Exhibit 10.2

 

SUBORDINATION AND INTERCREDITOR AGREEMENT

 

THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (as amended, restated,
supplemented or otherwise modified from time to time in accordance with the
terms hereof, this “Agreement”) is entered into as of September 1, 2016, by and
among Longboard Capital Advisors LLC (the “Subordinated Agent”), Ener-Core,
Inc., a Delaware corporation (“Borrower”), Ener-Core Power, Inc., a Delaware
corporation (the “Guarantor”), Anthony Tang, as a Senior Lender (as defined
below) (the “Senior L/C Lender”), and Empery Tax Efficient, LP in its capacity
as collateral agent for the Senior Note Lenders (as defined below) (together
with its successors and assigns, the “Agent”).

 

R E C I T A L S

 

A. Borrower, Agent and Senior Note Lenders have entered into (i) a Securities
Purchase Agreement dated as of April 22, 2015 and (ii) a Securities Purchase
Agreement dated as of May 7, 2015 (collectively, as each may be amended,
restated, supplemented or otherwise modified from time to time, the “Senior Note
Agreements”) pursuant to which, among other things, Senior Note Lenders have
agreed, subject to the terms and conditions set forth in the Senior Note
Agreements, to purchase senior secured notes from Borrower. All of
(i) Borrower’s obligations to Agent and Senior Note Lenders under the Senior
Note Agreements and the other Senior Note Debt Documents (as hereinafter
defined), and (ii) the obligations of the Guarantor, to Agent and Senior Note
Lenders under the Guaranty, dated as of April 23, 2015 (as amended prior to the
date hereof and as the same may be further amended, restated, supplemented or
otherwise modified from time to time, the “Senior Guaranty”), are secured by
first priority liens on and security interests in substantially all of the now
existing and hereafter acquired real and personal property of the Borrower and
the Guarantor (the “Collateral”).

 

B. Borrower and the Senior L/C Lender have entered into that certain Backstop
Security Support Agreement, dated as of November 2, 2015 (as the same may be
amended, restated, supplemented or otherwise modified from time to time, the
“L/C Support Agreement”), pursuant to which Senior L/C Lender may extend credit
to Borrower in the aggregate principal amount not to exceed $2,100,000. All of
Borrower’s and Guarantor’s obligations to the Senior L/C Lender under the Senior
L/C Debt Documents (as hereinafter defined) are secured by subordinated liens on
and security interests in substantially all of the Collateral.

 

C. Agent, Senior L/C Lender, Borrower and Guarantor have entered into that
certain Subordination and Intercreditor Agreement, dated as of November 2, 2015
(as the same may be amended, restated, supplemented or otherwise modified from
time to time, the “Senior Intercreditor Agreement”), which sets forth the rights
and obligations of the Agent and the Senior Note Lenders, on the one hand, and
the Senior L/C Lender, on the other hand.

 

D. Borrower, the buyers party thereto (the “Subordinated Creditors”) and the
Subordinated Agent have entered into that certain Securities Purchase Agreement,
dated as of the date hereof (the “Subordinated SPA”), pursuant to which, among
other things, the Subordinated Creditors have agreed, subject to terms and
conditions set forth therein, to purchase unsecured notes from the Borrower.

 

E. As an inducement to and as one of the conditions precedent to the agreement
of Agent, Senior Note Lenders and the Senior L/C Lender to approve the
transactions contemplated by the Subordinated SPA and the other Subordinated
Debt Documents (as hereinafter defined), Agent, Senior Lenders and the Senior
L/C Lender have required the execution and delivery of this Agreement by
Subordinated Agent, on behalf of itself and the Subordinated Creditors, and the
Credit Parties (as hereinafter defined) in order to set forth the relative
rights and priorities of Agent, Senior Note Lenders, Senior L/C Lender,
Subordinated Agent and Subordinated Creditors under the Senior Debt Documents
(as hereinafter defined) and the Subordinated Debt Documents.

 

NOW, THEREFORE, in order to induce Agent, Senior Note Lenders and the Senior L/C
Lender to consent and approve the transactions contemplated by the Subordinated
Debt Documents, and for other good and valuable consideration, the receipt and
sufficiency of which hereby are acknowledged, the parties hereto hereby agree as
follows:

 

 

 

 

1. Definitions. The following terms shall have the following meanings in this
Agreement:

 

“Agent” has the meaning specified therefor in the preamble hereto.

 

“Bankruptcy Code” shall mean the provisions of Title 11 of the United States
Code, as amended from time to time and any successor statute and all rules and
regulations promulgated thereunder.

 

“Bankruptcy Law” shall mean the Bankruptcy Code and any other federal, state, or
foreign law for the relief of debtors.

 

“Borrower” has the meaning specified therefor in the preamble hereto.

 

“Collateral” has the meaning specified therefor in the recitals hereto.

 

“Credit Parties” shall mean, collectively, Borrower, Guarantor and each other
subsidiary, and any guarantor or obligor of all or any portion of the Senior
Debt and/or the Subordinated Debt.

 

“Distribution” shall mean, with respect to any indebtedness, obligation or
security (a) any payment or distribution by any Credit Party of cash, securities
or other property, by set-off or otherwise, on account of such indebtedness,
obligation or security, (b) any redemption, purchase or other acquisition of
such indebtedness, obligation or security by any Credit Party or (c) the
granting of any lien or security interest to or for the benefit of the holders
of such indebtedness, obligation or security in or upon any property or
interests in property of any Credit Party.

