Item
1.01
|
Entry
into a Material Definitive Agreement.
|
September
2016 Financing
On
September 1, 2016, Ener-Core, Inc. (the “Company”) entered into a securities purchase agreement (the “Purchase
Agreement”), pursuant to which it issued to five accredited investors (the “Investors”) unregistered convertible
unsecured promissory notes (the “Convertible Unsecured Notes”) and five-year warrants (each, a “Warrant”)
to purchase an aggregate of 124,999 shares of the Company’s common stock, par value $0.0001 per share (“Common Stock”)
at an exercise price of $4.00 per share (the “Warrant Shares”), in exchange for aggregate gross proceeds of $1.25
million (the “September 2016 Financing”). In connection with the September 2016 Financing, on September 1, 2016, the
Company and its wholly-owned subsidiary, Ener-Core Power, Inc. (“ECP”) also entered into a Subordination and Intercreditor
Agreement (the “Subordination and Intercreditor Agreement”), with the Investors, an Investor who has agreed to serve
as subordinated agent (the “Subordinated Agent”), a senior lender with respect to a letter of credit for the benefit
of the Company (the “Senior L/C Lender”), and the collateral agent for certain senior noteholders (the “Collateral
Agent”). The closing of the September 2016 Financing occurred on September 1, 2016.
Securities
Purchase Agreement
Pursuant
to the terms of the Purchase Agreement, the Company agreed to sell and issue the Convertible Unsecured Notes and Warrants (collectively,
the “Securities”) to the Investors and each Investor agreed to pay $1,000 for each $1,000 of principal amount of Convertible
Unsecured Notes and associated Warrants to purchase 100 shares of Common Stock for each $1,000 of principal amount of Convertible
Unsecured Notes purchased by such Investor. The Purchase Agreement contains representations, warranties and covenants of the Investors
and the Company that are typical for transactions of this type. The Company agreed to use the proceeds from the sale of the Securities
for working capital and general corporate purposes. The Company also agreed to secure the listing of its Common Stock on a national
securities exchange by no later than December 31, 2016. The Purchase Agreement prohibits Investors from engaging in (or causing
any person to engage in) any short sales or similar transactions with respect to the Common Stock from the date of the Purchase
Agreement and ending on the 45th day following the closing date of the September 2016 Financing. Further, each Investor agrees
to appoint the Subordinated Agent and authorizes the Subordinated Agent to take action on behalf of each Investor in accordance
with the terms of the Purchase Agreement and the Subordination and Intercreditor Agreement.
The
Purchase Agreement entitles each Investor to receive additional warrants (the “Additional Warrants”) to purchase 50
shares of Common Stock for each $1,000 of principal amount of the Convertible Unsecured Notes at an exercise price of $4.00 per
share on each of the 61st, 91st, 121st and 151st days after the closing of the September 2016 Financing (each, an “Additional
Warrant Date”), but only in the event the Company has not consummated a further financing consisting of the issuance of
Common Stock and warrants for aggregate gross proceeds of at least $3,000,000 prior to such respective Additional Warrant Date.
The Purchase Agreement also provides that each Investor has the right to request that the Company register the shares issuable
upon conversion of such Investor’s Convertible Unsecured Note, the Warrant Shares (including the shares issuable upon exercise
of such Investor’s Additional Warrants, 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 (the “Senior Conversion Amount”), under the then outstanding senior secured notes of the
Company, issued pursuant to (x) 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 (the “April 2015 Notes”), and
(y) 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 (the “May 2015 Notes” and, together with the April 2015 Notes,
the “Senior Notes”), or (ii) the consummation of a private offering of securities of the Company resulting in gross
proceeds, inclusive of proceeds received pursuant to the Purchase Agreement, to the Company of at least $4,000,000.
Convertible
Unsecured Notes
The
Convertible Unsecured Notes bear interest at a rate of 12% per annum and mature on September 1, 2017. The Convertible Unsecured
Notes are subordinate to the Senior Notes, as more fully set forth in the Subordination and Intercreditor Agreement (as described
below). The Convertible Unsecured Notes are convertible at the option of the holder into Common Stock at an exercise price of
$4.31 (as subject to adjustment therein) and will automatically convert into shares of Common Stock in the event of a conversion
of at least fifty percent (50%) of the then outstanding (i) principal, (ii) accrued and unpaid interest with respect to such principal
and (iii) accrued and unpaid late charges, if any, with respect to such principal and interest, under the Senior Notes. The Convertible
Unsecured Notes also contain a blocker provision that prevents the Company from effecting a conversion in the event that the holder,
together with certain affiliated parties, would beneficially own in excess of 9.99% of the shares of Common Stock outstanding
immediately after giving effect to such conversion. At any time after the issuance date of the Convertible Unsecured Notes, the
Company may redeem (a “Company Optional Redemption”) all or any portion of the then outstanding principal and accrued
and unpaid interest with respect to such principal, at 100% of such aggregate amount; provided, however, that the Company shall
not redeem all or any portion of the Company Optional Redemption Amount so long as any of the Senior Notes remain outstanding
without the prior written consent of the collateral agent with respect to such Senior Notes and certain investors holding the
requisite number of conversion shares and warrant shares underlying the Senior Notes and warrants issued in April 2015 and May
2015 (the “Required Holders”).
