Exhibit 10.1

 

Execution Version

 

SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of December 30, 2015,
by and among Ener-Core, Inc., a Delaware corporation, with headquarters located
at 9400 Toledo Way, Irvine, California 92618 (the “Company”), and the investors
identified in their respective “Buyer Signature Page” attached hereto
(individually, a “Buyer” and collectively, the “Buyers”).

 

WHEREAS:

 

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

 

B.         Each Buyer wishes to purchase, and the Company wishes to sell, upon
the terms and conditions stated in this Agreement, (i) that aggregate number of
shares of the Company’s Common Stock, par value $0.0001 per share (the “Common
Stock”), as set forth opposite such Buyer’s name in column (3) on the schedule
of Buyers attached hereto as Exhibit A (the “Schedule of Buyers”) (which
aggregate amount for all Buyers together shall be 625,000 shares of Common Stock
and shall collectively be referred to herein as the “Common Shares”) and (ii) a
warrant to acquire up to that number of additional shares of Common Stock as set
forth opposite such Buyer’s name in column (4) on the Schedule of Buyers (the
“Warrants”), in substantially the form attached hereto as Exhibit B (as
exercised, collectively, the “Warrant Shares”).

 

C.         The Common Shares, the Warrants and the Warrant Shares collectively
are referred to as the “Securities”.

 

D.        Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement,
substantially in the form attached hereto as Exhibit C (the “Registration Rights
Agreement”), pursuant to which the Company has agreed to provide certain
registration rights with respect to the Registrable Securities (as defined in
the Registration Rights Agreement) under the 1933 Act and the rules and
regulations promulgated thereunder, and applicable state securities laws.

 

E.         In connection with the offer and sale of the Securities, the Company
has entered into an engagement letter dated December 26, 2015 (the “Engagement
Letter”) with Northland Securities, Inc. (“Northland”) and Lake Street Capital
Markets, LLC (“Lake Street”, and together with Northland, the “Agents”).

 

 

 

 

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

 

1.         PURCHASE AND SALE OF COMMON SHARES AND WARRANTS.

 

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

 

(b)       Closing. The date and time of the Closing (the “Closing Date”) shall
be the Trading Day on which all of the Transaction Documents have been executed
and delivered by the applicable parties thereto in connection with the Closing,
and all conditions precedent to the Closing set forth in Sections 6 and 7 below
have been satisfied or waived, or at such other time or on such other date as
the Company and each Buyer may mutually agree upon, at the offices of K&L Gates
LLP, 1 Park Plaza, 12th Floor, Irvine, California 92614.

 

(c)        Purchase Price. The aggregate purchase price for the Common Shares
and the Warrants to be purchased by each Buyer at the Closing (the “Purchase
Price”) shall be the amount set forth opposite each Buyer’s name in column (5)
on the Schedule of Buyers.

 

(d)        Form of Payment. On the Closing Date, (i) each Buyer shall pay its
Purchase Price to the Company for the Common Shares and the Warrants to be
issued and sold to such Buyer at the Closing, by wire transfer of immediately
available funds in accordance with the Company’s written wire instructions and
(ii) the Company shall deliver to each Buyer one or more stock certificates,
evidencing the number of Common Shares such Buyer is purchasing, and one or more
warrant certificates, evidencing the Warrants such Buyer is purchasing, which
certificates shall be duly executed on behalf of the Company and registered in
the name of such Buyer or its designee.

 

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

 

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

 

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(b)        Accredited Investor Status. Such Buyer is an “accredited investor” as
that term is defined in Rule 501(a) of Regulation D. Such Buyer has executed and
delivered to the Company a questionnaire (the “Investor Questionnaire”),
substantially in the form attached hereto as Exhibit D, which such Buyer
represents and warrants is true, correct and complete.

 

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

 

(d)        Information. Such Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company, including but not limited to the Company’s filings under the Securities
Exchange Act of 1934, as amended (the “1934 Act”), and materials relating to the
offer and sale of the Securities that have been requested by such Buyer. Such
Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company. Neither such inquiries nor any other due diligence
investigations conducted by such Buyer or its advisors, if any, or its
representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained herein. Such Buyer
understands that its investment in the Securities involves a high degree of risk
and is able to afford a complete loss of such investment. Such Buyer has sought
such accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Securities.
Such Buyer confirms and agrees that (i) it has independently evaluated the
merits of its decision to purchase the Securities, (ii) it has not relied on the
advice of, or any representations by, the Agents or any affiliate thereof or any
representative of the Agents or their affiliates in making such decision, and
(iii) neither the Agents nor any of their representatives has any responsibility
with respect to the completeness or accuracy of any information or materials
furnished to such Buyer in connection with the transactions contemplated hereby.

 

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

 

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

 

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

 

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

 