 

“Enforcement Action” shall mean (a) to take from or for the account of any
Credit Party, by set-off or in any other manner, the whole or any part of any
moneys which may now or hereafter be owing by any Credit Party with respect to
the Subordinated Debt (other than receipt of Permitted Subordinated Debt
Payments to the extent permitted under Section 2.3), (b) to sue for payment of,
or to initiate or participate with others in any suit, action or proceeding
against any Credit Party to (i) enforce payment of or to collect the whole or
any part of the Subordinated Debt or (ii) commence judicial enforcement of any
of the rights and remedies under the Subordinated Debt Documents or applicable
law with respect to the Subordinated Debt, including, without limitation, the
commencement of a Proceeding, (c) to accelerate the Subordinated Debt, (d) to
exercise any put option or to cause any Credit Party to honor any redemption or
mandatory prepayment obligation under any Subordinated Debt Document, (e) to
take any action under the provisions of any state or federal law, including,
without limitation, the Uniform Commercial Code, or under any contract or
agreement, to enforce, foreclose upon, take possession of or sell any property
or assets of any Credit Party, including the Collateral, (f) to notify account
debtors or directly collect accounts receivable or other payment rights of any
Credit Party or (g) to exercise in any other manner any remedies with respect to
the Subordinated Debt set forth in any Subordinated Debt Document or that
otherwise might be available to Subordinated Agent at law, in equity, pursuant
to judicial proceeding or otherwise.

 

“Guarantor” has the meaning specified therefor in the preamble hereto.

 

“L/C Support Agreement” has the meaning specified therefor in the recitals
hereto.

 

“Paid in Full” or “Payment in Full” shall mean the occurrence of all of the
following: (a) payment in full in cash of all of the Senior Note Debt and/or of
all of the Senior L/C Debt, as applicable, and (b) with respect to the Senior
L/C Debt, termination, cancellation or cash collateralization in a manner
acceptable to the Senior L/C Lender of all outstanding letters of credit and
obligations in connection therewith.

 

“Permitted Refinancing” shall mean any refinancing of any of the Senior Debt
under the applicable Senior Debt Documents.

 

“Permitted Subordinated Debt Payments” has the meaning specified therefor in
Section 2.3(a).

 

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“Person” shall mean any natural person, corporation, general or limited
partnership, limited liability company, firm, trust, association, government,
governmental agency or other entity, whether acting in an individual, fiduciary
or other capacity.

 

“Proceeding” shall mean any voluntary or involuntary insolvency, bankruptcy,
receivership, custodianship, liquidation, dissolution, reorganization,
assignment for the benefit of creditors, appointment of a custodian, receiver,
trustee or other officer with similar powers or any other proceeding for the
liquidation, dissolution or other winding up of a Person, whether initiated
under the Bankruptcy Code or any other similar federal or state statute.

 

“Senior Default” shall mean any default or event of default under any Senior
Debt Document.

 

“Senior Debt” shall mean the Senior Note Debt and the Senior L/C Debt.

 

“Senior Debt Documents” shall mean the Senior Note Debt Documents and/or the
Senior L/C Debt Documents, as applicable.

 

“Senior Guaranty” has the meaning specified therefor in the recitals hereto.

 

“Senior Intercreditor Agreement” has the meaning specified therefor in the
recitals hereto.

 

“Senior L/C Debt” shall mean all obligations, liabilities and indebtedness of
every nature of each Credit Party from time to time owed to the Senior L/C
Lender under the Senior L/C Debt Documents, including, without limitation, the
principal amount of all debts, claims and indebtedness, accrued and unpaid
interest accruing thereon (including, without limitation, interest accruing
after the commencement of a Proceeding, without regard to whether or not such
interest is an allowed claim) and all fees, costs and expenses, whether primary,
secondary, direct, contingent, fixed or otherwise, heretofore, now and from time
to time hereafter owing, due or payable, whether before or after the filing of a
Proceeding under the Bankruptcy Code.

 

“Senior L/C Debt Documents” shall mean the L/C Support Agreement, any guaranties
with respect to the Senior L/C Debt and all other documents, agreements and
instruments now existing or hereinafter entered into evidencing or pertaining to
all or any portion of the Senior L/C Debt, excluding the Warrant (as defined in
the L/C Support Agreement).

 

“Senior L/C Lender” has the meaning specified therefor in the preamble hereto.

 

“Senior Lenders” shall mean Agent, Senior Note Lenders and/or Senior L/C Lender,
as applicable.

 

“Senior Note Agreements” has the meaning specified therefor in the recitals
hereto.

 

“Senior Note Debt” shall mean all obligations, liabilities and indebtedness of
every nature of each Credit Party from time to time owed to Agent or any Senior
Note Lender under the Senior Note Debt Documents, including, without limitation,
the principal amount of all debts, claims and indebtedness, accrued and unpaid
interest accruing thereon (including, without limitation, interest accruing
after the commencement of a Proceeding, without regard to whether or not such
interest is an allowed claim) and all fees, costs and expenses, whether primary,
secondary, direct, contingent, fixed or otherwise, heretofore, now and from time
to time hereafter owing, due or payable, whether before or after the filing of a
Proceeding under the Bankruptcy Code.

