Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of April 22, 2015, by
and among Ener-Core, Inc., a Nevada corporation, with headquarters located at
9400 Toledo Way, Irvine, California 92618 (the "Company"), and the investors
listed on the Schedule of Buyers attached hereto (individually, a "Buyer" and
collectively, the "Buyers").

 

WHEREAS:

 

A. The Company and each Buyer is executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by Section
4(a)(2) of the Securities Act of 1933, as amended (the "1933 Act"), and Rule
506(b) of Regulation D ("Regulation D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the 1933 Act.

 

B. The Company has authorized a new series of senior secured notes of the
Company, in substantially the form attached hereto as Exhibit A (the "Notes"),
which Notes shall be convertible into the Company's common stock, par value
$0.0001 per share (the "Common Stock") (the shares of Common Stock issuable
pursuant to the terms of the Notes, including, without limitation, upon
conversion, upon payment of interest, or otherwise, collectively, the
"Conversion Shares"), in accordance with the terms of the Notes.

 

C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms
and conditions stated in this Agreement, (i) that aggregate principal amount of
Notes set forth opposite such Buyer's name in column (3) on the Schedule of
Buyers attached hereto (which aggregate principal amount of Notes for all Buyers
shall be $5,000,000), and (ii) Warrants, in substantially the form attached
hereto as Exhibit B (the "Warrants"), representing the right to acquire that
number of shares of Common Stock set forth opposite such Buyer's name in column
(4) on the Schedule of Buyers (as exercised, collectively, the "Warrant
Shares").

 

D. The Notes will rank senior to all outstanding and future indebtedness of the
Company, and its Subsidiaries (as defined below), will be guaranteed by all
direct and indirect Subsidiaries (as defined in Section 3(a)) of the Company,
currently formed or formed in the future, as evidenced by a guarantee agreement,
in the form attached hereto as Exhibit C (as amended or modified from time to
time in accordance with its terms, the "Guarantee Agreement"), and will be
secured by a first priority perfected security interest (subject to Permitted
Liens under and as defined in the Notes) in all of the current and future assets
of the Company and all direct and indirect Subsidiaries of the Company, except
for the “Excluded Assets” (as such term is defined in the Security Agreement),
currently formed or formed in the future, as evidenced by that certain Pledge
and Security Agreement, substantially in the form attached hereto as Exhibit D,
(as amended or modified from time to time in accordance with its terms, the
"Security Agreement" and together with the Guarantee Agreement and any ancillary
documents related thereto, collectively, the "Security Documents").

 

 

 

 

E. The Notes, the Conversion Shares, the Warrants and the Warrant Shares
collectively are referred to herein as the "Securities".

 

NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

 

1. PURCHASE AND SALE OF NOTES AND WARRANTS.

 

(a) Purchase of Notes and Warrants. Subject to the satisfaction (or waiver) of
the conditions set forth in Sections 6 and 7 below, the Company shall issue and
sell to each Buyer, and each Buyer severally, but not jointly, agrees to
purchase from the Company on the Closing Date (as defined below), (x) a
principal amount of Notes as is set forth opposite such Buyer's name in column
(3) on the Schedule of Buyers and (y) Warrants to acquire up to that number of
Warrant Shares as is set forth opposite such Buyer's name in column (4) on the
Schedule of Buyers (the "Closing").

 

(b) Closing. The date and time of the Closing (the "Closing Date") shall be
10:00 a.m., New York City time, on the date hereof (or such other date and time
as is mutually agreed to by the Company and each Buyer) after notification of
satisfaction (or waiver) of the conditions to the Closing set forth in Sections
6 and 7 below, at the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New
York, New York 10022.

 

(c) Purchase Price. The aggregate purchase price for the Notes and the Warrants
to be purchased by each Buyer at the Closing (the "Purchase Price") shall be the
amount set forth opposite each Buyer's name in column (5) of the Schedule of
Buyers. Each Buyer shall pay $1,000 for each $1,000 of principal amount of Notes
and related Warrants to be purchased by such Buyer at the Closing. The Buyers
and the Company agree that the Notes and the Warrants constitute an "investment
unit" for purposes of Section 1273(c)(2) of the Internal Revenue Code of 1986,
as amended (the "Code"). The Buyers and the Company mutually agree that the
allocation of the issue price of such investment unit between the Notes and the
Warrants in accordance with Section 1273(c)(2) of the Code and Treasury
Regulation Section 1.1273-2(h) shall be $79.50 per $1,000 of Purchase Price to
be allocated to the Warrants and the balance of each $1,000 of Purchase Price to
be allocated to the Notes, and neither the Buyers nor the Company shall take any
position inconsistent with such allocation in any tax return or in any judicial
or administrative proceeding in respect of taxes.

 

(d) Form of Payment. On the Closing Date, (i) each Buyer shall pay its Purchase
Price to the Company for the Notes and the Warrants to be issued and sold to
such Buyer at the Closing (less, in the case of Empery Asset Master, Ltd.
("Empery"), the amounts withheld pursuant to Section 4(h)), by wire transfer of
immediately available funds in accordance with the Company's written wire
instructions and (ii) the Company shall deliver to each Buyer the Notes
(allocated in the principal amounts as such Buyer shall request) which such
Buyer is then purchasing hereunder along with the Warrants (allocated in the
amounts as such Buyer shall request) which such Buyer is purchasing hereunder,
in each case duly executed on behalf of the Company and registered in the name
of such Buyer or its designee.

 

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2. BUYER'S REPRESENTATIONS AND WARRANTIES. Each Buyer, severally and not
jointly, represents and warrants with respect to only itself that:

 

(a) No Public Sale or Distribution. Such Buyer is (i) acquiring the Notes and
the Warrants and (ii) upon issuance of the Conversion Shares pursuant to the
terms of the Notes and upon exercise of the Warrants will acquire the Conversion
Shares issuable pursuant to the terms of the Notes and the Warrant Shares
issuable upon exercise of the Warrants, for its own account and not with a view
towards, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales registered or exempted under the 1933 Act;
provided, however, that by making the representations herein, such Buyer does
not agree to hold any of the Securities for any minimum or other specific term
and reserves the right to dispose of the Securities at any time in accordance
with or pursuant to a registration statement or an exemption under the 1933 Act.
Such Buyer is acquiring the Securities hereunder in the ordinary course of its
business. Such Buyer does not presently have any agreement or understanding,
directly or indirectly, with any Person (as defined below) to distribute any of
the Securities. For purposes of this Agreement, "Person" means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization and a government or any department or
agency thereof.

 

(b) Accredited Investor Status. Such Buyer is an "accredited investor" as that
term is defined in Rule 501(a) of Regulation D.

 

(c) Reliance on Exemptions. Such Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and such Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of such Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of such Buyer to acquire the
Securities.

 

(d) Information. Such Buyer and its advisors, if any, have been furnished with
all materials relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Securities that have been
requested by such Buyer. Such Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer's right to
rely on the Company's representations and warranties contained herein. Such
Buyer understands that its investment in the Securities involves a high degree
of risk. Such Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to its
acquisition of the Securities.

 

(e) No Governmental Review. Such Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.

 

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(f) Transfer or Resale. Such Buyer understands that (i) the Securities have not
been and are not being registered under the 1933 Act or any state securities
laws, and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect
that such Securities to be sold, assigned or transferred may be sold, assigned
or transferred pursuant to an exemption from such registration, or (C) such
Buyer provides the Company with reasonable assurance that such Securities can be
sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated
under the 1933 Act, as amended, (or a successor rule thereto) (collectively,
"Rule 144"); (ii) any sale of the Securities made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144 and further, if Rule 144 is
not applicable, any resale of the Securities under circumstances in which the
seller (or the Person) through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (iii) neither the Company nor any other Person is under any
obligation to register the Securities under the 1933 Act or any state securities
laws or to comply with the terms and conditions of any exemption thereunder.
Notwithstanding the foregoing, the Securities may be pledged in connection with
a bona fide margin account or other loan or financing arrangement secured by the
Securities and such pledge of Securities shall not be deemed to be a transfer,
sale or assignment of the Securities hereunder, and no Buyer effecting a pledge
of Securities shall be required to provide the Company with any notice thereof
or otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document (as defined in Section 3(b)), including, without
limitation, this Section 2(f).

 

(g) Legends. Such Buyer understands that the certificates or other instruments
representing the Notes and the Warrants and, until such time as the resale of
the Conversion Shares and the Warrant Shares have been registered under the 1933
Act, the stock certificates representing the Conversion Shares and the Warrant
Shares, except as set forth below, shall bear any legend as required by the
"blue sky" laws of any state and a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of such
stock certificates):

 

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES [MAY BE CONVERTIBLE] [ARE
EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
(B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

 

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The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped or issue to such holder by electronic delivery at the applicable balance
account at The Depository Trust Company ("DTC"), if, unless otherwise required
by state securities laws, (i) such Securities are registered for resale under
the 1933 Act, (ii) in connection with a sale, assignment or other transfer, such
holder provides the Company with an opinion of counsel, in a generally
acceptable form, to the effect that such sale, assignment or transfer of the
Securities may be made without registration under the applicable requirements of
the 1933 Act, or (iii) the Securities can be sold, assigned or transferred
pursuant to Rule 144 or Rule 144A. The Company shall be responsible for the fees
of its transfer agent and all DTC fees associated with such issuance.

 

(h) Validity; Enforcement. This Agreement has been duly and validly authorized,
executed and delivered on behalf of such Buyer and shall constitute the legal,
valid and binding obligations of such Buyer enforceable against such Buyer in
accordance with their respective terms, except as such enforceability may be
limited by general principles of equity or to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors' rights and
remedies.

 

(i) No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the consummation by such Buyer of the transactions contemplated
hereby and thereby will not (i) result in a violation of the organizational
documents of such Buyer or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which such Buyer is a
party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including federal and state securities laws) applicable to
such Buyer, except in the case of clauses (ii) and (iii) above, for such
conflicts, defaults, rights or violations which would not, individually or in
the aggregate, reasonably be expected to have a material adverse effect on the
ability of such Buyer to perform its obligations hereunder.

 

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company represents and warrants to each of the Buyers that:

 

(a) Organization and Qualification. Each of the Company and its "Subsidiaries"
(which for purposes of this Agreement means any entity in which the Company,
directly or indirectly, owns any of the capital stock or holds an equity or
similar interest) are entities duly organized and validly existing in good
standing under the laws of the jurisdiction in which they are formed, and have
the requisite power and authorization to own their properties and to carry on
their business as now being conducted. Each of the Company and its Subsidiaries
is duly qualified as a foreign entity to do business and is in good standing in
every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not
reasonably be expected to have a Material Adverse Effect. As used in this
Agreement, "Material Adverse Effect" means any material adverse effect on the
business, properties, assets, operations, results of operations, condition
(financial or otherwise) or prospects of the Company and its Subsidiaries,
individually or taken as a whole, or on the transactions contemplated hereby or
on the other Transaction Documents or by the agreements and instruments to be
entered into in connection herewith or therewith, or on the authority or ability
of the Company to perform its obligations under the Transaction Documents. The
Company has no Subsidiaries except as set forth on Schedule 3(a).

 

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(b) Authorization; Enforcement; Validity. The Company has the requisite power
and authority to enter into and perform its obligations under this Agreement,
the Notes, the Warrants, the Lock-Up Agreements (as defined in Section 7(viii)),
the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), the
Security Documents and each of the other agreements entered into by the parties
hereto in connection with the transactions contemplated by this Agreement
(collectively, the "Transaction Documents") and to issue the Securities in
accordance with the terms hereof and thereof. The execution and delivery of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby, including, without limitation, the
issuance of the Notes and the Warrants, and the reservation for issuance and the
issuance of the Conversion Shares and the reservation for issuance and issuance
of Warrant Shares issuable upon exercise of the Warrants have been duly
authorized by the Company's Board of Directors and (other than filings as may be
required by state securities agencies) no further filing, consent, or
authorization is required by the Company, its Board of Directors or its
shareholders. This Agreement and the other Transaction Documents have been duly
executed and delivered by the Company, and constitute the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of applicable creditors' rights and
remedies. Each of the Subsidiaries party to any of the Transaction Documents has
the requisite power and authority to enter into and perform its obligations
under such Transaction Documents. The execution and delivery by the Subsidiaries
party to any of the Transaction Documents of such Transaction Documents and the
consummation by such Subsidiaries of the transactions contemplated thereby have
been duly authorized by such Subsidiaries' respective boards of directors (or
other applicable governing body) and (other than filings as may be required by
state securities agencies) no further filing, consent, or authorization is
required by such Subsidiaries, their respective boards of directors (or other
applicable governing body) or shareholders (or other applicable owners of equity
of such Subsidiaries). The Transaction Documents to which any of the
Subsidiaries are parties have been duly executed and delivered by such
Subsidiaries, and constitute the legal, valid and binding obligations of such
Subsidiaries, enforceable against them in accordance with their respective
terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally, the enforcement
of applicable creditors' rights and remedies.

