ENER-CORE, INC.

 

2013 EQUITY AWARD INCENTIVE PLAN

 

STOCK OPTION AGREEMENT

 

Unless otherwise defined herein, the terms defined in the 2013 Equity Award
Incentive Plan shall have the same defined meanings in this Stock Option
Agreement (the “Option Agreement”).

 

I.           NOTICE OF GRANT

 

Optionee’s Name:  Alain Castro

 

Optionee’s Address:   512 N. McClurg Ct. Ste. 1707

 

Chicago, IL 60611

 

You have been granted an option to purchase common stock of the Company, subject
to the terms and conditions of the Plan and this Option Agreement, as follows:

 

 

Grant Number AC-1     Date of Grant July 3, 2013     Vesting Commencement Date
November 1, 2013     Exercise Price per Share $0.75     Total Number of Shares
Granted 1,250,000    

Total Exercise Price $ 937,500      

Type of Option:   Incentive Stock Option      

  X Nonstatutory Stock Option      

Term/Expiration Date: May 5, 2018

  

Exercise and Vesting Schedule:

 

This Option shall be exercisable in whole or in part, and this Option (and any
Shares with respect to which the Optionee exercises this Option) shall vest
according to the following vesting schedule, subject to the terms and conditions
of the Plan and this Option Agreement, as follows:

 

1/3 of Total Number of Shares Granted ……….. November 1, 2013

 

1/45 of Total Number of Shares Granted ……… after each month thereafter

 

1

 

 

 

Termination Period:

 

This Option may be exercised, to the extent it is then vested, for three (3)
months after Optionee ceases to be a Service Provider. Upon death or Disability
of the Optionee, this Option may be exercised, to the extent it is then vested,
for six (6) months after Optionee ceases to be Service Provider. In no event
shall this Option be exercised later than the Term/Expiration Date as provided
above.

 

II.           AGREEMENT

 

A.           Grant of Option. The Administrator of the Company hereby grants to
the Optionee named in the Notice of Grant above (the “Optionee”), an option (the
“Option”) to purchase the number of Shares set forth in the Notice of Grant
above, at the exercise price per Share set forth in the Notice of Grant above
(the “Exercise Price”), and subject to the terms and conditions of the Plan,
which is incorporated herein by reference. Subject to Section 14(c) of the
Ener-Core, Inc. 2013 Equity Award Incentive Plan (the “Plan”), in the event of a
conflict between the terms and conditions of the Plan and this Option Agreement,
the terms and conditions of the Plan shall prevail.

 

If designated in the Notice of Grant as an Incentive Stock Option (“ISO”), this
Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code. Nevertheless, to the extent that it exceeds the
$100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option (“NSO”).

 

B.           Exercise of Option. This Option shall be exercisable during its
term in accordance with the provisions of Section 9 of the Plan as follows:

 

1.          Right to Exercise.

 

(a)          This Option shall be exercisable cumulatively according to the
vesting schedule set forth in the Notice of Grant. Alternatively, at the
election of the Optionee, this Option may be exercised in whole or in part at
any time as to Shares that have not yet vested. Vested Shares shall not be
subject to the Company’s repurchase right (as set forth in the Restricted Stock
Purchase Agreement, attached hereto as Exhibit C-1).

 

(b)          As a condition to exercising any rights granted under this Option
for Unvested Shares, the Optionee shall execute the Restricted Stock Purchase
Agreement.

 

(c)          As a condition to exercising any rights granted under this Option,
the Optionee shall execute the Company’s then-current stockholders agreement(s)
applicable to holders of common stock in the Company.

 

(d)          This Option may not be exercised for a fraction of a Share.

 

2.          Method of Exercise. This Option shall be exercisable by delivery of
an exercise notice in the form attached as Exhibit A (the “Exercise Notice”),
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Shares with
respect to which the Optionee exercises this Option (the “Exercised Shares”).
This Option shall be deemed to be exercised upon receipt by the Company of such
fully executed Exercise Notice accompanied by the aggregate Exercise Price.

 

2

 

 

No Shares shall be issued pursuant to the exercise of an Option unless such
issuance and such exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares. Upon an exercise of this Option, all Exercised Shares shall

 

C.           Optionee’s Representations. In the event the Shares have not been
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as
Exhibit B.