 

“Senior Note Debt Documents” shall mean the Senior Note Agreements, the Senior
Guaranty and all other agreements, documents and instruments executed from time
to time in connection therewith, including, without limitation, the senior
secured notes issued pursuant to the Senior Note Agreements, as the same may be
amended, restated, supplemented, refinanced or otherwise modified from time to
time, as permitted hereunder.

 

“Senior Note Lenders” shall mean the holders of the Senior Note Debt, and shall
include, without limitation, the “Buyers”, as such term is defined in each of
the Senior Note Agreements.

 

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“Subordinated Agent” has the meaning specified therefor in the preamble hereto.

 

“Subordinated Creditors” has the meaning specified therefor in the recitals
hereto.

 

“Subordinated Debt” shall mean all of the obligations, liabilities and
indebtedness of each Credit Party to the Subordinated Agent and the Subordinated
Creditors evidenced by or incurred pursuant to the Subordinated Debt Documents.

 

“Subordinated Debt Documents” shall mean the Subordinated SPA, the Subordinated
Warrants, the Subordinated Notes, any guaranties with respect to the
Subordinated Debt and all other documents, agreements and instruments executed
from time to time in connection therewith, as the same may be amended, restated,
supplemented, refinanced or otherwise modified from time to time, as permitted
hereunder.

 

“Subordinated Notes” shall mean the unsecured notes issued to the Subordinated
Creditors pursuant to the Subordinated SPA.

 

“Subordinated Warrants” shall mean the warrants to purchase shares of common
stock of the Borrower issued to the Subordinated Creditors pursuant to the
Subordinated SPA, including the Additional Warrants (as defined in the
Subordinated SPA) issuable after the date hereof, if any.

 

2. Subordination.

 

2.1. Subordination of Subordinated Debt to Senior Debt. Each Credit Party
covenants and agrees, and the Subordinated Agent, on behalf itself and each
Subordinated Creditor, hereby covenants and agrees and by the Subordinated
Agent’s and the Subordinated Creditors’ acceptance of the Subordinated Debt
Documents (whether upon original issue or upon transfer or assignment) likewise
covenants and agrees, notwithstanding anything to the contrary contained in any
of the Subordinated Debt Documents, that the payment of any and all of the
Subordinated Debt shall be subordinate and subject in right and time of payment,
to the extent and in the manner hereinafter set forth, to the Payment in Full of
all Senior Debt. Each holder of Senior Debt, whether now outstanding or
hereafter created, incurred, assumed or guaranteed, shall be deemed to have
acquired Senior Debt in reliance upon the provisions contained in this
Agreement.

 

2.2. Liquidation, Dissolution, Bankruptcy. In the event of any Proceeding
involving any Credit Party:

 

(a) All Senior Debt shall first be Paid in Full before any Distribution, whether
in cash, securities or other property, shall be made to Subordinated Agent or
any Subordinated Creditor on account of any Subordinated Debt.

 

(b) Any Distribution, whether in cash, securities or other property which would
otherwise, but for the terms hereof, be payable or deliverable in respect of the
Subordinated Debt shall be paid or delivered directly to Agent (to be held
and/or applied to the Senior Note Debt by Agent in accordance with the terms of
the Senior Note Debt Documents) until all Senior Note Debt is Paid in Full (upon
such event Agent shall deliver to Senior L/C Lender (or to such other Person
entitled thereto under applicable law) amounts and any cash, securities or other
property held and not applied to the Senior Note Debt), and thereafter to Senior
L/C Lender (to be held and/or applied to the Senior L/C Debt by Senior L/C
Lender in accordance with the terms of the Senior L/C Debt Documents) until all
Senior L/C Debt is Paid in Full. The Subordinated Agent, on behalf of itself and
each Subordinated Creditor, irrevocably authorizes, empowers and directs any
debtor, debtor in possession, receiver, trustee, liquidator, custodian,
conservator or other Person having authority, to pay or otherwise deliver all
such Distributions to Agent (to be held and/or applied to the Senior Note Debt
by Agent in accordance with the terms of the Senior Note Debt Documents) until
all Senior Note Debt is Paid in Full (upon such event Agent shall deliver to
Senior L/C Lender (or to such other Person entitled thereto under applicable
law) amounts and any cash, securities or other property held and not applied to
the Senior Note Debt), and thereafter to Senior L/C Lender (to be held and/or
applied to the Senior L/C Debt by Senior L/C Lender in accordance with the terms
of the Senior L/C Debt Documents) until all Senior L/C Debt is Paid in Full. The
Subordinated Agent, on behalf of itself and each Subordinated Creditor, also
irrevocably authorizes and empowers Agent until all Senior Note Debt is Paid in
Full, and thereafter Senior L/C Lender until all Senior L/C Debt is Paid in
Full, in the name of Subordinated Agent, on behalf of itself and each
Subordinated Creditor, to demand, sue for, collect and receive any and all such
Distributions.

 

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(c) The Subordinated Agent, on behalf of itself and each Subordinated Creditor,
agrees (i) not to initiate, prosecute or participate in any claim, action or
other proceeding challenging the enforceability, validity, perfection or
priority of the Senior Debt or any liens and security interests securing the
Senior Debt, (ii) not to, directly or indirectly, provide, offer to provide, or
support any financing (other than any DIP Financing provided by the Senior Note
Lenders) provided under Section 364 of the Bankruptcy Code or any similar
provision of any other Bankruptcy Law (such financing, a “DIP Financing”),
without the written consent of the Senior Lenders, (iii) not to object to any
DIP Financing provided by any Senior Note Lender and (iv) to consent to the use
of cash collateral (as such term is defined in Section 363(a) of the Bankruptcy
Code; herein, “Cash Collateral”), on which the Agent has a lien to the extent
the Agent has consented to such use of Cash Collateral.

