Exhibit 10.3

 

SUBORDINATION AND INTERCREDITOR AGREEMENT

 

THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (as amended, restated,
supplemented or otherwise modified from time to time in accordance with the
terms hereof, this "Agreement") is entered into as of November 2, 2015, by and
among Anthony Tang (the "Subordinated Creditor"), Ener-Core, Inc., a Delaware
corporation ("Borrower"), and Empery Tax Efficient, LP in its capacity as
collateral agent for the Senior Lenders (as defined below) (together with its
successors and assigns, the "Agent").

 

R E C I T A L S

 

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

 

B.           Borrower and the Subordinated Creditor have entered into that
certain Backstop Security Support Agreement of even date herewith (as the same
may be amended, restated, supplemented or otherwise modified from time to time
as permitted hereunder, the "Subordinated Support Agreement"), pursuant to which
Subordinated Creditor may extend credit to Borrower in the aggregate principal
amount not to exceed $2,100,000.

 

C.           As an inducement to and as one of the conditions precedent to the
agreement of Agent and Senior Lenders to approve the transactions contemplated
by the Subordinated Support Agreement, Agent and Senior Lenders have required
the execution and delivery of this Agreement by Subordinated Creditor and the
Credit Parties (as hereinafter defined) in order to set forth the relative
rights and priorities of Agent, Senior Lenders and Subordinated Creditor under
the Senior Debt Documents and the Subordinated Debt Documents (as defined
below).

 

NOW, THEREFORE, in order to induce Agent and Senior Lenders to consummate the
transactions contemplated by the Senior Agreements, and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the parties hereto hereby agree as follows:

 

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

 

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

 

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

 

 

 

 

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

 

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

 

"Paid in Full" or "Payment in Full" shall mean the payment in full in cash of
all Senior Debt and termination of all commitments to lend under the Senior Debt
Documents.

 

"Permitted Refinancing" shall mean any refinancing of the Senior Debt under the
Senior Loan Documents, provided that the financing documentation entered into by
the Credit Parties in connection with such Permitted Refinancing constitutes
Permitted Refinancing Senior Debt Documents.

 

"Permitted Refinancing Senior Debt Documents" shall mean any financing
documentation which replaces the Senior Loan Documents and pursuant to which the
Senior Debt under the Senior Loan Documents is refinanced, as such financing
documentation may be amended, restated, supplemented or otherwise modified from
time to time in compliance with this Agreement.

 

"Permitted Subordinated Debt Payments" shall mean all fees payable by Borrower
to Subordinated Creditor under Section 3 of the Subordinated Support Agreement,
each as and when due and payable, and all payments of expenses and fees in the
ordinary course under the Subordinated Debt Documents, all in accordance with
the terms of the Subordinated Debt Documents as in effect on the date hereof or
as modified in accordance with the terms of this Agreement, and all subject to
the restrictions set forth in Section 2.3(a) below.

 

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

 

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

 

"Reorganization Subordinated Security" shall mean any debt or equity securities
of any Credit Party that are distributed to Subordinated Creditor in respect of
the Subordinated Debt pursuant to a confirmed plan of reorganization or
adjustment and that (a) are subordinated in right of payment to the Senior Debt
(or any debt or equity securities issued in substitution of all or any portion
of the Senior Debt) to at least the same extent as the Subordinated Debt is
subordinated to the Senior Debt, (b) do not have the benefit of any obligation
of any Person (whether as issuer, guarantor or otherwise) unless the Senior Debt
has at least the same benefit of the obligation of such Person and (c) do not
have any terms, and are not subject to or entitled to the benefit of any
agreement or instrument that has terms, that are more burdensome to the issuer
of or other obligor on such debt or equity securities than are the terms of the
Senior Debt.

 

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

 

"Senior Debt Documents" shall mean the Senior Loan Documents and, after the
consummation of any Permitted Refinancing, the Permitted Refinancing Senior Debt
Documents.

 

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

 

"Senior Default Notice" shall mean a written notice from Agent to Subordinated
Creditor pursuant to which Subordinated Creditor is notified of the occurrence
of a Senior Default, which notice incorporates a reasonably detailed description
of such Senior Default and states that such notice is a "Senior Default Notice"
for purposes of this Agreement.