 

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(c) Issuance of Securities. The issuance of the Notes and the Warrants are duly
authorized and, upon issuance, shall be validly issued and free from all taxes,
liens and charges with respect to the issue thereof. As of the ninetieth (90th)
day following the Closing, a number of shares of Common Stock shall have been
duly authorized and reserved for issuance which equals or exceeds (the "Required
Reserved Amount) the sum of (i) 200% of the maximum number of Conversion Shares
issued and issuable pursuant to the Notes based on an assumed Conversion Price
(as defined in the Notes) of $0.2275 (as adjusted for any stock dividend, stock
split, stock combination, reclassification or similar transaction occurring
after the date hereof and without taking into account any limitations on the
issuance thereof pursuant to the terms of the Notes) (the “Assumed Conversion
Price”) plus (ii) 100% of the maximum number of Warrant Shares issued and
issuable pursuant to the Warrants, each as of the Trading Day (as defined in the
Warrants) immediately preceding the applicable date of determination (without
taking into account any limitations on the exercise of the Warrants set forth in
the Warrants). As of the date hereof, there are 82,206,245 shares of Common
Stock authorized and unissued, of which 19,660,551 are reserved for issuance
upon full exercise of all outstanding options and warrants. Upon conversion of
the Notes in accordance with the Notes or exercise of the Warrants in accordance
with the Warrants, as the case may be, the Conversion Shares and the Warrant
Shares, respectively, will be validly issued, fully paid and nonassessable and
free from all preemptive or similar rights, taxes, liens and charges with
respect to the issue thereof, with the holders being entitled to all rights
accorded to a holder of Common Stock. Assuming the accuracy of each of the
representations and warranties set forth in Section 2 of this Agreement, the
offer and issuance by the Company of the Securities is exempt from registration
under the 1933 Act.

 

(d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and any of its Subsidiaries parties to any of the
Transaction Documents and the consummation by the Company and any of its
Subsidiaries of the transactions contemplated hereby and thereby (including,
without limitation, the issuance of the Notes and the Warrants and reservation
for issuance and issuance of the Conversion Shares and the Warrant Shares) will
not (i) result in a violation of the Articles of Incorporation (as defined in
Section (3(q)) or Bylaws (as defined in Section (3(q)), any memorandum of
association, certificate of incorporation, certificate of formation, bylaws, any
certificate of designations or other constituent documents of the Company or any
of its Subsidiaries, any capital stock of the Company or any of its Subsidiaries
or the articles of association or bylaws of the Company or any of its
Subsidiaries or (ii) conflict with, or constitute a default (or an event which
with notice or lapse of time or both would become a default) in any respect
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
Company or any of its Subsidiaries is a party, or (iii) result in a violation of
any law, rule, regulation, order, judgment or decree (including other foreign,
federal and state securities laws and regulations and the rules and regulations
of the OTC QB (the "Principal Market") and including all applicable laws of the
State of Nevada and any foreign, federal and state laws, rules and regulations)
applicable to the Company or any of its Subsidiaries or by which any property or
asset of the Company or any of its Subsidiaries is bound or affected.

 

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(e) Consents. Neither the Company nor any of its Subsidiaries is required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency or any regulatory or
self-regulatory agency or any other Person in order for it to execute, deliver
or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof. All
consents, authorizations, orders, filings and registrations which the Company or
any of its Subsidiaries is required to obtain pursuant to the preceding sentence
have been obtained or effected on or prior to the Closing Date, and the Company
and its Subsidiaries are unaware of any facts or circumstances that might
prevent the Company or any of its Subsidiaries from obtaining or effecting any
of the registration, application or filings pursuant to the preceding sentence.
The Company is not in violation of the listing requirements of the Principal
Market and has no knowledge of any facts that would reasonably lead to delisting
or suspension of the Common Stock in the foreseeable future. The issuance by the
Company of the Securities shall not have the effect of delisting or suspending
the Common Stock from the Principal Market.

 

(f) Acknowledgment Regarding Buyer's Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of an
arm's length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company or any of its Subsidiaries, (ii) an "affiliate" of
the Company or any of its Subsidiaries (as defined in Rule 144) or (iii) to the
knowledge of the Company, a "beneficial owner" of more than 10% of the shares of
Common Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange
Act of 1934, as amended (the "1934 Act")). The Company further acknowledges that
no Buyer is acting as a financial advisor or fiduciary of the Company or any of
its Subsidiaries (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated hereby and thereby, and any advice
given by a Buyer or any of its representatives or agents in connection with the
Transaction Documents and the transactions contemplated hereby and thereby is
merely incidental to such Buyer's purchase of the Securities. The Company
further represents to each Buyer that the Company's decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.

 

(g) No General Solicitation; Placement Agent's Fees. Neither the Company, nor
any of its Subsidiaries or affiliates, nor any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D) in connection with the offer or sale of the
Securities. The Company shall be responsible for the payment of any placement
agent's fees, financial advisory fees, or brokers' commissions (other than for
persons engaged by any Buyer or its investment advisor) relating to or arising
out of the transactions contemplated hereby, including, without limitation,
placement agent fees payable to Cowen and Company, LLC, as placement agent (the
"Placement Agent") in connection with the sale of the Securities. The Company
shall pay, and hold each Buyer harmless against, any liability, loss or expense
(including, without limitation, attorney's fees and out-of-pocket expenses)
arising in connection with any such claim. The Company acknowledges that it has
engaged the Placement Agent in connection with the sale of the Securities. Other
than the Placement Agent, neither the Company nor any of its Subsidiaries has
engaged any placement agent or other agent in connection with the sale of the
Securities.

 

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(h) No Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on their behalf has, directly or indirectly,
made any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would require registration of any of the
Securities under the 1933 Act, whether through integration with prior offerings
or otherwise, or cause this offering of the Securities to require approval of
shareholders of the Company for purposes of the 1933 Act or any applicable
shareholder approval provisions, including, without limitation, under the rules
and regulations of any exchange or automated quotation system on which any of
the securities of the Company are listed or designated. None of the Company, its
Subsidiaries, their affiliates and any Person acting on their behalf will take
any action or steps referred to in the preceding sentence that would require
registration of any of the Securities under the 1933 Act or cause the offering
of the Securities to be integrated with other offerings for purposes of any such
applicable shareholder approval provisions.

 

(i) Application of Takeover Protections; Rights Agreement. The Company and its
board of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Articles of Incorporation or the laws of the
jurisdiction of its formation which is or could become applicable to any Buyer
as a result of the transactions contemplated by this Agreement, including,
without limitation, the Company's issuance of the Securities and any Buyer's
ownership of the Securities. The Company has not adopted a shareholder rights
plan or similar arrangement relating to accumulations of beneficial ownership of
Common Stock or a change in control of the Company.

 

(j) SEC Documents; Financial Statements. Except as disclosed in Schedule 3(j),
during the two (2) years prior to the date hereof, the Company has timely filed
all reports, schedules, forms, statements and other documents required to be
filed by it with the SEC pursuant to the reporting requirements of the 1934 Act
(all of the foregoing filed prior to the date hereof, and all exhibits included
therein and financial statements, notes and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the "SEC
Documents"). The Company has delivered to the Buyers or their respective
representatives true, correct and complete copies of the SEC Documents not
available on the EDGAR system. As of their respective filing dates, the SEC
Documents complied in all material respects with the requirements of the 1934
Act and the rules and regulations of the SEC promulgated thereunder applicable
to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. As of their respective filing dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved ("GAAP") (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Buyers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(d) of this Agreement or in the
disclosure schedules to this Agreement, contains any untrue statement of a
material fact or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstance under which they are or
were made, not misleading.

 

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(k) Absence of Certain Changes. Except as disclosed in Schedule 3(k), since
December 31, 2014, there has been no material adverse change and no material
adverse development in the business, assets, properties, operations, condition
(financial or otherwise), results of operations or prospects of the Company or
its Subsidiaries. Except as disclosed in Schedule 3(k), since December 31, 2014,
neither the Company nor any of its Subsidiaries has (i) declared or paid any
dividends, (ii) sold any assets, individually or in the aggregate, in excess of
$100,000 outside of the ordinary course of business or (iii) had capital
expenditures, individually or in the aggregate, in excess of $100,000. Neither
the Company nor any of its Subsidiaries has taken any steps to seek protection
pursuant to any bankruptcy law nor does the Company have any knowledge or reason
to believe that its creditors intend to initiate involuntary bankruptcy
proceedings or any actual knowledge of any fact that would reasonably lead a
creditor to do so. The Company and its Subsidiaries, individually and on a
consolidated basis, are not as of the date hereof, and after giving effect to
the transactions contemplated hereby to occur at the Closing, will not be
Insolvent (as defined below). For purposes of this Section 3(k), "Insolvent"
means, with respect to any Person, (i) the present fair saleable value of such
Person's assets is less than the amount required to pay such Person's total
Indebtedness (as defined in Section 3(r)), (ii) such Person is unable to pay its
debts and liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured, (iii) such Person intends to incur or
believes that it will incur debts that would be beyond its ability to pay as
such debts mature or (iv) such Person has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now conducted
and is proposed to be conducted.

 

(l) No Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.

 

(m) Conduct of Business; Regulatory Permits. Neither the Company nor any of its
Subsidiaries is in violation of any term of or in default under any certificate
of designations of any outstanding series of preferred stock of the Company (if
any), its Articles of Incorporation or Bylaws or their organizational charter or
memorandum of association or certificate of incorporation or articles of
association or bylaws, respectively. Neither the Company nor any of its
Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or any of its
Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct
its business in violation of any of the foregoing, except for possible
violations which could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. Without limiting the generality of
the foregoing, the Company is not in violation of any of the rules, regulations
or requirements of the Principal Market and has no knowledge of any facts or
circumstances that would reasonably lead to delisting or suspension of the
Common Stock by the Principal Market in the foreseeable future. Except as set
forth in Schedule 3(m), during the two (2) years prior to the date hereof, the
Common Stock has been designated for quotation on the Principal Market. Except
as set forth in Schedule 3(m), during the two (2) years prior to the date
hereof, (i) trading in the Common Stock has not been suspended by the SEC or the
Principal Market and (ii) the Company has received no communication, written or
oral, from the SEC or the Principal Market regarding the suspension or delisting
of the Common Stock from the Principal Market. The Company and its Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, except where the failure to possess such certificates,
authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.

 

- 10 -

 

 

(n) Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries,
nor any director, officer, agent, employee or other Person acting on behalf of
the Company or any of its Subsidiaries has, in the course of its actions for, or
on behalf of, the Company or any of its Subsidiaries (i) used any corporate
funds for any unlawful contribution, gift, entertainment or other unlawful
expenses relating to political activity; (ii) made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds; (iii) violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful
bribe, rebate, payoff, influence payment, kickback or other unlawful payment to
any foreign or domestic government official or employee.

 

(o) Sarbanes-Oxley Act. The Company is in compliance with any and all applicable
requirements of the Sarbanes-Oxley Act of 2002, as amended, that are effective
as of the date hereof, and any and all applicable rules and regulations
promulgated by the SEC thereunder that are effective as of the date hereof.

 

(p) Transactions With Affiliates. Except as set forth on Schedule 3(p), none of
the officers, directors or employees of the Company or any of its Subsidiaries
is presently a party to any transaction with the Company or any of its
Subsidiaries (other than for ordinary course services as employees, officers or
directors), including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any such
officer, director or employee or, to the knowledge of the Company or any of its
Subsidiaries, any corporation, partnership, trust or other entity in which any
such officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.

 

- 11 -

 

 

(q) Equity Capitalization. As of the date hereof, the authorized capital stock
of the Company consists of (i) 200,000,000 shares of Common Stock, of which as
of the date hereof, 117,793,755 shares are issued and outstanding, 21,000,000
shares are reserved for issuance pursuant to the Company's stock option and
purchase plans and 5,687,000 shares are reserved for issuance pursuant to
securities (other than the aforementioned options, the Notes and the Warrants)
exercisable or exchangeable for, or convertible into, Common Stock, (ii)
50,000,000 shares of preferred stock, par value $0.0001 per share, none of which
are issued and outstanding as of the date hereof and (iii) there are 78,597,827
shares of Common Stock held by non-affiliates of the Company. All of such
outstanding shares have been, or upon issuance will be, validly issued and are
fully paid and nonassessable. Except as disclosed in (i) Schedule 3(q)(i), none
of the Company's capital stock is subject to preemptive rights or any other
similar rights or any liens or encumbrances suffered or permitted by the
Company; (ii) Schedule 3(q)(ii), there are no outstanding options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any shares of capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any shares of capital stock of the Company or
any of its Subsidiaries; (iii) Schedule 3(q)(iii), there are no outstanding debt
securities, notes, credit agreements, credit facilities or other agreements,
documents or instruments evidencing Indebtedness of the Company or any of its
Subsidiaries or by which the Company or any of its Subsidiaries is or may become
bound; (iv) Schedule 3(q)(iv), there are no financing statements securing
obligations in any material amounts, either singly or in the aggregate, filed in
connection with the Company or any of its Subsidiaries; (v) Schedule 3(q)(v),
there are no agreements or arrangements under which the Company or any of its
Subsidiaries is obligated to register the sale of any of their securities under
the 1933 Act; (vi) Schedule 3(q)(vi), there are no outstanding securities or
instruments of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (vii) Schedule 3(q)(vii), there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Securities; (viii) Schedule 3(q)(viii), the Company does not
have any stock appreciation rights or "phantom stock" plans or agreements or any
similar plan or agreement; and (ix) Schedule 3(q)(ix), the Company and its
Subsidiaries have no liabilities or obligations required to be disclosed in the
SEC Documents but not so disclosed in the SEC Documents, other than those
incurred in the ordinary course of the Company's or any of its Subsidiary's'
respective businesses and which, individually or in the aggregate, do not or
would not have a Material Adverse Effect. The Company has furnished or made
available to the Buyers true, correct and complete copies of the Company's
Articles of Incorporation, as amended and as in effect on the date hereof (the
"Articles of Incorporation"), and the Company's Bylaws, as amended and as in
effect on the date hereof (the "Bylaws"), and the terms of all securities
convertible into, or exercisable or exchangeable for shares of Common Stock and
the material rights of the holders thereof in respect thereto.