 

(d) Subordinated Agent, on behalf of itself and each Subordinated Creditor,
agrees to execute, verify, deliver and file any proofs of claim in respect of
the Subordinated Debt requested by Agent until all Senior Note Debt is Paid in
Full, and thereafter by Senior L/C Lender until all Senior L/C Debt is Paid in
Full in connection with any such Proceeding and hereby irrevocably authorizes,
empowers and appoints Agent until all Senior Note Debt is Paid in Full, and
thereafter Senior L/C Lender until all Senior L/C Debt is Paid in Full, its
agent and attorney-in-fact with full power of substitution and with full
authority in the place and stead of Subordinated Agent and each Subordinated
Creditor and in the name of Subordinated Agent and each Subordinated Creditor or
otherwise to (i) execute, verify, deliver and file such proofs of claim upon the
failure of Subordinated Agent or the Subordinated Creditors promptly to do so
prior to 10 days before the expiration of the time to file any such proof of
claim and (ii) vote such claim in any such Proceeding upon the failure of
Subordinated Agent or Subordinated Creditors to do so prior to 10 days before
the expiration of the time to vote any such claim; provided neither Agent nor
Senior L/C Lender shall have any obligation to execute, verify, deliver, file
and/or vote any such proof of claim. In the event that Agent or Senior L/C
Lender, as applicable, votes any claim in accordance with the authority granted
hereby, Subordinated Agent and each Subordinated Creditor shall not be entitled
to change or withdraw such vote.

 

(e) The Senior Debt shall continue to be treated as Senior Debt and the
provisions of this Agreement shall continue to govern the relative rights and
priorities of Senior Lenders, Subordinated Agent and Subordinated Creditors even
if all or part of the Senior Debt or the security interests securing the Senior
Note Debt and/or any security interests securing the Senior L/C Debt are
subordinated, set aside, avoided, invalidated or disallowed in connection with
any such Proceeding, and this Agreement shall be reinstated if at any time any
payment of any of the Senior Debt is rescinded or must otherwise be or is
returned by any holder of Senior Debt or any representative of such holder.

 

2.3. Subordinated Debt Payment Restrictions.

 

(a) Notwithstanding the terms of the Subordinated Debt Documents, each Credit
Party hereby agrees that it may not make, and the Subordinated Agent, on behalf
of itself and each Subordinated Creditor, hereby agrees that it will not accept,
any Distribution with respect to the Subordinated Debt until all of the Senior
Debt is Paid in Full; provided, that, (i) so long as no Senior Default has
occurred and is continuing or would result therefrom, the Credit Parties may
make, and the Subordinated Agent may accept, cash interest payments in
accordance with Section 2 of the Subordinated Notes (as in effect on the date
hereof) and (ii) nothing in this Agreement shall prohibit issuances of common
stock of the Borrower in accordance with the provisions of (A) the Subordinated
Notes (as in effect on the date hereof) and (B) the Subordinated Warrants (as in
effect on the date hereof) (such Distributions described in clauses (i) and (ii)
above, the “Permitted Subordinated Debt Payments”).

 

(b) No Senior Default shall be deemed to have been waived for purposes of this
Section 2.3 unless and until the Credit Parties shall have received a written
waiver from Agent and/or Senior L/C Lender, as applicable.

 

 5 

 

2.4. Subordinated Debt Standstill Provisions. Until all Senior Debt is Paid in
Full, Subordinated Agent and each Subordinated Creditor shall not, without the
prior written consent of Agent and Senior L/C Lender, take any Enforcement
Action with respect to the Subordinated Debt.

 

2.5. Incorrect Payments. If any Distribution on account of the Subordinated Debt
not permitted to be made by any Credit Party or accepted by Subordinated Agent
under this Agreement is made and received by Subordinated Agent or any
Subordinated Creditor, such Distribution shall not be commingled with any of the
assets of Subordinated Agent, shall be held in trust by Subordinated Agent for
the benefit of Senior Lenders and shall be promptly paid over to Agent (to be
held and/or applied to the Senior Note Debt by Agent in accordance with the
terms of the Senior Note Debt Documents) until all Senior Note Debt is Paid in
Full (upon such event Agent shall deliver to Senior L/C Lender (or to such other
Person entitled thereto under applicable law) amounts and Distributions held and
not applied to the Senior Note Debt), and thereafter to Senior L/C Lender (to be
held and/or applied to the Senior L/C Debt by Senior L/C Lender in accordance
with the terms of the Senior L/C Debt Documents) until all Senior L/C Debt is
Paid in Full.

