Notes pursuant to the terms of that certain Registration Rights Agreement, dated as of November 23, 2016, by
and between the Company and the investors from the November 2016 Financing (the “November 2016 RRA”). The Amendment
Agreements are binding upon the holders all of the issued 2015 Notes and 2016 Notes and the parties to the April 2015 SPA, May
2015 SPA, 2016 SPA and the November 2016 RRA pursuant to the terms thereof.
Second Amendments to Convertible Junior
Notes
On September 19, 2017,
the Company and certain investors holding Convertible Junior Notes executed Second Amendments to such Convertible Junior Notes
(the “Convertible Junior Notes Amendments”) to adjust certain definitions to allow for issuance of the Convertible
Senior Notes. The Convertible Junior Notes Amendments are binding upon the holders of all of the issued Convertible Junior Notes
pursuant to the terms thereof.
The forms of Purchase
Agreement, Second Amendment to November Subordination Agreement, Second Amendment to September Subordination Agreement and Security
Amendment Agreement are attached as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, to this Current Report on Form 8-K and are
incorporated herein by reference. The forms of Convertible Senior Note, Warrant, 2015 Amendment Agreement, 2016 Amendment Agreement
and Convertible Junior Note Amendment are attached as Exhibits 4.1, 4.2, 4.3, 4.4 and 4.5, 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.