 

D.          Lock-Up Period. Optionee hereby agrees that, if so requested by the
Company or any representative of the underwriters (the “Managing Underwriter”)
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the “Market Standoff Period”) following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.

 

E.          Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:

 

1.          cash;

 

2.          check;

 

3.          consideration received by the Company under a formal cashless
exercise program adopted by the Company (in its discretion) in connection with
the Plan; or

 

4.          surrender of other Shares which, (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than
six (6) months on the date of surrender, and (ii) have a Fair Market Value on
the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.

 

F.          Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.

 

3

 

 

G.          Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.

 

H.          Term of Option. This Option may be exercised only within the term
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.

 

I.           Tax Consequences. Set forth below is a brief summary as of the date
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

 

1.          Exercise of NSO. There may be a regular federal income tax liability
upon the exercise of an NSO. The Optionee will be treated as having received
compensation income (taxable at ordinary income tax rates) equal to the excess,
if any, of the Fair Market Value of the Exercised Shares on the date of exercise
over the Exercise Price. If Optionee is an Employee or a former Employee, the
Company will be required to withhold from Optionee’s compensation or collect
from Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.

 

2.          Exercise of ISO. If this Option qualifies as an ISO, there will be
no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Exercised Shares on
the date of exercise over the Exercise Price will be treated as an adjustment to
the alternative minimum tax for federal tax purposes and may subject the
Optionee to the alternative minimum tax in the year of exercise.

 

3.          Exercise of ISO Following Disability. If the Optionee ceases to be
an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months after such termination for the ISO to be qualified as an ISO.

 

4.          Disposition of Shares. In the case of an NSO, if Shares are held for
at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and at least two years after the Date of Grant, any gain
realized on disposition of the Shares will also be treated as long-term capital
gain for federal income tax purposes. If Shares purchased under an ISO are
disposed of within one year after exercise or two years after the Date of Grant,
any gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the difference between the
Exercise Price of the Exercised Shares and the lesser of (i) the Fair Market
Value of the Exercised Shares on the date of exercise, or (ii) the sale price of
the Exercised Shares. Different rules may apply if the Shares are subject to a
substantial risk of forfeiture (within the meaning of Section 83 of the Code) at
the time of purchase. Any additional gain will be taxed as capital gain,
short-term or long-term depending on the period that the ISO Shares were held.

 

4

 

 

5.          Notice of Disqualifying Disposition of ISO Shares. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the Date of Grant, or (ii) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.

 

6.          Section 83(b) Election for Unvested Shares Purchased Pursuant to
Options. With respect to the exercise of an Option for Unvested Shares, an
election (the “Election”) may be filed by the Optionee with the Internal Revenue
Service, within 30 days after the purchase of the Shares, electing pursuant to
Section 83(b) of the Code to be taxed currently on any difference between the
purchase price of the Shares and their Fair Market Value on the date of
purchase. In the case of an NSO, this will result in a recognition of taxable
income to the Optionee on the date of exercise, measured by the excess, if any,
of the Fair Market Value of the Exercised Shares, at the time the Option is
exercised over the purchase price for the Exercised Shares. Absent such an
election, taxable income will be measured and recognized by Optionee at the time
or times on which the Company’s Repurchase Option lapses. In the case of an ISO,
such an election will result in a recognition of income to the Optionee for
alternative minimum tax purposes on the date of exercise, measured by the
excess, if any, of the Fair Market Value of the Exercised Shares, at the time
the Option is exercised, over the purchase price for the Exercised Shares.
Absent such an election, alternative minimum taxable income will be measured and
recognized by Optionee at the time or times on which the Company’s Repurchase
Option lapses. Optionee is strongly encouraged to seek the advice of his or her
own tax consultants in connection with the purchase of the Shares and the
advisability of filing of the Election under Section 83(b) of the Code. A form
of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference.

 

OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE’S SOLE RESPONSIBILITY AND NOT THE
COMPANY’S TO DETERMINE THE EFFECT OF AND OPTIONEE’S ABILITY TO MAKE AND TO FILE
TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY
OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE’S BEHALF.

 

J.           Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee’s interest except by means of a writing signed by the Company and
Optionee. This Option Agreement is governed by the internal substantive laws but
not the choice of law rules of the State of Nevada.

 

5

 

 

K.          No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO
TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.