 

2.6. Subordination and Release of Liens and Security Interests; Agreement Not to
Contest.

 

(a) Until all Senior Debt has been Paid in Full, any liens and security
interests of Subordinated Agent and each Subordinated Creditor in any Collateral
which may exist in breach of Subordinated Agent’s agreement pursuant to Section
3.2 and Subordinated Agent’s representations and warranties pursuant to Section
5.1, shall be and hereby are subordinated for all purposes and in all respects
to the liens and security interests of Senior Lenders in such Collateral,
regardless of the time, manner or order of perfection of any such liens and
security interests. In the event that Subordinated Agent obtains any liens or
security interests in the Collateral, Subordinated Agent shall (or shall cause
its agent) to promptly execute and deliver to Agent (or after all of the Senior
Note Debt has been Paid in Full, Senior L/C Lender) such termination statements
and releases as Agent or Senior L/C Lender, as applicable, shall request to
effect the release of the liens and security interests of Subordinated Agent and
each Subordinated Creditor in such Collateral. In furtherance of the foregoing,
Subordinated Agent hereby irrevocably appoints Agent (and after all of the
Senior Note Debt has been Paid in Full, Senior L/C Lender) its attorney-in-fact,
with full power of substitution and with full authority in the place and stead
of Subordinated Agent and each Subordinated Creditor and in the name of
Subordinated Agent and each Subordinated Creditor or otherwise, to execute and
deliver any document or instrument which Subordinated Agent or Subordinated
Creditor may be required to deliver pursuant to this Section 2.6.

 

(b) Subordinated Agent, on behalf of itself and each Subordinated Creditor,
agrees that it will not at any time contest the validity, perfection, priority
or enforceability of the Senior Debt, the Senior Debt Documents, or the liens
and security interests of Senior Lenders in the Collateral securing the Senior
Debt.

 

2.7. Sale, Transfer or other Disposition of Subordinated Debt.

 

(a) Subordinated Agent and Subordinated Creditors shall not sell, assign,
pledge, dispose of or otherwise transfer all or any portion of the Subordinated
Debt or any Subordinated Debt Document without the prior written consent of the
Senior Lenders.

 

(b) Notwithstanding the foregoing, the subordination effected hereby shall
survive any sale, assignment, pledge, disposition or other transfer of all or
any portion of the Subordinated Debt in violation of the foregoing prohibition,
and the terms of this Agreement shall be binding upon the successors and assigns
of the Subordinated Agent and Subordinated Creditors, as provided in Section 10
hereof.

 

2.8. Application of Proceeds from Sale or other Disposition of the Collateral.
In the event of any sale, transfer or other disposition (including a casualty
loss or taking through eminent domain or expropriation) of any Collateral, the
proceeds resulting therefrom (including insurance proceeds) shall be applied in
accordance with the terms of the Senior Debt Documents (as in effect on the date
hereof) until such time as all of the Senior Debt is Paid in Full, then any
excess shall be paid to the Subordinate Agent.

 

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2.9. Legends. Until the termination of this Agreement in accordance with Section
16 hereof, the Subordinated Agent, on behalf of itself and each Subordinated
Creditor, will cause to be clearly, conspicuously and prominently inserted on
the face of each Subordinated Debt Document, as well as any renewals or
replacements thereof, the following legend:

 

“This instrument and the rights and obligations evidenced hereby are subordinate
in the manner and to the extent set forth in that certain Subordination and
Intercreditor Agreement, dated as of September 1, 2016 (as the same may be
amended or otherwise modified from time to time pursuant to the terms thereof,
the “Subordination Agreement”), by and among Longboard Capital Advisors LLC (the
“Subordinated Agent”), Ener-Core, Inc., a Delaware corporation (“Borrower”),
Ener-Core Power, Inc., a Delaware corporation (the “Guarantor”), Anthony Tang,
as a Senior Lender (as defined therein) (the “Senior L/C Lender”), and Empery
Tax Efficient, LP in its capacity as collateral agent for the Senior Note
Lenders (as defined therein) (together with its successors and assigns, the
“Agent”), to the indebtedness (including interest) owed by the Credit Parties
(as defined therein) pursuant to that certain (a)(i) Securities Purchase
Agreement dated as of April 22, 2015 and (ii) a Securities Purchase Agreement
dated as of May 7, 2015, in each case of clauses (i) and (ii), by and among
Borrower, Agent and the Senior Note Lenders and (b) Backstop Security Support
Agreement, dated as of November 2, 2015, by and between the Borrower and Senior
L/C Lender, in each case, as amended, restated, supplemented, refinanced or
otherwise modified from time to time; and each holder of this instrument, by its
acceptance hereof, irrevocably agrees to be bound by the provisions of the
Subordination Agreement.”

 

2.10. Obligations Hereunder Not Affected. All rights and interest of the Senior
Lenders hereunder, and all agreements and obligations of Subordinated Agent and
each Subordinated Creditor, any Credit Party hereunder, shall remain in full
force and effect irrespective of:

 

(a) any lack of validity or enforceability of any document evidencing any of the
Senior Debt;

 

(b) any change in the time, manner or place of payment of, or any other term of,
all or any of the Senior Debt, or any other permitted amendment or waiver of or
any release or consent to departure from any of the Senior Debt Documents;

 

(c) any exchange, release or non-perfection of any collateral for all or any of
the Senior Debt;

 

(d) any failure of any Senior Lender to assert any claim or to enforce any right
or remedy against any other party hereto under the provisions of this Agreement
or any Senior Debt Document other than this Agreement;

 

(e) any reduction, limitation, impairment or termination of the Senior Debt for
any reason, including any claim of waiver, release, surrender, alteration or
compromise, and shall not be subject to (and each Credit Party and Subordinated
Agent, on behalf of itself and each Subordinated Creditor, hereby waive any
right to or claim of) any defense or setoff, counterclaim, recoupment or
termination whatsoever by reason of invalidity, illegality, nongenuiness,
irregularity, compromise, unenforceability of, or any other event or occurrence
affecting, any Senior Debt; and

 

(f) any other circumstance, whether similar or dissimilar which might otherwise
constitute a defense available to, or a discharge of, any Credit Party in
respect of the Senior Debt or Subordinated Agent and each Subordinated Creditor
in respect of this Agreement.

