Exhibit 10.1

 

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

 

SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of September 1, 2016,
by and among Ener-Core, Inc., a Delaware corporation, with headquarters located
at 9400 Toledo Way, Irvine, California 92618 (the “Company”), Longboard Capital
Advisors LLC, in its capacity as agent for the Buyers in their capacity as
unsecured creditors (the “Subordinated Agent”), and the investors listed on the
Schedule of Buyers attached hereto (individually, a “Buyer” and collectively,
the “Buyers”).

 

WHEREAS:

 

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

 

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

 

C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms
and conditions stated in this Agreement, (i) that aggregate principal amount of
Notes set forth opposite such Buyer’s name in column (3) on the Schedule of
Buyers attached hereto as Schedule A (which aggregate principal amount of Notes
for all Buyers shall be $1,500,000), and (ii) Warrants, in substantially the
form attached hereto as Exhibit B (the “Warrants”), representing the right to
acquire that number of shares of Common Stock set forth opposite such Buyer’s
name in column (4) on the Schedule of Buyers (as exercised, collectively, the
“Warrant Shares”).

 

D. The Notes will be unsecured and will be subject and subordinate to all
outstanding indebtedness of the Company and its Subsidiaries (as defined below).

 

E. The Notes, the Conversion Shares, the Warrants, the Warrant Shares, the
Additional Warrants (as defined below), if any, and the Additional Warrant
Shares (as defined below), if any, collectively are referred to herein as the
“Securities”.

 

 

 

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

 

1. PURCHASE AND SALE OF NOTES AND WARRANTS.

 

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

 

(b) Closing. The date and time of the closing (the “Closing”) shall be 10:00
a.m., New York City time, on the date hereof (or such other date and time as is
mutually agreed to by the Company and each Buyer) after notification of
satisfaction (or waiver) of the conditions to the Closing set forth in Sections
6 and 7 below (the “Closing Date”), at the offices of K&L Gates LLP, 1 Park
Plaza, Twelfth Floor, Irvine, California 92614 (or such other location as is
mutually agreed to by the Company and each Buyer).

 

(c) Purchase Price. The aggregate purchase price for the Notes and the Warrants
to be purchased by each Buyer at the Closing (the “Purchase Price”) shall be the
amount set forth opposite each Buyer’s name in column (5) of the Schedule of
Buyers. Each Buyer shall pay $1,000 for each $1,000 of principal amount of Notes
and related Warrants to be purchased by such Buyer at the Closing. The Buyers
and the Company agree that the Notes and the Warrants constitute an “investment
unit” for purposes of Section 1273(c)(2) of the Internal Revenue Code of 1986,
as amended (the “Code”). The Buyers and the Company mutually agree that the
allocation of the issue price of such investment unit between the Notes and the
Warrants in accordance with Section 1273(c)(2) of the Code and Treasury
Regulation Section 1.1273-2(h) shall be $49.30 per $1,000 of Purchase Price to
be allocated to the Warrants and the balance of each $1,000 of Purchase Price to
be allocated to the Notes, and neither the Buyers nor the Company shall take any
position inconsistent with such allocation in any tax return or in any judicial
or administrative proceeding in respect of taxes.

 

(d) Form of Payment. On the Closing Date, (i) each Buyer shall pay its Purchase
Price to the Company for the Notes and the Warrants to be issued and sold to
such Buyer at the Closing by wire transfer of immediately available funds in
accordance with the Company’s written wire instructions and (ii) the Company
shall deliver to each Buyer the Notes (allocated in the principal amounts as
such Buyer shall request) which such Buyer is then purchasing hereunder along
with the Warrants (allocated in the amounts as such Buyer shall request) which
such Buyer is purchasing hereunder, in each case duly executed on behalf of the
Company and registered in the Company record 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 (i) is acquiring the Notes and
the Warrants, (ii) upon issuance of the Conversion Shares pursuant to the terms
of the Notes and upon exercise of the Warrants will acquire the Conversion
Shares and the Warrant Shares, respectively, and (iii) upon issuance of the
Additional Warrants, if any, pursuant to the terms of this Agreement and upon
exercise of such Additional Warrants, if any, will acquire the Additional
Warrant Shares issuable upon exercise of such Additional Warrants, if any, 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.

 

 - 2 - 

 

(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
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 investment risks and the merits of its decision to purchase the
Securities, (ii) it has not relied on the advice of, or any representations by,
any other Person, other than the Company and its officers and directors, in
making such decision, and (iii) no Person, other than the Company and its
officers and directors, 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.

 

(f) Transfer or Resale. Such Buyer understands that except as provided in
Section 4 (q) (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.

 

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

 

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES [MAY BE CONVERTIBLE] [ARE
EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
(B) AN OPINION OF COUNSEL, IN 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.

 

 - 3 - 

 

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.

 

(ii) Such Buyer understands that the certificates or other instruments
representing the Notes, the Warrants and the Additional Warrants, if any, shall
also bear the legend required by the Subordination Agreement, until such time as
the Subordination Agreement is no longer applicable to the Notes, the Warrants
and the Additional Warrants, if any.

 

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

 

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

 

(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.

 

 - 4 - 

 

(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.

 

(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, as of the Closing Date (unless otherwise
provided herein), 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 Notes, the Warrants, the Irrevocable Transfer Agent Instructions (as defined
in Section 5 (b)), the Subordination Agreement and each of the other agreements
entered into by the parties hereto in connection with the transactions
contemplated by this Agreement (collectively, the “Transaction Documents”) and
to issue the Securities in accordance with the terms hereof and thereof. The
execution and delivery of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Notes, the Warrants and the
Additional Warrants, if any, and the reservation for issuance and the issuance
of the Conversion Shares,the Warrant Shares and the Additional Warrant Shares,
if any, have been duly authorized by the Company’s Board of Directors and (other
than filings as may be required by state securities agencies) no further filing,
consent, or authorization is required by the Company, its Board of Directors or
its 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.

 

 - 5 - 

 

(c) Issuance of Securities. The issuance of the Notes, the Warrants and the
Additional Warrants, subject to the conditions set forth in Section 4(r), are
duly authorized and, upon issuance, shall be validly issued free from all
preemptive or similar rights, taxes, liens and charges with respect to the issue
thereof. 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 Notes, the Warrants and the Additional Warrants, if any, and reservation for
issuance and issuance of the Conversion Shares, the Warrant Shares and the
Additional 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. 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.

 

(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; Fees and Commissions. Neither the Company, nor any
of its Subsidiaries or affiliates, nor any Person acting on its or their behalf,
has engaged in any form of general solicitation or general advertising (within
the meaning of Regulation D) in connection with the offer or sale of the
Securities. The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or brokers’ commissions (other than for
persons engaged by any Buyer or its investment advisor) relating to or arising
out of the transactions contemplated hereby. 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. Notwithstanding the foregoing, 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.

 

 - 6 - 

 

(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.

 

(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 Securities Exchange Act of 1934, as amended
(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, Undisclosed Events, Liabilities or Developments.
Except as disclosed in Schedule 3 (k) or as set forth in the SEC Documents,
since June 30, 2016, (i) there has been no event, occurrence or development that
would, to the Company’s knowledge, reasonably be expected to result in a
Material Adverse Effect, (ii) neither the Company nor any of its Subsidiaries
has incurred any liabilities (contingent or otherwise) other than (A) trade
payables and accrued expenses incurred in the ordinary course of business
consistent with past practice and (B) liabilities not required to be reflected
in the Company’s financial statements pursuant to GAAP or disclosed in filings
made with the SEC, (iii) the Company has not altered its method of accounting,
(iv) the Company has not (A) declared or paid any dividends, (B) sold any
assets, individually or in the aggregate, in excess of $100,000 outside of the
ordinary course of business or C) had capital expenditures, individually or in
the aggregate, in excess of $100,000 and (v) the Company has not issued any
equity securities to any officer, director or affiliate, except pursuant to
existing Company stock option plans.

 

(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.

 

 - 7 - 

 

(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. Except as disclosed in Schedule 3 (n), 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.

 

(p) Equity Capitalization. As of the Closing Date, the authorized capital stock
of the Company consists of (i) 200,000,000 shares of Common Stock, of which as
of the date hereof, 3,785,216 shares are issued and outstanding, 608,464 shares
are reserved for issuance pursuant to the Company’s stock option and purchase
plans and 2,485,636 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) 2,470,938 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 or as disclosed in Schedule 3 (p): (i) none of the Company’s
capital stock is subject to rights of first refusal, rights of participation,
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) except as set forth in the SEC
Documents and in Section 4 (q), there are no agreements or arrangements under
which the Company or any of its Subsidiaries is obligated to register the sale
of any of their securities under the 1933 Act; (vi) 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.
Except as disclosed in Schedule 3 (p), 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. No further approval or authorization of any stockholder, the
Company’s Board of Directors or others is required for the issuance and sale of
the Securities. 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.

 

 - 8 - 

 

(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 (as defined below), (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) 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.

 

 - 9 - 

 

(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.

 

(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) [Reserved.]

 

(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.

 

(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.

 

 - 10 - 

 

(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.

 

(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) sold, bid for,
purchased, or paid any compensation for soliciting purchases of, any of the
Securities, or (iii) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.

 

 - 11 - 

 

(ee) Acknowledgement Regarding Buyers’ Trading Activity. Except as otherwise
provided in Section 4(m), 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) and Section 4(m), the
Company acknowledges that such aforementioned hedging and/or trading activities
do not constitute a breach of this Agreement, the Notes, the Warrants, the
Additional Warrants, if any, or any of the documents executed in connection
herewith.

 

(ff) Title to Assets. The Company and the Subsidiaries have good and marketable
title in fee simple to all real property owned by them and good and marketable
title in all personal property owned by them that is material to the business of
the Company and the Subsidiaries, in each case free and clear of all liens,
except for (i) liens as do not materially affect the value of such property and
do not materially interfere with the use made and proposed to be made of such
property by the Company and the Subsidiaries, (ii) liens for the payment of U.S,
federal, state or other taxes, for which appropriate reserves have been made
therefor in accordance with GAAP and the payment of which is neither delinquent
nor subject to penalties and (iii) liens identified on Schedule 3 (ff). Any real
property and facilities held under lease by the Company and the Subsidiaries are
held by them under valid, subsisting and enforceable leases with which the
Company and the Subsidiaries are in compliance.

 

(gg) 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.

 

(hh) 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.

 

(ii) 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.

 

(jj) No Disagreements with Accountants and Lawyers. There are no disagreements
of any kind presently existing, or reasonably anticipated by the Company to
arise, between the Company and the accountants and lawyers formerly or presently
employed by the Company.

 

(kk) 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.

 

 - 12 - 

 

(ll) 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.

 

(mm) No “Bad Actor” Disqualification Events. Except as set forth in Schedule 3
(mm), 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).

 

(nn) Other Covered Persons. The Company is not aware of any Person 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. Until the date on which the Buyers shall have sold all of
the Conversion Shares, Warrant Shares and Additional Shares, if any, and none of
the Notes, Warrants or Additional Warrants are outstanding (the “Reporting
Period”), the Company shall timely file all reports required to be filed with
the SEC pursuant to the 1934 Act, and 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.

 

(e) Financial Information. The Company agrees to send the following items to
each Buyer during the Reporting Period (i) unless the following are filed with
the SEC through EDGAR and are available to the public through the EDGAR system,
within one (1) Business Day after the filing thereof with the SEC, a copy of its
Annual Reports on Form 10-K, any Quarterly Reports on Form 10-Q, any Current
Reports on Form 8-K (or any analogous reports under the 1934 Act) and any
registration statements (other than on Form S-8) or amendments filed pursuant to
the 1933 Act, (ii) unless the following are filed with the SEC through EDGAR and
are available to the public through the EDGAR system, on the same day as the
release thereof, facsimile or e-mailed copies of all press releases issued by
the Company or any of its Subsidiaries, and (iii) copies of any notices and
other information made available or given to the 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.

 

 - 13 - 

 

(f) Listing. The Company shall commence trading of its Common Stock on either
The New York Stock Exchange, Inc., the NYSE MKT LLC, The NASDAQ Capital Market,
The NASDAQ Global Select Market or The NASDAQ Global Market no later than
December 31, 2016.

 

(g) 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. 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.

 

(h) 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.

 

(i) 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, the form of the Warrants, the form of the
Additional Warrants and the form of Notes as exhibits to such filing (including
all attachments, the “8-K Filing”). From and after the filing of the 8-K Filing
with the SEC, no Buyer shall be in possession of any material, nonpublic
information received from the Company, any of its Subsidiaries or any of their
respective officers, directors, affiliates, employees or agents, that is not
disclosed in the 8-K Filing. In addition, effective upon the filing of the 8-K
Filing, the Company acknowledges and agrees that any and all confidentiality or
similar obligations under any agreement, whether written or oral, between the
Company, any of its Subsidiaries or any of their respective officers, directors,
affiliates, employees or agents, on the one hand, and any of the Buyers or any
of their affiliates, on the other hand, shall terminate. The Company shall not,
and shall cause each of its Subsidiaries and its and each of their respective
officers, directors, affiliates, employees and agents, not to, provide any Buyer
with any material, nonpublic information regarding the Company or any of its
Subsidiaries from and after the date hereof without the express prior written
consent of such Buyer. If a Buyer has, or believes it has, received any such
material, nonpublic information regarding the Company or any of its Subsidiaries
from the Company, any of its Subsidiaries or any of their respective officers,
directors, affiliates, employees or agents, it may provide the Company with
written notice thereof. The Company shall, within two (2) Trading Days of
receipt of such notice, make public disclosure of such material, nonpublic
information. No Buyer shall have any liability to the Company, its Subsidiaries,
or any of its or their respective officers, directors, affiliates, employees,
stockholders 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 8-K Filing and contemporaneously therewith
and (ii) as is required by applicable law and regulations (provided that in the
case of clause (i) each Buyer shall be consulted by the Company in connection
with any such press release or other public disclosure prior to its release).
Except for the Registration Statement required to be filed pursuant to Section
4(q) 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.