 

L.           Familiarity with the Plan. Optionee acknowledges receipt of a copy
of the Plan and represents that Optionee is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all of the terms
and provisions thereof. Optionee has reviewed the Plan and this Option in their
entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option and fully understands all provisions of the Option.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions arising under the
Plan or this Option. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.

 

OPTIONEE   ENER-CORE, INC.             Signature   By:       Title:       Print
Name                 Spouse signature                 Print Name                
Residence Address                                        

 

6

 

 

EXHIBIT A

 

2013 Equity Award Incentive Plan

EXERCISE NOTICE

 

Ener-Core, Inc.

 

____________________________

 

____________________________

 

Attention: Stock Plan Administrator

 

A.           Exercise of Option. Effective as of today, ________________, 20___,
the undersigned (“Optionee”) hereby elects to exercise Optionee’s option (the
“Option”) to purchase ________________ shares of the common stock (the “Shares”)
of Ener-Core, Inc., a Nevada corporation (the “Company”), under and pursuant to
the 2013 Equity Award Incentive Plan (the “Plan”) and the Stock Option Agreement
dated ______________, ____ (the “Option Agreement”).

 

B.           Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price of the Shares, as set forth in the Option Agreement.

 

C.           Representations of Optionee. Optionee acknowledges that Optionee
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.

 

D.           Rights as Stockholder. Until the issuance of the Shares (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends
or any other rights as a stockholder shall exist with respect to the optioned
stock, notwithstanding the exercise of the Option. The Shares shall be issued to
the Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.

 

E.           Tax Consultation. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee’s purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.

 

F.           Restrictive Legends and Stop-Transfer Orders.

 

1.          Legends. Optionee understands and agrees that the Company shall
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:

 

A-1

 

 

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE
OPINION OF COMPANY COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.

 

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS
ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER OR ITS
ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE
ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE
PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST
REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.

 

2.          Stop-Transfer Notices. Optionee agrees that, to ensure compliance
with the restrictions referred to herein, the Company may issue appropriate
“stop transfer” instructions to its transfer agent, if any, and that, if the
Company transfers its own securities, it may make appropriate notations to the
same effect in its own records.

 

3.          Refusal to Transfer. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Exercise Notice or (ii) to treat as
owner of such Shares or to accord the right to vote or pay dividends to any
purchaser or other transferee to whom such Shares shall have been so
transferred.

 

G.           Successors and Assigns. The Company may assign any of its rights
under this Exercise Notice to single or multiple assignees, and the terms and
conditions of this Exercise Notice shall inure to the benefit of the successors
and assigns of the Company. Subject to the restrictions on transfer herein set
forth, the terms and conditions of this Exercise Notice shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.

 

H.           Interpretation. Any dispute regarding the interpretation of this
Exercise Notice shall be submitted by Optionee or by the Company forthwith to
the Administrator which shall review such dispute at its next regular meeting.
The resolution of such a dispute by the Administrator shall be final and binding
on all parties.

 

I.           Governing Law; Severability. This Exercise Notice is governed by
the internal substantive laws, but not the choice of law rules, of the State of
Nevada.

 

A-2

 

 

J.           Entire Agreement. The Plan and Option Agreement are incorporated
herein by reference. This Exercise Notice, the Plan, the Restricted Stock
Purchase Agreement, if applicable, the Option Agreement, and the Investment
Representation Statement, constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the
subject matter hereof, and may not be modified adversely to the Optionee’s
interest except by means of a writing signed by the Company and Optionee.

 

 

Submitted by:   Accepted by:       OPTIONEE   ENER-CORE, INC.           By:  
Signature   Its:        

 

      Print Name           Address:   Address:      

 

    Date Received:   Spouse Signature    

 

A-3

 

 

EXHIBIT B

 

INVESTMENT REPRESENTATION STATEMENT

 

OPTIONEE : Alain Castro       COMPANY : ENER-CORE, INC.       SECURITY : COMMON
STOCK       AMOUNT : 1,250,000       DATE : July 3, 2013

 

In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:

 

1.          Optionee is aware of the Company’s business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee’s own account only and
not with a view to, or for resale in connection with, any “distribution” thereof
within the meaning of the Securities Act of 1933, as amended (the “Securities
Act”).

