ENER-CORE, Inc. (OTCMKTS:ENCR) Files An 8-K Entry into a Material Definitive Agreement
Item 1.01 Entry into a Material Definitive Agreement.

January 2019 Financing

On January 18, 2019, Ener-Core, Inc. (the “Company”) entered into a securities purchase agreement (the “Purchase Agreement”), to which it issued to 4 accredited investors (each, an “Investor”) unregistered convertible senior secured promissory notes in principal amount of approximately $966,667 (the “Convertible Senior Notes”) and five-year warrants (each, a “Warrant”) to purchase an aggregate of 1,933,334 shares of the Company’s common stock, par value $0.0001 per share (“Common Stock”), at an exercise price of $0.10 per share (the “Warrant Shares”), with aggregate gross proceeds to the Company of $230,000 and forgiveness of certain indebtedness of $640,000 (the “January 2019 Financing”). The closing of the January 2019 Financing occurred on January 18, 2019.

Purchase Agreement

to the terms of the Purchase Agreement, the Company agreed to sell and issue the Convertible Senior Notes and Warrants (collectively, the “Securities”) to the Investors with each Convertible Senior Note to be issued at a 10% original issue discount and with associated Warrants to purchase 2,000 shares of Common Stock for each $1,000 of principal amount of Convertible Senior 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.

Convertible Senior Notes

The Convertible Senior Notes will bear no ordinary interest, as the principal amount of the Convertible Senior Notes includes an original issue discount. Upon an Event of Default (as defined in the Convertible Senior Notes), however, the Convertible Senior Notes will bear interest at a rate of 10% per annum. The Convertible Senior Notes will mature on January 31, 2019; provided that, effective upon the issuance by the Company of Convertible Senior Notes for aggregate gross proceeds of at least $2,000,000 to the Purchase Agreement, the maturity date of the Convertible Senior Notes shall be December 31, 2020. The Convertible Senior Notes will rank pari passu with the outstanding convertible senior secured promissory notes of the Company issued in April 2015, May 2015, December 2016, September 2017, November 2017, December 2017, January 2018, March 2018 and June 2018, and rank senior to the convertible unsecured promissory notes of the Company issued in September 2016 (the “Convertible Junior Notes”), as more fully set forth in the Subordination Agreement (as defined below), as amended to date. The Convertible Senior Notes will be convertible at the option of the holder into Common Stock at an exercise price of $0.10 (as subject to adjustment therein) and will automatically convert into shares of Common Stock on the fifth trading day immediately following the issuance date of the Convertible Senior Notes on which (i) the Weighted Average Price (as defined in the Convertible Senior Notes) of the Common Stock for each trading day during a twenty trading day period equals or exceeds $5.00 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction) and no Equity Conditions Failure (as defined in the Convertible Senior Notes) has occurred. In addition, the Convertible Senior Notes will be convertible, via approved exchange in lieu of cash consideration in connection with a subsequent issuance by the Company of equity securities for cash consideration (a “Next Equity Financing”), into the securities of the Company to be issued in such Next Equity Financing, provided the Lead Investor (as defined in the Convertible Senior Notes) elects to participate in such Next Equity Financing. The Convertible Senior 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 either 4.99% or 9.99%, with such threshold to be determined by the holder prior to issuance, of the shares of Common Stock outstanding immediately after giving effect to such conversion.

Upon an Event of Default and delivery to the holder of the Convertible Senior Note of notice thereof, such holder may require the Company to redeem all or any portion of its Convertible Senior Note at a price equal to 115% of the Conversion Amount (as defined in the Convertible Senior Notes) being redeemed. Additionally, upon a Change of Control (as defined in the Convertible Senior Notes) and delivery to the holder of the Convertible Senior Note of notice thereof, such holder may also require the Company to redeem all or any portion of its Convertible Senior Note at a price equal to 115% of the Conversion Amount being redeemed.