 

 - 14 - 

 

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

 

(k) 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.

 

(l) 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 (l) 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.

 

(m) 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.

 

(n) 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.

 

(o) Subordinated Agent.

 

(i) Each Buyer hereby (a) appoints Longboard Capital Advisors LLC as the
Subordinated Agent and (b) authorizes the Subordinated Agent (and its officers,
directors, employees and agents) to take such action on such Buyer’s behalf in
accordance with the terms hereof and of the Subordination Agreement. The
Subordinated Agent shall not have a fiduciary relationship in respect of any
Buyer. Neither the Subordinated Agent nor any of its officers, directors,
employees and agents shall have any liability to any Buyer for any action taken
or omitted to be taken in connection hereof except to the extent caused by its
own gross negligence or willful misconduct, and each Buyer agrees to defend,
protect, indemnify and hold harmless the Subordinated Agent and all of its
officers, directors, employees and agents (collectively, the “Subordinated Agent
Indemnitees”) from and against any losses, damages, liabilities, obligations,
penalties, actions, judgments, suits, fees, costs and expenses (including,
without limitation, reasonable attorneys’ fees, costs and expenses) incurred by
such Subordinated Agent Indemnitee, whether direct, indirect or consequential,
arising from or in connection with the performance by such Subordinated Agent
Indemnitee of the duties and obligations of Subordinated Agent pursuant hereto
in the event that such losses, damages, liabilities, obligations, penalties,
actions, judgments, suits, fees, costs or expenses are a direct result of such
Buyer’s breach of this Agreement or the Subordination Agreement.

 

 - 15 - 

 

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

 

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

 

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

 

(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.

 

(q) Registration Rights. Each Buyer shall have the right to request that the
Company register such Buyer’s Conversion Shares, Warrant Shares and Additional
Warrant Shares, if any, on the same terms set forth in any registration rights
agreement entered into by the Company on the earlier of (i) the conversion of at
least fifty percent (50%) of the then outstanding (A) principal, (B) accrued and
unpaid interest with respect to such principal and (C) accrued and unpaid late
charges, if any, with respect to such principal and interest, under the then
outstanding senior secured notes of the Company, issued pursuant to that certain
Securities Purchase Agreement, dated as of April 22, 2015 by and among the
Company and the investors listed on the signature pages thereto, as amended from
time to time, and that certain Securities Purchase Agreement, dated as of May 7,
2015 by and among the Company and the investors listed on the signature pages
thereto, as amended from time to time, or (ii) the consummation of a private
offering of its securities resulting in gross proceeds, inclusive of proceeds
received pursuant to this Agreement, to the Company of at least $4,000,000.

 

(r) Additional Warrants. Each Buyer shall be entitled to the receipt of
additional warrants, in substantially the form provided in Exhibit C (each, an
“Additional Warrant”), consistent with the following terms:

 

(i) In the event that the Company is unable to consummate a financing consisting
of the issuance of Common Stock and warrants for aggregate gross proceeds of at
least $3,000,000 (an “Equity Financing”) on or prior to the 61st day following
the date of issuance of such Note, the Company shall issue an Additional Warrant
to each Buyer exercisable for 50 shares of Common Stock per $1,000 of
outstanding principal of the Notes held by such Buyer as of such 61st day after
the date of issuance of such Note, which shall be exercisable for five years
from the date of issuance at an exercise price of $4.00 per share, subject to
adjustment as set forth within the Additional Warrants.

 

 - 16 - 

 

(ii) In the event that the Company is unable to consummate an Equity Financing
on or prior to the 91st day following the date of issuance of such Note, the
Company shall issue an Additional Warrant to each Buyer exercisable for 50
shares of Common Stock per $1,000 of outstanding principal of the Notes held by
such Buyer as of such 91st day after the date of issuance of such Note, which
shall be exercisable for five years from the date of issuance at an exercise
price of $4.00 per share, subject to adjustment as set forth within the
Additional Warrants.

 

(iii) In the event that the Company is unable to consummate an Equity Financing
on or prior to the 121st day following the date of issuance of such Note, the
Company shall issue an Additional Warrant to each Buyer exercisable for 50
shares of Common Stock per $1,000 of outstanding principal of the Notes held by
such Buyer as of such 121st day after the date of issuance of such Note, which
shall be exercisable for five years from the date of issuance at an exercise
price of $4.00 per share, subject to adjustment as set forth within the
Additional Warrants.

 

(iv) In the event that the Company is unable to consummate an Equity Financing
on or prior to the 151st day following the date of issuance of such Note, the
Company shall issue an Additional Warrant to each Buyer exercisable for 50
shares of Common Stock per $1,000 of outstanding principal of the Notes held by
such Buyer as of such 151st day after the date of issuance of such Note, which
shall be exercisable for five years from the date of issuance at an exercise
price of $4.00 per share, subject to adjustment as set forth within the
Additional Warrants.

 

5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

 

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

 

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

 

 - 17 - 

 

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

 

(a) 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.

 

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

 

(c) 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.

 

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

 

(a) 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, (B) the Notes (allocated in such principal amounts as such Buyer
shall request), being purchased by such Buyer at the Closing pursuant to this
Agreement and (C) the related Warrants (allocated in such amounts as such Buyer
shall request) being purchased by such Buyer at the Closing pursuant to this
Agreement.

 

(b) 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.

 

(c) The Company shall have delivered to such Buyer a certificate evidencing 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.

 

(d) 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 conducts business, as of a date within ten (10) days of the Closing
Date.

 

(e) 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, each as in effect at the Closing, in the
form attached hereto as Exhibit F.

 

(f) 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 G.

 

 - 18 - 

 

(g) 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.

 

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

 

(i) 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. MISCELLANEOUS.

 

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

 

(b) Counterparts. This Agreement 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.

 

 - 19 - 

 

(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
aggregate number of the Conversion Shares and the Warrant Shares issued or
issuable under the Notes (calculated using the Assumed Conversion Price) and
Warrants (without regard to any limitation on conversion or exercise set forth
therein) (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 8 (e) shall be binding upon each Buyer and holder of Securities and
the Company. No such amendment shall be effective to the extent that it applies
to less than all of the Buyers or holders of Securities. No consideration shall
be offered or paid to any Person to amend or consent to a waiver or modification
of any provision of any of the Transaction Documents unless the same
consideration (other than the reimbursement of legal fees) also is offered to
all of the parties to the Transaction Documents, holders of Notes or holders of
the Warrants, as the case may be. The Company has not, directly or indirectly,
made any agreements with any Buyers relating to the terms or conditions of the
transactions contemplated by the Transaction Documents except as set forth in
the Transaction Documents. Without limiting the foregoing, the Company confirms
that, except as set forth in this Agreement, no Buyer has made any commitment or
promise or has any other obligation to provide any financing to the Company or
otherwise.

 

(f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); (iii) 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

 

 - 20 - 

 

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: Shoshannah D. Katz

E-mail: 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 Notes, the Warrants or the Additional 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 8(k).

 

(i) Survival. 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 8 shall survive the Closing. Each Buyer shall be responsible
only for its own representations, warranties, agreements and covenants
hereunder.

 

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

 

(k) Indemnification.

 

(i) In consideration of each Buyer’s execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless each Buyer and each other holder of
the Securities and all of their 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.

 

 - 21 - 

 

(ii) Promptly after receipt by an Indemnitee under this Section 8(k) of notice
of the commencement of any action or proceeding (including any governmental
action or proceeding) involving an Indemnified Liability, such Indemnitee shall,
if a claim for indemnification in respect thereof is to be made against any
indemnifying party under this Section 8(k), deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnitee; provided, however, that an Indemnitee
shall have the right to retain its own counsel with the fees and expenses of not
more than one counsel for such Indemnitee to be paid by the indemnifying party,
if, in the reasonable opinion of the Indemnitee, the representation by such
counsel of the Indemnitee and the indemnifying party would be inappropriate due
to actual or potential differing interests between such Indemnitee and any other
party represented by such counsel in such proceeding. Legal counsel referred to
in the immediately preceding sentence shall be selected by the Buyer holding at
least a majority of the aggregate principal amount of the Notes. The Indemnitee
shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or Indemnified Liabilities by the
indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the Indemnitee that relates to such action or
Indemnified Liabilities. The indemnifying party shall keep the Indemnitee fully
apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. No indemnifying party shall be liable for any
settlement of any action, claim or proceeding effected without its prior written
consent, provided, however, that the indemnifying party shall not unreasonably
withhold, delay or condition its consent. No indemnifying party shall, without
the prior written consent of the Indemnitee, which consent shall not be
unreasonably withheld conditioned or delayed, consent to entry of any judgment
or enter into any settlement or other compromise which (i) does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnitee of a release from all liability in respect to such Indemnified
Liabilities or litigation, (ii) requires any admission of wrongdoing by such
Indemnitee, or (iii) obligates or requires an Indemnitee to take, or refrain
from taking, any action. Following indemnification as provided for hereunder,
the indemnifying party shall be subrogated to all rights of the Indemnitee with
respect to all third parties, firms or corporations relating to the matter for
which indemnification has been made. The failure to deliver written notice to
the indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnitee under this Section 8(k), except to the extent that the indemnifying
party is prejudiced in its ability to defend such action.

 

 - 22 - 

 

(iii) The indemnification required by this Section 8(k) shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnified Liabilities are
incurred.

 

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

 

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

 

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

 

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

 

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

 

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

 

(q) Subordination Agreement. The Company and each Buyer acknowledge and agree
that, notwithstanding anything to the contrary herein, the rights of the Buyer
pursuant to the terms of each of the Transaction Documents are subject to the
prohibitions on cash payments to the Buyer by the Company set forth in the
Subordination Agreement, except as explicitly permitted in the Subordination
Agreement.

 

[Signature Pages Follow]

 

 - 23 - 

 

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:     Title:

 

 

Signature Page to Securities Purchase Agreement

 

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

 

BUYER:

  

 

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

  

Date:                                         

 

INDIVIDUAL INVESTOR:

 

 

 

 

__________________________________________

(print name)

 

 

__________________________________________

(signature)

 

 

 

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

 

 

__________________________________________

(print name of entity)

 

 

By: _______________________________________

(signature of person signing on behalf of entity)

 

Name:_____________________________________

 

Title: _____________________________________

 

SSN/Tax I.D. No.: _______________________

 

Address for Notice:

 

_______________________________________

_______________________________________

_______________________________________

Tel: ___________________________________

Fax: __________________________________

Email: _________________________________

 

Tax I.D. No.:___________________________

 

Address for Notice:

 

_______________________________________

_______________________________________

_______________________________________

Tel: __________________________________

Fax: __________________________________

Email:_________________________________

 

Signature Page to Securities Purchase Agreement

 

EXHIBITS

 

Schedule A Schedule of Buyers Exhibit A Form of Note Exhibit B Form of Warrant
Exhibit C Form of Additional Warrant Exhibit D Investor Questionnaire Exhibit E
Form of Irrevocable Transfer Agent Instructions Exhibit F Form of Secretary’s
Certificate Exhibit G Form of Compliance Certificate

 

SCHEDULES

 

Schedule 3(a) Subsidiaries Schedule 3(k) Absence of Certain Changes, Undisclosed
Events, Liabilities or Developments Schedule 3(l) Conduct of Business;
Regulatory Permits Schedule 3(n) Sarbanes-Oxley Act Schedule 3(p) Equity
Capitalization Schedule 3(q) Indebtedness and Other Contracts Schedule 3(r)
Litigation Schedule 3(aa) Internal Accounting and Disclosure Controls Schedule
3(ff) Title to Assets Schedule 3(mm) No “Bad Actor” Disqualification Events

 

 

Exhibits and Schedules

 

SCHEDULE A

 

Schedule of Buyers

 

(1)

Buyer

(2)

Contact

Information

(3)

Aggregate Principal Amount of Notes

(4)

Number of
Warrant Shares

(5)

Purchase

Price

                                                 

 

 

Schedule a

 

EXHIBIT A

 

Form of Note

 

See Exhibit 4.1 to the Current Report on Form 8-K of even date.

 

 

Exhibit a

 

EXHIBIT B

 

Form of Warrant

 

See Exhibit 4.2 to the Current Report on Form 8-K of even date.

 

 

Exhibit B

 

EXHIBIT C

 

Form of Additional Warrant

 

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.

 

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

 

Ener-Core, Inc.