 

2.          Optionee acknowledges and understands that the Securities constitute
“restricted securities” under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Optionee’s
investment intent as expressed herein. In this connection, Optionee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Optionee’s representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future. Optionee
further understands that the Securities must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and understands that
the Company is under no obligation to register the Securities. Optionee
understands that the certificate evidencing the Securities will be imprinted
with a legend that prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel
satisfactory to the Company and with any other legend required under applicable
state securities laws.

 

3.          Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of “restricted securities” acquired, directly or indirectly from
the issuer thereof, in a non-public offering subject to the satisfaction of
certain conditions. Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that any
such other registration exemption will be available in such event.

 

 

  Signature of Optionee:  

 

  Date:  

 

B-1

 

 

EXHIBIT C-1

 

ENER-CORE, INC.

 

2013 Equity Award Incentive Plan

 

RESTRICTED STOCK PURCHASE AGREEMENT

 

THIS AGREEMENT is made between _____________________________ (the “Purchaser”)
and Ener-Core, Inc., a Nevada corporation (the “Company”) as of
__________________, ____.

 

Unless otherwise defined herein, the terms defined in the Ener-Core, Inc. 2013
Equity Award Incentive Plan (the “Plan”) shall have the same defined meanings in
this Agreement.

 

RECITALS

 

A.           Pursuant to the exercise of the option (grant number ____) granted
to Purchaser under the Plan and pursuant to the Option Agreement dated
_______________, ____ by and between the Company and Purchaser with respect to
such grant (the “Option”), which Plan and Option Agreement are hereby
incorporated by reference, Purchaser has elected to purchase _________ of those
shares of common stock that have not become vested under the vesting schedule
set forth in the Option Agreement (“Unvested Shares”). The Unvested Shares and
the shares subject to the Option Agreement which have become vested are
sometimes collectively referred to herein as the “Shares”.

 

B.           As required by the Option Agreement, as a condition to Purchaser’s
election to exercise the option with respect to Unvested Shares, Purchaser must
execute this Agreement, which sets forth the rights and obligations of the
parties with respect to Shares acquired upon exercise of the Option.

 

1.            Repurchase Option.

 

A.           If Purchaser’s status as a Service Provider is terminated for any
reason, including for cause, death, and Disability, the Company shall have the
right and option to purchase from Purchaser, or Purchaser’s personal
representative, as the case may be, all of the Purchaser’s Unvested Shares as of
the date of such termination at the price paid by the Purchaser for such Shares
(the “Repurchase Option”).

 

B.           Upon the occurrence of such termination, the Company may exercise
its Repurchase Option by delivering personally or by registered mail, to
Purchaser (or his transferee or legal representative, as the case may be),
within 90 days of the termination, a notice in writing indicating the Company’s
intention to exercise the Repurchase Option and setting forth a date for closing
not later than 30 days from the mailing of such notice. The closing shall take
place at the Company’s office. At the closing, the holder of the certificates
for the Unvested Shares being transferred shall deliver the stock certificate or
certificates evidencing the Unvested Shares, and the Company shall deliver the
purchase price therefor.

 

1

 

 

C.           At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company’s
office.

 

D.           If the Company does not elect to exercise the Repurchase Option
conferred above by giving the requisite notice within 90 days following the
termination, the Repurchase Option shall terminate.

 

E.           The Repurchase Option shall terminate in accordance with the
vesting schedule contained in Optionee’s Option Agreement.

 

2.            Transferability of the Shares; Escrow.

 

A.           Purchaser hereby authorizes and directs the Secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.

 

B.           To ensure the availability for delivery of Purchaser’s Unvested
Shares upon repurchase by the Company pursuant to the Repurchase Option under
Section 1, Purchaser hereby appoints the Secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the Secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit C-2. The Unvested Shares and stock assignment shall
be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of
the Company and Purchaser attached as Exhibit C-3 hereto, until the Company
exercises its Repurchase Option, until such Unvested Shares are vested, or until
such time as this Agreement no longer is in effect. As a further condition to
the Company’s obligations under this Agreement, the spouse of the Purchaser, if
any, shall execute and deliver to the Company the Consent of Spouse attached
hereto as Exhibit C-4. Upon vesting of the Unvested Shares, the escrow agent
shall promptly deliver to the Purchaser the certificate or certificates
representing such Shares in the escrow agent’s possession belonging to the
Purchaser, and the escrow agent shall be discharged of all further obligations
hereunder; provided, however, that the escrow agent shall nevertheless retain
such certificate or certificates as escrow agent if so required pursuant to
other restrictions imposed pursuant to this Agreement.