 

- 12 -

 

 

(r) Indebtedness and Other Contracts. Neither the Company nor any of its
Subsidiaries (i) except as disclosed in Schedule 3(r)(i), has any outstanding
Indebtedness (as defined below), (ii) except as disclosed in Schedule 3(r)(ii),
is a party to any contract, agreement or instrument, the violation of which, or
default under which, by the other party(ies) to such contract, agreement or
instrument could reasonably be expected to result in a Material Adverse Effect,
(iii) except as disclosed in Schedule 3(r)(iii), is in violation of any term of
or in default under any contract, agreement or instrument relating to any
Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect, or (iv) except
as disclosed in Schedule 3(r)(iv), is a party to any contract, agreement or
instrument relating to any Indebtedness, the performance of which, in the
judgment of the Company's officers, has or is expected to have a Material
Adverse Effect. Schedule 3(r) provides a detailed description of the material
terms of any such outstanding Indebtedness. For purposes of this Agreement: (x)
"Indebtedness" of any Person means, without duplication (A) all indebtedness for
borrowed money, (B) all obligations issued, undertaken or assumed as the
deferred purchase price of property or services, including, without limitation,
"capital leases" in accordance with GAAP (other than trade payables entered into
in the ordinary course of business consistent with past practice), (C) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (D) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses,
(E) all indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case with respect
to any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (F) all
monetary obligations under any leasing or similar arrangement which, in
connection with GAAP, consistently applied for the periods covered thereby, is
classified as a capital lease, (G) all indebtedness referred to in clauses (A)
through (F) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (H) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (G) above; and (y) "Contingent Obligation"
means, as to any Person, any direct or indirect liability, contingent or
otherwise, of that Person with respect to any Indebtedness, lease, dividend or
other obligation of another Person if the primary purpose or intent of the
Person incurring such liability, or the primary effect thereof, is to provide
assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto.

 

(s) Absence of Litigation. There is no action, suit, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of
its Subsidiaries, the Common Stock or any of the Company's Subsidiaries or any
of the Company's or its Subsidiaries' officers or directors, whether of a civil
or criminal nature or otherwise, in their capacities as such, except as set
forth in Schedule 3(s). The matters set forth in Schedule 3(s) would not
reasonably be expected to have a Material Adverse Effect.

 

(t) Insurance. The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the
Company nor any such Subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such Subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a
Material Adverse Effect.

 

- 13 -

 

 

(u) Employee Relations.

 

(i) Neither the Company nor any of its Subsidiaries is a party to any collective
bargaining agreement or employs any member of a union. The Company and its
Subsidiaries believe that their relations with their employees are good. No
executive officer of the Company or any of its Subsidiaries (as defined in Rule
501(f) of the 1933 Act) has notified the Company or any such Subsidiary that
such officer intends to leave the Company or any such Subsidiary or otherwise
terminate such officer's employment with the Company or any such Subsidiary. No
executive officer of the Company or any of its Subsidiaries, to the knowledge of
the Company or any of its Subsidiaries, is, or is now expected to be, in
violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement, non-competition agreement, or
any other contract or agreement or any restrictive covenant, and the continued
employment of each such executive officer does not subject the Company or any of
its Subsidiaries to any liability with respect to any of the foregoing matters.

 

(ii) The Company and its Subsidiaries are in compliance with all federal, state,
local and foreign laws and regulations respecting labor, employment and
employment practices and benefits, terms and conditions of employment and wages
and hours, except where failure to be in compliance would not, either
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.

 

(v) Title. The Company and its Subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all liens, encumbrances and defects
except for Permitted Liens which do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of such
property by the Company and any of its Subsidiaries. Any real property and
facilities held under lease by the Company and any of its Subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its Subsidiaries.

 

(w) Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, original works of authorship,
patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and other intellectual property
rights and all applications and registrations therefor ("Intellectual Property
Rights") necessary to conduct their respective businesses as now conducted. Each
of patents owned by the Company or any of its Subsidiaries is listed on Schedule
3(w)(i). Except as set forth in Schedule 3(w)(ii), none of the Company's
Intellectual Property Rights have expired or terminated or have been abandoned
or are expected to expire or terminate or are expected to be abandoned, within
three years from the date of this Agreement. The Company does not have any
knowledge of any infringement by the Company or its Subsidiaries of Intellectual
Property Rights of others. There is no claim, action or proceeding being made or
brought, or to the knowledge of the Company or any of its Subsidiaries, being
threatened, against the Company or any of its Subsidiaries regarding its
Intellectual Property Rights. Neither the Company nor any of its Subsidiaries is
aware of any facts or circumstances which might give rise to any of the
foregoing infringements or claims, actions or proceedings. The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their Intellectual Property Rights.

 

- 14 -

 

 

(x) Environmental Laws. The Company and its Subsidiaries (i) are in compliance
with any and all Environmental Laws (as hereinafter defined), (ii) have received
all permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or approval
where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so
comply could be reasonably expected to have, individually or in the aggregate, a
Material Adverse Effect. The term "Environmental Laws" means all federal, state,
local or foreign laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes
(collectively, "Hazardous Materials") into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.

 

(y) Subsidiary Rights. The Company or one of its Subsidiaries has the
unrestricted right to vote, and (subject to limitations imposed by applicable
law) to receive dividends and distributions on, all capital securities of its
Subsidiaries as owned by the Company or such Subsidiary.

 

(z) Investment Company Status. Neither the Company nor any Subsidiary is, and
upon consummation of the sale of the Securities, and for so long any Buyer holds
any Securities, will be, an "investment company," a company controlled by an
"investment company" or an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.

 

(aa) Tax Status. The Company and each of its Subsidiaries (i) has made or filed
all U.S. federal, state and foreign income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject, (ii) has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside
on its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim.

 

- 15 -

 

 

(bb) Internal Accounting and Disclosure Controls. Except as set forth in
Schedule 3(bb), the Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset and liability accountability, (iii)
access to assets or incurrence of liabilities is permitted only in accordance
with management's general or specific authorization and (iv) the recorded
accountability for assets and liabilities is compared with the existing assets
and liabilities at reasonable intervals and appropriate action is taken with
respect to any difference. The Company maintains disclosure controls and
procedures (as such term is defined in Rule 13a-15 under the 1934 Act) that are
effective in ensuring that information required to be disclosed by the Company
in the reports that it files or submits under the 1934 Act is recorded,
processed, summarized and reported, within the time periods specified in the
rules and forms of the SEC, including, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the 1934 Act is
accumulated and communicated to the Company's management, including its
principal executive officer or officers and its principal financial officer or
officers, as appropriate, to allow timely decisions regarding required
disclosure. During the twelve months prior to the date hereof neither the
Company nor any of its Subsidiaries has received any notice or correspondence
from any accountant relating to any material weakness in any part of the system
of internal accounting controls of the Company or any of its Subsidiaries.

 

(cc) Off Balance Sheet Arrangements. There is no transaction, arrangement, or
other relationship between the Company and an unconsolidated or other off
balance sheet entity that is required to be disclosed by the Company in its 1934
Act filings and is not so disclosed or that otherwise would be reasonably likely
to have a Material Adverse Effect.

 

(dd) Ranking of Notes. Except as set forth in Schedule 3(dd), no Indebtedness of
the Company or any of its Subsidiaries is senior to or ranks pari passu with the
Notes in right of payment, whether with respect of payment of redemptions,
interest, damages or upon liquidation or dissolution or otherwise.

 

(ee) Transfer Taxes. On the Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the sale and transfer of the Securities to be sold to each Buyer hereunder
will be, or will have been, fully paid or provided for by the Company, and all
laws imposing such taxes will be or will have been complied with.

 

(ff) Manipulation of Price. The Company has not, and to its knowledge no one
acting on its behalf has, (i) taken, directly or indirectly, any action designed
to cause or to result, or that could reasonably be expected to cause or result,
in the stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of any of the Securities, (ii) other than the
Placement Agent, sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) other than the
Placement Agent, paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.

 

- 16 -

 

 

(gg) Acknowledgement Regarding Buyers' Trading Activity. The Company
acknowledges and agrees that, except as set forth in Section 4(x), (i) none of
the Buyers has been asked to agree, nor has any Buyer agreed, to desist from
purchasing or selling, long and/or short, securities of the Company, or
"derivative" securities based on securities issued by the Company or to hold the
Securities for any specified term; (ii) any Buyer, and counter-parties in
"derivative" transactions to which any such Buyer is a party, directly or
indirectly, presently may have a "short" position in the Common Stock, and (iii)
each Buyer shall not be deemed to have any affiliation with or control over any
arm's length counter-party in any "derivative" transaction. The Company further
understands and acknowledges that, except as set forth in Section 4(x), one or
more Buyers may engage in hedging and/or trading activities at various times
during the period that the Securities are outstanding, including, without
limitation, during the periods that the value of the Conversion Shares and/or
the Warrant Shares are being determined and (b) such hedging and/or trading
activities, if any, can reduce the value of the existing shareholders' equity
interest in the Company both at and after the time the hedging and/or trading
activities are being conducted. The Company acknowledges that such
aforementioned hedging and/or trading activities do not constitute a breach of
this Agreement, the Notes, the Warrants or any of the documents executed in
connection herewith.

 

(hh) U.S. Real Property Holding Corporation. The Company is not, has never been,
and so long as any Securities remain outstanding, shall not become, a U.S. real
property holding corporation within the meaning of Section 897 of the Code and
the Company shall so certify upon any Buyer's request.

 

(ii) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries
or affiliates is subject to the Bank Holding Company Act of 1956, as amended
(the "BHCA") and to regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). Neither the Company nor any of its Subsidiaries
or affiliates owns or controls, directly or indirectly, five percent (5%) or
more of the outstanding shares of any class of voting securities or twenty-five
percent (25%) or more of the total equity of a bank or any entity that is
subject to the BHCA and to regulation by the Federal Reserve. Neither the
Company nor any of its Subsidiaries or affiliates exercises a controlling
influence over the management or policies of a bank or any entity that is
subject to the BHCA and to regulation by the Federal Reserve.

 

(jj) No Additional Agreements. Neither the Company nor any of its Subsidiaries
has any agreement or understanding with any Buyer with respect to the
transactions contemplated by the Transaction Documents other than as specified
in the Transaction Documents.

 

- 17 -

 

 

(kk) Disclosure. The Company confirms that neither it nor any other Person
acting on its behalf has provided any of the Buyers or their agents or counsel
with any information that constitutes or could reasonably be expected to
constitute material, nonpublic information. The Company understands and confirms
that each of the Buyers will rely on the foregoing representations in effecting
transactions in securities of the Company. All disclosure provided to the Buyers
regarding the Company, or any of its Subsidiaries, their business and the
transactions contemplated hereby, including the disclosure schedules to this
Agreement, furnished by or on behalf of the Company is true and correct and does
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading. Each
press release issued by the Company or any of its Subsidiaries during the twelve
(12) months preceding the date of this Agreement did not at the time of release
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. No event or circumstance has occurred or information exists with
respect to the Company or any of its Subsidiaries or its or their business,
properties, prospects, operations or financial conditions, which, under
applicable law, rule or regulation, requires public disclosure or announcement
by the Company but which has not been so publicly announced or disclosed. The
Company acknowledges and agrees that no Buyer makes or has made any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Section 2.

 

(ll) Shell Company Status. The Company is not, and has not been since July 14,
2013, an issuer identified in Rule 144(i)(1) of the 1933 Act. As of July 14,
2013, the Company filed current "Form 10 information" (as defined in Rule 144
(i)(3)) with the SEC reflecting its status as an entity that was no longer an
issuer described in Rule 144(i)(1)(i).

 

(mm) Stock Option Plans. Each stock option granted by the Company was granted
(i) in accordance with the terms of the applicable stock option plan of the
Company and (ii) with an exercise price at least equal to the fair market value
of the Common Stock on the date such stock option would be considered granted
under GAAP and applicable law. No stock option granted under the Company's stock
option plan has been backdated. The Company has not knowingly granted, and there
is no and has been no policy or practice of the Company to knowingly grant,
stock options prior to, or otherwise knowingly coordinate the grant of stock
options with, the release or other public announcement of material information
regarding the Company or its Subsidiaries or their financial results or
prospects.