 

Warrant To Purchase Common Stock

 

Warrant No.:                       

Number of Shares of Common Stock:                                           

Date of Issuance: _________________ (“Issuance Date”)

 

Ener-Core, Inc., a company incorporated under the laws of Delaware (the
“Company”), hereby certifies that, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, [HOLDER], the
registered holder hereof or its permitted assigns (the “Holder”), is entitled,
subject to the terms set forth below, to purchase from the Company, at the
Exercise Price (as defined below) then in effect, at any time or times on or
after the Issuance Date, but not after 11:59 p.m., New York time, on the
Expiration Date, (as defined below), ______________ (_____________) fully paid
nonassessable shares of Common Stock (as defined below), subject to adjustment
as provided herein (the “Warrant Shares”). Except as otherwise defined herein,
capitalized terms in this Warrant to Purchase Common Stock (including any
Warrants to Purchase Common Stock issued in exchange, transfer or replacement
hereof, this “Warrant”), shall have the meanings set forth in Section 16. This
Warrant is one of the Warrants to purchase Common Stock (the “Additional
Warrants”) issued pursuant to Section 4(r) of that certain Securities Purchase
Agreement, dated as of September 1, 2016 (the “Subscription Date”), by and among
the Company and the investors (the “Buyers”) referred to therein (the
“Securities Purchase Agreement”).

 

 

 

1. EXERCISE OF WARRANT.

 

(a) Mechanics of Exercise. Subject to the terms and conditions hereof
(including, without limitation, the limitations set forth in Section 1(f)), this
Warrant may be exercised by the Holder at any time or times on or after the
Issuance Date, in whole or in part, by delivery (whether via facsimile,
electronic mail or otherwise) of a written notice, in the form attached hereto
as Exhibit A (the “Exercise Notice”), of the Holder’s election to exercise this
Warrant. Within two (2) days following the date of delivery of the Exercise
Notice, the Holder shall make payment to the Company of an amount equal to the
Exercise Price in effect on the date of such exercise multiplied by the number
of Warrant Shares as to which this Warrant is being exercised (the “Aggregate
Exercise Price”) in cash by wire transfer of immediately available funds or, if
the provisions of Section 1(d) are applicable, by notifying the Company that
this Warrant is being exercised pursuant to a Cashless Exercise (as defined in
Section 1(d)). The Holder shall not be required to deliver the original Warrant
in order to effect an exercise hereunder, nor shall any ink-original signature
or medallion guarantee (or other type of guarantee or notarization) with respect
to any Exercise Notice be required. Execution and delivery of the Exercise
Notice with respect to less than all of the Warrant Shares shall have the same
effect as cancellation of the original Warrant and issuance of a new Warrant
evidencing the right to purchase the remaining number of Warrant Shares. On or
before the first (1st) Trading Day following the date on which the Company has
received the applicable Exercise Notice, the Company shall transmit by facsimile
or electronic mail an acknowledgment of confirmation of receipt of the Exercise
Notice, in the form attached to the Exercise Notice, to the Holder and the
Company’s transfer agent (the “Transfer Agent”). So long as the Holder delivers
the Aggregate Exercise Price (or notice of a Cashless Exercise) on or prior to
the second (2nd) Trading Day following the date on which the Exercise Notice has
been delivered to the Company, then on or prior to the earlier of (i) the third
(3rd) Trading Day following the date on which the Exercise Notice has been
delivered to the Company and (ii) the number of Trading Days comprising the
Standard Settlement Period (but in no event sooner than the 2nd Trading Day
following the date on which the Exercise Notice has been delivered to the
Company, unless the Holder has elected to deliver a notice of a Cashless
Exercise), or, if the Holder does not deliver the Aggregate Exercise Price (or
notice of a Cashless Exercise) on or prior to the second (2nd) Trading Day
following the date on which the Exercise Notice has been delivered to the
Company, then on or prior to the second (2nd) Trading Day following the date on
which the Aggregate Exercise Price (or notice of a Cashless Exercise) is
delivered (the “Share Delivery Date”), the Company shall (X) provided that the
Transfer Agent is participating in The Depository Trust Company (“DTC”) Fast
Automated Securities Transfer Program, credit such aggregate number of Warrant
Shares to which the Holder is entitled pursuant to such exercise to the Holder’s
or its designee’s balance account with DTC through its Deposit / Withdrawal At
Custodian system, or (Y) if the Transfer Agent is not participating in the DTC
Fast Automated Securities Transfer Program, issue and dispatch by overnight
courier to the address as specified in the Exercise Notice, a certificate,
registered in the Company’s share register in the name of the Holder or its
designee, for the number of Warrant Shares to which the Holder is entitled
pursuant to such exercise. The Company shall be responsible for all fees and
expenses of the Transfer Agent and all fees and expenses with respect to the
issuance of Warrant Shares via DTC, if any, including without limitation for
same day processing. Upon delivery of the Exercise Notice, the Holder shall be
deemed for purposes of Rule 200(b) of Regulation SHO to have become the owner of
the Warrant Shares with respect to which this Warrant has been exercised,
irrespective of the date such Warrant Shares are credited to the Holder’s DTC
account or the date of delivery of the certificates evidencing such Warrant
Shares, as the case may be, provided that the Holder delivers the Aggregate
Exercise Price (or a duly executed notice of a Cashless Exercise) on or prior to
the second (2nd) Trading Day following the date on which the Exercise Notice has
been delivered to the Company. If this Warrant is physically delivered to the
Company in connection with any exercise pursuant to this Section 1(a) and the
number of Warrant Shares represented by this Warrant submitted for exercise is
greater than the number of Warrant Shares being acquired upon an exercise, then
the Company shall as soon as practicable and in no event later than three (3)
Trading Days after any exercise and at its own expense, issue and deliver to the
Holder (or its designee) a new Warrant (in accordance with Section 7(d))
representing the right to purchase the number of Warrant Shares issuable
immediately prior to such exercise under this Warrant, less the number of
Warrant Shares with respect to which this Warrant is exercised. No fractional
Warrant Shares are to be issued upon the exercise of this Warrant, but rather
the number of Warrant Shares to be issued shall be rounded to the nearest whole
number. The Company shall pay any and all transfer, stamp, issuance and similar
taxes, costs and expenses (including, without limitation, fees and expenses of
the Transfer Agent) which may be payable with respect to the issuance and
delivery of Warrant Shares upon exercise of this Warrant. The Company’s
obligations to issue and deliver Warrant Shares in accordance with the terms and
subject to the conditions hereof are absolute and unconditional, irrespective of
any action or inaction by the Holder to enforce the same, any waiver or consent
with respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination; provided, however, that the Company shall
not be required to deliver Warrant Shares with respect to an exercise prior to
the Holder’s delivery of the Aggregate Exercise Price (or notice of a Cashless
Exercise) with respect to such exercise. As used herein, “Standard Settlement
Period” means the standard settlement period, expressed in a number of Trading
Days, on the Company’s primary trading market or quotation system with respect
to the Company’s Common Stock that is in effect on the date of receipt of an
applicable Exercise Notice.

 

 - 2 - 

 

(b) Exercise Price. For purposes of this Warrant, “Exercise Price” means $4.00,
subject to adjustment as provided herein.

 

(c) Company’s Failure to Timely Deliver Securities. If either (I) the Company
shall fail for any reason or for no reason to issue to the Holder on or prior to
the applicable Share Delivery Date, if (x) the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, a
certificate for the number of shares of Common Stock to which the Holder is
entitled and register such Common Stock on the Company’s share register or (y)
the Transfer Agent is participating in the DTC Fast Automated Securities
Transfer Program, to credit the Holder’s balance account with DTC, for such
number of shares of Common Stock to which the Holder is entitled upon the
Holder’s exercise of this Warrant or (II) a registration statement covering the
resale of the Warrant Shares that are the subject of the Exercise Notice (the
“Exercise Notice Warrant Shares”) is not available for the resale of such
Exercise Notice Warrant Notice Shares and (x) the Company fails to promptly, but
in no event later than one (1) Business Day after such registration statement
becomes unavailable, to so notify the Holder and (y) the Company is unable to
deliver the Exercise Notice Warrant Shares electronically without any
restrictive legend by crediting such aggregate number of Exercise Notice Warrant
Shares to the Holder’s or its designee’s balance account with DTC through its
Deposit / Withdrawal At Custodian system (the event described in the immediately
foregoing clause (II) is hereinafter referred to as a “Notice Failure” and
together with the event described in clause (I) above, an “Exercise Failure”),
then, in addition to all other remedies available to the Holder, if on or prior
to the applicable Share Delivery Date either (I) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, the Company
shall fail to issue and deliver a certificate to the Holder and register such
shares of Common Stock on the Company’s share register or, if the Transfer Agent
is participating in the DTC Fast Automated Securities Transfer Program, credit
the Holder’s balance account with DTC for the number of shares of Common Stock
to which the Holder is entitled upon the Holder’s exercise hereunder or pursuant
to the Company’s obligation pursuant to clause (ii) below or (II) if a Notice
Failure occurs, and if on or after such Trading Day the Holder purchases (in an
open market transaction or otherwise) Common Stock to deliver in satisfaction of
a sale by the Holder of shares of Common Stock issuable upon such exercise that
the Holder anticipated receiving from the Company (a “Buy-In”), then the Company
shall, within three (3) Trading 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 and other
out-of-pocket expenses, if any) for the shares of Common Stock so purchased (the
“Buy-In Price”), at which point the Company’s obligation to deliver such
certificate (and to issue such shares of Common Stock) or credit such Holder’s
balance account with DTC for such shares of Common Stock shall terminate, or
(ii) promptly honor its obligation to deliver to the Holder a certificate or
certificates representing such shares of Common Stock or credit such Holder’s
balance account with DTC, as applicable, 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) any trading price of the Common
Stock selected by the Holder in writing as in effect at any time during the
period beginning on the applicable Exercise Date and ending on the applicable
Share Delivery Date. Nothing shall limit the Holder’s right to pursue any other
remedies available to it hereunder, at law or in equity, including, without
limitation, a decree of specific performance and/or injunctive relief with
respect to the Company’s failure to timely deliver certificates representing
Warrant Shares (or to electronically deliver such Warrant Shares) upon the
exercise of this Warrant as required pursuant to the terms hereof. While this
Warrant is outstanding, the Company shall cause its transfer agent to
participate in the DTC Fast Automated Securities Transfer Program. In addition
to the foregoing rights, if the Company fails to deliver the applicable number
of Warrant Shares upon an exercise pursuant to Section 1 by the applicable Share
Delivery Date, then the Holder shall have the right to rescind such exercise in
whole or in part and retain and/or have the Company return, as the case may be,
any portion of this Warrant that has not been exercised pursuant to such
Exercise Notice; provided that the rescission of an exercise shall not affect
the Company’s obligation to make any payments that have accrued prior to the
date of such notice pursuant to this Section 1(c) or otherwise, and (ii) if a
registration statement covering the resale of the Warrant Shares that are
subject to an Exercise Notice is not available for the resale of such Exercise
Notice Warrant Shares and the Holder has submitted an Exercise Notice prior to
receiving notice of the non-availability of such registration statement and the
Company has not already delivered the Warrant Shares underlying such Exercise
Notice electronically without any restrictive legend by crediting such aggregate
number of Warrant Shares to which the Holder is entitled pursuant to such
exercise to the Holder’s or its designee’s balance account with DTC through its
Deposit / Withdrawal At Custodian system, the Holder shall have the option, by
delivery of notice to the Company, to (x) rescind such Exercise Notice in whole
or in part and retain or have returned, as the case may be, any portion of this
Warrant that has not been exercised pursuant to such Exercise Notice; provided
that the rescission of an Exercise Notice shall not affect the Company’s
obligation to make any payments that have accrued prior to the date of such
notice pursuant to this Section 1(c) or otherwise, and/or (y) switch some or all
of such Exercise Notice from a cash exercise to a Cashless Exercise.

 

 - 3 - 

 

(d) Cashless Exercise. Notwithstanding anything contained herein to the
contrary, unless all of the Warrant Shares that are subject to an Exercise
Notice are registered for resale pursuant to an effective registration statement
and are issuable without any restrictive legends, the Holder may, in its sole
discretion, exercise this Warrant in whole or in part and, in lieu of making the
cash payment otherwise contemplated to be made to the Company upon such exercise
in payment of the Aggregate Exercise Price, elect instead to receive upon such
exercise the “Net Number” of shares of Common Stock determined according to the
following formula (a “Cashless Exercise”):

 

Net Number = (A x B) - (A x C)

D

For purposes of the foregoing formula:

 

  A = the total number of shares with respect to which this Warrant is then
being  exercised.         B = the arithmetic average of the Closing Sale Prices
of the Common Stock for the five (5) consecutive Trading Days ending on the date
immediately preceding the date of the Exercise Notice.         C = the Exercise
Price then in effect for the applicable Warrant Shares at the time of such
exercise.         D = as applicable: (i) the Closing Sale Price of the Common
Stock on the Trading Day immediately preceding the date of the applicable
Exercise Notice if such Exercise Notice is (1) both executed and delivered
pursuant to Section 1(a) hereof on a day that is not a Trading Day or (2) both
executed and delivered pursuant to Section 1(d) hereof on a Trading Day prior to
the opening of “regular trading hours” (as defined in Rule 600(b)(64) of
Regulation NMS promulgated under the federal securities laws) on such Trading
Day, (ii) the Bid Price of the Common Stock as of the time of the Holder’s
execution of the applicable Exercise Notice if such Exercise Notice is executed
during “regular trading hours” on a Trading Day and is delivered within two (2)
hours thereafter pursuant to Section 1(a) hereof, or (iii) the Closing Sale
Price of the Common Stock on the date of the applicable Exercise Notice if the
date of such Exercise Notice is a Trading Day and such Exercise Notice is both
executed and delivered pursuant to Section 1(a) hereof after the close of
“regular trading hours” on such Trading Day.