 

C.           The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.

 

D.           Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any Unvested Shares
purchased by Purchaser and shall acknowledge the same by signing a copy of this
Agreement.

 

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3.            Ownership, Voting Rights, Duties. This Agreement shall not affect
in any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.

 

4.            Legends. The share certificate evidencing the Shares issued
hereunder shall be endorsed with the following legend (in addition to any legend
required under applicable federal and state securities laws):

 

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS
UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE
COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF
THE COMPANY.

 

5.           Adjustment for Stock Split. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company pursuant to Section 12 of the Plan after
the date of this Agreement.

 

6.           Notices. Notices required hereunder shall be given in person or by
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.

 

7.           Survival of Terms. This Agreement shall apply to and bind Purchaser
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.

 

8.           Section 83(b) Election. Purchaser hereby acknowledges that he or
she has been informed that, with respect to the exercise of an Option for
Unvested Shares, an election (the “Election”) may be filed by the Purchaser with
the Internal Revenue Service, within 30 days of the purchase of the exercised
Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on
any difference between the purchase price of the exercised Shares and their Fair
Market Value on the date of purchase. In the case of a Nonstatutory Stock
Option, this will result in the recognition of taxable income to the Purchaser
on the date of exercise, measured by the excess, if any, of the Fair Market
Value of the exercised Shares, at the time the Option is exercised over the
purchase price for the exercised Shares. Absent such an Election, taxable income
will be measured and recognized by the Purchaser at the time or times on which
the Company’s Repurchase Option lapses. In the case of an Incentive Stock
Option, such an Election will result in a recognition of income to the Purchaser
for alternative minimum tax purposes on the date of exercise, measured by the
excess, if any, of the Fair Market Value of the exercised Shares, at the time
the option is exercised, over the purchase price for the exercised Shares.
Absent such an Election, alternative minimum taxable income will be measured and
recognized by Purchaser at the time or times on which the Company’s Repurchase
Option lapses. The Purchaser is strongly encouraged to seek the advice of his or
her own tax consultants in connection with the purchase of the Shares and the
advisability of filing of the Election under Section 83(b) of the Code. A form
of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference.

 

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PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER’S SOLE RESPONSIBILITY AND NOT THE
COMPANY’S TO DETERMINE THE EFFECT OF AND OPTIONEE’S ABILITY TO MAKE AND TO FILE
TIMELY THE ELECTION UNDER SECTION 83(b) OF THE CODE, EVEN IF PURCHASER REQUESTS
THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PURCHASER’S BEHALF.

 

9.            Representations. Purchaser has reviewed with his own tax advisors
the federal, state, local and foreign tax consequences of this investment and
the transactions contemplated by this Agreement. Purchaser is relying solely on
such advisors and not on any statements or representations of the Company or any
of its agents. Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.

 

10.           Governing Law. This Agreement shall be governed by the internal
substantive laws, but not the choice of law rules, of the State of Nevada.

 

Purchaser represents that he has read this Agreement and is familiar with its
terms and provisions. Purchaser hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under this Agreement.

 

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IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth
above.

 

 

OPTIONEE   ENER-CORE, INC.           By:   Signature   Its:  

      Print Name                   Spouse Signature                 Print Name  
          Residence Address:                                        

 

Dated:                                                                                 ,
____

 

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EXHIBIT C-2

 

ASSIGNMENT SEPARATE FROM CERTIFICATE

 

FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto ______________ ______________________ (__________) shares of
Common Stock of Ener-Core, Inc., a Nevada corporation, standing in my name of
the books of said corporation represented by Certificate No. _____ herewith and
do hereby irrevocably constitute and appoint ________________________, to
transfer the said stock on the books of the within named corporation with full
power of substitution in the premises.

 

This Stock Assignment may be used only in accordance with the Restricted Stock
Purchase Agreement between _______________ and the undersigned dated
______________, _____.

 

Dated: _______________, ____   Signature:  

 

INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
“repurchase option,” as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.