Warrants
Each
Warrant (including any Additional Warrants, if issued) will be exercisable immediately for cash. In addition, unless all of the
Warrant Shares that are subject to an exercise notice with respect to any Warrant are registered for resale pursuant to an effective
registration statement and are issuable without any restrictive legend, such Warrant may also be exercised by way of a cashless
exercise. The Warrants also provide that the exercise price of each Warrant will be adjusted upon the occurrence of certain events
such as stock dividends, stock splits and other similar events. The Warrants include a blocker provision that prevents the Company
from effecting any exercise in the event that the holder, together with certain affiliated parties, would beneficially own in
excess of 9.99% of the shares of Common Stock outstanding immediately after giving effect to such exercise.
The
Shares and the Warrants (including any Additional Warrants, if issued) to be issued to the Investors were not registered under
the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state, and were offered
and will be sold and issued in reliance on the exemption from registration under the Securities Act provided by Section 4(a)(2)
of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder (“Regulation D”). The Warrant Shares
issuable to Investors upon exercise of the Warrants (and shares issuable to Investors upon exercise of any Additional Warrants,
if issued) were not registered under the Securities Act, or the securities laws of any state, and were offered in reliance on
the exemption from registration under the Securities Act provided by Section 4(a)(2) of the Securities Act and/or Rule 506 of
Regulation D and may be sold upon exercise pursuant to an available exemption, including Section 4(a)(2) and Section 3(a)(9) of
the Securities Act. Each Investor was an accredited investor (as defined in Rule 501 of Regulation D under the Securities Act)
at the time of the September 2016 Financing.
Subordination
and Intercreditor Agreement
The
Subordination and Intercreditor Agreement sets forth the relative rights and priorities of the Collateral Agent, holders of Senior
Notes, the Senior L/C Lender, the Subordinated Agent and the Investors under the Senior Debt Documents (as defined in the Subordination
and Intercreditor Agreement) and the Subordinated Debt Documents (as defined in the Subordination and Intercreditor Agreement).
The Subordination and Intercreditor Agreement provides that the debt evidenced by the Convertible Unsecured Notes will be junior
and subordinate to the debt evidenced by the Senior Notes as well as the debt held by the Senior L/C Lender. Further, the Subordination
and Intercreditor Agreement prohibits the Company from making payments of principal on the Convertible Unsecured Notes until the
debt evidenced by the Senior Notes and the debt held by the Senior L/C Lender are paid in full, and the payment by the Company
of interest on the Convertible Unsecured Notes is subject to certain restrictions, as further described therein.
Amendments
to Securities Purchase Agreements
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 Amendments”), each with
the Required Holders. The Company previously disclosed the terms of the April 2015 and May 2015 purchase agreements, as amended
prior to the September Amendments, and the securities issued pursuant thereto, in its current reports on Form 8-K dated April
23, 2015, May 7, 2015, October 23, 2015, November 24, 2015, December 30, 2015 and March 30, 2016. The September Amendments (i)
extend the deadline for the Company to commence trading on a Qualified Eligible Market (as defined in the September Amendments)
to no later than December 31, 2016; (ii) provide that the Company may, on or prior to September 1, 2016, issue to 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 100 shares of Common Stock at $4.00 per share for each $1,000 of principal funded (and such
additional warrants as may be issued pursuant to the Purchase Agreement), in a form satisfactory to the Required Holder; (iii)
approve the form of Convertible Unsecured Note, Warrant and Purchase Agreement, as well as the form of Subordination and Intercreditor
Agreement, for use in the September 2016 Financing; and (iv) removes the covenant on behalf of the Company related to net monthly
cash flow directly associated with the Company’s Commercial License Agreement, effective as of November 14, 2014, by and
among ECP and Dresser-Rand Company.
Amendments
to 2015 Notes
Effective
as of September 1, 2016, the Company and certain investors holding Senior Notes executed Fifth Amendments (the “Senior Notes
Amendments”) to such Senior Notes to (i) revise the definition of “Permitted Indebtedness” to include the indebtedness
evidenced by the Convertible Unsecured Notes; (ii) extend the earliest date on which holders of the Senior Notes may require the
Company to redeem all or any portion of the Senior Conversion Amount until December 31, 2016; and (iii) extend the deadline for
the Company to consummate a “Further Private Offering” (as defined in the Senior Notes) to December 31, 2016. The
Senior Notes Amendments are binding upon all of the issued Senior Notes pursuant to the terms thereof.
The
forms of Securities Purchase Agreement, Subordination and Intercreditor Agreement and September Amendments are attached as Exhibits
10.1, 10.2, 10.3 and 10.4, respectively, to this Current Report on Form 8-K and are incorporated herein by reference. The form(s)
of Convertible Unsecured Note, Warrant and Notes Amendments are attached as Exhibits 4.1, 4.2, 4.3 and 4.4, respectively, to this
Current Report on Form 8-K and are also incorporated herein by reference. The foregoing descriptions of these agreements and instruments
do not purport to be complete and are qualified in their entirety by reference to such exhibits.