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The legend set forth above shall be removed and the Company shall issue a
certificate or other instrument without such legend to the holder of the
Securities upon which it is stamped or issue to such holder by electronic
delivery at the applicable balance account at The Depository Trust Company
(“DTC”), if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act (in which case an
alternate prospectus delivery legend may apply), (ii) in connection with a sale,
assignment or other transfer, such holder provides the Company with an opinion
of counsel, in form and substance reasonably acceptable to the Company, to the
effect that such sale, assignment or transfer of the Securities may be made
without registration under the applicable requirements of the 1933 Act, or (iii)
the Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule
144A. The Company shall be responsible for the fees of its transfer agent and
all DTC fees associated with such issuance. If the Company shall fail for any
reason or for no reason (other than failure of a Buyer to comply with Section
2(g)) to issue to the holder of the Securities within three (3) Trading Days
after the occurrence of any of (i) through (iii) above, a certificate without
such legend to the holder or to issue such Securities to such holder by
electronic delivery at the applicable balance account at DTC, and if on or after
such Trading Day the holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
holder of such Securities that the holder anticipated receiving without legend
from the Company (a “Buy-In”), then the Company shall, within three (3) Business
Days after the holder’s request and in the holder’s discretion, either (i) pay
cash to the holder in an amount equal to the holder’s total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased (the “Buy-In Price”), at which point the Company’s obligation to
deliver such unlegended Securities shall terminate, or (ii) promptly honor its
obligation to deliver to the holder such unlegended Securities as provided above
and pay cash to the holder in an amount equal to the excess (if any) of the
Buy-In Price over the product of (A) such number of shares of Common Stock,
times (B) the Closing Bid Price on the date of the occurrence of any of clauses
(i) through (iii), as applicable. As used herein, (i) “Trading Day” means any
day on which the Common Stock is traded on the Principal Market (as defined in
Section 3(d)), or, if the Principal Market is not the principal trading market
for the Common Stock, then on the principal securities exchange or securities
market on which the Common Stock is then traded; provided that “Trading Day”
shall not include any day on which the Common Stock is scheduled to trade on
such exchange or market for less than 4.5 hours or any day that the Common Stock
is suspended from trading during the final hour of trading on such exchange or
market (or if such exchange or market does not designate in advance the closing
time of trading on such exchange or market, then during the hour ending at 4:00
p.m., New York time); (ii) “Closing Bid Price” means, for any security as of any
date, the last closing bid price for such security on the Principal Market, as
reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price, then the last
bid price of such security prior to 4:00 p.m., New York time, as reported by
Bloomberg, or, if the Principal Market is not the principal securities exchange
or trading market for such security, the last closing bid price of such security
on the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if the foregoing do not apply, the
last closing bid price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
closing bid price is reported for such security by Bloomberg, the average of the
bid prices of any market makers for such security as reported in the OTC Link or
“pink sheets” by OTC Markets Group Inc. (formerly Pink OTC Markets Inc.). If the
Closing Bid Price cannot be calculated for a security on a particular date on
any of the foregoing bases, the Closing Bid Price of such security on such date
shall be the fair market value as mutually determined by the Company and such
holder of Securities. All such determinations to be appropriately adjusted for
any stock dividend, stock split, stock combination or other similar transaction
during the applicable calculation period; and (iii) “Bloomberg” means Bloomberg
Financial Markets.

 

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

 

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

 

(j)          Short Sales. Between the time such Buyer learned about the offering
contemplated by this Agreement and the public announcement of the offering, such
Buyer has not engaged in any short sales or similar transactions with respect to
the Common Stock, nor has such Buyer, directly or indirectly, caused any Person
to engage in any short sales or similar transactions with respect to the Common
Stock. Such Buyer shall not engage in any short sales involving the Securities
in violation of the 1933 Act. Notwithstanding the foregoing, in the case of a
Buyer that is a multi-managed investment vehicle whereby separate portfolio
managers manage separate portions of such Buyer’s assets and the portfolio
managers have no direct knowledge of the investment decisions made by the
portfolio managers managing other portions of such Buyer’s assets, the
representation set forth above shall apply only with respect to the portion of
assets managed by the portfolio managers that have knowledge about the financing
transaction contemplated by this Agreement.

 

(k)        No General Solicitation and Advertising; Prior Relationship. Such
Buyer represents and acknowledges, to its knowledge, that it has not been
solicited to offer to purchase or to purchase any Securities by means of any
general solicitation or advertising within the meaning of Regulation D. The
Buyer represents that its interest in the purchase of the Securities is the
result of its substantive, pre-existing relationship with the Company.

 

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(l)         Rule 506(d) Representation. Such Buyer represents that it is not a
person of the type described in Section 506(d) of Regulation D that would
disqualify the Company from engaging in a transaction pursuant to Section 506 of
Regulation D.

 

(m)       Residency. Such Buyer is a resident of that jurisdiction specified
below its address on the Schedule of Buyers.

 

3.         REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

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

 

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

 

(b)       Authorization; Enforcement; Validity. The Company has the requisite
power and authority to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement, the Irrevocable Transfer Agent
Instructions (as defined in Section 5) and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by
this Agreement (collectively, the “Transaction Documents”) and to issue the
Securities in accordance with the terms hereof and thereof. The execution and
delivery of the Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Common Shares, the issuance of the Warrants and
the reservation for issuance and the issuance of the Warrant Shares have been
duly authorized by the Company’s Board of Directors and (other than the filing
with the SEC of one or more Registration Statements (as defined in the
Registration Rights Agreement) in accordance with the requirements of the
Registration Rights Agreement and (other filings as may be required by state
securities agencies) no further filing, consent, or authorization is required by
the Company, its Board of Directors or its stockholders. This Agreement and the
other Transaction Documents have been duly executed and delivered by the
Company, and constitute the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of applicable
creditors’ rights and remedies.

 

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(c)       Issuance of Securities. The Common Shares and the Warrants are duly
authorized and, upon issuance, shall be validly issued and free from all from
all preemptive or similar rights, taxes, liens and charges with respect to the
issue thereof, with the holders being entitled to all rights accorded to a
holder of Common Stock. As of the date hereof, there are 197,535,840 shares of
Common Stock authorized and unissued. Assuming the accuracy of each of the
representations and warranties set forth in Section 2 of this Agreement, the
offer and issuance by the Company of the Securities is exempt from registration
under the 1933 Act.

 

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

 

(e)       Consents. Neither the Company nor any of its Subsidiaries is required
to obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency or any regulatory or
self-regulatory agency or any other Person in order for it to execute, deliver
or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof, other
than the filings or registration required by Sections 4(b) and 4(j) of this
Agreement, the Registration Rights Agreement and as may be required under the
rules and regulations of the Financial Industry Regulatory Authority, Inc. The
Company is not in violation of the requirements of the Principal Market and has
no knowledge of any facts that would reasonably lead to delisting or suspension
of the Common Stock in the foreseeable future. The issuance by the Company of
the Securities shall not have the effect of delisting or suspending the Common
Stock from the Principal Market.

