Item 1.01
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Entry into a Material Definitive Agreement.
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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, as previously disclosed, the Company and certain
Investors amended and restated the Purchase Agreement (the “Amended and Restated Purchase Agreement”) pursuant to which
the Company issued to certain accredited investors, pursuant to a series of joinder agreements, additional unregistered Convertible
Senior Notes in principal amount of approximately $444,445 and five-year Warrants to purchase an aggregate of 177,778 shares of
Common Stock at an exercise price of $1.50 per share, with aggregate gross proceeds to the Company of approximately $400,000. The
second closing of the 2017 Bridge Financing occurred on November 1, 2017 (the “Second Closing”).
On December 20, 2017,
the Company and certain Investors agreed to further amend and restate the Amended and Restated Purchase Agreement (the “Second
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 $555,556 (the “Additional Convertible Senior Notes”) and
five-year warrants (each, an “Additional Warrant”) to purchase an aggregate of 222,222 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
$500,000 (together with the Initial Closing and the Second Closing, the “2017 Bridge Financing”). The third closing
of the 2017 Bridge Financing occurred on December 20, 2017.
Second Amended and Restated Purchase
Agreement
Pursuant to the terms
of the Second 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 Second 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 November 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 Second 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 or prior to December
20, 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.