 

If Warrant Shares are issued in such a cashless exercise, the Company
acknowledges and agrees that in accordance with Section 3(a)(9) of the
Securities Act of 1933, as amended (the “1933 Act”), the Warrant Shares shall
take on the characteristics of the Warrants being exercised, and the holding
period of the Warrants being exercised may be tacked on to the holding period of
the Warrant Shares. The Company agrees not to take any position contrary to this
Section 1(d).

 

(e) Disputes. In the case of a dispute as to the determination of the Exercise
Price or the arithmetic calculation of the Warrant Shares, the Company shall
promptly issue to the Holder the number of Warrant Shares that are not disputed
and resolve such dispute in accordance with Section 11.

 

 - 4 - 

 

(f) Beneficial Ownership. Notwithstanding anything to the contrary contained
herein, the Company shall not effect the exercise of any portion of this
Warrant, and the Holder shall not have the right to exercise any portion of this
Warrant, pursuant to the terms and conditions of this Warrant and any such
exercise shall be null and void and treated as if never made, to the extent that
after giving effect to such exercise, the Holder together with the other
Attribution Parties collectively would beneficially own in excess of 9.99% (the
“Maximum Percentage”) of the number of shares of Common Stock outstanding
immediately after giving effect to such exercise. For purposes of the foregoing
sentence, the aggregate number of shares of Common Stock beneficially owned by
the Holder and the other Attribution Parties shall include the number of shares
of Common Stock held by the Holder and all other Attribution Parties plus the
number of shares of Common Stock issuable upon exercise of this Warrant with
respect to which the determination of such sentence is being made, but shall
exclude the number of shares of Common Stock which would be issuable upon (A)
exercise of the remaining, unexercised portion of this Warrant beneficially
owned by the Holder or any of the other Attribution Parties and (B) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company (including, without limitation, any convertible notes or convertible
preferred stock or warrants, including the other Additional Warrants)
beneficially owned by the Holder or any other Attribution Party subject to a
limitation on conversion or exercise analogous to the limitation contained in
this Section 1(f). For purposes of this Section 1(f), beneficial ownership shall
be calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended (the “1934 Act”). For purposes of this Warrant, in determining
the number of outstanding shares of Common Stock the Holder may acquire upon the
exercise of this Warrant without exceeding the Maximum Percentage, the Holder
may rely on the number of outstanding shares of Common Stock as reflected in (x)
the Company’s most recent Annual Report on Form 10-K, Quarterly Report on Form
10-Q and Current Reports on Form 8-K or other public filing with the Securities
and Exchange Commission (the “SEC”), as the case may be, (y) a more recent
public announcement by the Company or (3) any other written notice by the
Company or the Transfer Agent setting forth the number of shares of Common Stock
outstanding (the “Reported Outstanding Share Number”). If the Company receives
an Exercise Notice from the Holder at a time when the actual number of
outstanding shares of Common Stock is less than the Reported Outstanding Share
Number, the Company shall (i) notify the Holder in writing of the number of
shares of Common Stock then outstanding and, to the extent that such Exercise
Notice would otherwise cause the Holder’s beneficial ownership, as determined
pursuant to this Section 1(f), to exceed the Maximum Percentage, the Holder must
notify the Company of a reduced number of Warrant Shares to be purchased
pursuant to such Exercise Notice (the number of shares by which such purchase is
reduced, the “Reduction Shares”) and (ii) as soon as reasonably practicable, the
Company shall return to the Holder any exercise price paid by the Holder for the
Reduction Shares. For any reason at any time, upon the written or oral request
of the Holder, the Company shall within one (1) Business Day confirm orally and
in writing or by electronic mail to the Holder the number of shares of Common
Stock then outstanding. In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Warrant, by the Holder and any other
Attribution Party since the date as of which the Reported Outstanding Share
Number was reported. In the event that the issuance of Common Stock to the
Holder upon exercise of this Warrant results in the Holder and the other
Attribution Parties being deemed to beneficially own, in the aggregate, more
than the Maximum Percentage of the number of outstanding shares of Common Stock
(as determined under Section 13(d) of the 1934 Act), the number of shares so
issued by which the Holder’s and the other Attribution Parties’ aggregate
beneficial ownership exceeds the Maximum Percentage (the “Excess Shares”) shall
be deemed null and void and shall be cancelled ab initio, and the Holder shall
not have the power to vote or to transfer the Excess Shares. As soon as
reasonably practicable after the issuance of the Excess Shares has been deemed
null and void, the Company shall return to the Holder the exercise price paid by
the Holder for the Excess Shares. Upon delivery of a written notice to the
Company, the Holder may from time to time increase or decrease the Maximum
Percentage to any other percentage not in excess of 9.99% as specified in such
notice; provided that (i) any such increase in the Maximum Percentage will not
be effective until the sixty-first (61st) day after such notice is delivered to
the Company and (ii) any such increase or decrease will apply only to the Holder
and the other Attribution Parties and not to any other holder of Warrants that
is not an Attribution Party of the Holder. For purposes of clarity, the shares
of Common Stock issuable pursuant to the terms of this Warrant in excess of the
Maximum Percentage shall not be deemed to be beneficially owned by the Holder
for any purpose including for purposes of Section 13(d) or Rule 16a-1(a)(1) of
the 1934 Act. No prior inability to exercise this Warrant pursuant to this
paragraph shall have any effect on the applicability of the provisions of this
paragraph with respect to any subsequent determination of exercisability. The
provisions of this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this Section 1(f) to the
extent necessary to correct this paragraph or any portion of this paragraph
which may be defective or inconsistent with the intended beneficial ownership
limitation contained in this Section 1(f) or to make changes or supplements
necessary or desirable to properly give effect to such limitation. The
limitation contained in this paragraph may not be waived and shall apply to a
successor holder of this Warrant.

 

 - 5 - 

 

(g) Required Reserve Amount.  So long as this Warrant remains outstanding, the
Company shall at all times keep reserved for issuance under this Warrant a
number of shares of Common Stock at least equal to 100% of the maximum number of
shares of Common Stock as shall be necessary to satisfy the Company’s obligation
to issue shares of Common Stock under the Warrants then outstanding (without
regard to any limitations on exercise) (the “Required Reserve Amount”); provided
that at no time shall the number of shares of Common Stock reserved pursuant to
this Section 1(g) be reduced other than in connection with any exercise of
Warrants or such other event covered by Section 2(c) below. The Required Reserve
Amount (including, without limitation, each increase in the number of shares so
reserved) shall be allocated pro rata among the holders of the Warrants based on
the number of shares of Common Stock issuable upon exercise of Warrants held by
each holder thereof on the Issuance Date (without regard to any limitations on
exercise) (the “Authorized Share Allocation”). In the event that a holder shall
sell or otherwise transfer any of such holder’s Warrants, each transferee shall
be allocated a pro rata portion of such holder’s Authorized Share Allocation.
Any shares of Common Stock reserved and allocated to any Person which ceases to
hold any Warrants shall be allocated to the remaining holders of Warrants, pro
rata based on the number of shares of Common Stock issuable upon exercise of the
Warrants then held by such holders thereof (without regard to any limitations on
exercise).

 

(h) Insufficient Authorized Shares. If at any time while this Warrant remains
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance the Required Reserve Amount (an “Authorized Share Failure”), then the
Company shall immediately take all action necessary to increase the Company’s
authorized shares of Common Stock to an amount sufficient to allow the Company
to reserve the Required Reserve Amount for this Warrant then outstanding.
Without limiting the generality of the foregoing sentence, as soon as
practicable after the date of the occurrence of an Authorized Share Failure, but
in no event later than seventy-five (75) days after the occurrence of such
Authorized Share Failure, the Company shall hold a meeting of its stockholders
for the approval of an increase in the number of authorized shares of Common
Stock. In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its best efforts to solicit its
stockholders’ approval of such increase in authorized shares of Common Stock and
to cause its board of directors to recommend to the stockholders that they
approve such proposal. Notwithstanding the foregoing, if any such time of an
Authorized Share Failure, the Company is able to obtain the written consent of a
majority of the shares of its issued and outstanding shares of Common Stock to
approve the increase in the number of authorized shares of Common Stock, the
Company may satisfy this obligation by obtaining such consent and submitting for
filing with the SEC an Information Statement on Schedule 14C.

 

2. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise Price
and the number of Warrant Shares shall be adjusted from time to time as follows:

 

(a) Voluntary Adjustment By Company. The Company may at any time during the term
of this Warrant reduce the then current Exercise Price to any amount and for any
period of time deemed appropriate by the Board of Directors of the Company.

 

(b) Adjustment Upon Subdivision or Combination of Common Stock. If the Company
at any time on or after the Subscription Date subdivides (by any stock split,
stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the Exercise
Price in effect immediately prior to such subdivision will be proportionately
reduced and the number of Warrant Shares will be proportionately increased. If
the Company at any time on or after the Subscription Date combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination will be proportionately
increased and the number of Warrant Shares will be proportionately decreased.
Any adjustment under this Section 2(b) shall become effective at the close of
business on the date the subdivision or combination becomes effective.

 

(c) Other Events. If any event occurs of the type contemplated by the provisions
of this Section 2 but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Company’s Board of
Directors will make an appropriate adjustment in the Exercise Price and the
number of Warrant Shares, as mutually determined by the Company’s Board of
Directors and the Required Holders, so as to protect the rights of the Holder;
provided that no such adjustment pursuant to this Section 2(c) will increase the
Exercise Price or decrease the number of Warrant Shares as otherwise determined
pursuant to this Section 2.

 

 - 6 - 

 

3. RIGHTS UPON DISTRIBUTION OF ASSETS. In addition to any adjustments pursuant
to Section 2 above, if, on or after the Subscription Date and on or prior to the
Expiration Date, the Company shall declare or make any dividend or other
distribution of its assets (or rights to acquire its assets) to holders of
shares of Common Stock, by way of return of capital or otherwise (including,
without limitation, any distribution of cash, stock or other securities,
property, options, evidence of indebtedness or any other assets by way of a
dividend, spin off, reclassification, corporate rearrangement, scheme of
arrangement or other similar transaction) (a “Distribution”), at any time after
the issuance of this Warrant, then, in each such case, the Holder shall be
entitled to participate in such Distribution to the same extent that the Holder
would have participated therein if the Holder had held the number of shares of
Common Stock acquirable upon complete exercise of this Warrant (without regard
to any limitations or restrictions on exercise of this Warrant, including
without limitation, the Maximum Percentage) immediately before the date of which
a record is taken for such Distribution, or, if no such record is taken, the
date as of which the record holders of shares of Common Stock are to be
determined for the participation in such Distribution (provided, however, that
to the extent that the Holder’s right to participate in any such Distribution
would result in the Holder and the other Attribution Parties exceeding the
Maximum Percentage, then the Holder shall not be entitled to participate in such
Distribution to such extent (and shall not be entitled to beneficial ownership
of such shares of Common Stock as a result of such Distribution (and beneficial
ownership) to such extent) and the portion of such Distribution shall be held in
abeyance for the benefit of the Holder until such time or times as its right
thereto would not result in the Holder and the other Attribution Parties
exceeding the Maximum Percentage, at which time or times the Holder shall be
granted such Distribution (and any Distributions declared or made on such
initial Distribution or on any subsequent Distribution held similarly in
abeyance) to the same extent as if there had been no such limitation).

 

4. PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.

 

(a) Purchase Rights. In addition to any adjustments pursuant to Section 2 above,
if at any time on or after the Subscription Date and on or prior to the
Expiration Date the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of Common Stock (the “Purchase
Rights”), then the Holder will be entitled to acquire, upon the terms applicable
to such Purchase Rights, the aggregate Purchase Rights which the Holder could
have acquired if the Holder had held the number of shares of Common Stock
acquirable upon complete exercise of this Warrant (without regard to any
limitations or restrictions on exercise of this Warrant, including without
limitation, the Maximum Percentage) immediately before the date on which a
record is taken for the grant, issuance or sale of such Purchase Rights, or, if
no such record is taken, the date as of which the record holders of Common Stock
are to be determined for the grant, issuance or sale of such Purchase Rights
(provided, however, that to the extent that the Holder’s right to participate in
any such Purchase Right would result in the Holder and the other Attribution
Parties exceeding the Maximum Percentage, then the Holder shall not be entitled
to participate in such Purchase Right to such extent (and shall not be entitled
to beneficial ownership of such Common Stock as a result of such Purchase Right
(and beneficial ownership) to such extent) and such Purchase Right to such
extent shall be held in abeyance for the benefit of the Holder until such time
or times as its right thereto would not result in the Holder and the other
Attribution Parties exceeding the Maximum Percentage, at which time or times the
Holder shall be granted such right (and any Purchase Right granted, issued or
sold on such initial Purchase Right or on any subsequent Purchase Right to be
held similarly in abeyance) to the same extent as if there had been no such
limitation).