 

Subordinated Agent, on behalf of itself and each Subordinated Creditor,
acknowledges and agrees that Senior Lenders may in accordance with the terms of
the Senior Debt Documents, without notice or demand and without affecting or
impairing Subordinated Agent’s obligations hereunder from time to time (i)
renew, compromise, extend, increase, accelerate or otherwise change the time for
payment of, or otherwise change the terms of the Senior Debt or any part
thereof, including, without limitation, to increase or decrease the rate of
interest thereon or the principal amount thereof; (ii) take or hold security for
the payment of the Senior Debt and exchange, enforce, foreclose upon, waive and
release any such security; (iii) apply such security and direct the order or
manner of sale thereof as any Senior Lender in its sole discretion, may
determine; (iv) release and substitute one or more endorsers, warrantors,
borrowers or other obligors; and (v) exercise or refrain from exercising any
rights against the Credit Parties or any other Person, provided that Senior
Lenders shall endeavor to provide written notice to Subordinated Agent in the
event that Senior Lenders renew, compromise, extend, increase, accelerate or
otherwise change the time for payment of, or otherwise change the terms of the
Senior Debt or any part thereof, including, without limitation, to increase or
decrease the rate of interest thereon or the principal amount thereof.

 

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3. Modifications.

 

3.1. Modifications to Senior Debt Documents. Senior Lenders may at any time and
from time to time without the consent of or notice to the Subordinated Agent and
the Subordinated Creditors, without incurring liability to Subordinated Agent
and the Subordinated Creditors and without impairing or releasing the
obligations of Subordinated Agent under this Agreement, change the manner or
place of payment or extend the time of payment of or renew or alter any of the
terms or increase the amount of any or all of the Senior Debt, or amend or
otherwise modify in any manner any agreement, note, guarantee or other
instrument evidencing or securing or otherwise relating to any or all of the
Senior Debt or any Senior Debt Documents.

 

3.2. Modifications to Subordinated Debt Documents. Until all of the Senior Debt
has been Paid in Full, and notwithstanding anything to the contrary contained in
the Subordinated Debt Documents, the Subordinated Agent and each Subordinated
Lender shall not, without the prior written consent of Agent and Senior L/C
Lender, agree to any amendment, modification or supplement to the Subordinated
Debt Documents.

 

4. Waiver of Certain Rights by Subordinated Agent. The Subordinated Agent hereby
waives all notice of the acceptance by Agent and Senior Lenders of the
subordination and other provisions of this Agreement, and Subordinated Agent
expressly consents to reliance by Agent and the Senior Lenders upon the
subordination and other agreements as herein provided.

 

5. Representations and Warranties.

 

5.1. Representations and Warranties of Subordinated Agent. To induce Agent and
Senior L/C Lender to execute and deliver this Agreement, the Subordinated Agent
hereby represents and warrants to Agent and Senior L/C Lender that as of the
date hereof: (a) it has the power and authority to enter into, execute, deliver
and carry out the terms of this Agreement, all of which have been duly
authorized by all proper and necessary action; (b) the execution of this
Agreement by Subordinated Agent will not violate or conflict with any material
agreement binding upon Subordinated Agent or any law, regulation or order or
require any consent or approval which has not been obtained; (c) this Agreement
is the legal, valid and binding obligation of Subordinated Agent, enforceable
against Subordinated Agent in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors’ rights generally and by equitable principles; (d) Subordinated Agent
and each Subordinated Creditor are the sole owners, beneficially and of record,
of the Subordinated Debt Documents and the Subordinated Debt; (e) Subordinated
Agent has the authority to bind all Persons that are currently Subordinated
Creditors and all Persons that become Subordinated Creditors; and (f) the
Subordinated Debt is, and at all times prior to the termination of this
Agreement shall remain, an unsecured obligation of the Credit Parties.

 

5.2. Representations and Warranties of Agent. To induce the Subordinated Agent
to execute and deliver this Agreement, Agent hereby represents and warrants to
the Subordinated Agent that as of the date hereof: (a) Agent is a limited
liability company duly formed and validly existing under the laws of the State
of Delaware; (b) Agent has the power and authority to enter into, execute,
deliver and carry out the terms of this Agreement, all of which have been duly
authorized by all proper and necessary action; (c) the execution of this
Agreement by Agent will not violate or conflict with the organizational
documents of Agent, any material agreement binding upon Agent or any law,
regulation or order or require any consent or approval which has not been
obtained; and (d) this Agreement is the legal, valid and binding obligation of
Agent, enforceable against Agent and each current and future Senior Lender in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors’ rights generally or by equitable
principles.