 

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(f)        Acknowledgment Regarding Buyer’s Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of an
arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby. The Company further acknowledges
that no Buyer is acting as a financial advisor or fiduciary of the Company or
any of its Subsidiaries (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated hereby and thereby, and
any advice given by a Buyer or any of its representatives or agents in
connection with the Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to such Buyer’s purchase of the
Securities. The Company further represents to each Buyer that the Company’s
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.

 

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

 

(h)       No Integrated Offering. None of the Company, its Subsidiaries, any of
their affiliates, and any Person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act, whether through integration with prior
offerings or otherwise. None of the Company, its Subsidiaries, their affiliates
and any Person acting on their behalf will take any action or steps referred to
in the preceding sentence that would require registration of any of the
Securities under the 1933 Act.

 

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

 

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(j)        SEC Documents; Financial Statements. During the one (1) year prior to
the date hereof, the Company has timely filed all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the 1934 Act (all of the foregoing filed prior
to the date hereof, and all exhibits included therein and financial statements,
notes and schedules thereto and documents incorporated by reference therein
being hereinafter referred to as the “SEC Documents”). The Company has delivered
to the Buyers or their respective representatives true, correct and complete
copies of the SEC Documents not available on the EDGAR system. As of their
respective filing dates, the SEC Documents complied in all material respects
with the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. As of
their respective filing dates, the financial statements of the Company included
in the SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto. Such financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied,
during the periods involved (“GAAP”) (except (i) as may be otherwise indicated
in such financial statements or the notes thereto, or (ii) in the case of
unaudited interim statements, to the extent they may exclude footnotes or may be
condensed or summary statements) and fairly present in all material respects the
financial position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).

 

(k)       Absence of Certain Changes. Except as disclosed in Schedule 3(k) or as
set forth in the SEC Documents, since December 31, 2014, there has been no event
that would, to the Company’s knowledge, reasonably be expected to result in a
Material Adverse Effect. Except as disclosed in Schedule 3(k), since December
31, 2014, neither the Company nor any of its Subsidiaries has (i) declared or
paid any dividends, (ii) sold any assets, individually or in the aggregate, in
excess of $100,000 outside of the ordinary course of business or (iii) had
capital expenditures, individually or in the aggregate, in excess of $100,000.

 

(l)        Conduct of Business; Regulatory Permits. Neither the Company nor any
of its Subsidiaries is in violation of any term of or in default under any
certificate of designations of any outstanding series of preferred stock of the
Company (if any), its Certificate of Incorporation or Bylaws or their
organizational charter or memorandum of association or certificate of
incorporation or articles of association or bylaws, respectively. Neither the
Company nor any of its Subsidiaries is in violation of any judgment, decree or
order or any statute, ordinance, rule or regulation applicable to the Company or
any of its Subsidiaries, and neither the Company nor any of its Subsidiaries
will conduct its business in violation of any of the foregoing, except for
possible violations which could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. Without limiting the
generality of the foregoing, the Company is not in violation of any of the
rules, regulations or requirements of the Principal Market and has no knowledge
of any facts or circumstances that would reasonably lead to delisting or
suspension of the Common Stock by the Principal Market in the foreseeable
future. Except as set forth in Schedule 3(l), during the one (1) year prior to
the date hereof, the Common Stock has been designated for quotation on the
Principal Market. Except as set forth in Schedule 3(l), during the one (1) year
prior to the date hereof, (i) trading in the Common Stock has not been suspended
by the SEC or the Principal Market and (ii) the Company has received no
communication, written or oral, from the SEC or the Principal Market regarding
the suspension or delisting of the Common Stock from the Principal Market. The
Company and its Subsidiaries possess all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, except where the
failure to possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.

 

 - 10 - 

 

 

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

 

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

 

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

 

 - 11 - 

 

 

(p)       Equity Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) 200,000,000 shares of Common Stock, of
which as of the date hereof, 2,464,160 shares are issued and outstanding,
608,464 shares are reserved for issuance pursuant to the Company’s stock option
and purchase plans and 413,043 shares are reserved for issuance pursuant to
securities (other than the aforementioned options) exercisable or exchangeable
for, or convertible into, Common Stock, (ii) 50,000,000 shares of preferred
stock, par value $0.0001 per share, none of which are issued and outstanding as
of the date hereof and (iii) 1,814,688 shares of Common Stock held by
non-affiliates of the Company. All of such outstanding shares have been, or upon
issuance will be, validly issued and are fully paid and nonassessable. Except as
set forth in the SEC Documents: (i) none of the Company’s capital stock is
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company; (ii) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any shares of capital stock of the Company or
any of its Subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any shares of capital
stock of the Company or any of its Subsidiaries; (iii) there are no outstanding
debt securities, notes, credit agreements, credit facilities or other
agreements, documents or instruments evidencing Indebtedness (as defined below)
of the Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either singly or in the aggregate,
filed in connection with the Company or any of its Subsidiaries; (v) there are
no agreements or arrangements under which the Company or any of its Subsidiaries
is obligated to register the sale of any of their securities under the 1933 Act
(except pursuant to the Registration Rights Agreement); (vi) there are no
outstanding securities or instruments of the Company or any of its Subsidiaries
that contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the Company or any
of its Subsidiaries; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; and (viii) the Company does not have any stock appreciation
rights or “phantom stock” plans or agreements or any similar plan or agreement.
The Company and its Subsidiaries have no liabilities or obligations required to
be disclosed in the SEC Documents but not so disclosed in the SEC Documents,
other than those incurred in the ordinary course of the Company’s or any of its
Subsidiaries’ respective businesses and which, individually or in the aggregate,
do not or would not have a Material Adverse Effect. The Company has furnished or
made available to the Buyers true, correct and complete copies of the Company’s
Certificate of Incorporation, as amended and as in effect on the date hereof
(the “Certificate of Incorporation”), and the Company’s Bylaws, as amended and
as in effect on the date hereof (the “Bylaws”), and the terms of all securities
convertible into, or exercisable or exchangeable for shares of Common Stock and
the material rights of the holders thereof in respect thereto.