 

(nn) No Disagreements with Accountants and Lawyers. There are no material
disagreements of any kind presently existing, or reasonably anticipated by the
Company to arise, between the Company and the accountants and lawyers formerly
or presently employed by the Company and the Company is current with respect to
any fees owed to its accountants and lawyers which could affect the Company's
ability to perform any of its obligations under any of the Transaction
Documents. In addition, on or prior to the date hereof, the Company had
discussions with its accountants about its financial statements previously filed
with the SEC. Based on those discussions, the Company has no reason to believe
that it will need to restate any such financial statements or any part thereof.

 

(oo) No Disqualification Events. With respect to Securities to be offered and
sold hereunder in reliance on Rule 506(b) under the 1933 Act ("Regulation D
Securities"), none of the Company, any of its predecessors, any affiliated
issuer, any director, executive officer, other officer of the Company
participating in the offering hereunder, any beneficial owner of 20% or more of
the Company's outstanding voting equity securities, calculated on the basis of
voting power, nor any promoter (as that term is defined in Rule 405 under the
1933 Act) connected with the Company in any capacity at the time of sale (each,
an "Issuer Covered Person" and, together, "Issuer Covered Persons") is subject
to any of the "Bad Actor" disqualifications described in Rule 506(d)(1)(i) to
(viii) under the 1933 Act (a "Disqualification Event"), except for a
Disqualification Event covered by Rule 506(d)(2) or (d)(3). The Company has
exercised reasonable care to determine whether any Issuer Covered Person is
subject to a Disqualification Event. The Company has complied, to the extent
applicable, with its disclosure obligations under Rule 506(e), and has furnished
to the Buyers a copy of any disclosures provided thereunder.

 

- 18 -

 

 

(pp) Other Covered Persons. The Company is not aware of any Person (other than
the Placement Agent) that has been or will be paid (directly or indirectly)
remuneration for solicitation of Buyers or potential purchasers in connection
with the sale of any Regulation D Securities.

 

4. COVENANTS.

 

(a) Best Efforts. Each party shall use its best efforts timely to satisfy each
of the covenants and the conditions to be satisfied by it as provided in
Sections 6 and 7 of this Agreement.

 

(b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing. The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary in
order to obtain an exemption for or to qualify the Securities for sale to the
Buyers at the Closing pursuant to this Agreement under applicable securities or
"Blue Sky" laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to the Buyers on or prior to the Closing Date. The Company shall make all
filings and reports relating to the offer and sale of the Securities required
under applicable securities or "Blue Sky" laws of the states of the United
States following the Closing Date.

 

(c) Reporting Status. Until the date on which the Buyers shall have sold all of
the Conversion Shares and Warrant Shares and none of the Notes or Warrants are
outstanding (the "Reporting Period"), the Company shall timely file all reports
required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would no
longer require or otherwise permit such termination.

 

(d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities solely as set forth on Schedule 4(d).

 

(e) Financial Information. The Company agrees to send the following to each
Buyer during the Reporting Period (i) unless the following are filed with the
SEC through EDGAR and are available to the public through the EDGAR system,
within one (1) Business Day after the filing thereof with the SEC, a copy of its
Annual Reports on Form 10-K, any Quarterly Reports on Form 10-Q, any Current
Reports on Form 8-K (or any analogous reports under the 1934 Act) and any
registration statements (other than on Form S-8) or amendments filed pursuant to
the 1933 Act, (ii) unless the following are filed with the SEC through EDGAR and
are available to the public through the EDGAR system, on the same day as the
release thereof, facsimile or e-mailed copies of all press releases issued by
the Company or any of its Subsidiaries, and (iii) copies of any notices and
other information made available or given to the shareholders of the Company
generally, contemporaneously with the making available or giving thereof to the
shareholders. As used herein, "Business Day" means any day other than Saturday,
Sunday or other day on which commercial banks in The City of New York are
authorized or required by law to remain closed.

 

- 19 -

 

 

(f) Listing. The Company shall commence trading of its Common Stock on either
The New York Stock Exchange, Inc., the NYSE MKT LLC, The NASDAQ Capital Market,
The NASDAQ Global Select Market or The Nasdaq Global Market (collectively, the
"Qualified Eligible Markets") no later than six (6) months following the Closing
Date (the "Listing Deadline"). The Company shall promptly secure the listing of
all of the Conversion Shares and the Warrant Shares upon each national
securities exchange and automated quotation system, if any, upon which the
Common Stock then listed (subject to official notice of issuance) and shall
maintain such listing of all Conversion Shares and Warrant Shares from time to
time issuable under the terms of the Transaction Documents. The Company shall
maintain the authorization for quotation of the Common Stock on the Principal
Market or any other Eligible Market (as defined in the Warrants). From and after
the Listing Deadline, the Company shall maintain the authorization for quotation
of the Common Stock on a Qualified Eligible Market and neither the Company nor
any of its Subsidiaries shall take any action which would be reasonably expected
to result in the delisting or suspension of the Common Stock on the applicable
Qualified Eligible Market. The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(f).

 

(g) Transfer Agent. For so long any Securities are outstanding, the Company
shall cause its transfer agent to participate in the Depository Trust Company
Fast Automated Securities Transfer Program.

 

(h) Fees. The Company shall reimburse Empery (a Buyer) or its designee(s) (in
addition to any other expense amounts paid to any Buyer or its counsel prior to
the date of this Agreement) for all costs and expenses incurred in connection
with the transactions contemplated by the Transaction Documents (including all
legal fees and disbursements in connection therewith, documentation and
implementation of the transactions contemplated by the Transaction Documents and
due diligence in connection therewith)(hereinafter, collectively, the “Empery
Expenses”), which amount may be withheld by such Buyer from its purchase price
for any Notes purchased at the Closing to the extent not previously reimbursed
by the Company. Notwithstanding the foregoing, in no event will the Empery
Expenses reimbursed by the Company pursuant to this Section 4(h) exceed $50,000
without the prior approval from the Company. The Company shall be responsible
for the payment of any placement agent's fees, financial advisory fees, or
broker's commissions (other than for Persons engaged by any Buyer) relating to
or arising out of the transactions contemplated hereby, including, without
limitation, any fees or commissions payable to the Placement Agent. The Company
shall pay, and hold each Buyer harmless against, any liability, loss or expense
(including, without limitation, reasonable attorney's fees and out-of-pocket
expenses) arising in connection with any claim relating to any such payment.
Except as otherwise set forth in the Transaction Documents, each party to this
Agreement shall bear its own expenses in connection with the sale of the
Securities to the Buyers.

 

- 20 -

 

 

(i) Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged by a Buyer in connection with a bona fide margin
agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale
or assignment of the Securities hereunder, and no Buyer effecting a pledge of
Securities shall be required to provide the Company with any notice thereof or
otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document, including, without limitation, Section 2(f) hereof;
provided that a Buyer and its pledgee shall be required to comply with the
provisions of Section 2(f) hereof in order to effect a sale, transfer or
assignment of Securities to such pledgee. The Company hereby agrees to execute
and deliver such documentation as a pledgee of the Securities may reasonably
request in connection with a pledge of the Securities to such pledgee by a
Buyer.

 

(j) Disclosure of Transactions and Other Material Information. On or before 8:30
a.m., New York City time, on April 23, 2015, (i) the Company shall issue a press
release reasonably acceptable to the Buyers and (ii) file a Current Report on
Form 8-K describing the terms of the transactions contemplated by the
Transaction Documents in the form required by the 1934 Act and attaching the
material Transaction Documents (including, without limitation, this Agreement
(and all schedules and exhibits to this Agreement), the form of the Warrants,
the form of Lock-Up Agreement, the form of Notes and the Security Documents as
exhibits to such filing (including all attachments), the "8-K Filing"). From and
after the filing of the 8-K Filing with the SEC, no Buyer shall be in possession
of any material, nonpublic information received from the Company, any of its
Subsidiaries or any of their respective officers, directors, affiliates,
employees or agents, that is not disclosed in the 8-K Filing. In addition,
effective upon the filing of the 8-K Filing, the Company acknowledges and agrees
that any and all confidentiality or similar obligations under any agreement,
whether written or oral, between the Company, any of its Subsidiaries or any of
their respective officers, directors, affiliates, employees or agents, on the
one hand, and any of the Buyers or any of their affiliates, on the other hand,
shall terminate. The Company shall not, and shall cause each of its Subsidiaries
and its and each of their respective officers, directors, affiliates, employees
and agents, not to, provide any Buyer with any material, nonpublic information
regarding the Company or any of its Subsidiaries from and after the date hereof
without the express prior written consent of such Buyer. If a Buyer has, or
believes it has, received any such material, nonpublic information regarding the
Company or any of its Subsidiaries from the Company, any of its Subsidiaries or
any of their respective officers, directors, affiliates, employees or agents, it
may provide the Company with written notice thereof. The Company shall, within
two (2) Trading Days of receipt of such notice, make public disclosure of such
material, nonpublic information. In the event of a breach of the foregoing
covenant by the Company, any of its Subsidiaries, or any of its or their
respective officers, directors, affiliates, employees and agents, in addition to
any other remedy provided herein or in the Transaction Documents, a Buyer shall
have the right to make a public disclosure, in the form of a press release,
public advertisement or otherwise, of such material, nonpublic information
without the prior approval by the Company, its Subsidiaries, or any of its or
their respective officers, directors, affiliates, employees or agents. No Buyer
shall have any liability to the Company, its Subsidiaries, or any of its or
their respective officers, directors, affiliates, employees, shareholders or
agents for any such disclosure. To the extent that the Company delivers any
material, non-public information to a Buyer without such Buyer's consent, the
Company hereby covenants and agrees that such Buyer shall not have any duty of
confidentiality to the Company, any of its Subsidiaries or any of their
respective officers, directors, employees, affiliates or agents with respect to,
or a duty not to trade on the basis of, such material, non-public information or
any other obligation with respect to such information. Subject to the foregoing,
neither the Company, its Subsidiaries nor any Buyer shall issue any press
releases or any other public statements with respect to the transactions
contemplated hereby; provided, however, that the Company shall be entitled,
without the prior approval of any Buyer, to make any press release or other
public disclosure with respect to such transactions (i) in substantial
conformity with the 8-K Filing and contemporaneously therewith and (ii) as is
required by applicable law and regulations (provided that in the case of clause
(i) each Buyer shall be consulted by the Company in connection with any such
press release or other public disclosure prior to its release). Without the
prior written consent of any applicable Buyer, neither the Company nor any of
its Subsidiaries or affiliates shall disclose the name of such Buyer in any
filing, announcement, release or otherwise.

 

- 21 -

 

 

(k) Additional Notes; Variable Securities. So long as any Buyer beneficially
owns any Notes, the Company will not issue any Notes (other than to the Buyers
as contemplated hereby and Additional Notes (as defined below)), and the Company
shall not issue any other securities that would cause a breach or default under
the Notes. Notwithstanding anything to the contrary contained in this Section or
in any of the Transaction Documents, the Company shall be permitted on or prior
to the fourteenth calendar day following the Closing Date to issue to one or
more investors up to an aggregate of $1.0 million principal amount of senior
secured notes with the same percentage of warrants issuable hereunder, all on
substantially the same terms as the Notes and Warrants issuable pursuant to this
Agreement (the "Additional Subscription"), but in any event with no terms more
favorable to the investors in the Additional Subscription than those of the
Buyers hereunder. Any notes issued pursuant to the Additional Subscription (the
"Additional Notes"), for purposes of any amendment provisions, for purposes of
calculating whether the approval of the Required Holders shall have occurred and
for purposes of the Security Documents, shall be deemed to have been issued
pursuant to this Agreement on the Closing Date. Any warrants issued pursuant to
the Additional Subscription (the "Additional Warrants"), for purposes of
determining whether the approval of the Required Holders shall have occurred,
shall be deemed to have been issued pursuant to this Agreement as of the Closing
Date. For so long as any Notes remain outstanding, the Company shall not, in any
manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Stock or directly or indirectly convertible into or exchangeable
or exercisable for Common Stock at a price which varies or may vary with the
market price of the Common Stock, including by way of one or more reset(s) to
any fixed price unless the conversion, exchange or exercise price of any such
security cannot be less than the then applicable Conversion Price (as defined in
the Notes) with respect to the Common Stock into which any Note is convertible
or the then applicable Exercise Price (as defined in the Warrants) with respect
to the Common Stock into which any Warrant is exercisable.

 

- 22 -

 

 

(l) Corporate Existence. So long as any Buyer beneficially owns any Securities,
the Company shall (i) maintain its corporate existence and (ii) not be party to
any Fundamental Transaction (as defined in the Notes) unless the Company is in
compliance with the applicable provisions governing Fundamental Transactions set
forth in the Notes and the Warrants.

 

(m) Reservation of Shares. So long as any Buyer owns any Securities, the Company
shall take all action necessary to at all times have authorized, and reserved
for the purpose of issuance, no less than the Required Reserve Amount. If at any
time the number of shares of Common Stock authorized and reserved for issuance
is not sufficient to meet the Required Reserved Amount, the Company will
promptly take all corporate action necessary to authorize and reserve a
sufficient number of shares, including, without limitation, calling a special
meeting of shareholders to authorize additional shares to meet the Company's
obligations under Section 3(c), in the case of an insufficient number of
authorized shares, obtain shareholder approval of an increase in such authorized
number of shares, and voting the management shares of the Company in favor of an
increase in the authorized shares of the Company to ensure that the number of
authorized shares is sufficient to meet the Required Reserved Amount.