 

 8 

 

5.3. Representations and Warranties of Senior L/C Lender. To induce the
Subordinated Agent to execute and deliver this Agreement, Senior L/C Lender
hereby represents and warrants to the Subordinated Agent that as of the date
hereof: (a) Agent has the power and authority to enter into, execute, deliver
and carry out the terms of this Agreement, all of which have been duly
authorized by all proper and necessary action; (b) the execution of this
Agreement by Senior L/C Lender will not violate or conflict with any material
agreement binding upon Senior L/C Lender or any law, regulation or order or
require any consent or approval which has not been obtained; and (c) this
Agreement is the legal, valid and binding obligation of Senior L/C Lender,
enforceable against Senior L/C Lender in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors’ rights generally or by equitable principles.

 

6. Subrogation. Subject to the Payment in Full of all Senior Debt, Subordinated
Agent and each Subordinated Creditor shall be subrogated to the rights of Senior
Lenders to receive Distributions with respect to the Senior Debt until the
Subordinated Debt is paid in full. Subordinated Agent, on behalf of itself and
each Subordinated Creditor, agrees that in the event that all or any part of a
payment made with respect to the Senior Debt is recovered from the holders of
the Senior Debt in a Proceeding or otherwise, any Distribution received by
Subordinated Agent or Subordinated Creditors with respect to the Subordinated
Debt at any time after the date of the payment that is so recovered, whether
pursuant to the right of subrogation provided for in this Agreement or
otherwise, shall be deemed to have been received by Subordinated Agent or
Subordinated Creditors in trust as property of the holders of the Senior Debt
and Subordinated Agent or Subordinated Creditors shall forthwith deliver the
same to the Agent for the benefit of the Senior Note Lenders (to be held and/or
applied to the Senior Note Debt by the Agent in accordance with the terms of the
Senior Note Debt Documents) until all Senior Note Debt is Paid in Full (upon
such event Agent shall deliver to Senior L/C Lender (or to such other Person
entitled thereto under applicable law) amounts and Distributions held and not
applied to the Senior Note Debt), and thereafter to Senior L/C Lender (to be
held and/or applied to the Senior L/C Debt by Senior L/C Lender in accordance
with the Senior L/C Debt Documents) until all Senior L/C Debt is Paid in Full. A
Distribution made pursuant to this Agreement to a Senior Lender which otherwise
would have been made to a Subordinated Agent or Subordinated Creditors is not,
as between the Credit Parties and Subordinated Agent and Subordinated Creditors,
a payment by the Credit Parties to or on account of the Senior Debt.

 

7. Modification. Any modification or waiver of any provision of this Agreement,
or any consent to any departure by any party from the terms hereof, shall not be
effective in any event unless the same is in writing and signed by Agent, Senior
L/C Lender and Subordinated Agent, and then such modification, waiver or consent
shall be effective only in the specific instance and for the specific purpose
given. Any notice to or demand on any party hereto in any event not specifically
required hereunder shall not entitle the party receiving such notice or demand
to any other or further notice or demand in the same, similar or other
circumstances unless specifically required hereunder.

 

8. Further Assurances. Each party to this Agreement promptly will execute and
deliver such further instruments and agreements and do such further acts and
things as may be reasonably requested in writing by any other party hereto that
may be necessary in order to effect fully the terms of this Agreement.

 

9. Notices. Unless otherwise specifically provided herein, any notice delivered
under this Agreement shall be in writing addressed to the respective party as
set forth below and may be personally served, sent by facsimile or email
transmission or sent by overnight courier service or certified or registered
United States mail and shall be deemed to have been given (a) if delivered in
person, when delivered; (b) if delivered by facsimile or email transmission, on
the date of transmission if transmitted on a business day before 4:00 p.m. (New
York time) or, if not, on the next succeeding business day; (c) if delivered by
overnight courier, one business day after delivery to such courier properly
addressed; or (d) if by United States mail, four (4) business days after deposit
in the United States mail, postage prepaid and properly addressed.

 

 9 

 

Notices shall be addressed as follows:

 

If to Subordinated Agent:

 

Longboard Capital Advisors LLC

[Address]

[Address]

[Address]

Telephone:

Email:

 

If to Senior L/C Lender:

 

Anthony Tang

[Address]

[Address]

Email:

 

If to any Credit Party:

 

c/o Ener-Core, Inc.
9400 Toledo Way
Irvine, CA 92618

  Attention: Domonic J. Carney, CFO   Telephone: (949) 616-3300   Facsimile:
(949) 616-3399   Email: DJ.Carney@ener-core.com

 

If to Agent:

 

Empery Tax Efficient, LP, as collateral agent
[Address]

[Address]

[Address]

Attention:

Facsimile:

Email:

 

or in any case, to such other address as the party addressed shall have
previously designated by written notice to the serving party, given in
accordance with this Section 9.

 

10. Successors and Assigns. This Agreement shall inure to the benefit of, and
shall be binding upon, the respective successors and assigns of Senior Lenders,
Subordinated Agent and the Credit Parties. To the extent permitted under the
applicable Senior Debt Documents, Senior Lenders may, from time to time, without
notice to the Subordinated Agent, assign or transfer any or all of the Senior
Debt or any interest therein to any Person and, notwithstanding any such
assignment or transfer, or any subsequent assignment or transfer, the Senior
Debt shall, subject to the terms hereof, be and remain Senior Debt for purposes
of this Agreement, and every permitted assignee or transferee of any of the
Senior Debt or of any interest therein shall, to the extent of the interest of
such permitted assignee or transferee in the Senior Debt, be entitled to rely
upon and be the third party beneficiary of the subordination provided under this
Agreement and shall be entitled to enforce the terms and provisions hereof to
the same extent as if such assignee or transferee were initially a party hereto.
Subordinated Agent, on behalf of itself and each Subordinated Creditor, agrees
that any party that consummates a Permitted Refinancing may rely on and enforce
this Agreement.