 

 - 12 - 

 

 

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

 

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

 

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

 

 - 13 - 

 

 

(t)        Employee Relations.

 

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

 

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

 

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

 

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

 

 - 14 - 

 

 

(w)     Environmental Laws. Except as would not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect: (i) neither
the Company nor its Subsidiaries is in violation of any Environmental Laws (as
hereinafter defined), (ii) the Company and its Subsidiaries have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) the Company
and its Subsidiaries are in compliance with all terms and conditions of any such
permit, license or approval. The term “Environmental Laws” means all federal,
state, local or foreign laws relating to pollution or protection of human health
or the environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes
(collectively, “Hazardous Materials”) into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.

 

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

 

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

 

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

 

 - 15 - 

 

 

(aa)    Internal Accounting and Disclosure Controls. Except as set forth in
Schedule 3(aa) or as set forth in the SEC Documents, the Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management’s general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference. Except
as set forth in Schedule 3(aa) or as set forth in the SEC Documents, the Company
maintains disclosure controls and procedures (as such term is defined in Rule
13a-15 under the 1934 Act) that are effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
1934 Act is accumulated and communicated to the Company’s management, including
its principal executive officer or officers and its principal financial officer
or officers, as appropriate, to allow timely decisions regarding required
disclosure.

 

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

 

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

 

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

 

(ee)    Acknowledgement Regarding Buyers’ Trading Activity. The Company
acknowledges and agrees that (i) none of the Buyers has been asked to agree, nor
has any Buyer agreed, to desist from purchasing or selling, long and/or short,
securities of the Company, or “derivative” securities based on securities issued
by the Company or to hold the Securities for any specified term; (ii) any Buyer,
and counter-parties in “derivative” transactions to which any such Buyer is a
party, directly or indirectly, presently may have a “short” position in the
Common Stock, and (iii) each Buyer shall not be deemed to have any affiliation
with or control over any arm’s length counter-party in any “derivative”
transaction. The Company further understands and acknowledges that one or more
Buyers may engage in hedging and/or trading activities at various times during
the period that the Securities are outstanding, and (b) such hedging and/or
trading activities, if any, can reduce the value of the existing stockholders’
equity interest in the Company both at and after the time the hedging and/or
trading activities are being conducted. Subject to the provisions of Section
2(j), the Company acknowledges that such aforementioned hedging and/or trading
activities do not constitute a breach of this Agreement or any of the documents
executed in connection herewith.

 

 - 16 - 

 

 

(ff)     U.S. Real Property Holding Corporation. The Company is not, has never
been, and so long as any Securities remain outstanding, shall not become, a U.S.
real property holding corporation within the meaning of Section 897 of the
Internal Revenue Code of 1986, as amended, and the Company shall so certify upon
any Buyer’s request.

 

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

 

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

 

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

 

 - 17 - 

 

 

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

 

(kk)    No “Bad Actor” Disqualification Events. No “bad actor” disqualifying
event described in Rule 506(d)(1)(i)–(viii) of the 1933 Act (a “Disqualification
Event”) is applicable to the Company or, to the Company’s knowledge, any Company
Covered Person (as defined below), except for a Disqualification Event as to
which Rule 506(d)(2)(ii–iv) or (d)(3), is applicable. “Company Covered Person”
means, with respect to the Company as an “issuer” for purposes of Rule 506
promulgated under the 1933 Act, any Person listed in the first paragraph of Rule
506(d)(1).

 

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

 

4.         COVENANTS.

 

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

 

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

 

(c)        Reporting Status. During the Registration Period (as defined in the
Registration Rights Agreement), the Company shall timely file all reports
required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would no
longer require or otherwise permit such termination.

 

(d)        Use of Proceeds. The Company will use the proceeds from the sale of
the Securities for working capital and general corporate purposes.

 

 - 18 - 

 

 

(e)        Purchase Price Reset. From the date of this Agreement until the
earlier of (i) thirty (30) days from the date of effectiveness of the
Registration Statement required to be filed by the Company pursuant to the
Registration Rights Agreement and (ii) six months after the Closing Date (the
“Adjustment Period”), if the Company issues or sells any shares of Common Stock
at a price less than $4.00 per share (subject to appropriate adjustments for any
stock dividend, stock split, stock combination, reclassification or similar
transaction after the date hereof) (such issuances, a “Dilutive Issuance”), then
the Company shall issue as soon as reasonably practicable additional shares of
Common Stock to each Buyer for no additional consideration, in an amount equal
to (x) the Purchase Price paid by such Buyer hereunder divided by the price per
share of Common Stock for the Dilutive Issuance, minus (y) the total number of
Common Shares purchased by such Buyer (such adjustment, a “Dilution
Adjustment”). In evaluating whether a registered or unregistered offering
constitutes a Dilutive Issuance, (i) derivative securities, including warrants,
that are issued or sold with shares of Common Stock, whether as part of units or
otherwise, shall not be attributed any value in determining the price per share
of Common Stock in the offering, and (ii) the price per share of Common Stock
shall be the price per share paid by investors in the offering, excluding any
underwriting discounts, commissions, placement agent fees and other similar fees
and expenses. A Dilution Adjustment shall be made successively whenever a
Dilutive Issuance is made within the Adjustment Period. Notwithstanding the
foregoing, this Section 4(e) shall not apply (i) if a Buyer no longer holds any
Common Shares or (ii) with respect to an Exempt Issuance (as defined in the
following sentence). “Exempt Issuance” means the issuance of (i) shares of
Common Stock issued in a stock dividend, stock split, stock combination,
reclassification or similar transaction, (ii) shares of Common Stock, options
and other derivative securities issued to employees, officers, directors,
consultants or other service providers of the Company pursuant to any equity
incentive plan of the Company, (iii) shares of Common Stock issuable pursuant to
the conversion or exercise of derivative securities, including options,
warrants, notes or other similar rights, that are issued and outstanding on the
date of this Agreement, (iv) shares of Common Stock issued in connection with a
business acquisition of or by the Company, whether by merger, consolidation,
sale of assets, sale or exchange of stock or otherwise and (v) shares of Common
Stock issued in connection with bona fide real estate transactions, equipment
lease financing, bank or similar credit or debt arrangements, license agreements
or other partnering agreements so long as such issuances are not for the
principal purpose of raising capital.