 

 - 7 - 

 

(b) The Company shall not enter into or be party to a Fundamental Transaction
unless the Successor Entity assumes in writing all of the obligations of the
Company under this Warrant in accordance with the provisions of this Section
4(b), including agreements to deliver to the Holder in exchange for this Warrant
a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to this Warrant, including, without
limitation, which is exercisable for a corresponding number of shares of capital
stock equivalent to the shares of Common Stock acquirable and receivable upon
exercise of this Warrant (without regard to any limitations on the exercise of
this Warrant) prior to such Fundamental Transaction, and with an exercise price
which applies the exercise price hereunder to such shares of capital stock (but
taking into account the relative value of the shares of Common Stock pursuant to
such Fundamental Transaction and the value of such shares of capital stock, such
adjustments to the number of shares of capital stock and such exercise price
being for the purpose of protecting the economic value of this Warrant
immediately prior to the consummation of such Fundamental Transaction). Upon the
consummation of each Fundamental Transaction, the Successor Entity shall succeed
to, and be substituted for (so that from and after the date of the applicable
Fundamental Transaction, the provisions of this Warrant and the other
Transaction Documents referring to the “Company” shall refer instead to the
Successor Entity), and may exercise every right and power of the Company and
shall assume all of the obligations of the Company under this Warrant with the
same effect as if such Successor Entity had been named as the Company herein.
Upon consummation of each Fundamental Transaction, the Successor Entity shall
deliver to the Holder confirmation that there shall be issued upon exercise of
this Warrant at any time after the consummation of the applicable Fundamental
Transaction, in lieu of the shares of Common Stock (or other securities, cash,
assets or other property (except such items still issuable under Sections 3 and
4(a) above, which shall continue to be receivable thereafter)) issuable upon the
exercise of this Warrant prior to the applicable Fundamental Transaction, such
shares of common stock (or its equivalent) of the Successor Entity (including
its Parent Entity) which the Holder would have been entitled to receive upon the
happening of the applicable Fundamental Transaction had this Warrant been
exercised immediately prior to the applicable Fundamental Transaction (without
regard to any limitations on the exercise of this Warrant), as adjusted in
accordance with the provisions of this Warrant. Notwithstanding the foregoing,
and without limiting the provisions of Section 1(f) hereof, the Holder may
elect, at its sole option, by delivery of written notice to the Company to waive
this Section 4(b) to permit the Fundamental Transaction without the assumption
of this Warrant. In addition to and not in substitution for any other rights
hereunder, prior to the consummation of each Fundamental Transaction pursuant to
which holders of shares of Common Stock are entitled to receive securities or
other assets with respect to or in exchange for shares of Common Stock (a
“Corporate Event”), the Company shall make appropriate provision to ensure that
the Holder will thereafter have the right to receive upon an exercise of this
Warrant at any time after the consummation of the applicable Fundamental
Transaction but prior to the Expiration Date, in lieu of the shares of the
Common Stock (or other securities, cash, assets or other property (except such
items still issuable under Sections 3 and 4(a) above, which shall continue to be
receivable thereafter)) issuable upon the exercise of the Warrant prior to such
Fundamental Transaction, such shares of stock, securities, cash, assets or any
other property whatsoever (including warrants or other purchase or subscription
rights) (collectively, the “Corporate Event Consideration”) which the Holder
would have been entitled to receive upon the happening of the applicable
Fundamental Transaction had this Warrant been exercised immediately prior to the
applicable Fundamental Transaction (without regard to any limitations on the
exercise of this Warrant). The provision made pursuant to the preceding sentence
shall be in a form and substance reasonably satisfactory to the Holder.

 

5. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Certificate of Incorporation or Bylaws, or through
any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement, dissolution, issuance or sale of securities, or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, and will at all times in good faith carry out all of the
provisions of this Warrant and take all action as may be required to protect the
rights of the Holder. Without limiting the generality of the foregoing, the
Company (i) shall not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the Exercise Price then in
effect, (ii) shall take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant, and
(iii) shall, so long as any of the Additional Warrants are outstanding, take all
action necessary to reserve and keep available out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the
exercise of the Additional Warrants, the number of shares of Common Stock as
shall from time to time be necessary to effect the exercise of the Additional
Warrants then outstanding (without regard to any limitations on exercise).

 

6. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise specifically
provided herein, the Holder, solely in such Person’s capacity as a holder of
this Warrant, shall not be entitled to vote or receive dividends or be deemed
the holder of capital stock of the Company for any purpose, nor shall anything
contained in this Warrant be construed to confer upon the Holder, solely in such
Person’s capacity as the Holder of this Warrant, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the Holder of the Warrant Shares which such Person is then entitled
to receive upon the due exercise of this Warrant. In addition, nothing contained
in this Warrant shall be construed as imposing any liabilities on the Holder to
purchase any securities (upon exercise of this Warrant or otherwise) or as a
stockholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 6, the Company
shall provide the Holder with copies of the same notices and other information
given to the stockholders of the Company generally, contemporaneously with the
giving thereof to the stockholders.

 

 - 8 - 

 

7. REISSUANCE OF WARRANTS.

 

(a) Transfer of Warrant. If this Warrant is to be transferred, the Holder shall
surrender this Warrant to the Company, whereupon the Company will forthwith
issue and deliver upon the order of the Holder a new Warrant (in accordance with
Section 7(d)), registered as the Holder may request, representing the right to
purchase the number of Warrant Shares being transferred by the Holder and, if
less than the total number of Warrant Shares then underlying this Warrant is
being transferred, a new Warrant (in accordance with Section 7(d)) to the Holder
representing the right to purchase the number of Warrant Shares not being
transferred.

 

(b) Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant, and, in the case of loss, theft or destruction, of
any indemnification undertaking by the Holder to the Company in customary form
(but without the obligation to post a bond) and, in the case of mutilation, upon
surrender and cancellation of this Warrant, the Company shall execute and
deliver to the Holder a new Warrant (in accordance with Section 7(d))
representing the right to purchase the Warrant Shares then underlying this
Warrant.

 

(c) Exchangeable for Multiple Warrants. This Warrant is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new
Warrant or Warrants (in accordance with Section 7(d)) representing in the
aggregate the right to purchase the number of Warrant Shares then underlying
this Warrant, and each such new Warrant will represent the right to purchase
such portion of such Warrant Shares as is designated by the Holder at the time
of such surrender; provided, however, that no Additional Warrants for fractional
Warrant Shares shall be given.

 

(d) Issuance of New Warrants. Whenever the Company is required to issue a new
Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall be of
like tenor with this Warrant, (ii) shall represent, as indicated on the face of
such new Warrant, the right to purchase the Warrant Shares then underlying this
Warrant (or in the case of a new Warrant being issued pursuant to Section 7(a)
or Section 7(c), the Warrant Shares designated by the Holder which, when added
to the number of shares of Common Stock underlying the other new Warrants issued
in connection with such issuance, does not exceed the number of Warrant Shares
then underlying this Warrant), (iii) shall have an issuance date, as indicated
on the face of such new Warrant which is the same as the Issuance Date, and (iv)
shall have the same rights and conditions as this Warrant.

 

8. NOTICES. Whenever notice is required to be given under this Warrant, unless
otherwise provided herein, such notice shall be given in writing, (i) if
delivered (a) from within the domestic United States, by first-class registered
or certified airmail, or nationally recognized overnight express courier,
postage prepaid, electronic mail or by facsimile or (b) from outside the United
States, by International Federal Express, electronic mail or facsimile, and (ii)
will be deemed given (A) if delivered by first-class registered or certified
mail domestic, three (3) Business Days after so mailed, (B) if delivered by
nationally recognized overnight carrier, one (1) Business Day after so mailed,
(C) if delivered by International Federal Express, two (2) Business Days after
so mailed and (D) if delivered by electronic mail, when sent and (E) if
delivered by facsimile, upon electronic confirmation of receipt of such
facsimile, and will be delivered and addressed as follows:

 

(i) if to the Company, to:

 

Ener-Core, Inc.
9400 Toledo Way

Irvine, California 92618
Attention:   Domonic J. Carney, Chief Financial Officer

Facsimile:   (949) 616-3399

Email:         dj.carney@ener-core.com

 

 - 9 - 

 

(ii) if to the Holder, at such address or other contact information delivered by
the Holder to Company or as is on the books and records of the Company.

 

The Company shall provide the Holder with prompt written notice of all actions
taken pursuant to this Warrant, including in reasonable detail a description of
such action and the reason therefor. Without limiting the generality of the
foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Exercise Price, setting forth in reasonable detail,
and certifying, the calculation of such adjustment and (ii) at least fifteen
(15) days prior to the date on which the Company closes its books or takes a
record (A) with respect to any dividend or distribution upon the shares of
Common Stock, (B) with respect to any grants, issuances or sales of any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to holders of shares of Common Stock or (C) for
determining rights to vote with respect to any Fundamental Transaction,
dissolution or liquidation; provided in each case that such information shall be
made known to the public prior to or in conjunction with such notice being
provided to the Holder. It is expressly understood and agreed that the time of
exercise specified by the Holder in each Exercise Notice shall be definitive and
may not be disputed or challenged by the Company.

 

9. AMENDMENT AND WAIVER. Except as otherwise provided herein, the provisions of
this Warrant may be amended or waived and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by it,
only if the Company has obtained the written consent of the holder(s) of
then-outstanding Additional Warrants exercisable for at least a majority of the
shares of Common Stock underlying such then-outstanding Additional Warrants.

 

10. GOVERNING LAW; JURISDICTION; JURY TRIAL. This Warrant shall be governed by
and construed and enforced in accordance with, and all questions concerning the
construction, validity, interpretation and performance of this Warrant 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. The Company 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. The Company 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 the
Company at the address set forth in Section 8(i) above or such other address as
the Company subsequently delivers to the Holder 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. Nothing contained herein shall be deemed
or operate to preclude the Holder from bringing suit or taking other legal
action against the Company in any other jurisdiction to collect on the Company’s
obligations to the Holder, to realize on any collateral or any other security
for such obligations, or to enforce a judgment or other court ruling in favor of
the Holder. THE COMPANY 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 WARRANT OR ANY
TRANSACTION CONTEMPLATED HEREBY.

 

11. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Exercise Price or the arithmetic calculation of the Warrant Shares, the Company
shall submit the disputed determinations or arithmetic calculations via
facsimile or electronic mail within two (2) Business Days of receipt of the
Exercise Notice or other event giving rise to such dispute, as the case may be,
to the Holder. If the Holder and the Company are unable to agree upon such
determination or calculation of the Exercise Price or the Warrant Shares within
three (3) Business Days of such disputed determination or arithmetic calculation
being submitted to the Holder, then the Company shall, within two (2) Business
Days submit via facsimile or electronic mail (a) the disputed determination of
the Exercise Price to an independent, reputable investment bank selected by the
Company and approved by the Holder or (b) the disputed arithmetic calculation of
the Warrant Shares to the Company’s independent, outside accountant. The Company
shall cause at its expense the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and
the Holder of the results no later than ten (10) Business Days from the time it
receives the disputed determinations or calculations. Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

 

 - 10 - 

 

12. REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies
provided in this Warrant shall be cumulative and in addition to all other
remedies available under this Warrant and any other Transaction Documents, at
law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the right of the Holder to
pursue actual damages for any failure by the Company to comply with the terms of
this Warrant. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at law
for any such breach may be inadequate. The Company therefore agrees that, in the
event of any such breach or threatened breach, the holder of this Warrant shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.

 

13. RESTRICTIONS ON TRANSFER; LEGEND. This Warrant and the Warrant Shares may be
offered for sale, sold, transferred, pledged or assigned without the consent of
the Company.

 

(a) The Holder understands that (i) the Warrant and Warrant Shares 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) the Holder shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect
that such Warrant or Warrant Shares to be sold, assigned or transferred may be
sold, assigned or transferred pursuant to an exemption from such registration,
or (C) such Holder provides the Company with reasonable assurance that such
Warrant or Warrant Shares can be sold, assigned or transferred pursuant to Rule
144 or Rule 144A, as promulgated under the 1933 Act and then in effect (or a
successor rule thereto) (collectively, “Rule 144”); (ii) any sale of the Warrant
or Warrant Shares made in reliance on Rule 144 may be made only in accordance
with the terms of Rule 144 and further, if Rule 144 is not applicable, any
resale of the Securities under circumstances in which the seller (or the Person)
through whom the sale is made) may be deemed to be an underwriter (as that term
is defined in the 1933 Act) may require compliance with some other exemption
under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii)
neither the Company nor any other Person is under any obligation to register the
Warrant or Warrant Shares under the 1933 Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder, except to the
extent provided in that certain Registration Rights Agreement dated as of the
Issuance Date. Notwithstanding the foregoing, the Warrant and Warrant Shares may
be pledged in connection with a bona fide margin account or other loan or
financing arrangement secured by the Warrant and/or Warrant Shares and such
pledge of the Warrant and/or Warrant Shares shall not be deemed to be a
transfer, sale or assignment of the Warrant or Warrant Shares hereunder, and no
Holder effecting such a pledge shall be required to provide the Company with any
notice thereof or otherwise make any delivery to the Company pursuant to this
Warrant.