 

(n) Conduct of Business. The business of the Company and its Subsidiaries shall
not be conducted in violation of any law, ordinance or regulation of any
governmental entity, except where such violations would not result, either
individually or in the aggregate, in a Material Adverse Effect.

 

(o) Public Information. At any time during the period commencing from the six
(6) month anniversary of the Closing Date and ending at such time that all of
the Securities, if a registration statement is not available for the resale of
all of the Securities, may be sold without restriction or limitation pursuant to
Rule 144 and without the requirement to be in compliance with Rule 144(c)(1), if
the Company shall (i) fail for any reason to satisfy the requirements of Rule
144(c)(1), including, without limitation, the failure to satisfy the current
public information requirement under Rule 144(c) or (ii) if the Company has ever
been an issuer described in Rule 144(i)(1)(i) or becomes such an issuer in the
future, and the Company shall fail to satisfy any condition set forth in Rule
144(i)(2) (a "Public Information Failure") then, as partial relief for the
damages to any holder of Securities by reason of any such delay in or reduction
of its ability to sell the Securities (which remedy shall not be exclusive of
any other remedies available at law or in equity), the Company shall pay to each
such holder an amount in cash equal to two percent (2.0%) of the aggregate
Purchase Price of such holder's Securities on the day of a Public Information
Failure and on every thirtieth day (pro rated for periods totaling less than
thirty days) thereafter until the earlier of (i) the date such Public
Information Failure is cured and (ii) such time that such public information is
no longer required pursuant to Rule 144. The payments to which a holder shall be
entitled pursuant to this Section 4(o) are referred to herein as "Public
Information Failure Payments." Public Information Failure Payments shall be paid
on the earlier of (I) the last day of the calendar month during which such
Public Information Failure Payments are incurred and (II) the third Business Day
after the event or failure giving rise to the Public Information Failure
Payments is cured. In the event the Company fails to make Public Information
Failure Payments in a timely manner, such Public Information Failure Payments
shall bear interest at the rate of 1.5% per month (prorated for partial months)
until paid in full.

 

- 23 -

 

 

(p) Lock-Up. The Company shall not amend, modify, waive or terminate any
provision of any of the Lock-Up Agreements except to extend the term of the
lock-up period and shall enforce the provisions of each Lock-Up Agreement in
accordance with its terms. If any Person that is a party to a Lock-Up Agreement
breaches any provision of a Lock-Up Agreement, the Company shall promptly use
its best efforts to seek specific performance of the terms of such Lock-Up
Agreement.

 

(q) Notice of Disqualification Events. The Company will notify the Buyers in
writing, prior to the Closing Date of (i) any Disqualification Event relating to
any Issuer Covered Person and (ii) any event that would, with the passage of
time, become a Disqualification Event relating to any Issuer Covered Person.

 

(r) Collateral Agent.

 

(i) Each Buyer hereby (a) appoints Empery Tax Efficient, LP as the collateral
agent hereunder and under the Security Documents (in such capacity, the
"Collateral Agent"), and (b) authorizes the Collateral Agent (and its officers,
directors, employees and agents) to take such action on such Buyer's behalf in
accordance with the terms hereof and thereof. The Collateral Agent shall not
have, by reason hereof or pursuant to any Security Documents, a fiduciary
relationship in respect of any Buyer. Neither the Collateral Agent nor any of
its officers, directors, employees and agents shall have any liability to any
Buyer for any action taken or omitted to be taken in connection hereof or the
Security Documents except to the extent caused by its own gross negligence or
willful misconduct, and each Buyer agrees to defend, protect, indemnify and hold
harmless the Collateral Agent and all of its officers, directors, employees and
agents (collectively, the "Collateral Agent Indemnitees") from and against any
losses, damages, liabilities, obligations, penalties, actions, judgments, suits,
fees, costs and expenses (including, without limitation, reasonable attorneys'
fees, costs and expenses) incurred by such Collateral Agent Indemnitee, whether
direct, indirect or consequential, arising from or in connection with the
performance by such Collateral Agent Indemnitee of the duties and obligations of
Collateral Agent pursuant hereto or any of the Security Documents.

 

(ii) The Collateral Agent shall be entitled to rely upon any written notices,
statements, certificates, orders or other documents or any telephone message
believed by it in good faith to be genuine and correct and to have been signed,
sent or made by the proper Person, and with respect to all matters pertaining to
this Agreement or any of the other Transaction Documents and its duties
hereunder or thereunder, upon advice of counsel selected by it.

 

- 24 -

 

 

(iii) The Collateral Agent may resign from the performance of all its functions
and duties hereunder and under the Notes and the Security Documents at any time
by giving at least ten (10) Business Days prior written notice to the Company
and each holder of the Notes. Such resignation shall take effect upon the
acceptance by a successor Collateral Agent of appointment as provided below.
Upon any such notice of resignation, the holders of a majority of the
outstanding principal amount of Notes shall appoint a successor Collateral
Agent. Upon the acceptance of the appointment as Collateral Agent, such
successor Collateral Agent shall succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Collateral Agent, and the
retiring Collateral Agent shall be discharged from its duties and obligations
under this Agreement, the Notes and the Security Agreement. After any Collateral
Agent's resignation hereunder, the provisions of this Section 4(r) shall inure
to its benefit. If a successor Collateral Agent shall not have been so appointed
within said ten (10) Business Day period, the retiring Collateral Agent shall
then appoint a successor Collateral Agent who shall serve until such time, if
any, as the holders of a majority of the outstanding principal amount of Notes
appoints a successor Collateral Agent as provided above.

 

(iv) The Company hereby covenants and agrees to take all actions as promptly as
practicable reasonably requested by either the holders of a majority of the
outstanding principal amount of Notes or the Collateral Agent (or its
successor), from time to time pursuant to the terms of this Section 4(r), to
secure a successor Collateral Agent satisfactory to such requesting
part(y)(ies), in their sole discretion, including, without limitation, by paying
all fees of such successor Collateral Agent, by having the Company agree to
indemnify any successor Collateral Agent and by each of the Company executing a
collateral agency agreement or similar agreement and/or any amendment to the
Security Documents reasonably requested or required by the successor Collateral
Agent.

 

(v) The Company agrees to pay the Collateral Agent, by wire transfer of
immediately available funds in accordance with the Collateral Agent’s written
wire instructions, a quarterly agency fee of $3,000 within three (3) Business
Days following the end of each calendar quarter that the Collateral Agent acted
as collateral agent in accordance with this Section 3(r) and the Security
Documents during such calendar quarter.

 

(s) Reverse Stock Split. The Company shall, no later than the date that is
ninety (90) days following the Closing Date, effect a reverse stock split of the
Common Stock that initially yields a post-split stock price of at least $4.00
per share of Common Stock.

 

(t) Public Offering. The Company shall, no later than the date that is six (6)
months following the Closing Date, complete a Qualified Public Offering (as
defined in the Notes).

 

(u) Closing Documents. On or prior to fourteen (14) calendar days after the
Closing Date, the Company agrees to deliver, or cause to be delivered, to each
Buyer and Schulte Roth & Zabel LLP a complete closing set of the executed
Transaction Documents, Securities and any other documents required to be
delivered to any party pursuant to Section 7 hereof or otherwise.

 

(v) Pledges of Intellectual Property Rights. The Company hereby agrees that it
shall not pledge, mortgage, encumber or otherwise permit the Intellectual
Property Rights to be subject to any lien, security interest, encumbrances, or
charge (such actions hereinafter referred to collectively as “Pledge”) any of
its Intellectual Property Rights except for Pledges related to current
commercial development agreements as listed on Schedule 4(v) or for future
commercial development agreements entered into in the ordinary course of
business. The Company hereby further agrees: (a) to promptly notify the
Collateral Agent of any such future commercial development agreements (but only
if the Collateral Agent executes a confidentiality agreement with respect to any
material, non-public information regarding or related to such commercial
development agreements prior to its receipt of any such material, non-public
information), and (b) to amend Schedule 4(v) in connection with such additional
Pledges, with the approval of the Collateral Agent, which approval shall not be
unreasonably withheld.

 

- 25 -

 

 

(w) Additional Insured. Within thirty (30) days following the Closing Date (or
such later date as the Collateral Agent may agree in its sole discretion), the
Company shall deliver to the Collateral Agent insurance certificates and loss
payable and additional insured endorsement in favor of the Collateral Agent, in
each case, in form and substance satisfactory to the Collateral Agent, with
respect to each insurance policy of the Company and/ or each of its
subsidiaries.

 

(x) Certain Trading Activities.  Each Buyer hereby covenants and agrees not to,
and shall cause its affiliates not to, engage, directly or indirectly, in any
Short Sales or hedging transactions relating to any of the Securities at any
time prior to June 2, 2015.  As used herein, “Short Sales” means all “short
sales” as defined in Rule 200 promulgated under Regulation SHO under the 1934
Act (but shall not be deemed to include the location and/or reservation of
borrowable shares of Common Stock).  Such Buyer is aware that Short Sales and
other hedging activities may be subject to applicable federal and state
securities laws, rules and regulations and such Buyer acknowledges that the
responsibility of compliance with any such federal or state securities laws,
rules and regulations is solely the responsibility of such Buyer.

 

5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

 

(a) Register. The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to each
holder of Securities), a register for the Notes and the Warrants in which the
Company shall record the name and address of the Person in whose name the Notes
and the Warrants have been issued (including the name and address of each
transferee), the principal amount of Notes held by such Person, the number of
Conversion Shares issuable pursuant to the terms of the Notes and the number of
Warrant Shares issuable upon exercise of the Warrants held by such Person. The
Company shall keep the register open and available at all times during business
hours for inspection of any Buyer or its legal representatives.

 

(b) Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, in the
form of Exhibit E attached hereto (the "Irrevocable Transfer Agent
Instructions") to issue certificates or credit shares to the applicable balance
accounts at DTC, registered in the name of each Buyer or its respective
nominee(s), for the Conversion Shares and the Warrant Shares issued at the
Closing or pursuant to the terms of the Notes or exercise of the Warrants in
such amounts as specified from time to time by each Buyer to the Company upon
conversion of the Notes or exercise of the Warrants. The Company warrants that
no instruction other than the Irrevocable Transfer Agent Instructions referred
to in this Section 5(b), and stop transfer instructions to give effect to
Section 2(f) hereof, will be given by the Company to its transfer agent, and
that the Securities shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement and the
other Transaction Documents. If a Buyer effects a sale, assignment or transfer
of the Securities in accordance with Section 2(f), the Company shall permit the
transfer and shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such
name and in such denominations as specified by such Buyer to effect such sale,
transfer or assignment. In the event that such sale, assignment or transfer
involves the Conversion Shares or the Warrant Shares sold, assigned or
transferred pursuant to an effective registration statement or pursuant to Rule
144, the transfer agent shall issue such Securities to the Buyer, assignee or
transferee, as the case may be, without any restrictive legend. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to a Buyer. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5(b) will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5(b), that a Buyer shall be entitled,
in addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.

 

- 26 -

 

 

6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

 

The obligation of the Company hereunder to issue and sell the Notes and the
related Warrants to each Buyer at the Closing is subject to the satisfaction, at
or before the Closing Date, of each of the following conditions, provided that
these conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion by providing each Buyer with prior
written notice thereof:

 

(i) Such Buyer shall have executed each of the Transaction Documents to which it
is a party and delivered the same to the Company.

 

(ii) Such Buyer shall have delivered its Purchase Price to the Company (less, in
the case of Empery, the amounts withheld pursuant to Section 4(h)), for the
Notes and the related Warrants being purchased by such Buyer at the Closing by
wire transfer of immediately available funds pursuant to the wire instructions
provided by the Company.

 

(iii) The representations and warranties of such Buyer shall be true and correct
as of the date when made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date
which shall be true and correct as of such specified date), and such Buyer shall
have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by such Buyer at or prior to the Closing Date.

 

7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.

 

The obligation of each Buyer hereunder to purchase the Notes and the related
Warrants at the Closing is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions, provided that these conditions are
for each Buyer's sole benefit and may be waived by such Buyer at any time in its
sole discretion by providing the Company with prior written notice thereof:

 

(i) The Company and each of its Subsidiaries shall have duly executed and
delivered to such Buyer each of the following documents to which it is a party:
(A) each of the Transaction Documents, (B) the Notes (allocated in such
principal amounts as such Buyer shall request), being purchased by such Buyer at
the Closing pursuant to this Agreement and (C) the related Warrants (allocated
in such amounts as such Buyer shall request) being purchased by such Buyer at
the Closing pursuant to this Agreement.

 

- 27 -

 

 

(ii) Such Buyer shall have received the opinion of LKP Global Law, LLP, the
Company's outside counsel, dated as of the Closing Date, in substantially the
form of Exhibit F attached hereto.

 

(iii) The Company shall have delivered to such Buyer a copy of the Irrevocable
Transfer Agent Instructions, in the form of Exhibit E attached hereto, which
instructions shall have been delivered to and acknowledged in writing by the
Company's transfer agent.

 

(iv) The Company shall have delivered to such Buyer a certificate evidencing the
formation and good standing of the Company and each of its Subsidiaries in such
entity's jurisdiction of formation issued by the Secretary of State (or
comparable office) of such jurisdiction, as of a date within ten (10) days of
the Closing Date.