 

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

 

 - 19 - 

 

 

(g)        Listing. The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which the Common Stock then listed (subject to official notice of issuance) and
shall maintain such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents. The Company shall
maintain the authorization for quotation of the Common Stock on the Principal
Market or any other Eligible Market. Neither the Company nor any of its
Subsidiaries shall take any action that would reasonably be expected to result
in the delisting or suspension of the Common Stock on the Principal Market. The
Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(g). As used herein, “Eligible Market” means the
Principal Market, the NYSE MKT LLC, The NASDAQ Global Market, The NASDAQ Global
Select Market, The NASDAQ Capital Market or The New York Stock Exchange, Inc.

 

(h)        Fees. The Company shall be responsible for the payment of any
placement agent’s fees, financial advisory fees, or broker’s commissions (other
than for Persons engaged by any Buyer) relating to or arising out of the
transactions contemplated hereby, including, without limitation, any fees or
commissions payable to the Agents. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
reasonable attorney’s fees and out-of-pocket expenses) arising in connection
with any claim relating to any such payment. Except as otherwise set forth in
the Transaction Documents, each party to this Agreement shall bear its own
expenses in connection with the sale of the Securities to the Buyers.

 

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

 

 - 20 - 

 

 

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

 

(k)        Corporate Existence. So long as any Buyer beneficially owns any
Securities, the Company shall maintain its corporate existence.

 

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

 

 - 21 - 

 

 

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

 

(n)        Short Sales. Starting on the date hereof and ending on the 45th day
following the Closing Date, no Buyer shall engage in any short sales or similar
transactions with respect to the Common Stock, nor cause any Person to engage in
any short sales or similar transactions with respect to the Common Stock.

 

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

 

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

 

 - 22 - 

 

 

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

 

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

 

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

 

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

 

(ii)      Such Buyer shall have delivered its Purchase Price to the Company, for
the Common Shares and the Warrants being purchased by such Buyer at the Closing
by wire transfer of immediately available funds pursuant to the wire
instructions provided by the Company.

 

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

 

 - 23 - 

 

 

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

 

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

 

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

 

(ii)      Such Buyer shall have received the opinion of K&L Gates LLP, the
Company’s outside counsel, dated as of the Closing Date, in substantially the
form of Exhibit F attached hereto.

 

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

 

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

 

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

 

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

 

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

 

 - 24 - 

 

 

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

  

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

 

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

 

8.          TERMINATION. In the event that the Closing shall not have occurred
with respect to a Buyer on or before five (5) Business Days from the date hereof
due to the Company’s or such Buyer’s failure to satisfy the conditions set forth
in Sections 6 and 7 above (and the nonbreaching party’s failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date by delivering a written notice to that effect to each
other party to this Agreement and without liability of any party to any other
party.

 

9.         MISCELLANEOUS.

 

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

 

 - 25 - 

 

 

(b)       Counterparts. This Agreement and any amendments hereto may be executed
and delivered in two or more counterparts, and by the different parties hereto
in separate counterparts, each of which when executed shall be deemed to be an
original, but all of which taken together shall constitute one and the same
agreement, and shall become effective when counterparts have been signed by each
party hereto and delivered to the other parties hereto, it being understood that
all parties need not sign the same counterpart.  In the event that any signature
to this Agreement or any amendment hereto is delivered by facsimile transmission
or by e-mail delivery of a “.pdf” format data file, such signature shall create
a valid and binding obligation of the party executing (or on whose behalf such
signature is executed) with the same force and effect as if such facsimile or
“.pdf” signature page were an original thereof.  No party hereto shall raise the
use of a facsimile machine or e-mail delivery of a “.pdf” format data file to
deliver a signature to this Agreement or any amendment hereto or the fact that
such signature was transmitted or communicated through the use of a facsimile
machine or e-mail delivery of a “.pdf” format data file as a defense to the
formation or enforceability of a contract and each party hereto forever waives
any such defense.

 

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

 

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

 

(e)        Entire Agreement; Amendments. This Agreement and the other
Transaction Documents supersede all other prior oral or written agreements
between the Buyers, the Company, their affiliates and Persons acting on their
behalf with respect to the matters discussed herein, and this Agreement, the
other Transaction Documents and the instruments referenced herein and therein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. Provisions of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
at least a majority of the amount of Common Shares issued hereunder (as adjusted
for any stock dividend, stock split, stock combination, reclassification or
similar transaction occurring after the date thereof) (the “Required Holders”);
provided that any such amendment or waiver that complies with the foregoing but
that disproportionately, materially and adversely affects the rights and
obligations of any Buyer relative to the comparable rights and obligations of
the other Buyers shall require the prior written consent of such adversely
affected Buyer. Any amendment or waiver effected in accordance with this Section
9(e) shall be binding upon each Buyer and holder of Securities and the Company.
No such amendment shall be effective to the extent that it applies to less than
all of the Buyers or holders of Securities. No consideration shall be offered or
paid to any Person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration
(other than the reimbursement of legal fees) also is offered to all of the
parties to the Transaction Documents, holders of Common Shares. The Company has
not, directly or indirectly, made any agreements with any Buyers relating to the
terms or conditions of the transactions contemplated by the Transaction
Documents except as set forth in the Transaction Documents. Without limiting the
foregoing, the Company confirms that, except as set forth in this Agreement, no
Buyer has made any commitment or promise or has any other obligation to provide
any financing to the Company or otherwise.