 

(b) The Holder understands that the stock certificates representing the Warrant
Shares when issued, except as set forth below, shall bear any legend as required
by the “blue sky” laws of any state and a restrictive legend in substantially
the following form (and a stop-transfer order may be placed against transfer of
such stock certificates):

 

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES 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 SHARES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SHARES

 

 - 11 - 

 

The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Warrant Shares upon which
it is stamped or issue to such holder by electronic delivery at the applicable
balance account at DTC, if, unless otherwise required by state securities laws,
(i) such Warrant Shares are registered for resale under the 1933 Act, (ii) in
connection with a sale, assignment or other transfer, such holder provides the
Company with an opinion of counsel, in a generally acceptable form, to the
effect that such sale, assignment or transfer of the Warrant Shares may be made
without registration under the applicable requirements of the 1933 Act, or (iii)
the Warrant Shares 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 the Holder to comply with the
provisions set forth in this paragraph) to issue to the holder of the Warrant
Shares 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
Warrant Shares 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 Warrant Shares that the Holder
anticipated receiving without legend from the Company, then the Company shall,
within three (3) Trading 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 “Legend Buy-In Price”), at which point the
Company’s obligation to deliver such unlegended Warrant Shares shall terminate,
or (ii) promptly honor its obligation to deliver to the holder such unlegended
Warrant Shares as provided above and pay cash to the Holder in an amount equal
to the excess (if any) of the Legend 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. In addition,
the Company shall cause its legal counsel to issue a legal opinion to the
Transfer Agent, if required by the Company or such Transfer Agent, to effect the
removal of the restrictive legends hereunder, at such time as the Warrant Shares
may be sold pursuant to Rule 144 or an effective registration statement,
provided that, with respect to legend removal in reliance upon the availability
of Rule 144, the Holder provides the Company and such legal counsel with such
information as may be reasonably required by such legal counsel that provides
reasonable assurance that the Warrant Shares can be sold assigned or transferred
pursuant to Rule 144 as of the date in question.

 

14. SEVERABILITY; CONSTRUCTION; HEADINGS. If any provision of this Warrant 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 Warrant so long as this Warrant 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). This Warrant shall be deemed to be jointly drafted
by the Company and all the Buyers and shall not be construed against any Person
as the drafter hereof. The headings of this Warrant are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Warrant.

 

15. DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Warrant, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its subsidiaries, the Company
shall within one (1) Business Day after such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K or
otherwise. In the event that the Company believes that a notice contains
material, nonpublic information relating to the Company or its subsidiaries, the
Company so shall indicate to such Holder contemporaneously with delivery of such
notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its subsidiaries.

 

16. CERTAIN DEFINITIONS. For purposes of this Warrant, the following terms shall
have the following meanings:

 

(a) “Affiliate” means, with respect to any Person, any other Person that
directly or indirectly controls, is controlled by, or is under common control
with, such Person, it being understood for purposes of this definition that
“control” of a Person means the power directly or indirectly either to vote 10%
or more of the stock having ordinary voting power for the election of directors
of such Person or direct or cause the direction of the management and policies
of such Person whether by contract or otherwise.

 

 - 12 - 

 

(b) “Attribution Parties” means, collectively, the following Persons and
entities: (i) any investment vehicle, including, any funds, feeder funds or
managed accounts, currently, or from time to time after the Subscription Date,
directly or indirectly managed or advised by the Holder’s investment manager or
any of its Affiliates or principals, (ii) any direct or indirect Affiliates of
the Holder or any of the foregoing, (iii) any Person acting or who could be
deemed to be acting as a Group together with the Holder or any of the foregoing
and (iv) any other Persons whose beneficial ownership of the Company’s Common
Stock would or could be aggregated with the Holder’s and the other Attribution
Parties for purposes of Section 13(d) of the 1934 Act. For clarity, the purpose
of the foregoing is to subject collectively the Holder and all other Attribution
Parties to the Maximum Percentage.

 

(c) “Bid Price” means, for any security as of the particular time of
determination, the bid price for such security on the Principal Market as
reported by Bloomberg as of such time of determination, or, if the Principal
Market is not the principal securities exchange or trading market for such
security, the bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
as of such time of determination, or if the foregoing does not apply, the bid
price of such security in the over-the-counter market on the electronic bulletin
board for such security as reported by Bloomberg as of such time of
determination, or, if no bid price is reported for such security by Bloomberg as
of such time of determination, the average of the bid prices of any market
makers for such security as reported in the “pink sheets” by OTC Markets Group
Inc. (formerly Pink Sheets LLC) as of such time of determination. If the Bid
Price cannot be calculated for a security as of the particular time of
determination on any of the foregoing bases, the Bid Price of such security as
of such time of determination shall be the fair market value as mutually
determined by the Company and the Holder. If the Company and the Holder are
unable to agree upon the fair market value of such security, then such dispute
shall be resolved in accordance with the procedures in Section 11. All such
determinations shall be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during such period.

 

(d) “Bloomberg” means Bloomberg Financial Markets.

 

(e) “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.

 

(f) “Change of Control” means any Fundamental Transaction other than (i) any
reorganization, recapitalization or reclassification of the Common Stock in
which holders of the Company’s voting power immediately prior to such
reorganization, recapitalization or reclassification continue after such
reorganization, recapitalization or reclassification to hold publicly traded
securities and, directly or indirectly, are, in all material respect, the
holders of the voting power of the surviving entity (or entities with the
authority or voting power to elect the members of the board of directors (or
their equivalent if other than a corporation) of such entity or entities) after
such reorganization, recapitalization or reclassification, (ii) pursuant to a
migratory merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company or (iii) a merger in connection with a bona fide
acquisition by the Company of any Person in which (x) the gross consideration
paid, directly or indirectly, by the Company in such acquisition is not greater
than 20% of the Company’s market capitalization as calculated on the date of the
consummation of such merger and (y) such merger does not contemplate a change to
the identity of a majority of the board of directors of the Company.
Notwithstanding anything herein to the contrary, any transaction or series of
transaction that, directly or indirectly, results in the Company or the
Successor Entity not having Common Stock or common stock, as applicable,
registered under the 1934 Act and quoted or listed on an Eligible Market shall
be deemed a Change of Control.

 

(g) “Closing Bid Price” and “Closing Sale Price” means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
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 or the closing trade price, as the case may be,
then the last bid price or the last trade price, respectively, of such security
prior to 4:00:00 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 or last trade price, respectively, 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 or last trade price, respectively, 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 or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, 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 or the
Closing Sale Price cannot be calculated for a security on a particular date on
any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as
the case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to Section 11. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination,
reclassification or other similar transaction during the applicable calculation
period.

 

 - 13 - 

 

(h) “Common Stock” means (i) the Company’s Common Stock, par value $0.0001 per
share, and (ii) any capital stock into which such Common Stock shall have been
changed or any capital stock resulting from a reclassification of such Common
Stock.

 

(i) “Convertible Securities” means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
shares of Common Stock.

 

(j) “Eligible Market” means the Principal Market, The NASDAQ Capital Market, the
NYSE MKT LLC, The NASDAQ Global Select Market, The NASDAQ Global Market or The
New York Stock Exchange, Inc.

 

(k) “Expiration Date” means the date sixty (60) months after the Issuance Date
or, if such date falls on a day other than a Business Day or on which trading
does not take place on the Principal Market (a “Holiday”), the next day that is
not a Holiday.

 

(l) “Fundamental Transaction” means (A) that the Company shall, directly or
indirectly, including through subsidiaries, Affiliates or otherwise, in one or
more related transactions, (i) consolidate or merge with or into (whether or not
the Company is the surviving corporation) another Subject Entity, or (ii) sell,
assign, transfer, convey or otherwise dispose of all or substantially all of the
properties or assets of the Company or any of its “significant subsidiaries” (as
defined in Rule 1-02 of Regulation S-X) to one or more Subject Entities, or
(iii) make, or allow one or more Subject Entities to make, or allow the Company
to be subject to or have its shares of Common Stock be subject to or party to
one or more Subject Entities making, a purchase, tender or exchange offer that
is accepted by the holders of at least either (x) 50% of the outstanding shares
of Common Stock, (y) 50% of the outstanding shares of Common Stock calculated as
if any shares of Common Stock held by all Subject Entities making or party to,
or Affiliated with any Subject Entities making or party to, such purchase,
tender or exchange offer were not outstanding; or (z) such number of shares of
Common Stock such that all Subject Entities making or party to, or Affiliated
with any Subject Entity making or party to, such purchase, tender or exchange
offer, become collectively the beneficial owners (as defined in Rule 13d-3 under
the 1934 Act) of at least 50% of the outstanding shares of Common Stock, or (iv)
consummate a stock purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with one or more Subject Entities whereby all such Subject
Entities, individually or in the aggregate, acquire, either (x) at least 50% of
the outstanding shares of Common Stock, (y) at least 50% of the outstanding
shares of Common Stock calculated as if any shares of Common Stock held by all
the Subject Entities making or party to, or Affiliated with any Subject Entity
making or party to, such stock purchase agreement or other business combination
were not outstanding; or (z) such number of shares of Common Stock such that the
Subject Entities become collectively the beneficial owners (as defined in Rule
13d-3 under the 1934 Act) of at least 50% of the outstanding shares of Common
Stock, or (v) reorganize, recapitalize or reclassify its shares of Common Stock,
(B) that the Company shall, directly or indirectly, including through
subsidiaries, Affiliates or otherwise, in one or more related transactions,
allow any Subject Entity individually or the Subject Entities in the aggregate
to be or become the “beneficial owner” (as defined in Rule 13d-3 under the 1934
Act), directly or indirectly, whether through acquisition, purchase, assignment,
conveyance, tender, tender offer, exchange, reduction in outstanding shares of
Common Stock, merger, consolidation, business combination, reorganization,
recapitalization, spin-off, scheme of arrangement, reorganization,
recapitalization or reclassification or otherwise in any manner whatsoever, of
either (x) at least 50% of the aggregate ordinary voting power represented by
issued and outstanding shares of Common Stock, (y) at least 50% of the aggregate
ordinary voting power represented by issued and outstanding shares of Common
Stock not held by all such Subject Entities as of the Subscription Date
calculated as if any shares of Common Stock held by all such Subject Entities
were not outstanding, or (z) a percentage of the aggregate ordinary voting power
represented by issued and outstanding shares of Common Stock or other equity
securities of the Company sufficient to allow such Subject Entities to effect a
statutory short form merger or other transaction requiring other stockholders of
the Company to surrender their Common Stock without approval of the stockholders
of the Company or (C) directly or indirectly, including through subsidiaries,
Affiliates or otherwise, in one or more related transactions, the issuance of or
the entering into any other instrument or transaction structured in a manner to
circumvent, or that circumvents, the intent of this definition in which case
this definition shall be construed and implemented in a manner otherwise than in
strict conformity with the terms of this definition to the extent necessary to
correct this definition or any portion of this definition which may be defective
or inconsistent with the intended treatment of such instrument or transaction.

 

 - 14 - 

 

(m) “Group” means a “group” as that term is used in Section 13(d) of the 1934
Act and as defined in Rule 13d-5 thereunder.

 

(n) “Options” means any rights, warrants or options to subscribe for or purchase
shares of Common Stock or Convertible Securities.

 

(o) “Parent Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person, including such entity whose common stock or
equivalent equity security is quoted or listed on an Eligible Market (or, if so
elected by the Holder, any other market, exchange or quotation system), or, if
there is more than one such Person or such entity, the Person or such entity
designated by the Holder or in the absence of such designation, such Person or
entity with the largest public market capitalization as of the date of
consummation of the Fundamental Transaction.

 

(p) “Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.

 

(q) “Principal Market” means the OTCQB, unless and until the Company lists its
Common Stock on another Eligible Market, at which time such Eligible Market
shall become the Principal Market for purposes of this Warrant.

 

(r) “Required Holders” means the holders of the Additional Warrants representing
at least a majority of the aggregate shares of Common Stock underlying the
Additional Warrants then outstanding.

 

(s) “Subject Entity” means any Person, Persons or Group or any Affiliate or
associate of any such Person, Persons or Group.

 

(t) “Successor Entity” means one or more Person or Persons (or, if so elected by
the Holder, the Company or Parent Entity) formed by, resulting from or surviving
any Fundamental Transaction or one or more Person or Persons (or, if so elected
by the Holder, the Company or the Parent Entity) with which such Fundamental
Transaction shall have been entered into.

 

(u) “Trading Day” means any day on which the Common Stock is traded on the
Principal Market, 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.

 

(v) “Transaction Documents” means any agreement entered into by and between the
Company and the Holder, as applicable.

 

(w) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during
the period beginning at 9:30:01 a.m., New York time (or such other time as the
Principal Market publicly announces is the official open of trading), and ending
at 4:00:00 p.m., New York time (or such other time as the Principal Market
publicly announces is the official close of trading), as reported by Bloomberg
through its “Volume at Price” function or, if the foregoing does not apply, the
dollar volume-weighted average price of such security in the over-the-counter
market on the electronic bulletin board for such security during the period
beginning at 9:30:01 a.m., New York time (or such other time as such market
publicly announces is the official open of trading), and ending at 4:00:00 p.m.,
New York time (or such other time as such market publicly announces is the
official close of trading), as reported by Bloomberg, or, if no dollar
volume-weighted average price is reported for such security by Bloomberg for
such hours, the average of the highest Closing Bid Price and the lowest closing
ask price of any of the 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 Weighted Average Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Weighted Average Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the Holder. If the Company and the Holder are unable to agree
upon the fair market value of such security, then such dispute shall be resolved
pursuant to Section 11 with the term “Weighted Average Price” being substituted
for the term “Exercise Price.” All such determinations shall be appropriately
adjusted for any stock dividend, stock split, stock combination,
reclassification or other similar transaction during the applicable calculation
period.

 

[Signature Page Follows]

 

 - 15 - 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock
to be duly executed as of the Issuance Date set out above.

