Item
1.01
|
Entry
into a Material Definitive Agreement.
|
September
2017 Financing Increase
As
previously disclosed, on September 19, 2017, Ener-Core, Inc. (the “Company”) entered into a securities purchase agreement
(the “Purchase Agreement”), pursuant to which it concurrently issued to 10 accredited investors (each, an “Investor”)
unregistered convertible senior secured promissory notes in principal amount of to 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,
with aggregate gross proceeds to the Company of approximately $500,000.
On
November 1, 2017, the Company and certain Investors agreed to amend and restate the Purchase Agreement (the “Amended and
Restated Purchase Agreement”) pursuant to which the Company agreed to issue to certain accredited investors (each, an “Additional
Investor”), pursuant to a series of joinder agreements, additional unregistered convertible senior secured promissory notes
in principal amount of up to approximately $444,445 (the “Additional Convertible Senior Notes”) and five-year warrants
(each, an “Additional Warrant”) to purchase an aggregate of 177,778 shares of Common Stock at an exercise price of
$1.50 per share (the “Additional Warrant Shares”), with aggregate gross proceeds to the Company of approximately $400,000
(together with the Initial Closing, the “2017 Bridge Financing”). The second closing of the 2017 Bridge Financing
occurred on November 1, 2017.
Amended
and Restated Purchase Agreement
Pursuant
to the terms of the Amended and Restated Purchase Agreement, the Company agreed to sell and issue the Additional Convertible Senior
Notes and Additional Warrants (collectively, the “Additional Securities”) to the Additional Investors with each Additional
Convertible Senior Note to be issued at a 10% original issue discount and with associated Additional Warrants to purchase 400
shares of Common Stock for each $1,000 of principal amount of Additional Convertible Senior Notes purchased by such Additional
Investor. The Amended and Restated Purchase Agreement contains representations, warranties and covenants of the Additional Investors
and the Company that are typical for transactions of this type. The Company agreed to use the proceeds from the sale of the Additional
Securities for working capital and general corporate purposes.
Additional
Convertible Senior Notes
The
Additional Convertible Senior Notes are substantially identical to the Convertible Senior Secured Notes and will bear no ordinary
interest, as the principal amount of the Additional Convertible Senior Notes will include an original issue discount. Upon an
Event of Default (as defined in the Additional Convertible Senior Notes), however, the Additional Convertible Senior Notes will
bear interest at a rate of 10% per annum. The Additional Convertible Senior Notes will mature on December 31, 2018. The Additional
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, as well as the Convertible Senior Secured Notes issued in September 2017, and
rank senior to the convertible unsecured promissory notes of the Company issued in September 2016 (the “Convertible Junior
Notes”), as amended to date. The Additional 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 Additional Convertible Senior Notes on which (i)
the Weighted Average Price (as defined in the Additional 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 Additional Convertible Senior Notes) has occurred.
In addition, the Additional 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 Additional
Convertible Senior Notes) elects to participate in such Next Equity Financing. The Additional 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 Additional Convertible Senior Note of notice thereof, such holder may require
the Company to redeem all or any portion of its Additional Convertible Senior Note at a price equal to 115% of the Conversion
Amount (as defined in the Additional Convertible Senior Notes) being redeemed. Additionally, upon a Change of Control (as defined
in the Additional Convertible Senior Notes) and delivery to the holder of the Additional Convertible Senior Note of notice thereof,
such holder may also require the Company to redeem all or any portion of its Additional 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 Additional Convertible Senior Notes and ending on December 31, 2017, the holder of the Additional Convertible
Senior Note may require the Company to redeem all or any portion of its Additional Convertible Senior Note at a price equal to
100% of the Conversion Amount being redeemed.
At
any time after the issuance date of the Additional 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 and Additional Convertible
Senior Notes must be at least $500,000, or such lesser amount as is then outstanding. The portion of the Additional 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 Additional
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 Additional 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 Additional
Convertible Senior Notes) in effect during such period.
The
Additional 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 Additional Convertible Senior Notes) unless the Company’s successor entity
assumes all of the Company’s obligations under the Additional Convertible Senior 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 and Additional Convertible Senior Notes.
Ener-Core
Power, Inc., the Company’s wholly-owned subsidiary, has agreed to guarantee all of the obligations of the Company under
the Amended and Restated Purchase Agreement, the Additional Convertible Senior Notes and the Transaction Documents.
Additional
Warrants
The
Additional Warrants are substantially identical to the Warrants and each Additional Warrant will be exercisable immediately in
exchange for cash. In addition, unless all of the Additional Warrant Shares that are subject to an exercise notice with respect
to any Additional Warrant are registered for resale pursuant to an effective registration statement and are issuable without any
restrictive legend, such Additional Warrant may also be exercised by way of a cashless exercise. The Additional Warrants will
also provide that the exercise price of each Additional Warrant will be adjusted upon the occurrence of certain events such as
stock dividends, stock splits and other similar events. The Additional 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
Additional Warrants will contain a provision that prevents the Company from entering into or becoming party to a Fundamental Transaction
(as defined in the Additional Warrants) unless the Company’s successor entity assumes all of the Company’s obligations
under the Additional 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 and Additional Warrants.
The
Additional Securities to be issued to the Additional 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 Additional Investors upon conversion of the Additional Convertible Senior Notes (the “Additional
Conversion Shares”) and the Additional Warrant Shares issuable to Additional Investors upon exercise of the Additional 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 Additional 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.
Waivers
On
November 1, 2017, certain investors holding convertible senior secured notes issued in April and May 2015 (the “2015 Notes”)
and December 2016 (the “2016 Notes”) executed waivers (“2015 Waivers” and “2016 Waivers”,
respectively, and together, the “Waivers”) to allow for the issuance by the Company of the Additional Securities.
The Waivers are binding upon the holders all of the issued 2015 Notes and 2016 Notes and the parties to the related securities
purchase agreements pursuant to the terms thereof.