 

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

 

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

 

 

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"Subordinated Debt" shall mean all of the obligations, liabilities and
indebtedness of each Credit Party to the Subordinated Creditor evidenced by or
incurred pursuant to the Subordinated Debt Documents.

 

"Subordinated Debt Default" shall mean a default in the payment of the
Subordinated Debt or in the performance of any term, covenant or condition
contained in the Subordinated Debt Documents or any other occurrence permitting
the Subordinated Creditor to accelerate the payment of, put or cause the
redemption of (to the extent applicable), all or any portion of the Subordinated
Debt or any Subordinated Debt Document.

 

"Subordinated Debt Default Notice" shall mean a written notice from Subordinated
Creditor to Agent pursuant to which Agent is notified of the occurrence of a
Subordinated Debt Default, which notice incorporates a reasonably detailed
description of such Subordinated Debt Default and states that such notice is a
"Subordinated Debt Default Notice" for purposes of this Agreement.

 

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

 

2.            Subordination.

 

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

 

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

 

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

 

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(b)          Any Distribution, whether in cash, securities or other property
which would otherwise, but for the terms hereof, be payable or deliverable in
respect of the Subordinated Debt (other than a Distribution of Reorganization
Subordinated Securities) shall be paid or delivered directly to Agent (to be
held and/or applied by Agent in accordance with the terms of the Senior Debt
Documents) until all Senior Debt is Paid in Full. The Subordinated Creditor
irrevocably authorizes, empowers and directs any debtor, debtor in possession,
receiver, trustee, liquidator, custodian, conservator or other Person having
authority, to pay or otherwise deliver all such Distributions to Agent, for the
benefit of the Senior Lenders, for application to the Senior Debt until Payment
in Full of all Senior Debt. The Subordinated Creditor also irrevocably
authorizes and empowers Agent, in the name of Subordinated Creditor, to demand,
sue for, collect and receive any and all such Distributions.

 

(c)          The Subordinated Creditor agrees not to initiate, prosecute or
participate in any claim, action or other proceeding challenging the
enforceability, validity, perfection or priority of the Senior Debt or any liens
and security interests securing the Senior Debt.

 

(d)          The Subordinated Creditor hereby irrevocably authorizes, empowers
and appoints Agent its agent and attorney-in-fact to execute, verify, deliver
and file such proofs of claim in respect of the Subordinated Debt upon the
failure of Subordinated Creditor promptly to do so prior to ten (10) days before
the expiration of the time to file any such proof of claim. Agent shall have no
obligation to execute, verify, deliver and/or file any such proof of claim.

 

(e)          The Subordinated Creditor will be deemed to have irrevocably,
absolutely and unconditionally consented under Section 363 of the Bankruptcy
Code (and otherwise) to any sale or other disposition of any Collateral (i) to a
third party unaffiliated with any holder of the Senior Debt, or (ii) pursuant to
an auction process or public sale process, and to have released its liens on any
such Collateral. The Subordinated Creditor also irrevocably authorizes and
empowers Agent, in the name of the Subordinated Creditor, to vote in favor of
any such sale or other disposition.

 

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

 

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2.3.         Subordinated Debt Payment Restrictions.

 

(a)          Notwithstanding the terms of the Subordinated Debt Documents, each
Credit Party hereby agrees that it may not make, and the Subordinated Creditor
hereby agrees that it will not accept, any Distribution with respect to the
Subordinated Debt until the Senior Debt is Paid in Full, except as otherwise
provided herein. Notwithstanding the immediately preceding sentence, subject to
the terms of Section 2.2, the Credit Parties may make, and the Subordinated
Creditor may accept, Permitted Subordinated Debt Payments (or portion thereof);
provided, however, that with respect to any Permitted Subordinated Debt Payment
pursuant to Section 3(e) of the Subordinated Support Agreement (or portion
thereof), each Credit Party and the Subordinated Creditor further agree that no
such Permitted Subordinated Debt Payment may be made by any Credit Party or
accepted by Subordinated Creditor if, either at the time of such payment or
after giving effect thereto, both subclauses 2.3(a)(i) and 2.3(a) (ii) below are
both not met; provided, further, that with respect to any Permitted Subordinated
Debt Payment other than pursuant to Section 3(e) thereof, each Credit Party and
the Subordinated Creditor further agree that no such Permitted Subordinated Debt
Payment may be made by any Credit Party or accepted by Subordinated Creditor if,
either at the time of such payment or after giving effect thereto, subclause
2.3(a)(i) below is not met. For purposes of this Section 2.3(a), subclauses (i)
and (ii) are as follows, respectively:

 

(i)            a Senior Default exists and such Senior Default shall not have
been cured or waived; or

 

(ii)           immediately after giving effect to such Permitted Subordinated
Debt Payment (or portion thereof), Borrower shall not have cash on hand (as
evidenced in a manner acceptable to Agent) in an amount equal to at least 110%
of the amount of all remaining principal payments, interest payments and other
payments that are or may become due and payable under the Senior Debt Documents
(as such amounts are reasonably determined by the Agent).

 

(b)          The Credit Parties may resume Permitted Subordinated Debt Payments
(and may make any Permitted Subordinated Debt Payments missed due to the
application of paragraph (a) of this Section 2.3) in respect of the Subordinated
Debt or any judgment with respect thereto:

 

(i)            in the case of a Senior Default referred to in clause (i) of
paragraph (a) of this Section 2.3, upon a cure or waiver thereof; or

 

(ii)           in the case of the failure of cash on hand to exceed the amount
required in clause (ii) of paragraph (a) of this subsection 2.3, upon,
immediately after giving effect to such Permitted Subordinated Debt Payment,
Borrower shall have cash on hand (as evidenced in a manner acceptable to Agent)
in an amount equal to the sum of (i) the amount of Permitted Subordinated Debt
Payments contemplated to be paid and (ii) at least 110% of the amount of all
remaining principal payments, interest payments and other payments that are or
may become due and payable under the Senior Debt Documents.

 

(c)          No Senior Default shall be deemed to have been waived for purposes
of this Section 2.3 unless and until the Credit Parties shall have received a
written waiver from Agent or all Senior Lenders (or such lower percentage of
Senior Lenders as is required under the Senior Debt Documents).

 

2.4.         Subordinated Debt Standstill Provisions.

 

(a)          Until the Senior Debt is Paid in Full, Subordinated Creditor shall
not, without the prior written consent of Agent, take any Enforcement Action
with respect to the Subordinated Debt, until the earliest to occur of the
following:

 

(i)           the passage of ninety (90) days from the delivery of a
Subordinated Debt Default Notice to Agent if any Subordinated Debt Default
described therein shall not have been cured or waived within such period;
provided, however, that Subordinated Creditor shall not deliver to Agent a
Subordinated Debt Default Notice involving a failure by Borrower to pay fees due
under one or more of Sections 3(a)-(d) and 3(f) of the Subordinated Support
Agreement unless and until the unpaid outstanding fees are at least six months
past due and total at least $100,000; and provided further, however, that
Subordinated Creditor shall not deliver to Agent a Subordinated Debt Default
Notice involving a failure by Borrower to make a payment due under Section 3(e)
of the Subordinated Support Agreement unless and until the unpaid outstanding
payments under such Section 3(e) total at least $500,000; or

 

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(ii)           the commencement of any Proceeding under the Bankruptcy Code with
respect to any Credit Party.

 

Notwithstanding the foregoing, (i) if Agent or any Senior Lender shall have
commenced or joined any Enforcement Action, Subordinated Creditor shall not
commence or continue any Enforcement Action with respect to any Collateral so
long as Agent or such Senior Lender is pursuing such Enforcement Action in good
faith, and (ii) subject to the provisions of Section 2.2(d), the Subordinated
Creditor may file proofs of claim against any Credit Party in any Proceeding
involving such Credit Party. Any Distributions (other than Permitted
Subordinated Debt Payments made in compliance with the terms hereof) or other
proceeds of any Enforcement Action obtained by Subordinated Creditor shall in
any event be held in trust by it for the benefit of Agent and Senior Lenders and
promptly paid or delivered to Agent for the benefit of Senior Lenders in the
form received until all Senior Debt is Paid in Full.

 

(b)          Notwithstanding anything contained herein to the contrary, at no
time may Subordinated Creditor take any Enforcement Action with respect to any
Permitted Subordinated Debt Payment that is not made when due pursuant to the
Subordinated Debt Documents.