 

ENER-CORE, INC.     By:                         Name:  Title: 

 

 

Signature Page to Warrant

 

EXHIBIT A

 

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

 

ENER-CORE, INC.

The undersigned holder hereby exercises the right to purchase _________________
of the shares of Common Stock (“Warrant Shares”) of Ener-Core, Inc., a company
incorporated under the laws of Delaware (the “Company”), evidenced by the
attached Warrant to Purchase Common Stock (the “Warrant”). Capitalized terms
used herein and not otherwise defined shall have the respective meanings set
forth in the Warrant.

 

1. Form of Exercise Price. The Holder intends that payment of the Exercise Price
shall be made as:

 

____________ a “Cash Exercise” with respect to _________________ Warrant Shares;
and/or

 

____________ a “Cashless Exercise” with respect to _______________ Warrant
Shares.

 

2. Payment of Exercise Price. In the event that the holder has elected a Cash
Exercise with respect to some or all of the Warrant Shares to be issued pursuant
hereto, the holder shall pay the Aggregate Exercise Price in the sum of
$___________________ to the Company in accordance with the terms of the Warrant.

 

3. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.

 

Date: _______________ __, ______

 

    Name of Registered Holder       By:                       Name:    Title:   

 

 

 

ACKNOWLEDGMENT

 

 

The Company hereby acknowledges this Exercise Notice and hereby directs VStock
Transfer, LLC to issue the above indicated number of shares of Common Stock on
or prior to the applicable Share Delivery Date.

 

ENER-CORE, INC.     By:                     Name:  Title: 

 

 

 

EXHIBIT D

 

Investor Questionnaire

 

This investor questionnaire is being submitted by the undersigned to Ener-Core,
Inc., a Delaware corporation (“Issuer”) in order to determine whether the
undersigned qualifies as an “accredited investor” under Regulation D promulgated
under the Securities Act of 1933 (the “Securities Act”). The undersigned
understands that Issuer will rely upon the accuracy and completeness of the
information provided in this questionnaire in determining whether certain
issuances of securities of Issuer may qualify for an exemption from the
registration requirements of the Securities Act. Please return your completed
questionnaire and executed signature page hereto with your signature page to the
Securities Purchase Agreement.

 

I. Accredited Investor: The undersigned hereby represents and warrants that the
undersigned is an “accredited investor” under Regulation D promulgated under the
Securities Act. ☐ (please check box if you are an accredited investor)

 

The undersigned is an “accredited investor” for one of the following reasons
(check whichever applies):

 

Individuals. If the undersigned is a natural person (ignoring any revocable
grantor trust), then the undersigned hereby represents and warrants as follows
(check whichever applies):

 

☐The undersigned is a director, executive officer, or general partner of the
Issuer, or a director, executive officer, or general partner of a general
partner of the Issuer.     ☐The undersigned has a net worth (either individually
or jointly with the undersigned’s spouse) in excess of $1,000,000 (see
calculation guidance below).     ☐The undersigned (i) either (A) had an
individual annual income (exclusive of spousal income) in excess of $200,000 or
(B) had a joint income with the undersigned’s spouse in excess of $300,000 in
each of the two preceding tax years, and (ii) reasonably expects to have the
same income level (individually or jointly, as applicable) in the current tax
year (see calculation guidance below).

 

The term “net worth” means the excess of total assets over total liabilities. In
calculating “net worth,” the Investor must exclude the value of the Investor’s
principal residence as an asset. The value of the principal residence should be
calculated as the fair market value of the residence, less any debt secured by
such residence. To the extent that the amount of debt secured by the primary
residence exceeds the fair market value of such residence, this excess amount of
debt should be considered a liability for purposes of calculating net worth. The
term “individual income” means adjusted gross income, as reported for federal
income tax purposes, less any income attributable to a spouse or property owned
by a spouse, increased by the amount (if not attributable to a spouse or
property owned by a spouse) of any tax-exempt shares received, losses claimed as
a partner in an entity treated as a partnership for tax purposes, any deduction
claimed for depletion, any deduction for long term capital gains. The term
“joint income” is defined in the same manner as “individual income,” except that
income attributable to a spouse or property owned by a spouse is included.

 

Trusts. If the undersigned is a trust, then the undersigned hereby represents
and warrants that the undersigned is (check whichever applies):

 

☐A revocable trust (such as a living trust) or a trust formed for the purpose of
acquiring the securities and for which, in either case, each grantor is an
accredited investor. Indicate each grantor and the category that describes how
each such grantor itself is qualified as an “accredited investor”:    
  ________________________________________________________________________

 

 

 

  _________________________________________________________________________    
☐A trust which has total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring securities, whose purchase is directed by a
“sophisticated person” within the meaning of Regulation D who has such knowledge
and experience in financial and business matters as to be capable of evaluating
the merits and risks of an investment in the proposed investment.

 

Entities. If the undersigned is a corporation, partnership, limited liability
company or trust, then the undersigned hereby represents and warrants that the
undersigned is (check whichever applies):

 

☐an employee benefit plan within the meaning of the Employment Retirement Income
Security Act of 1974, as amended (“ERISA”), if either:

 

a.the investment decision is made by a plan fiduciary, as defined in ERISA §
3(21), that is a bank, savings and loan association, insurance company or
registered investment adviser,     b.an employee benefit plan with total assets
in excess of $5,000,000, or     c.a self-directed plan with investment decisions
made solely by persons who are accredited investors as defined in Rule 501(a)
promulgated under the Securities Act.

 

☐one of the following entities, not formed for the specific purpose of acquiring
securities and having total assets in excess of $5,000,000:

 

a.an organization described in Section 501(c)(3) of the Internal Revenue Code of
1986, as amended;

b.a corporation, partnership, or limited liability company; or

c.a Massachusetts or similar business trust.

☐a bank as defined in Section 3(a)(2) of the Securities Act, or any savings and
loan association or other institution as defined in Section 3(a)(5)(A) of the
Securities Act, whether acting in its individual or a fiduciary capacity.     ☐a
broker or dealer registered pursuant to Section 15 of the Securities Exchange
Act of 1934, as amended.     ☐an insurance company as defined in Section 2(13)
of the Securities Act.     ☐an investment company registered under the
Investment Company Act of 1940 (the “Investment Company Act”), or a business
development company as defined in Section 2(a)(48) of the Investment Company
Act.     ☐a Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958.     ☐a plan established and maintained by a state, its
political subdivisions, or any agency or instrumentality of a state or its
political subdivisions for the benefit of its employees with total assets in
excess of $5,000,000.     ☐a private business development company as defined in
Section 202(a)(22) of the Investment Advisers Act of 1940, as amended.

 

 

 

☐An entity in which all of the equity owners are “accredited investors” under
any of the above categories (including the categories for individuals and trusts
listed in the preceding Sections 1(a) and 1(b)). If the undersigned belongs to
this investor category only, list the equity owners of the undersigned, and the
“accredited investor” category which each such equity owner satisfies:    
  ______________________________________________________________________    
  ______________________________________________________________________

 

If the Issuer needs to verify my status as an accredited investor or has any
questions with respect to such status, I hereby consent to request that the
Issuer contact:

 

Name:                    _____________________________________

 

Firm name:            _____________________________________

 

Email:                    _____________________________________

 

Telephone:             _____________________________________

 

Address:        ____________________________________________

 

Relationship to accredited investor:         ________________________

 

II. Not an Accredited Investor: The undersigned hereby represents and warrants
that the undersigned does NOT meet one of the foregoing tests and does not
qualify as an “accredited investor” under Regulation D promulgated under the
Securities Act. ☐ (please check box if you are not an accredited investor)

 

Signature Page Follows

 

 

 

The undersigned has/have executed this Accredited Investor Questionnaire
effective as of the date set forth below.

 

  FOR INDIVIDUALS         By:     Signature         Name:           Title:      
  By:     Signature         Name:           Title:  

 

NOTE: IF YOU ARE PURCHASING SHARES WITH YOUR SPOUSE, YOU MUST BOTH SIGN THIS
SIGNATURE PAGE.

 

IF YOU ARE PURCHASING SHARES WITH ANOTHER PERSON NOT YOUR SPOUSE, YOU MUST EACH
FILL OUT A SEPARATE QUESTIONNAIRE.

  

  FOR ENTITIES             Name of Entity (i.e., corporation, partnership,
trust, LLC etc.)         By:       Signature         Name:           Title:    
      Date:  

  

 

 

EXHIBIT E

 

Form of Irrevocable Transfer Agent Instructions

 

ENER-CORE, INC.

 

September 1, 2016

 

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

 

Ladies and Gentlemen:

 

Reference is made to that certain Securities Purchase Agreement, dated as of
September 1, 2016 (the “Agreement”), by and among Ener-Core, Inc., a Delaware
corporation (the “Company”), and the investors named on each Buyer’s signature
page to the Agreement and the Schedule of Buyers attached thereto (collectively,
the “Holders”), pursuant to which the Company is issuing to the Holders:
(i) convertible unsecured promissory notes (the “Notes”), which Notes shall be
convertible into shares of common stock of the Company, par value $0.0001 per
share (the “Common Stock”) and (ii) warrants (the “Warrants”), which are
exercisable to purchase shares of Common Stock.

 

This letter shall serve as our irrevocable authorization and direction to you
(provided that you are the transfer agent of the Company at such time):

 

(i) to issue shares of Common Stock upon conversion of the Notes (the
“Conversion Shares”) to or upon the order of a Holder from time to time upon
delivery to you of a properly completed and duly executed Conversion Notice, in
the form attached hereto as Exhibit I, which has been acknowledged by the
Company as indicated by the signature of a duly authorized officer of the
Company thereon; and

 

(ii) to issue shares of Common Stock upon exercise of the Warrants (the “Warrant
Shares”) to or upon the order of a Holder from time to time upon delivery to you
of a properly completed and duly executed Exercise Notice, in the form attached
hereto as Exhibit II, which has been acknowledged by the Company as indicated by
the signature of a duly authorized officer of the Company thereon.

 

You acknowledge and agree that so long as you have previously received (a) a
written legal opinion from the Company’s legal counsel that either (i) a
registration statement covering resales of the Conversion Shares and/or Warrant
Shares has been declared effective by the Securities and Exchange Commission
(“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), or
(ii) sales of the Conversion Shares and/or the Warrant Shares may be made in
conformity with Rule 144 under the Securities Act (“Rule 144”) and (b) if
applicable, a copy of such registration statement, then within three (3)
business days of your receipt of a notice of transfer, Conversion Notice or
Exercise Notice, you shall issue the certificates representing the Conversion
Shares and/or the Warrant Shares, as applicable, registered in the names of such
transferees, and such certificates shall not bear any legend restricting
transfer of the Conversion Shares and/or the Warrant Shares thereby and should
not be subject to any stop-transfer restriction; provided, however, that if such
Conversion Shares and Warrant Shares are not registered for resale under the
Securities Act or able to be sold under Rule 144, then the certificates for such
Conversion Shares and/or Warrant Shares shall bear the following legend:

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN 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.

 

[Remainder of page left blank intentionally. Signatures follow.]

 

 

 

Please execute this letter in the space indicated to acknowledge your agreement
to act in accordance with these instructions. Should you have any questions
concerning this matter, please contact me at 949-616-3300.

 

  Very truly yours,       ENER-CORE, INC.         By:                    Name:
Domonic J. Carney   Title: Chief Financial Officer

 

THE FOREGOING INSTRUCTIONS ARE

ACKNOWLEDGED AND AGREED TO

     

this ___ day of September, 2016

     

VSTOCK TRANSFER, LLC

        By:                    Name:

Yoel Goldfeder

  Title:

Chief Executive Officer

 

 

Enclosures

 

 

Signature Page to Transfer Agent Instructions

 

EXHIBIT I

 

CONVERSION NOTICE

 

ENER-CORE, inc.

 

Reference is made to the convertible unsecured promissory note (the “Note”)
issued to the undersigned by Ener-Core, Inc., a Delaware corporation (the
“Company”). In accordance with and pursuant to the Note, the undersigned hereby
elects to convert the Conversion Amount (as defined in the Note) of the Note
indicated below into shares of Common Stock par value $0.0001 per share (the
“Common Stock”) of the Company, as of the date specified below.

 

Date of Conversion:  

 

Aggregate Conversion Amount to be converted:

 

 

Please confirm the following information:

 

Conversion Price:  

 

Number of shares of Common Stock to be issued:

 

 

Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:

 

Issue to:              

 

Facsimile Number and E-mail Address:

              Authorization:   By:   Title:   Dated:  

 

Account Number (if book entry transfer):  

 

Transaction Code Number (if book entry transfer):

  Installment Amounts to be reduced and amount of reduction:  

 

 

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Conversion Notice and hereby directs VStock
Transfer, LLC to issue the above indicated number of shares of Common Stock in
accordance with the Transfer Agent Instructions dated September 1, 2016 from the
Company and acknowledged and agreed to by VStock Transfer, LLC.

 

  ENER-CORE, INC.         By:                   Name:     Title:  

 

 

 

EXHIBIT II

 

EXERCISE NOTICE

 

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

 

ENER-CORE, inc.

 

The undersigned holder hereby exercises the right to purchase _________________
of the shares of Common Stock (“Warrant Shares”) of Ener-Core, Inc., a Delaware
corporation (the “Company”), evidenced by the attached Warrant to Purchase
Common Stock (the “Warrant”). Capitalized terms used herein and not otherwise
defined shall have the respective meanings set forth in the Warrant.