At any time after the issuance date of the Convertible Senior Notes, the Company may redeem all or any portion of the then outstanding principal and accrued and unpaid interest with respect to such principal, at 50% of such aggregate amount; provided, however, that the aggregate Conversion Amount to be redeemed to all Convertible Senior Notes must be at least $500,000, or such lesser amount as is then outstanding. The portion of the Convertible Senior Note(s) to be redeemed shall be redeemed at a price equal to the greater of (i) 110% of the Conversion Amount of the Convertible Senior Note being redeems and (ii) the product of (A) the Conversion Amount being redeemed and (B) the quotient determined by dividing (I) the greatest Weighted Average Price (as defined in the Convertible Senior Notes) of the shares of Common Stock during the period beginning on the date immediately preceding the date of the notice of such redemption by the Company and ending on the date on which the redemption by the Company occurs by (II) the lowest Conversion Price (as defined in the Convertible Senior Notes) in effect during such period.

The Convertible Senior Notes contain a provision that prevents the Company from entering into or becoming party to a Fundamental Transaction (as defined in the Convertible Senior Notes) unless the Company’s successor entity assumes all of the Company’s obligations under the Convertible Secured Notes and the related transaction documents (the “Transaction Documents”) to written agreements in form and substance satisfactory to at least a certain number of holders of the Convertible Senior Notes.

The Convertible Senior Notes are further governed by a side letter agreement that provides that each holder of the Convertible Senior Notes may require the Company to apply its pro rata percentage of up to 25% of the Company’s total monthly receipts of cash from one or more third party customers in connection with the delivery of product, installation of product, or servicing of product or as a result of technology transfer licensing or royalty-based licensing for sales of units under license to prepay all or a portion of the outstanding principal, interest and late charges under such holder’s Convertible Senior Notes. Notwithstanding the foregoing, if the Company receives less than $50,000 in cash that may be applied to the foregoing term of the side letter agreement, such monthly amount will not be distributable and will be aggregated with the following month’s receipts for potential future distribution.

In connection with the execution of the Purchase Agreement and issuance of the Convertible Senior Notes, Ener-Core Power, Inc., the Company’s wholly-owned subsidiary (the “Subsidiary”), entered into a Third Amendment to Guaranty, which amends that certain Guaranty, dated as of November 23, 2016, as amended to date, to which the Subsidiary has agreed to guarantee all of the obligations of the Company under the Purchase Agreement, the Convertible Senior Notes and the Transaction Documents.

Warrants

Each Warrant will be exercisable immediately in exchange 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 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 will 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 will 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 either 4.99% or 9.99%, with such threshold to be determined by the holder prior to issuance, of the shares of Common Stock outstanding immediately after giving effect to such exercise.

The Warrants contain a provision that prevents the Company from entering into or becoming party to a Fundamental Transaction (as defined in the Warrants) unless the Company’s successor entity assumes all of the Company’s obligations under the Warrants and the related transaction documents to written agreements in form and substance satisfactory to at least a certain number of holders of the Warrants.

The Securities issued to the Investors and the underlying shares of Common Stock have not been 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 shares of Common Stock issuable to Investors upon conversion of the Convertible Senior Notes and the shares of Common Stock issuable to Investors upon exercise of the Warrants 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 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 January 2019 Financing.

Fourth Amendment to Subordination and Intercreditor Agreement (September 2016)

On January 18, 2019, the Company entered into a Fourth Amendment to Subordination and Intercreditor Agreement (the “Fourth Amendment to Subordination Agreement”), which amends that certain Subordination and Intercreditor Agreement, dated as of September 1, 2016, as amended to date (the “Subordination Agreement”), to provide that the Convertible Senior Notes issued to the Purchase Agreement, the convertible senior notes (the “2015 Notes”) issued to that certain securities purchase agreement dated as of April 22, 2015 and that certain securities purchase agreement dated as of May 7, 2015, as amended and/or restated to date, the convertible senior notes (the “2016 Notes”) issued to that certain securities purchase agreement dated as of November 23, 2016, as amended to date, the convertible senior notes (the “June 2018 Notes”)issued to that certain securities purchase agreement dated as of June 5, 2018 and the convertible senior notes (the “Bridge Notes”) issued to that certain securities purchase agreement dated as of September 19, 2017, as amended and/or restated to date, will rank pari passu as “Senior Note Debt” (as defined in the Subordination Agreement).