 

(v) The Company shall have delivered to such Buyer a certificate evidencing the
Company's and each of its Subsidiaries' qualification as a foreign corporation
and good standing issued by the Secretary of State (or comparable office) of
each jurisdiction in which the Company and its Subsidiaries conduct business, as
of a date within ten (10) days of the Closing Date.

 

(vi) The Company shall have delivered to such Buyer a certificate, executed by
the Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(b) as adopted by the Company's and each of
its Subsidiaries' Board of Directors in a form reasonably acceptable to such
Buyer, (ii) the Articles of Incorporation of the Company and each of its
Subsidiaries and (iii) the Bylaws of the Company and each of its Subsidiaries,
each as in effect at the Closing, in the form attached hereto as Exhibit G.

 

(vii) The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date which shall be true and correct as of such specified date) and the Company
shall have performed, satisfied and complied in all respects with the covenants,
agreements and conditions required by the Transaction Documents to be performed,
satisfied or complied with by the Company at or prior to the Closing Date. Such
Buyer shall have received a certificate, executed by the Chief Executive Officer
of the Company, dated as of the Closing Date, to the foregoing effect and as to
such other matters as may be reasonably requested by such Buyer in the form
attached hereto as Exhibit H.

 

- 28 -

 

 

(viii) The Company shall have delivered to each Buyer a lock-up agreement in the
form attached hereto as Exhibit I executed and delivered by each of the Persons
listed on Schedule 7(viii) (collectively, the "Lock Up Agreements").

 

(ix) The Common Stock (I) shall be designated for quotation or listed on the
Principal Market and (II) shall not have been suspended, as of the Closing Date,
by the SEC or the Principal Market from trading on the Principal Market nor
shall suspension by the SEC or the Principal Market have been threatened, as of
the Closing Date, either (A) in writing by the SEC or the Principal Market or
(B) by falling below the minimum listing maintenance requirements of the
Principal Market.

 

(x) The Company shall have obtained all governmental, regulatory or third party
consents and approvals, if any, necessary for the sale of the Securities.

 

(xi) Each of the Company's Subsidiaries shall have executed and delivered to
such Buyer the Guarantee Agreement.

 

(xii) The Collateral Agent shall have received certified copies of request for
copies of information on Form UCC-11, listing all effective financing statements
which name as debtor the Company or any of its Subsidiaries and which are filed
in such office or offices as may be necessary or, in the opinion of the
Collateral Agent, desirable to perfect the security interests purported to be
created by the Security Agreement, together with copies of such financing
statements, none of which, except as otherwise agreed in writing by the
Collateral Agent, shall cover any of the Collateral, and the results of searches
for any tax lien and judgment lien filed against such person or its property,
which results, except as otherwise agreed to in writing by the Collateral Agent,
shall not show any such liens.

 

(xiii) The Collateral Agent shall have received the Security Agreement, duly
executed by the Company and each of its Subsidiaries, together with the original
stock certificates representing all of the equity interests and all promissory
notes required to be pledged thereunder, accompanied by undated stock powers and
allonges executed in blank and other proper instruments of transfer..

 

(xiv) The Company shall have delivered to such Buyer such other documents
relating to the transactions contemplated by this Agreement as such Buyer or its
counsel may reasonably request.

 

8. TERMINATION. In the event that the Closing shall not have occurred with
respect to a Buyer on or before five (5) Business Days from the date hereof due
to the Company's or such Buyer's failure to satisfy the conditions set forth in
Sections 6 and 7 above (and the nonbreaching party's failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date by delivering a written notice to that effect to each
other party to this Agreement and without liability of any party to any other
party; provided, however, that if this Agreement is terminated pursuant to this
Section 8, the Company shall remain obligated to reimburse Empery or its
designee(s), as applicable, for the expenses described in Section 4(h) above.

 

- 29 -

 

 

9. MISCELLANEOUS.

 

(a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

(b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party; provided that a facsimile or “.pdf” electronic
format signature shall be considered due execution and shall be binding upon the
signatory thereto with the same force and effect as if the signature were an
original, not a facsimile or “.pdf” electronic format signature.

 

(c) Headings. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.

 

(d) Severability. If any provision of this Agreement is prohibited by law or
otherwise determined to be invalid or unenforceable by a court of competent
jurisdiction, the provision that would otherwise be prohibited, invalid or
unenforceable shall be deemed amended to apply to the broadest extent that it
would be valid and enforceable, and the invalidity or unenforceability of such
provision shall not affect the validity of the remaining provisions of this
Agreement so long as this Agreement as so modified continues to express, without
material change, the original intentions of the parties as to the subject matter
hereof and the prohibited nature, invalidity or unenforceability of the
provision(s) in question does not substantially impair the respective
expectations or reciprocal obligations of the parties or the practical
realization of the benefits that would otherwise be conferred upon the parties.
The parties will endeavor in good faith negotiations to replace the prohibited,
invalid or unenforceable provision(s) with a valid provision(s), the effect of
which comes as close as possible to that of the prohibited, invalid or
unenforceable provision(s).

 

- 30 -

 

 

(e) Entire Agreement; Amendments. This Agreement and the other Transaction
Documents supersede all other prior oral or written agreements between the
Buyers, the Company, their affiliates and Persons acting on their behalf with
respect to the matters discussed herein, and this Agreement, the other
Transaction Documents and the instruments referenced herein and therein contain
the entire understanding of the parties with respect to the matters covered
herein and therein and, except as specifically set forth herein or therein,
neither the Company nor any Buyer makes any representation, warranty, covenant
or undertaking with respect to such matters. Provisions of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the holders of at least a majority of the
aggregate number of the Conversion Shares and the Warrant Shares issued or
issuable under the Notes (calculated using the Assumed Conversion Price) and
Warrants (without regard to any limitation on conversion or exercise set forth
therein) and shall include Empery so long as Empery or any of its affiliates
holds any Securities (the "Required Holders"); provided that any such amendment
or waiver that complies with the foregoing but that disproportionately,
materially and adversely affects the rights and obligations of any Buyer
relative to the comparable rights and obligations of the other Buyers shall
require the prior written consent of such adversely affected Buyer; provided,
further, that the provisions of Section 4(r) cannot be amended without the
additional prior written approval of the Collateral Agent or its successor. Any
amendment or waiver effected in accordance with this Section 9(e) shall be
binding upon each Buyer and holder of Securities and the Company. No such
amendment shall be effective to the extent that it applies to less than all of
the Buyers or holders of Securities. No consideration shall be offered or paid
to any Person to amend or consent to a waiver or modification of any provision
of any of the Transaction Documents unless the same consideration (other than
the reimbursement of legal fees) also is offered to all of the parties to the
Transaction Documents, holders of Notes or holders of the Warrants, as the case
may be. The Company has not, directly or indirectly, made any agreements with
any Buyers relating to the terms or conditions of the transactions contemplated
by the Transaction Documents except as set forth in the Transaction Documents.
Without limiting the foregoing, the Company confirms that, except as set forth
in this Agreement, no Buyer has made any commitment or promise or has any other
obligation to provide any financing to the Company or otherwise.

 

(f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); (iii) upon receipt, if sent by e-mail (provided that such sent
e-mail is kept on file (whether electronically or otherwise) by the sending
party and the sending party does not immediately receive an automatically
generated message from the recipient’s e-mail server that such e-mail could not
be delivered to such recipient) or (iv) one Business Day after deposit with an
overnight courier service, in each case properly addressed to the party to
receive the same. The addresses, facsimile numbers and e-mail addresses for such
communications shall be:

 

If to the Company:

 

Ener-Core, Inc.

9400 Toledo Way
Irvine, California 92618

  Telephone: (949) 616-3333

  Facsimile:
Attention: (949) 616-3399
Mr. Domonic J. Carney, CFO

  Email: DJ.Carney@ener-core.com

 

- 31 -

 

 

With a copy (for informational purposes only) to:

 

LKP Global Law, LLP 

1901 Avenue of the Stars, Suite 480 

Los Angeles, California 90067 

  Telephone: (424) 239-1890

  Facsimile: (424) 239-1882 

  Attention: Kevin K. Leung, Esq. 

  E-mail: kleung@lkpgl.com

 

If to the Transfer Agent:

 

VStock Transfer, LLC. 

18 Lafayette Place 

Woodmere, New York 11598

  Telephone: (212) 828-8436 

  Facsimile: (646) 536-3179 

  Attention: Yoel Goldfeder 

  E-mail: yoel@vstocktransfer.com

 

If to a Buyer, to its address, facsimile number and e-mail address set forth on
the Schedule of Buyers, with copies to such Buyer's representatives as set forth
on the Schedule of Buyers,

 

with a copy (for informational purposes only) to:

 

Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022

  Telephone: (212) 756-2000

  Facsimile: (212) 593-5955

  Attention: Eleazer N. Klein, Esq.

  E-mail: eleazer.klein@srz.com

 

or to such other address, facsimile number and/or e-mail address and/or to the
attention of such other Person as the recipient party has specified by written
notice given to each other party five (5) days prior to the effectiveness of
such change. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine or e-mail containing
the time, date, recipient facsimile number and an image of the first page of
such transmission or (C) provided by an overnight courier service shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from an
overnight courier service in accordance with clause (i), (ii) or (iv) above,
respectively. A copy of the e-mail transmission containing the time, date and
recipient e-mail address shall be rebuttable evidence of receipt by e-mail in
accordance with clause (iii) above.

 

- 32 -

 

 

(g) Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns,
including any purchasers of the Notes or the Warrants. The Company shall not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the Required Holders, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Notes and the Warrants). A
Buyer may assign some or all of its rights hereunder without the consent of the
Company, in which event such assignee shall be deemed to be a Buyer hereunder
with respect to such assigned rights.

 

(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, except that each Indemnitee shall have the right to enforce the
obligations of the Company with respect to Section 9(k).

 

(i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3, and the agreements and covenants set forth in Sections 4, 5
and 9 shall survive the Closing. Each Buyer shall be responsible only for its
own representations, warranties, agreements and covenants hereunder.

 

(j) Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as any other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby, including without limitation taking such reasonable action as is
necessary or desirable to perfect a security interest in the Company's or one or
more of its Subsidiaries' Intellectual Property. Also, without limiting the
generality of the requirements of the Company set forth in the Transaction
Documents, the Company hereby covenants and agrees to provide prompt notice to
the Collateral Agent upon the issuance of any patents in the name of the Company
or any of their Subsidiaries anywhere in the world.

 

- 33 -

 

 

(k) Indemnification. (i) In consideration of each Buyer's execution and delivery
of the Transaction Documents and acquiring the Securities thereunder and in
addition to all of the Company's other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their shareholders,
partners, members, officers, directors, employees and direct or indirect
investors and any of the foregoing Persons' agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Indemnitees")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby or
(c) any cause of action, suit or claim brought or made against such Indemnitee
by a third party (including for these purposes a derivative action brought on
behalf of the Company) and arising out of or resulting from (i) the execution,
delivery, performance or enforcement of the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any
disclosure made by such Buyer pursuant to Section 4(j), or (iv) the status of
such Buyer or holder of the Securities as an investor in the Company pursuant to
the transactions contemplated by the Transaction Documents. To the extent that
the foregoing undertaking by the Company may be unenforceable for any reason,
the Company shall make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities that is permissible under applicable law.

 

(ii) Promptly after receipt by an Indemnitee under this Section 9(k) of notice
of the commencement of any action or proceeding (including any governmental
action or proceeding) involving an Indemnified Liability, such Indemnitee shall,
if a claim for indemnification in respect thereof is to be made against any
indemnifying party under this Section 9(k), deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnitee; provided, however, that an Indemnitee
shall have the right to retain its own counsel with the fees and expenses of not
more than one counsel for such Indemnitee to be paid by the indemnifying party,
if, in the reasonable opinion of the Indemnitee, the representation by such
counsel of the Indemnitee and the indemnifying party would be inappropriate due
to actual or potential differing interests between such Indemnitee and any other
party represented by such counsel in such proceeding. Legal counsel referred to
in the immediately preceding sentence shall be selected by the Buyer holding at
least a majority of the aggregate principal amount of the Notes. The Indemnitee
shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or Indemnified Liabilities by the
indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the Indemnitee that relates to such action or
Indemnified Liabilities. The indemnifying party shall keep the Indemnitee fully
apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. No indemnifying party shall be liable for any
settlement of any action, claim or proceeding effected without its prior written
consent, provided, however, that the indemnifying party shall not unreasonably
withhold, delay or condition its consent. No indemnifying party shall, without
the prior written consent of the Indemnitee, which consent shall not be
unreasonably withheld conditioned or delayed, consent to entry of any judgment
or enter into any settlement or other compromise which (i) does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnitee of a release from all liability in respect to such Indemnified
Liabilities or litigation, (ii) requires any admission of wrongdoing by such
Indemnitee, or (iii) obligates or requires an Indemnitee to take, or refrain
from taking, any action. Following indemnification as provided for hereunder,
the indemnifying party shall be subrogated to all rights of the Indemnitee with
respect to all third parties, firms or corporations relating to the matter for
which indemnification has been made. The failure to deliver written notice to
the indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnitee under this Section 9(k), except to the extent that the indemnifying
party is prejudiced in its ability to defend such action.