 

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EXHIBIT C-3

 

JOINT ESCROW INSTRUCTIONS

 

Ener-Core, Inc.

Corporate Secretary

________________________

________________________

 

Dear Sir or Madam:

 

As Escrow Agent for both Ener-Core, Inc., a Nevada corporation (the “Company”),
and the undersigned purchaser of stock of the Company (the “Purchaser”), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Purchase Agreement (the
“Agreement”) between the Company and the undersigned, in accordance with the
following instructions:

 

1.          In the event the Company and/or any assignee of the Company
(referred to collectively for convenience herein as the “Company”) exercises the
Company’s repurchase option set forth in the Agreement, the Company shall give
to Purchaser and you a written notice specifying the number of shares of stock
to be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.

 

2.          At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver the stock assignments, together with the
certificate evidencing the shares of stock to be transferred, to the Company or
its assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company’s repurchase option.

 

3.          Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser’s
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.

 

4.          Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company’s repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company’s repurchase option.
Within 120 days after cessation of Purchaser’s continuous employment by or
services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company’s repurchase
option.

 

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5.          If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.

 

6.          Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.

 

7.          You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.

 

8.          You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree, you
shall not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.

 

9.          You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.

 

10.         You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.

 

11.         You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.

 

12.         Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be an officer or agent of the Company or if you shall resign
by written notice to each party. In the event of any such termination, the
Company shall appoint a successor Escrow Agent.

 

13.         If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.

 

8

 

 

14.         It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written agreement
of the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.

 

15.         Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days’ advance written notice to each of the other parties hereto.

 

16.         By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.

 

17.         This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.

 

18.         These Joint Escrow Instructions shall be governed by the internal
substantive laws, but not the choice of law rules, of Nevada.

 

PURCHASER   ENER-CORE, INC.           By:   Signature   Its:         Print
Name_________________________________________                 Spouse Signature  
              Print Name           Residence Address                            
                     

 

9

 

 

ESCROW AGENT

 

    Corporate Secretary  

 

Dated: ________________________, _____

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EXHIBIT C-4

 

CONSENT OF SPOUSE

 

I, ____________________, spouse of ___________________, have read and approve
the foregoing Restricted Stock Purchase Agreement (the “Agreement”). In
consideration of granting of the right to my spouse to purchase shares of common
stock of Ener-Core, Inc., a Nevada corporation, as set forth in the Agreement, I
hereby appoint my spouse as my attorney-in-fact in respect to the exercise of
any rights under the Agreement and agree to be bound by the provisions of the
Agreement insofar as I may have any rights in said Agreement or any shares
issued pursuant thereto under the community property laws or similar laws
relating to marital property in effect in the state of our residence as of the
date of the signing of the foregoing Agreement.

 

Dated: ___________________, _____ Signature:  

 

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EXHIBIT C-5

 

ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986

 

The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer’s gross income
or alternative minimum taxable income, as the case may be, for the current
taxable year the amount of any compensation taxable to taxpayer in connection
with taxpayer’s receipt of the property described below:

 

1.          The name, address, taxpayer identification number and taxable year
of the undersigned are as follows:

 

NAME:  TAXPAYER:   SPOUSE:  

 

ADDRESS:  

 

IDENTIFICATION NO.:   TAXPAYER:   SPOUSE:  

 

TAXABLE YEAR:    

 

2.          The property with respect to which the election is made is described
as follows: __________ shares (the “Shares”) of the common stock of Ener-Core,
Inc., a Nevada corporation (the “Company”).

 

3.          The date on which the property was transferred
is:___________________ ,______.

 

4.          The property is subject to the following restrictions: The Shares
may not be transferred and are subject to forfeiture under the terms of an
agreement between the taxpayer and the Company. These restrictions lapse upon
the satisfaction of certain conditions contained in such agreement.

 

5.          The fair market value at the time of transfer, determined without
regard to any restriction other than a restriction which by its terms will never
lapse, of such property is: $_________________.

 

6.          The amount (if any) paid for such property is: $_________________.

 

The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned’s receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.

 

The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.

 

Dated: ______________________, _____ _________________________________________  
Taxpayer     The undersigned spouse of taxpayer joins in this election.      
Dated: _____________________, ______ _________________________________________  
Spouse of Taxpayer

 

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