 

 - 26 - 

 

 

(f)         Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party), (iii) when sent, if sent by electronic mail;
or (iv) one Business Day after deposit with an overnight courier service, in
each case properly addressed to the party to receive the same. The addresses,
facsimile numbers and e-mail addresses for such communications shall be:

 

If to the Company:

 

Ener-Core, Inc. 

9400 Toledo Way

Irvine, California 92618

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

 

With a copy to:

 

K&L Gates LLP 

1 Park Plaza, 12th Floor 

  Irvine, California 92614   Telephone: (949) 253-0900   Facsimile:     (949)
253-0902   Attention: David C. Lee      Shoshannah D. Katz    E-mail:
david.lee@klgates.com      shoshannah.katz@klgates.com

 

If to the Transfer Agent:

 

VStock Transfer, LLC. 

18 Lafayette Place 

Woodmere, New York 11598

  Telephone: (212) 828-8436    Facsimile: (646) 536-3179    Attention: Yoel
Goldfeder    E-mail: yoel@vstocktransfer.com

 

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

 

(g)        Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Common Shares or the Warrants. The Company shall
not assign this Agreement or any rights or obligations hereunder without the
prior written consent of the Required Holders. A Buyer may assign some or all of
its rights hereunder without the consent of the Company, in which event such
assignee shall be deemed to be a Buyer hereunder with respect to such assigned
rights.

 

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

 

(i)         [Intentionally omitted]

 

(j)         [Intentionally omitted]

 

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

 

(l)         Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

 

 - 27 - 

 

 

(m)       Indemnification. In consideration of each Buyer’s execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their stockholders,
partners, members, officers, directors, employees and direct or indirect
investors and any of the foregoing Persons’ agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the “Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby or
(c) any cause of action, suit or claim brought or made against such Indemnitee
by a third party (including for these purposes a derivative action brought on
behalf of the Company) and arising out of or resulting from (i) the execution,
delivery, performance or enforcement of the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, or (iii) the
status of such Buyer or holder of the Securities as an investor in the Company
pursuant to the transactions contemplated by the Transaction Documents, except,
in each case, with respect to any Indemnified Liabilities that resulted from any
Indemnitee’s gross negligence, willful misconduct or fraud. To the extent that
the foregoing undertaking by the Company may be unenforceable for any reason,
the Company shall make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities that is permissible under applicable law.
Except as otherwise set forth herein, the mechanics and procedures with respect
to the rights and obligations under this Section 9(m) shall be the same as those
set forth in Section 6 of the Registration Rights Agreement.

 

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

 

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

 

 - 28 - 

 

 

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

 

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

 

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

 

[Signature Pages Follow]

 

 - 29 - 

 

 

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

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

 

[Company Signature Page to Securities Purchase Agreement] 

 

 - 30 - 

 

 

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

BUYER:

 

____________________________________________________________________________ 

Please print above the exact name(s) in which the Common Shares and Warrants are
to be held

 

Date: ________________________

 

Number of Common Shares Purchased: ________________________

Number of Shares of Common Stock underlying Warrants Purchased:
________________________

Purchase Price: $ ________________________

 

INDIVIDUAL INVESTOR:

 

PARTNERSHIP, CORPORATION, TRUST, LIMITED LIABILITY COMPANY, CUSTODIAL ACCOUNT,
OR OTHER INVESTOR:

            (print name)   (print name of entity)            By:   (signature)
(signature of person signing on behalf of entity)            Name:              
Title:  

 

          SSN/Tax I.D. No.:     Tax I.D. No.:             Address for Notice:  
Address for Notice:

 

                  Tel:     Tel:   Fax:     Fax:   Email:     Email:  

 

[Buyer Signature Page to Securities Purchase Agreement]

 

 

 

 

EXHIBITS

 

Exhibit A Schedule of Buyers Exhibit B Form of Warrant Exhibit C Form of
Registration Rights Agreement Exhibit D Investor Questionnaire Exhibit E Form of
Irrevocable Transfer Agent Instructions Exhibit F Form of Opinion of Company
Counsel Exhibit G Form of Secretary’s Certificate Exhibit H Form of Compliance
Certificate

 

SCHEDULES

Schedule 3(a) Subsidiaries Schedule 3(h) No Integrated Offering Schedule 3(j)
SEC Documents Schedule 3(k) Absence of Certain Changes Schedule 3(l) Regulatory
Permits Schedule 3(n) Sarbanes-Oxley Act Schedule 3(p) Equity Capitalization
Schedule 3(q) Indebtedness and Other Contracts Schedule 3(r) Absence of
Litigation Schedule 3(aa) Internal Accounting and Disclosure Controls

 

 

 

 

EXHIBIT A

 

Schedule of Buyers

 

(1)

Investor Name

(2)

Contact Information

(3)

Number of Shares of Common Stock

(4)

Number of Warrant Shares

(5)

Aggregate Purchase Price

(6)

Closing Date

                                                                               
   

 

Exhibit A

 

 

 

 

EXHIBIT B

 

Form of Warrant

 

Exhibit B

 

 

 

 

EXHIBIT C

 

Form of Registration Rights Agreement

 

Exhibit C

 

 

 

 

EXHIBIT D

 

Investor Questionnaire

 

Exhibit D

 

 

 

 

EXHIBIT E

 

Form of Irrevocable Transfer Agent Instructions

 

Exhibit E

 

 

 

 

EXHIBIT F

 

Form of Opinion of Company Counsel

 

Exhibit F

 

 

 

 

EXHIBIT G

 

Form of Secretary’s Certificate

 

Exhibit G

 

 

 

 

EXHIBIT H

 

Form of Compliance Certificate

 

Exhibit H

 

 

 

 

DISCLOSURE SCHEDULES TO SECURITIES PURCHASE AGREEMENT

 

(Note: Capitalized terms used herein and not otherwise defined shall have the
definitions ascribed to such terms in the Securities Purchase Agreement.)