 

- 34 -

 

 

(iii) The indemnification required by this Section 9(k) shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Liabilities are
incurred.

 

(iv) The indemnity agreements contained herein shall be in addition to (x) any
cause of action or similar right of the Indemnitee against the indemnifying
party or others, and (y) any liabilities the indemnifying party may be subject
to pursuant to the law.

 

(l) No Strict Construction. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.

 

(m) Remedies. Each Buyer and each holder of the Securities shall have all rights
and remedies set forth in the Transaction Documents and all rights and remedies
which such holders have been granted at any time under any other agreement or
contract and all of the rights which such holders have under any law. Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law. Furthermore, the Company recognizes
that in the event that it fails to perform, observe, or discharge any or all of
its obligations under the Transaction Documents, any remedy at law may prove to
be inadequate relief to the Buyers. The Company therefore agrees that the Buyers
shall be entitled to seek temporary and permanent injunctive relief in any such
case without the necessity of proving actual damages and without posting a bond
or other security.

 

(n) Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction
Documents, whenever any Buyer exercises a right, election, demand or option
under a Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Buyer may rescind or
withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights.

 

- 35 -

 

 

(o) Payment Set Aside. To the extent that the Company makes a payment or
payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, foreign, state or federal law, common law or equitable cause of
action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred.

 

(p) Independent Nature of Buyers' Obligations and Rights. The obligations of
each Buyer under any Transaction Document are several and not joint with the
obligations of any other Buyer, and no Buyer shall be responsible in any way for
the performance of the obligations of any other Buyer under any Transaction
Document. Nothing contained herein or in any other Transaction Document, and no
action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as, and the Company acknowledges that the Buyers do not so
constitute, a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Buyers are in any way acting in concert
or as a group, and the Company shall not assert any such claim with respect to
such obligations or the transactions contemplated by the Transaction Documents
and the Company acknowledges that the Buyers are not acting in concert or as a
group with respect to such obligations or the transactions contemplated by the
Transaction Documents. The Company acknowledges and each Buyer confirms that it
has independently participated in the negotiation of the transaction
contemplated hereby with the advice of its own counsel and advisors. Each Buyer
shall be entitled to independently protect and enforce its rights, including,
without limitation, the rights arising out of this Agreement or out of any other
Transaction Documents, and it shall not be necessary for any other Buyer to be
joined as an additional party in any proceeding for such purpose.

 

[Signature Page Follows]

 

- 36 -

 

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

 

      COMPANY:               ENER - CORE, INC.                 By:          
Name: Alain J. Castro         Title: Chief Executive Officer  

  

[Signature Page to Securities Purchase Agreement]

 

 

 

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

 

      BUYERS:               By:           Name:         Title:

 

 

 

 

SCHEDULE OF BUYERS

 

(1) (2) (3) (4) (5) (6)             Buyer Address and
Facsimile Number Aggregate Principal Amount of Notes Number of
Warrant Shares Purchase Price Legal
Representative's
Address
and
Facsimile
Number                                                                          
                                 

 

 

 

 

EXHIBITS

 

Exhibit A Form of Notes Exhibit B Form of Warrants Exhibit C Form of Guarantee
Agreement Exhibit D Form of Security Agreement Exhibit E Form of Irrevocable
Transfer Agent Instructions Exhibit F Form of Opinion of Company Counsel Exhibit
G Form of Secretary's Certificate Exhibit H Form of Officer's Certificate
Exhibit I Form of Lock-Up Agreement

 

SCHEDULES

 

Schedule 3(a) Subsidiaries Schedule 3(j) SEC Documents Schedule 3(k) Absence of
Certain Changes Schedule 3(m) Regulatory Permits Schedule 3(p) Transactions with
Affiliates Schedule 3(q) Equity Capitalization Schedule 3(r) Indebtedness and
Other Contracts Schedule 3(s) Absence of Litigation Schedule 3(w) Intellectual
Property Rights Schedule 3(bb) Internal Accounting and Disclosure Controls
Schedule 3(dd) Ranking of Notes Schedule 4(d) Use of Proceeds Schedule 7(viii)
Lock-Up Parties

 

 

 

 

DISCLOSURE SCHEDULES TO SECURITIES PURCHASE AGREEMENT

  

(Note: Capitalized terms used herein and not otherwise defined shall have the
definitions

ascribed to such terms in the Securities Purchase Agreement.)

 

Schedule 3(a)

(Subsidiaries)

 

Ener-Core Power, Inc., a Delaware corporation

 

Schedule 3(j)

(SEC Documents)

 

On August 14, 2013, the Company failed to file its Form 10-Q filing for the
quarter ended June 30, 2013 on time and failed to file an extension for its Form
10-Q filing on August 15, 2013. The Company resolved the filing delinquency by
filing a Form 12b-25 on August 16, 2013 and completed its Form 10-Q filing on
August 19, 2013.

 

Schedule 3(k)

(Material Adverse Change/Development since December 31, 2014)

 

None, except as noted below:

 

On March 24, 2015 the Company reduced the exercise price of warrants (the “April
2014 Warrants”) for the purchase of up to 4,097,015 issued in April 2014 from
$0.50 per share to $0.11 per share. On April 2, 2015, the Company entered in an
Exchange Agreement (the “Exchange Agreement”) with each holder of the April 2014
Warrants (the “April 2014 Investors”) whereby the Company agreed to issue an
aggregate 3,687,316 shares of the Company’s common stock in exchange for the
cancellation of all of the April 2014 Warrants (the “Warrant Exchange”). The
completion of the delivery of the Exchange Shares and the closing of the Warrant
Exchange occurred on April 17, 2015. See also our Current Report on Form 8-K
filed with the Securities and Exchange Commission (“SEC”) on April 7, 2015 and
Exhibit 10.1 thereto and our Current Report on Form 8-K filed with the SEC on
April 17, 2015. The Exchange Shares to be issued are subject to certain lockup
provisions until the earlier of 60 days after April 17, 2015, or the date that
the weighted average price of the Company’s common stock equals or exceeds $0.30
per share for ten consecutive trading days. See also Exhibit 10.2 on Form 8-K
filed April 7, 2015 with the Securities and Exchange Commission for additional
details on the lock up provisions.

 

On March 25, 2015 the Company increased the shares available for issuance under
the Company’s 2013 Equity Incentive Award Plan to 21,000,000 shares from
14,000,000 shares.

 

 

 

 

Schedule 3(m)

(Regulatory Permits)

 

On August 14, 2013, the Company failed to file its Form 10-Q filing for the
quarter ended June 30, 2013 and failed to file an extension for its Form 10-Q
filing on August 15, 2013. The Company resolved the filing delinquency by filing
a Form 12b-25 on August 16, 2013 and completed its Form 10-Q filing on August
19, 2013. The Company did not receive a notice relating to its trading
eligibility for the one day of delinquency.

 

Schedule 3(p)

(Related Party Transactions)

 

None

 

Schedule 3(q)

(Equity Capitalization)

 

(i)Capital stock subject to preemptive or similar rights, liens or encumbrances

  

None.

  

(ii)Outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any shares of capital
stock of the Company or any of its Subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its Subsidiaries

  

On April 2, 2015 the Company and the holders of the April 2014 Warrants (the
“April 2014 Investors”) entered in Exchange Agreements pursuant to which the
Company agreed to issue an aggregate 3,687,316 shares of the Company’s Common
Stock to the April 2014 Investors in exchange for the cancellation of all of the
April 2014 Warrants. The exchange was completed on April 17, 2015. The figures
below are shown after the completion of the exchange on April 17, 2015.

  

The Company has 117,793,755 shares of Common Stock outstanding.

 

The Company has 13,973,051 options granted to purchase a like number of common
shares with exercise prices ranging between $0.15 and $0.48 per share out of a
total 2013 Equity Incentive Award Plan pool of 21,000,000. 

 

 

 

 

The Company has 5,687,000 warrants outstanding with exercise prices ranging from
$0.50 per share to $1.00 per share as described more fully in the SEC Documents.

 

(iii)Outstanding debt securities, notes, credit agreements, credit facilities or
other agreements, documents or instruments evidencing Indebtedness of the
Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound

  

The Company leases certain assets, primarily computer equipment under agreements
expiring in 2017. The total amount of the Capital leases is approximately
$55,000.

 

The Company leases office and research locations under operating leases which
expires December 31, 2016 for the office location and January 1, 2025 for our
research location. Combined monthly rent is $27,500.

 

The Company expects to enter into a material credit facility so as to deliver a
$2.1 million performance bond for the benefit of Dresser-Rand Company
(“Dresser-Rand”). 

 

The Company expects to enter into up to $1 million of Capital Lease financing
over the next 6 months to finance R&D related equipment and prototypes

 

The Company expects to enter into a material operating lease to rent a
Dresser-Rand turbine in order to build a prototype.

 

(iv)Financing statements securing obligations in any material amounts, either
singly or in the aggregate, filed in connection with the Company or any of its
Subsidiaries

 

None

 

(v)Agreements or arrangements under which the Company or any of its Subsidiaries
is obligated to register the sale of any of their securities under the 1933 Act
(except pursuant to the Registration Rights Agreement)

  

(1)Registration Rights Agreement dated as of April 22, 2013, whereby the Company
is obligated to register 6,613,530 shares of its common stock. The registration
statement for such shares has been filed and declared effective (SEC File No.
333-192612).

 

(2)Registration Rights Agreement dated as of August 24, 2013, whereby the
Company is obligated to register 413,334 shares of its common stock. The
registration statement for such shares has been filed and declared effective
(SEC File No. 333-192612).

 

 

 

 

(3)Letter Agreement dated as of April 27, 2013, between Flex Power Generation,
Inc. (now Ener-Core Power, Inc.) and Roth, granting registration rights to
shares underlying warrants issued to Roth. The registration statement for such
shares has been filed and declared effective (SEC File No. 333-192612).

 

(4)Letter Agreement dated as of October 28, 2013, between Ener-Core Power Inc.
and Colorado, granting registration rights to shares underlying warrants issued
to Colorado. The registration statement for such shares has been filed and
declared effective (SEC File No. 333-192612).

  

(5)Registration Rights Agreement dated as of November 18, 2013, whereby the
Company is obligated to register 1,500,000 shares of its common stock. The
registration statement for such shares has been filed and declared effective
(SEC File No. 333-196046)

  

(6)Letter Agreement dated as of October 25, 2013, between Ener-Core Power Inc.
and Merriman, granting registration rights to 120,000 shares underlying warrants
issued to Merriman. The registration statement for such shares has been filed
and declared effective (SEC File No. 333-196046).

  

(7)Registration Rights Agreement dated as of April 16, 2014, whereby the company
is obligated to register 23,378,502 shares of its common stock. The registration
statement for such shares has been filed and declared effective (SEC File No.
333-196046)

  

(8)Registration Rights Agreement dated as of September 22, 2014, whereby the
Company is obligated to register up to 26,666,667 shares of its common stock.
The registration statement for 25,719,984 shares has been filed and declared
effective (SEC File No. 333-199553). The remaining shares were issued to
insiders who waived their registration rights.

  

(9)Warrants issued in December 2014 to Rufus Dufus LLC, Dylana Dreams, LLC,
Island Pickle, LLC and Pilly Boy, LLC contain piggyback registration rights for
an aggregate 1,923,078 shares issuable upon exercise of such warrants for
registration in the Company’s next available registration statement under the
Securities Act unless registration would cause the Company undue harm or is
prohibited by securities laws, rules or regulations.

  

(vi)Outstanding securities or instruments of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to redeem a security of the
Company or any of its Subsidiaries

  

None

 

 

 

  

(vii)Securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities

  

None

 

(viii)Stock appreciation rights or "phantom stock" plans or agreements or any
similar plan or agreement

 

None

 

(ix)Liabilities or obligations required to be disclosed in the SEC Documents but
not so disclosed in the SEC Documents, other than those incurred in the ordinary
course of the Company's or any of its Subsidiary's' respective businesses and
which, individually or in the aggregate, do not or would not have a Material
Adverse Effect

 

None

  

Schedule 3(r) 

(Indebtedness and Other Contracts)

 

(i)Outstanding indebtedness, including (A) all indebtedness for borrowed money,
(B) all obligations issued, undertaken or assumed as the deferred purchase price
of property or services, including, without limitation, "capital leases" in
accordance with GAAP (other than trade payables entered into in the ordinary
course of business consistent with past practice), (C) all reimbursement or
payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (D) all obligations evidenced by notes, bonds, debentures
or similar instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or businesses, (E) all
indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (F) all
monetary obligations under any leasing or similar arrangement which, in
connection with GAAP, consistently applied for the periods covered thereby, is
classified as a capital lease, (G) all indebtedness referred to in clauses (A)
through (F) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (H) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (G) above

 

 

 

 

Capital Leases Payable

 

Capital leases payable consisted of the following as of December 31, 2014: 

 

   December 31,
2014   December 31,
2013  Capital lease payable to De Lange Landon secured by forklift, 10.0%
interest, due on October 1, 2018, monthly payment of $451.50.  $17,000  
$20,000  Capital lease payable to Dell Computers secured by computer equipment,
15.09% interest, due on November 16, 2016, monthly payment of $592.   12,000  
 17,000  Capital lease payable to Dell Computers secured by computer equipment,
15.09% interest, due on December 15, 2016, monthly payment of $590.   8,000  
 -  Capital lease payable to Dell Computers secured by computer equipment,
15.09% interest, due on January 3, 2017, monthly payment of $405.   8,000    - 
Total capital leases   49,000    37,000 

 

The Company entered into additional capital leases totaling $13,680 payable to
Dell Computers in January, 2015.