 

11. Relative Rights. This Agreement shall define the relative rights of Senior
Lenders, Subordinated Agent and Subordinated Creditors. Nothing in this
Agreement shall (a) impair, as among the Credit Parties, Agent and the Senior
Note Lenders, and as among the Credit Parties and the Senior L/C Lender, and as
among the Credit Parties, the Subordinated Agent and the Subordinated Creditors,
the obligation of each Credit Party with respect to the payment of the Senior
Note Debt, the Senior L/C Debt and the Subordinated Debt in accordance with
their respective terms or (b) affect the relative rights of any Senior Lender,
Subordinated Agent or any Subordinated Creditor with respect to any other
creditors of any Credit Party.

 

 10 

 

12. Conflict. In the event of any conflict between any term, covenant or
condition of this Agreement and any term, covenant or condition of any of the
Subordinated Debt Documents or the Senior Debt Documents, the provisions of this
Agreement shall control and govern.

 

13. Headings. The paragraph headings used in this Agreement are for convenience
only and shall not affect the interpretation of any of the provisions hereof.

 

14. Counterparts. This Agreement may be executed in multiple counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument. Delivery of an executed counterpart of this
Agreement by telecopy or electronic mail shall be equally effective as delivery
of an original executed counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by telecopy or electronic mail also shall
deliver an original executed counterpart of this Agreement but the failure to
deliver an original executed counterpart shall not affect the validity,
enforceability, and binding effect of this Agreement.

 

15. Severability. In the event that any provision of this Agreement is deemed to
be invalid, illegal or unenforceable by reason of the operation of any law or by
reason of the interpretation placed thereon by any court or governmental
authority, the validity, legality and enforceability of the remaining provisions
of this Agreement shall not in any way be affected or impaired thereby, and the
affected provision shall be modified to the minimum extent permitted by law so
as most fully to achieve the intention of this Agreement.

 

16. Continuation of Subordination; Termination of Agreement. This Agreement
shall remain in full force and effect until Payment in Full of all of the Senior
Debt, after which this Agreement shall terminate without further action on the
part of the parties hereto.

 

17. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. THE
SUBORDINATED AGENT, AGENT, SENIOR L/C LENDER AND EACH CREDIT PARTY HEREBY
CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE
COUNTY OF NEW YORK, STATE OF NEW YORK AND IRREVOCABLY AGREES THAT ALL ACTIONS OR
PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE LITIGATED IN
SUCH COURTS. THE SUBORDINATED AGENT, AGENT, SENIOR L/C LENDER AND EACH CREDIT
PARTY EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS
AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. THE SUBORDINATED AGENT, AGENT,
SENIOR L/C LENDER AND EACH CREDIT PARTY HEREBY WAIVES PERSONAL SERVICE OF ANY
AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON IT
BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO SUCH
PERSON AT THEIR RESPECTIVE ADDRESSES SET FORTH IN THIS AGREEMENT AND SERVICE SO
MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.

 

18. WAIVER OF JURY TRIAL. THE SUBORDINATED AGENT, EACH CREDIT PARTY, SENIOR L/C
LENDER AND AGENT HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN
ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY
OF THE SUBORDINATED DEBT DOCUMENTS OR ANY OF THE SENIOR DEBT DOCUMENTS AND
AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT
BEFORE A JURY. THE SUBORDINATED AGENT, EACH CREDIT PARTY, SENIOR L/C LENDER AND
AGENT ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A
BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN ENTERING INTO THIS
AGREEMENT, THE SUBORDINATED DEBT DOCUMENTS AND THE SENIOR DEBT DOCUMENTS AND
THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS.
THE SUBORDINATED AGENT, EACH CREDIT PARTY, SENIOR L/C LENDER AND AGENT WARRANTS
AND REPRESENTS THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER
WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS.

 

19. Agent/Senior L/C Lender Relationship. Agent and Senior L/C Lender
acknowledge and agree that, notwithstanding anything to the contrary contained
herein, various rights and obligations among the Agent and the Senior Note
Lenders, on the one hand, and the Senior L/C Lender, on the other hand, are
subject to the Senior Intercreditor Agreement.

 

[Signature Pages Follow]

 

 11 

 

IN WITNESS WHEREOF, the Subordinated Agent, the Credit Parties, Senior L/C
Lender and Agent have caused this Agreement to be executed as of the date first
above written.

 

  SUBORDINATED AGENT:       Longboard Capital Advisors LLC

 

  By:     Name:     Title:  

 

 

[Subordination Agreement]

 

  CREDIT PARTIES:         ENER-CORE, INC.

 

  By:     Name:     Title:  

 

  ENER-CORE POWER, INC.

 

  By:     Name:     Title:  

 

 

[Subordination Agreement]

 

  SENIOR L/C LENDER:           Anthony Tang

 

 

[Subordination Agreement]

 

 

AGENT:

        EMPERY TAX EFFICIENT, LP         By: Empery Asset Management, LP, its
authorized agent         By:     Name: Brett Director   Title: General Counsel

  

 

[Subordination Agreement]