 

Schedule 3(a)

(Subsidiaries)

 

Ener-Core Power, Inc., a Delaware corporation

 

Schedule 3(h)

 

No Integrated Offering.

 

None

 

Schedule 3(j)

(SEC Documents)

 

None

 

Schedule 3(k)

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

 

None, except as noted below:

 

Effective as of December 30, 2015, the Company executed a Fourth Amendment to
Securities Purchase Agreement dated April 22, 2015, and a Third Amendment to
Securities Purchase Agreement dated May 7, 2015 (collectively, the “December
Amendments”), each with certain investors holding the requisite number of
conversion shares and warrant shares underlying the notes and warrants issued in
April 2015 and May 2015 pursuant to the referenced purchase agreements. The
December Amendments (i) extend the deadline to March 31, 2016 for the Company’s
consummation of a firm commitment underwritten public offering registered under
the Securities Act and related listing of its Common Stock on a national
securities exchange, (ii) provide for the issuance of additional five-year
warrants (the “Additional Warrants”), exercisable for ten shares of Common Stock
per $1,000 of outstanding principal of the 2015 Notes (defined below) held by
each buyer pursuant to the April 2015 and May 2015 purchase agreements, each
with an exercise price of $12.50 per share, subject to adjustment as set forth
within the warrants, issuable in tranches triggered by certain Company actions
as set forth in the December Amendments and (iii) authorize the Company, prior
to January 31, 2016, to issue to one or more investors up to an aggregate of
$1,000,000 principal amount of senior secured notes, on the terms and subject to
the restrictions set forth in the December Amendments. An initial tranche of
50,000 Additional Warrants became issuable and were issued in conjunction with
the execution of the December Amendments. A second tranche of 50,000 Additional
Warrants will become issuable if the Company consummates further debt issuances
as approved in the December Amendments, and a third tranche of 50,000 Additional
Warrants will become issuable if the Company does not complete an uplisting of
its common stock to a national securities exchange prior to February 2, 2016.

 

 DS-1 

 

 

Effective as of December 30, 2015, the Company and certain investors holding
senior secured notes issued by the Company in April and May 2015 (the “2015
Notes”) executed third amendments (the “Notes Amendments”) to such 2015 Notes to
remove the minimum raise requirement from the definition of a Qualified Public
Offering set forth in the Notes, to allow full conversion of the Notes and to
integrate any additional debt issued pursuant to the SPA Amendments. The revised
definition of a Qualified Public Offering is incorporated by reference into each
of the Securities Purchase Agreement, dated April 22, 2015 and the Securities
Purchase Agreement, dated May 7, 2015, each as amended to date. The Notes
Amendments are binding upon all of the issued 2015 Notes pursuant to the terms
thereof.

 

The Company has received a notice from Dresser-Rand in relation to the pending
satisfaction of the requirement in Article 3.4.1 of the Commercial License
Agreement (“CLA”), entered into effective as of November 14, 2014 with
Dresser-Rand Company (“D-R”), to raise additional capital, within 120 days
following the Core Binding Date (as defined in the CLA), which was August 3,
2015. The Company has negotiated with D-R and received an extension to February
29, 2016, to complete the required capital raise, contingent on the successful
raise of at least $1 million within the 45 day extension period, which the
current transaction should satisfy. Pursuant to Article 3.4.1 of the CLA, if the
Company fails to satisfy the capital raise requirement by February 29, 2016,
which represents the end of the extended cure period, D-R shall be entitled, by
delivering written notice to the Company, to terminate the CLA.

 

Schedule 3(l)

(Regulatory Permits)

 

None

 

Schedule 3(n)

(Sarbanes-Oxley Act)

 

None, other than as disclosed in the Form 10-K for the year ended December 31,
2014, as updated on Forms 10-Q for the quarterly period ended September 30, 2015
and as described in Schedule 3(aa) below.

 

Schedule 3(p)

(Equity Capitalization)

 

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

 

The Company is concurrently issuing 50,000 Additional Warrants as described in
Schedule 3(k) with the consummation of this transaction, and has reserved the
shares of common stock underlying such Additional Warrants.

 

As described in Schedule 3(k), the Company has also committed to the further
issuance of potentially 100,000 Additional Warrants, and has reserved the shares
of common stock underlying such Additional Warrants.

 

 DS-2 

 

 

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

 

The Company leases certain assets, primarily computer equipment under agreements
expiring in 2017. The total amount of the Capital leases is approximately
$45,000.

 

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

 

Concurrent with this transaction, as described in Schedule 3(k), the Company has
amended the terms of its Senior Notes outstanding, including to enable the
issuance of up to $1,000,000 of additional debt in the same form.

 

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

 

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

 

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

 

UCC Statements have been filed for the Company’s Senior Notes and Backstop
Security Agreement, and may have been filed in conjunction with its capital
lease obligations.

 

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

 

See Schedule 3(k) disclosure.