 

The Company is obligated to enter into a performance bond of $2,100,000 (the
“Bond”) payable for the benefit of Dresser-Rand in order to secure performance
on delivery of two Power Oxidizer units. The Bond is required within 45 days of
the placement of an order for the Power Oxidizer units.

 

Pursuant to the Exchange Agreement, the Company granted the April 2014 Investors
a right of first refusal to participate in any future sale of the Company’s
equity or equity equivalent securities on a pro rata basis up to 50% of the
securities offered in such sale, from the closing date of the Warrant Exchange
(April 17, 2015) until April 16, 2016 except for a registered underwritten
public offering. In the event that the Company engages in a registered
underwritten public offering of its common stock and the offering price per
share in such registered offering is more than 85% of the closing sale price of
the registrant’s common stock on the date of pricing of such offering, then the
participation right shall be 20% of the securities offered in such registered
offering. Such participation rights are also more fully described in our Current
Report on Form 8-K filed with the SEC April 7, 2015 and in Section 4(b)(xvii) of
the form of Exchange Agreement attached as Exhibit 10.1 to such Current Report.

 

The Company expects to enter into up to $1 million of additional secured
financings within the next 12 months consisting of approximately $500,000 of
capital lease financing for the Company’s multi-fuel test facility under
construction and approximately $500,000 of secured financing for the 1.75MW
power station prototype under development with Dresser-Rand.

 

(ii)Violation of any contract, agreement or instrument, the violation of which,
or default under which, by the other party(ies) to such contract, agreement or
instrument could reasonably be expected to result in a Material Adverse Effect

 

None

 

 

 

 

(iii)Violation of any term of or in default under any contract, agreement or
instrument relating to any Indebtedness, except where such violations and
defaults would not result, individually or in the aggregate, in a Material
Adverse Effect

  

None

 

(iv)Any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company's officers, has or is
expected to have a Material Adverse Effect

 

None

 

Schedule 3(s)

(Litigation)

 

None

 

Schedule 3(w)

(Intellectual Property Rights)

 

(i)All patents owned by the Company and its Subsidiaries

  

Country Name Application Number Application Title File Date Issue Date Patent
Number USA 12/050,734 Oxidizing Fuel 3/18/2008 3/18/2014 8,671,658 USA
12/288,238 Managing Leaks in a Gas Turbine System 10/17/2008 3/12/2013 8,393,160
USA 12/330,151 Oxidizing Fuel in Multiple Operating Modes 12/8/2008 4/22/2014
8,701,413 USA 12/772,622 Distributing Fuel Flow in a Reaction Chamber 5/3/2010  
  USA 09/713,574 Method for Collection and Use of Low-Level Methane Emissions
11/14/2000 5/28/2002 6,393,821 USA 12/870,021 Heating a Reaction Chamber
8/27/2010 1/7/2014 8,621,869 PCT PCT/US12/46112 Speed Controls for Turbine
7/10/2012     USA 13/289,989 Controls for Multi-Combustor Turbine with Gradual
Oxidizer 11/4/2011    

 

 

 

 

Country Name Application Number Application Title File Date Issue Date Patent
Number USA 13/289,996 Multi-Combustor Turbine with Gradual Oxidizer 11/4/2011  
  USA 13/115,910 Integrated Gasifier Power Plant 5/25/2011     USA 13/048,796
Processing Fuel and Water 3/15/2011 11/25/2014 8,893,468 PCT PCT/US11/28547
Processing Fuel and Water 3/15/2011     USA 13/115,902 Gasifier Power Plant with
Management of Wastes 5/25/2011     PCT PCT/US2011/037,974 Gasifier Power Plant
with Management of Wastes 5/25/2011     China 200980155514.1 Method of Operating
a Fuel Oxidizer in Multiple Operating Modes and Fuel Oxidizer System 7/27/2011  
  EPO 09764677.2 Method of Operating a Fuel Oxidizer in Multiple Operating Modes
and Fuel Oxidizer System 6/27/2011 8/20/2014 2,370,681 India 09764677.2 Method
of Operating a Fuel Oxidizer in Multiple Operating Modes and Fuel Oxidizer
System 6/7/2011     Japan 2011-540778 Oxidizing Fuel in Multiple Operating Modes
12/1/2009 13-Dec-13 5,428,102 South Korea 2011-7015389 Method of Operating a
Fuel Oxidizer in Multiple Operating Modes and Fuel Oxidizer System 7/4/2011
8/23/2013 10-1301454 Russia 2011126266.0 Method of Operating a Fuel Oxidizer in
Multiple Operating Modes and Fuel Oxidizer System 12/1/2009 3/20/2014 2,509,904
USA 13/417,129 Gradual Oxidation with Heat Transfer 3/9/2012     USA 13/417,140
Gradual Oxidation with Heat Transfer 3/9/2012     USA 13/417,142 Gradual
Oxidation with Heat Transfer 3/9/2012     USA 13/417,149 Gradual Oxidation with
Heat Control 3/9/2012     USA 13/417,027 Gradual Oxidation with Heat Control
3/9/2012    

 

 

 

 

Country Name Application Number Application Title File Date Issue Date Patent
Number USA 13/417,050 Gradual Oxidation with Heat Control 3/9/2012     USA
13/417,095 Gradual Oxidation with Heat Control 3/9/2012     USA 13/417,105
Gradual Oxidation with Heat Control 3/9/2012     USA 13/417,134 Gradual
Oxidation with Heat Control 3/9/2012     USA 13/417,060 Gradual Oxidation with
Heat Exchange Media 3/9/2012     USA 13/417,074 Gradual Oxidation with
Reciprocating Engine 3/9/2012 9/30/2014                8,844,473 USA 13/417,083
Gradual Oxidation with Reciprocating Engine 3/9/2012 3/18/2014 8,671,917 USA
13/417,090 Gradual Oxidation with Flue Gas 3/9/2012     USA 13/417,162 Staged
Gradual Oxidation 3/9/2012 8/19/2014 8,807,989 USA 13/417,164 Staged Gradual
Oxidation 3/9/2012     USA 13/417,165 Hyrbid Gradual Oxidation 3/9/2012     USA
13/417,167 Gradual Oxidation Below Flameout Temperature 3/9/2012     USA
13/417,094 Gradual Oxidation with Adiabatic Temperature Above Flameout
Temperature 3/9/2012     USA 13/417,100 Gradual Oxidation Below Flameout
Temperature 3/9/2012 3/17/2015 8,980,192 USA 13/417,110 Gradual Oxidation with
Adiabatic Temperature Above Flameout Temperature 3/9/2012 1/6/2015 8,926,917 USA
13/417,048 Gradual Oxidation with Gradual Oxidizer Warmer 3/9/2012     USA
13/417,122 Gradual Oxidation and Autoignition Temperature Controls 3/9/2012    
USA 13/417,125 Gradual Oxidation and Autoignition Temperature Controls 3/9/2012
    USA 13/417,132 Gradual Oxidation and Multiple Flow Paths 3/9/2012    

  

 

 

 

Country Name Application Number Application Title File Date Issue Date Patent
Number USA 13/417,130 Gradual Oxidation and Multiple Flow Paths 3/9/2012
3/17/2015 8,980,193 PCT PCT/US12/46115 Multi-Combustor Turbine 7/10/2012     EPO
PCT/US2011/028547 / 11756873.3 Processing Fuel and Water 9/14/2012     PCT
PCT/US13/30024 Gradual Oxidation with Heat Transfer 3/8/2013     EPO
PCT/US2011/037974 / 11866252.7 Gasifier Power Plant and Management of Wastes
12/16/2013     Japan PCT/US2011/037974 / 2014-512805 Gasifier Power Plant and
Management of Wastes 3/20/2014     China  No. 201180070736.0 Gasifier Power
Plant and Management of Wastes 11/8/2013     Russia 2013157525 Gasifier Power
Plant and Management of Wastes 12/24/2013     USA 14/217,106 Oxidizing Fuel
3/17/2014     USA 14/221,216 Oxidizing Fuel in Multiple Operating Modes
3/20/2014     EPO PCT/US2012/046112 / 12845461.8 Controls for Multi-Combustor
Turbine 5/23/2014     Russia 2014120545 Controls for Multi-Combustor Turbine
5/21/2014     EPO 12846778.4 Multi-Combustor Turbine 5/28/2014     Australia
2013229851 Gradual Oxidation with Heat Transfer 9/27/2014     Brazil
BR1120140222525 Gradual Oxidation with Heat Transfer 9/9/2014     Canada 2866824
Gradual Oxidation with Heat Transfer 9/5/2014     China 2.01378E+13 Gradual
Oxidation with Heat Transfer 11/6/2014     EPO 12757916.5 Gradual Oxidation with
Heat Transfer 10/2/2014     India 7127/CHENP/2014 Gradual Oxidation with Heat
Transfer 9/25/2014     Japan 2014-561169 Gradual Oxidation with Heat Transfer
9/5/2014     South Korea 2014-7028417 Gradual Oxidation with Heat Transfer
10/8/2014     Russia 2014140734 Gradual Oxidation with Heat Transfer 10/8/2014  
 

 

 

 

 

(i)Terminated/expired Intellectual Property Rights

   

None

  

Schedule 3(bb)

(Internal Accounting and Disclosure Controls)

 

As of December 31, 2014, the Company’s management, under the supervision and
with the participation of its Chief Executive Officer and Chief Financial
Officer, performed an evaluation of the effectiveness of its disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934).

 

Based on such evaluation, the disclosure controls and procedures of the Company
and the Subsidiary as of December 31, 2014 were ineffective at the reasonable
assurance level due to the following material weaknesses in internal control
over financial reporting:

 

1.We do not have written documentation of our internal control policies and
procedures.  Management evaluated the impact of our failure to have written
documentation of our internal controls and procedures on our assessment of our
disclosure controls and procedures and has concluded that the control deficiency
that resulted, represented a material weakness.

  

2.We do not have sufficient segregation of duties within accounting functions,
which is a basic internal control.  Due to our size and nature, segregation of
all conflicting duties may not always be possible and may not be economically
feasible. However, to the extent possible, the initiation of transactions, the
custody of assets and the recording of transactions should be performed by
separate individuals.  Management evaluated the impact of our failure to have
segregation of duties on our assessment of our disclosure controls and
procedures and has concluded that the control deficiency that resulted,
represented a material weakness.

 

3.For the year ending December 31, 2014 we did not have accounting and finance
staff with sufficient technical accounting training and experience capable to
manage and process the Company’s derivative equity accounting including stock
options and warrants.  In addition, the Company had 100% turnover during the
year of accounting and finance management and staff.  This turnover resulted in
periods of time where there was insufficient review of internal and external
reports and proof of key internal controls. Management evaluated the impact of
our failure to have inadequate technical accounting experience, coupled with the
turnover, on our assessment of our disclosure controls and procedures and has
concluded that the control deficiency that resulted, represented a material
weakness.

 

4.For the year ending December 31, 2014 we did not have a majority of our
Directors considered to be independent Directors.  Until December 1, 2014, we
had a majority of our Board of Directors considered to the not
independent.  Between December 1, 2014 and December 31, 2014 our Board was split
evenly between independent Directors and non-independent Directors.  Management
evaluated the impact of our failure to have a fully independent Board of
Directors, on our assessment of our disclosure controls and procedures and has
concluded that the control deficiency that resulted, represented a material
weakness.

 

 

 

 

5.For the year ending December 31, 2014, our audit committee consisted of the
Chairman of the committee only.  Management evaluated the impact of our failure
to have an adequate audit committee and an internal audit function on our
assessment of our disclosure controls and procedures and has concluded that the
control deficiency that resulted, represented a material weakness.

 

6.For the year ending December 31, 2014, management concluded that the Company’s
management information systems and information technology internal control
design was deficient because the potential for unauthorized access to certain
information systems and software applications existed during 2014 in several
departments, including corporate accounting. Additionally, certain key controls
for maintaining the overall integrity of systems and data processing were not
properly designed and operating effectively. These deficiencies increased the
likelihood of potential material errors in our financial reporting

 

Schedule 3(dd)

(Ranking of Notes)

 

Senior secured debt - proforma (if deal is closed)

Capital Leases Payable

 

Schedule 4(d)

(Use of Proceeds)

 

Working Capital

 

General Corporate purposes

Collateral for Dresser-Rand Bond (if required)

 

Schedule 4(v)

(Pledges of Intellectual Property Rights)

 

List of current commercial development agreements:

 

1.     Commercial License Agreement, as amended, with Dresser-Rand Company, a
New York general Partnership” dated November 14, 2014

 

 

 

 

Schedule 7(viii)

(Lock Up Agreements)

 

Sail Exit Partners, LLC

Sail Venture Management, LLC

Sail Venture Partners II, LLC