 

2.5.         Incorrect Payments. If any Distribution on account of the
Subordinated Debt not permitted to be made by any Credit Party or accepted by
Subordinated Creditor under this Agreement is made and received by Subordinated
Creditor, such Distribution shall be held in trust by Subordinated Creditor for
the benefit of Agent and Senior Lenders and shall be promptly paid over to
Agent, with any necessary endorsement, for application (in accordance with the
Senior Debt Documents) to the payment of the Senior Debt then remaining unpaid,
until all of the Senior Debt is Paid in Full; provided that any such payment
received by Subordinated Creditor may be retained by Subordinated Creditor if
Subordinated Creditor does not receive written notice from any Credit Party,
Agent or any Senior Lender within one hundred twenty days of receipt of such
payment or Subordinated Creditor does not otherwise have actual knowledge that
such payment has been received at a time during which it was prohibited by the
terms of this Agreement.

 

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

 

(a)          Until the Senior Debt has been Paid in Full, any liens and security
interests of Subordinated Creditor in any Collateral which may exist in breach
of Subordinated Creditor's agreement pursuant to Section 3.2 and Subordinated
Creditor's representations and warranties pursuant to Section 5.1, shall be and
hereby are subordinated for all purposes and in all respects to the liens and
security interests of Agent and Senior Lenders in such Collateral, regardless of
the time, manner or order of perfection of any such liens and security
interests. In the event that Subordinated Creditor obtains any liens or security
interests in the Collateral or any portion thereof that are not subordinate to
the liens and security interests of the Agent and Senior Lenders, (i) Agent
shall be deemed authorized by Subordinated Creditor to file Uniform Commercial
Code termination statements necessary to terminate such liens and security
interests and (ii)  Subordinated Creditor shall promptly execute and deliver to
Agent such releases and terminations as Agent shall reasonably request to effect
the release of such liens, and security interests.

 

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(b)          The Subordinated Creditor agrees that it will not at any time,
including without limitation in connection with any Proceeding, contest the
validity, perfection, priority or enforceability of the Senior Debt, the Senior
Debt Documents, or the liens and security interests of Agent and Senior Lenders
in the Collateral securing the Senior Debt.

 

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

 

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

 

(b)          Notwithstanding the failure of any transferee to execute or deliver
an agreement substantially identical to this Agreement, the subordination
effected hereby shall survive any sale, assignment, pledge, disposition or other
transfer of all or any portion of the Subordinated Debt, and the terms of this
Agreement shall be binding upon the successors and assigns of the Subordinated
Creditor, as provided in Section 10 hereof.

 

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

 

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

 

"This instrument and the rights and obligations evidenced hereby are subordinate
in the manner and to the extent set forth in that certain Subordination and
Intercreditor Agreement (as the same may be amended or otherwise modified from
time to time pursuant to the terms thereof, the "Subordination Agreement") dated
as of November 2, 2015, by and among Anthony Tang (the "Subordinated Creditor"),
Ener-Core, Inc., a Delaware corporation ("Borrower") and Empery Tax Efficient,
LP in its capacity as collateral agent for the Senior Lender (as defined
therein) (together with its successors and assigns, the "Agent"), to the
indebtedness (including interest) owed by the Credit Parties pursuant to that
securities purchase agreements among Borrower, Agent and the Senior Lenders from
time to time party thereto, and certain guarantees of the indebtedness evidenced
thereby, as such agreements and such guarantees have been and hereafter may be
amended, restated, supplemented or otherwise modified from time to time; and
each holder of this instrument, by its acceptance hereof, irrevocably agrees to
be bound by the provisions of the Subordination Agreement."

 

 

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3.            Modifications.