 

Schedule 3(q)

(Indebtedness and Other Contracts)

 

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

 

 DS-3 

 

 

Capital Leases Payable

 

Capital leases payable consisted of the following:

 

  

September 30,

2015

   December 31, 2014     (unaudited)      Capital lease payable to De Lange
Landon secured by forklift, 10.0% interest, due on October 1, 2018, monthly
payment of $452.  $14,000   $17,000  Capital lease payable to Dell Computers
secured by computer equipment, 15.09% interest, due on November 16, 2016,
monthly payment of $592.   8,000    12,000  Capital lease payable to Dell
Computers secured by computer equipment, 15.09% interest, due on December 15,
2016, monthly payment of $590.   8,000    12,000  Capital lease payable to Dell
Computers secured by computer equipment, 15.09% interest, due on January 3,
2017, monthly payment of $405.   6,000    8,000  Capital lease payable to Dell
Computers secured by computer equipment, 15.09% interest, due on January 3,
2017, monthly payment of $394.   10,000    —  Total capital leases   46,000  
 49,000 

   

The Company is obligated to enter into a performance bond of $2,100,000 (the
“Bond”) payable for the benefit of Dresser-Rand in order to secure performance
on delivery of two Power Oxidizer units. The Bond is required within 45 days of
the placement of an order for the Power Oxidizer units. On November 2, 2015, the
Company satisfied this obligation by the creation of the Backstop Security
Agreement. For detailed terms of the Backstop Security and related documents,
see Current Report on Form 8-K filed November 3, 2015
(http://www.sec.gov/Archives/edgar/data/1495536/000121390015008150/f8k110215_enercoreinc.htm),
incorporated by reference herein.

 

Pursuant to certain Exchange Agreements, the Company granted investors a right
of first refusal to participate in any future sale of the Company’s equity or
equity equivalent securities on a pro rata basis, which has been waived in
conjunction with the Company’s pending registered offering and this transaction.
Such participation rights are also more fully described in our Current Report on
Form 8-K filed April 7, 2015
(http://www.sec.gov/Archives/edgar/data/1495536/000121390015002493/f8k040215_enercore.htm)
, incorporated by reference herein.

 

 DS-4 

 

 

The terms of the Company’s Senior Notes as amended to date, including the
related securities purchase agreements as amended to date and the related
pledge, guaranty and intercreditor agreements, are described in the following
Current Reports on Form 8-K, incorporated by reference herein, and in Schedule
3(k) above:

 

●Filed April 23, 2015
(http://www.sec.gov/Archives/edgar/data/1495536/000121390015002938/f8k042215_enercore.htm)
    ●Filed May 7, 2015
(http://www.sec.gov/Archives/edgar/data/1495536/000121390015003364/0001213900-15-003364-index.htm)
    ●Filed October 23, 2015
(http://www.sec.gov/Archives/edgar/data/1495536/000121390015007903/f8k102215_enercore.htm)
    ●Filed November 3, 2015
(http://www.sec.gov/Archives/edgar/data/1495536/000121390015008150/0001213900-15-008150-index.htm)
    ●Filed November 25, 2015
(http://www.sec.gov/Archives/edgar/data/1495536/000121390015009088/f8k112415_enercoreinc.htm)
    ●Filed December 11, 2015
(http://www.sec.gov/Archives/edgar/data/1495536/000121390015009442/f8k120715_enercoreinc.htm)

 

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

 

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

 

See Dresser-Rand waiver discussion in Schedule 3(k).

 

Schedule 3(r)

(Litigation)

 

None

 

Schedule 3(aa)

(Internal Accounting and Disclosure Controls)

 

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

 

 DS-5 

 

 

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

 

1.We do not have written documentation of our internal control policies and
procedures.  Management evaluated the impact of our failure to have written
documentation of our internal controls and procedures on our assessment of our
disclosure controls and procedures and has concluded that the control deficiency
that resulted, represented a material weakness.     2.We do not have sufficient
segregation of duties within accounting functions, which is a basic internal
control.  Due to our size and nature, segregation of all conflicting duties may
not always be possible and may not be economically feasible. However, to the
extent possible, the initiation of transactions, the custody of assets and the
recording of transactions should be performed by separate
individuals.  Management evaluated the impact of our failure to have segregation
of duties on our assessment of our disclosure controls and procedures and has
concluded that the control deficiency that resulted, represented a material
weakness.     3.For the year ending December 31, 2014 we did not have accounting
and finance staff with sufficient technical accounting training and experience
capable to manage and process the Company’s derivative equity accounting
including stock options and warrants.  In addition, the Company had 100%
turnover during the year of accounting and finance management and staff.  This
turnover resulted in periods of time where there was insufficient review of
internal and external reports and proof of key internal controls. Management
evaluated the impact of our failure to have inadequate technical accounting
experience, coupled with the turnover, on our assessment of our disclosure
controls and procedures and has concluded that the control deficiency that
resulted, represented a material weakness.     4.For the year ending December
31, 2014 we did not have a majority of our Directors considered to be
independent Directors.  Until December 1, 2014, we had a majority of our Board
of Directors considered to the not independent.  Between December 1, 2014 and
December 31, 2014 our Board was split evenly between independent Directors and
non-independent Directors.  Management evaluated the impact of our failure to
have a fully independent Board of Directors, on our assessment of our disclosure
controls and procedures and has concluded that the control deficiency that
resulted, represented a material weakness.     5.For the year ending December
31, 2014, our audit committee consisted of the Chairman of the committee
only.  Management evaluated the impact of our failure to have an adequate audit
committee and an internal audit function on our assessment of our disclosure
controls and procedures and has concluded that the control deficiency that
resulted, represented a material weakness.     6.For the year ending December
31, 2014, management concluded that the Company’s management information systems
and information technology internal control design was deficient because the
potential for unauthorized access to certain information systems and software
applications existed during 2014 in several departments, including corporate
accounting. Additionally, certain key controls for maintaining the overall
integrity of systems and data processing were not properly designed and
operating effectively. These deficiencies increased the likelihood of potential
material errors in our financial reporting

 

 

DS-6