Fifth Amendment to Pledge and Security Agreement

On January 18, 2019, the Company entered into a Fifth Amendment to Pledge and Security Agreement (the “Security Amendment Agreement”), which amends that certain Pledge and Security Agreement dated as of April 23, 2015, as amended to date (the “Security Agreement”), to provide for the grant by the Company and the Subsidiary (collectively, the “Grantors”) to the Investors of a security interest in all personal property (subject to certain exceptions specified therein) of the Grantors to secure all of the Company’s obligations to such Investors, such that the Investors and the holders of the 2015 Notes, 2016 Notes, June 2018 Notes and Bridge Notes will each have a first priority perfected security interest in all of the current and future assets of the Company and direct and indirect subsidiaries of the Company, except for the Excluded Assets (as defined in the Security Agreement).

Fourth Amendments to Convertible Junior Notes

On January 18, 2019, the Company and certain investors holding Convertible Junior Notes executed Fourth Amendments to such Convertible Junior Notes (the “Convertible Junior Notes Amendments”) to adjust certain definitions to allow for issuance of the Convertible Senior Notes. The Convertible Junior Notes Amendments are binding upon the holders of all of the issued Convertible Junior Notes to the terms thereof.

The forms of Purchase Agreement, Fourth Amendment to Subordination Agreement and Security Amendment Agreement are attached as Exhibits 10.1, 10.2 and 10.3, respectively, to this Current Report on Form 8-K and are incorporated herein by reference. The forms of Convertible Senior Note, Warrant and Convertible Junior Notes Amendment are attached as Exhibits 4.1, 4.2 and 4.3, 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.

Item 3.02 Unregistered Sales of Equity Securities.

As more fully described in Item 1.01 above, which disclosure regarding the Convertible Senior Notes and Warrants is incorporated by reference herein, on January 18, 2019, the Company agreed to issue the Convertible Senior Notes and the Warrants to the Investors to the Purchase Agreement. The issuance of the Convertible Senior Notes is, and upon conversion of the Convertible Senior Notes in accordance with their terms, the issuance of the shares of Common Stock issuable upon conversion of the Convertible Senior Notes will be, and the issuance of the Warrants is, and upon exercise of the Warrants in accordance with their terms, the issuance and sale of the Warrant Shares will be, exempt from registration to an exemption afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D, based on representations of the Investors, which included, in pertinent part, that each recipient is an “accredited investor” as that term is defined in Rule 501 of Regulation D, who is acquiring such Convertible Senior Note and Warrant for investment purposes for its own account and not as nominee or agent, and not with a view to the resale or distribution thereof, and that such investor understands that the Convertible Senior Note and Warrant may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

Ener-Core, Inc. Exhibit
EX-4.1 2 f8k011819ex4-1_enercore.htm FORM OF CONVERTIBLE SENIOR SECURED PROMISSORY NOTE Exhibit 4.1   [FORM OF SENIOR SECURED NOTE]   NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES MAY BE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,…
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About ENER-CORE, Inc. (OTCMKTS:ENCR)

Ener-Core, Inc. designs, develops, manufactures and has commercially deployed products based on technologies that generate base-load, clean power from polluting waste gases that are otherwise destroyed or vented into the atmosphere by a range of industries. The Company also designs its technologies to provide power generation solutions with reduced air emissions. Its Power Oxidation technology offers an alternative to traditional methods of destroying gaseous pollution, by simultaneously enabling industrial facilities. Its commercial products include Ener-Core Powerstation EC250 (EC250) and Ener-Core Powerstation EC333 (EC333), which combine its Power Oxidizer with an approximately 250 kilowatt (kW)and over 333 kW gas turbine, respectively. It is also engaged in developing a product, which is called the KG2-3GEF/PO (KG2 with Power Oxidizer (KG2/PO)). It has over two powerstations in operation at a landfill site in the Netherlands and at the University of California, Irvine.