 

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

 

3.2.         Modifications to Subordinated Debt Documents. Until the Senior Debt
has been Paid in Full, and notwithstanding anything to the contrary contained in
the Subordinated Debt Documents, the Subordinated Creditor shall not, without
the prior written consent of Agent, either (i) agree to any amendment,
modification or supplement to the Subordinated Debt Documents the effect of
which is to (a) increase the amount of fees under the Subordinate Support
Agreement or add any interest payments thereto, (b) change the dates upon which
such fees are due or terms upon which such fees are required to be paid,
(c) change or add any event of default or any covenant with respect to the
Subordinated Debt (other than any modifications or additions to reflect
comparable changes made with respect to the corresponding provisions contained
in the Senior Debt Documents so long as any applicable cushion is maintained),
(d) add or change any redemption or prepayment provisions of the Subordinated
Debt, (e) alter the subordination provisions with respect to the Subordinated
Debt, including, without limitation, subordinating the Subordinated Debt to any
other indebtedness, (f) change or amend any other term of the Subordinated Debt
Documents if such change or amendment would result in a Senior Default or confer
additional material rights on Subordinated Creditor or any other holder of the
Subordinated Debt in a manner adverse to any Credit Party or Senior Lenders, or
(g) obtain any guaranties or credit support from any Person other than the
Credit Parties or (ii) take any liens or security interests in any assets of any
Credit Party other than the liens and security interest that exist as of the
date of this Agreement.

 

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

 

5.            Representations and Warranties.

 

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

 

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

 

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6.            Subrogation. Subject to the Payment in Full of all Senior Debt,
the Subordinated Creditor shall be subrogated to the extent of any Distributions
made by Subordinated Creditor to Agent on behalf of the Senior Lenders, or
otherwise applied to payment of such Senior Debt solely by reason of the
provisions of this Agreement, to any rights of the Senior Lenders to receive
payments and distributions of cash, securities and other property applicable to
the Senior Debt, if any, until the Subordinated Debt shall have been paid in
full. For purposes of such subrogation, no payments or distributions to the
Senior Lenders of any cash, securities or other property to which Subordinated
Creditor would have been entitled, except for the provisions of this Agreement,
and no payments pursuant to the provisions of this Agreement to Agent on behalf
of the Senior Lenders by Subordinated Creditor, shall be deemed to be a payment
or distribution by any Credit Party to or on account of the Senior Debt, it
being understood and agreed that the provisions of this Agreement are solely for
the purpose of defining the relative rights of the Senior Lenders on the one
hand, and the Subordinated Creditor on the other hand.

 

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

 

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

 

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

 

Notices shall be addressed as follows:

 

If to Subordinated Creditor, as set forth below:

Anthony Tang

870 Orlando Road

San Marino, CA [zip]

Facsimile:        [               ]

Email:                [               ]

 

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If to any Credit Party:

 

c/o Ener-Core, Inc

9400 Toledo Way

Irvine, CA 92618

Attention:           Domonic J. Carney, CFO
Telephone:         949-616-3333
Facsimile:           949-616-3399

Email:                  DJ. Carney@ener-core.com

 

If to Agent:

 

Empery Tax Efficient, LP, as collateral agent

c/o Empery Asset Management, LP

1 Rockefeller Plaza, Suite 1205

New York, NY 10020

Attention:          Ryan M. Lane

Facsimile:           212-608-3307

Email:                 notices@emperyam.com

 

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

 

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

 

11.          Relative Rights. This Agreement shall define the relative rights of
Agent, Senior Lenders and Subordinated Creditor. Nothing in this Agreement shall
(a) impair, as among the Credit Parties, Agent and Senior Lenders and as between
the Credit Parties and the Subordinated Creditor, the obligation of the Credit
Parties with respect to the payment of the Senior Debt and the Subordinated Debt
in accordance with their respective terms or (b) affect the relative rights of
Agent, Senior Lenders or Subordinated Creditor with respect to any other
creditors of the Credit Parties. The terms of this Agreement shall govern even
if all or any part of the Senior Debt or the liens or security interests in
favor of Agent or Senior Lenders are avoided, disallowed, unperfected, set aside
or otherwise invalidated in any judicial proceeding or otherwise.

 

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

 

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

 

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14.          Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

 

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

 

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

 

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

 

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

 

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

 

  SUBORDINATED CREDITOR:       /s/ Anthony Tang   ANTHONY TANG

 

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CREDIT PARTIES:

     

ENER-CORE, INC.

      By /s/ Domonic Carney   Name: Domonic Carney   Title: CFO

  

  ENER-CORE POWER, INC.       By /s/ Domonic Carney   Name: Domonic Carney  
Title: CFO

  

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AGENT:

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

 

 

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