 

1. Form of Exercise Price. The Holder intends that payment of the Exercise Price
shall be made as:

 

____________ a “Cash Exercise” with respect to _________________ Warrant Shares;
and/or

 

____________ a “Cashless Exercise” with respect to _______________ Warrant
Shares.

 

2. Payment of Exercise Price. In the event that the holder has elected a Cash
Exercise with respect to some or all of the Warrant Shares to be issued pursuant
hereto, the holder shall pay the Aggregate Exercise Price in the sum of
$___________________ to the Company in accordance with the terms of the Warrant.

 

3. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.

 

Date: _______________ __, ______

 

        Name of Registered Holder         By:         Name:       Title:    

 

 

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Exercise Notice and hereby directs VStock
Transfer, LLC to issue the above indicated number of shares of Common Stock in
accordance with the Transfer Agent Instructions dated September 1, 2016 from the
Company and acknowledged and agreed to by VStock Transfer, LLC.

 

  ENER-CORE, INC.         By:                    Name:     Title:  

 

 

 

EXHIBIT F

 

Form of Secretary’s Certificate

 

Pursuant to Section 7(e) of the Securities Purchase Agreement, dated as of
September 1, 2016 (the “Purchase Agreement”), by and among Ener-Core, Inc., a
Delaware corporation (the “Company”), the investors (each, a “Buyer” and
collectively, the “Buyers”) set forth on Exhibit A to the Purchase Agreement and
Longboard Capital Advisors LLC, in its capacity as agent for the Buyers in their
capacity as unsecured creditors, Domonic J. Carney, the Secretary of the
Company, hereby certifies, in his capacity as an officer of the Company and not
individually, on behalf of the Company and to the best of his knowledge after a
reasonable investigation that:

 

1. Attached hereto as Exhibit A is a true, correct, and complete copy of
resolutions duly adopted by the Board of Directors of the Company (the “Board”)
(the “Board Resolutions”) approving the Purchase Agreement and the transactions
contemplated under the Purchase Agreement. Such resolutions have not been
amended, modified, supplemented, annulled or revoked and are in full force and
effect in the form adopted, and are the only resolutions adopted by the Board or
by any committee of or designated by the Board relating to (i) the transactions
contemplated by the Board Resolutions, and (ii) the transaction agreements
identified in the Board Resolutions. All members of the Board were, at the time
of their approval of the resolutions attached hereto as Exhibit A, respectively,
and have been at all times thereafter, duly elected, qualified, and acting
directors of the Company.

 

2. Attached hereto as Exhibit B is a true, correct, and complete copy of the
Certificate of Incorporation of the Company, as currently in effect (the
“Certificate”). The Certificate has not been amended subsequent to September 3,
2015, and no action has been taken by the Company, its stockholders, directors,
or officers to authorize or effect any further amendment or modification to such
Certificate.

 

3. Attached hereto as Exhibit C is a true, correct, and complete copy of the
Bylaws of the Company, as currently in effect (the “Bylaws”). The Bylaws have
not been amended subsequent to September 3, 2015, and no action has been taken
by the Company, its stockholders, directors, or officers to authorize or effect
any further amendment or modification to such Bylaws.

 

Capitalized terms contained herein and not otherwise defined shall be
interpreted in accordance with their meaning in the Purchase Agreement.

 

[Signature Page Follows]

 

 

 

IN WITNESS WHEREOF, the undersigned has signed his name to this Secretary’s
Certificate this September __, 2016.

 

  ENER-CORE, INC.         By:                    Name: Domonic J. Carney  
Title: Secretary

 

Signature Page to Secretary’s Certificate

 

EXHIBIT A

 

Board of Directors Resolutions

 

 

 

EXHIBIT B

 

Certificate of Incorporation

 

 

 

EXHIBIT C

 

Bylaws

 

 

 

EXHIBIT G

 

Form of Compliance Certificate

 

Pursuant to Section 7(g) of the Securities Purchase Agreement, dated as of
September 1, 2016 (the “Purchase Agreement”), by and among Ener-Core, Inc., a
Delaware corporation (the “Company”), the investors (each, a “Buyer” and
collectively, the “Buyers”) set forth on Exhibit A to the Purchase Agreement and
Longboard Capital Advisors LLC, in its capacity as agent for the Buyers in their
capacity as unsecured creditors, Alain J. Castro, the Chief Executive Officer of
the Company, hereby certifies, in his capacity as an officer of the Company and
not individually, on behalf of the Company and to the best of his knowledge
after a reasonable investigation that:

 

1. The representations and warranties of the Company contained in Section 3 of
the Purchase Agreement are 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).

 

2. The Company has 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.

 

Capitalized terms contained herein and not otherwise defined shall be
interpreted in accordance with their meaning in the Purchase Agreement.

 

[Signature Page Follows]

 

 

 

IN WITNESS WHEREOF, the undersigned has signed his name to this Compliance
Certificate this September __, 2016.

 

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

 

Signature Page to Compliance Certificate

 

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(k)

(Absence of Certain Changes)

 

None, except as noted below:

 

Effective as of September 1, 2016, the Company executed a Sixth Amendment to
Securities Purchase Agreement dated April 22, 2015, and a Fifth Amendment to
Securities Purchase Agreement dated May 7, 2015 (collectively, the “September
SPA 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
“Required Holders”). The September SPA Amendments (i) extend the deadline for
the Company to commence trading on a Qualified Eligible Market (as defined in
the September SPA Amendments) to no later than December 31, 2016; (ii) authorize
the Company to issue, on or prior to September 1, 2016, one or more investors up
to an aggregate of $1,500,000 principal amount of one-year term unsecured notes,
in a form satisfactory to the Required Holders, with warrants to purchase 62.5
shares of Common Stock at $4.00 per share for each $1,000 of principal funded
(and additional warrants as may be issued pursuant to that certain securities
purchase agreement governing the purchase and sale of such unsecured notes and
warrants), in a form satisfactory to the Required Holders (the “Bridge Debt
Financing”); (iii) approve the form of unsecured note, form of warrant, form of
securities purchase agreement and form of subordination and intercreditor
agreement to be executed by the investors in the Bridge Debt Financing; and (iv)
remove the covenant in Section 4(y), which provides that on or prior to April
14, 2016, the Company shall cause its net monthly cash flow directly associated
with the November 14, 2014 Commercial License Agreement, as amended (the “CLA”),
taken together with its monthly capital expenditure spending associated with
such license, and excluding expenditures associated with the Full Scale
Acceptance Test requirements defined in the CLA, to be neutral or positive,
which may be accomplished by re-negotiation or termination of such license. The
September SPA Amendments are binding upon each holder of any securities
purchased under the April 2015 and May 2015 purchase agreements.

 

Effective as of September 1, 2016, the Company and certain investors holding
senior secured notes issued by the Company in April and May 2015 (the “2015
Notes”) executed Fifth Amendments (the “September Notes Amendments”) to such
2015 Notes to (i) revise the definition of “Permitted Indebtedness” to include
Indebtedness evidenced by the one-year term unsecured notes to be issued in the
Bridge Debt Financing; (ii) extends the redemption date of the 2015 Notes in
Section 7 from October 23, 2015 to December 31, 2016; and (iii) extends the
deadline for the Company to consummate a “Further Private Offering” from prior
to October 15, 2016 to prior to December 31, 2016. The September Notes
Amendments are binding upon all of the issued 2015 Notes pursuant to the terms
thereof.

 

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,
2015, as updated on Forms 10-Q for the quarterly periods ended March 31, 2016
and June 30, 2016, and as described in Schedule 3(aa) below.

 

 

 

Schedule 3(p)

(Equity Capitalization)

 

(ii)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 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 leases certain assets, primarily computer equipment under agreements
expiring in 2017. The total amount of the capital leases is approximately
$25,000.

 

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.

 

The Company has entered into an operating lease to rent a Dresser-Rand turbine
in order to build a prototype. The lease payments began with the commissioning
of the turbine with the prototype system in Q1 2016 and consist of $9,000 per
month payments. The lease payments terminate upon the decommissioning of the
prototype, expected in 2017.

 

Subject to final approval of the Board of Directors, the Company intends to
engage MZ Consulting to provide investor relations services to the Company at a
cost of $10,000 per month for the first three months, with a monthly rate review
after three months of service, pursuant to the terms of a consulting agreement
that would provide that the Company may choose to satisfy its payment
obligations thereunder by remitting to MZ a mix of cash and unregistered shares
of Common Stock to satisfy the monthly payment.

 

(iii)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 2015 Notes and Backstop
Security Agreement, and may have been filed in conjunction with its capital
lease obligations.

 

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-7  

 

Capital Leases Payable

 

Capital leases payable consisted of the following:

 

  

December 31,

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. 
$13,000   $17,000  Capital lease payable to Dell Computers secured by computer
equipment, 15.09% interest, due on November 16, 2016, monthly payment of $592. 
 7,000    12,000  Capital lease payable to Dell Computers secured by computer
equipment, 15.09% interest, due on December 15, 2016, monthly payment of $590. 
 7,000    12,000  Capital lease payable to Dell Computers secured by computer
equipment, 15.09% interest, due on January 3, 2017, monthly payment of $405. 
 5,000    8,000  Capital lease payable to Dell Computers secured by computer
equipment, 15.09% interest, due on January 3, 2017, monthly payment of $394. 
 9,000    —  Total capital leases   41,000    49,000 

 

  

June 30,

2016

   December 31,
2015     (unaudited)      Capital lease payable to De Lange Landon secured by
forklift, 10.0% interest, due on October 1, 2018, monthly payment of $452. 
$10,000   $13,000  Capital lease payable to Dell Computers secured by computer
equipment, 15.09% interest, due on November 16, 2016, monthly payment of $592. 
 3,000    6,000  Capital lease payable to Dell Computers secured by computer
equipment, 15.09% interest, due on December 15, 2016, monthly payment of $590. 
 4,000    6,000  Capital lease payable to Dell Computers secured by computer
equipment, 15.09% interest, due on January 3, 2017, monthly payment of $405. 
 3,000    5,000  Capital lease payable to Dell Computers secured by computer
equipment, 15.09% interest, due on January 3, 2017, monthly payment of $394. 
 7,000    10,000  Total capital leases   27,000    40,000 

 

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 (EDGAR Link), 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 rights expired on April
16, 2016. Such participation rights are also more fully described in our Current
Report on Form 8-K filed April 7, 2015 (EDGAR Link), incorporated by reference
herein.

 

The terms of the Company’s 2015 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:

 

●Filed April 23, 2015 (EDGAR Link)     ●Filed May 7, 2015 (EDGAR Link)    
●Filed October 23, 2015 (EDGAR Link)     ●Filed November 3, 2015 (EDGAR Link)
    ●Filed November 25, 2015 (EDGAR Link)     ●Filed December 11, 2015 (EDGAR
Link)     ●Filed December 31, 2015 (EDGAR Link)     ●Filed April 5, 2016 (EDGAR
Link)

 

 DS-8  

 

See also the disclosure in Schedule 3(k) regarding further amendments to the
2015 Notes and related securities purchase agreements.

 

Schedule 3(r)

(Litigation)

 

On June 13, 2016, SAIL Venture Partners LLC, SAIL Capital Management LLC and all
SAIL affiliates owning shares of the Company (collectively, “SAIL”) filed a
Schedule 13D in which it set forth various complaints and demands with respect
to the Company (EDGAR Link). The Company has disputed all such complaints and
demands.

 

Schedule 3(aa)

(Internal Accounting and Disclosure Controls)

 

As of December 31, 2015, 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, as amended).

 

Based on such evaluation, the disclosure controls and procedures of the Company
and the Subsidiary as of December 31, 2015 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, 2015, we did not have a sufficient,
integrated purchasing and accounting system to allow for proper tracking,
control and costing of our prototype KG2 Powerstation costs carried as a fixed
asset and Powerstations currently under construction for sale and carried in
inventory. Although we believe that our costing is accurate, based on additional
review and procedures, to the extent we sell additional units, we will need to
enhance our controls over our inventory systems. Management evaluated the impact
of our failure to have adequate inventory accounting systems, coupled with the
risk associated with costing our inventory, and the expected future activity for
our inventory costing system 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 be not independent. Between
December 1, 2014 and May 18, 2015 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.

 

 DS-9  

 

5.For the year ending December 31, 2014 and until July 2015, our Audit Committee
consisted of the Chairman of the committee only. Until July 2015 we did not have
a formal Compensation Committee or Nominating and Corporate Governance
Committee. 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, 2015, 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 2015 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. Management
evaluated the impact of our failure to have adequate information technology
controls, on our assessment of our disclosure controls and procedures and has
concluded that the control deficiency that resulted represented a material
weakness.

 

As of June 30, 2016, 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, as amended). Based on the evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that, as of June 30,
2016, the Company’s disclosure controls and procedures were ineffective at the
reasonable assurance level. Such conclusion is due to the presence of material
weaknesses in internal control over financial reporting. The Company’s
management anticipates that its disclosure controls and procedures will remain
ineffective until such material weaknesses are remediated.

 

Schedule 3(ff)

(Title to Assets)

 

Any lien that qualifies as a “Permitted Lien”, as defined in the 2015 Notes, as
amended to date.

 

Schedule 3(kk)

(No “Bad Actor” Disqualification Events)

 

None.

 

 

DS-10