UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 
 
Date of report (Date of earliest event reported):    May 30, 2014 (May 23, 2014)
 
Ener-Core, Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
 
333-173040
 
45-0525350
(State or other jurisdiction
of incorporation)
 
(Commission File No.)
 
(IRS Employer
Identification No.)
 
9400 Toledo Way
Irvine, California
 
 
92618
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code   949-616-3300
 
N/A
(Former name or former address, if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 
 
 

Item 5.02
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

(b)           Resignation of Director

Effective May 26, 2014, Stephen L. Johnson resigned from the registrant’s board of directors (the “Board”) and from the Board’s compensation committee.  Mr. Johnson’s decision to resign from his positions was not the result of any material disagreement with the registrant on any matter relating to the registrant’s operations, policies or practices.  On May 28, 2014, Mr. Johnson was appointed to the registrant’s board of advisors newly established by the Board.

(c)           Appointment of New Director

Effective May 28, 2014, Jeff Horn was appointed to the Board to fill the vacancy created by Mr. Johnson’s resignation.

Mr. Horn accepted the foregoing appointments pursuant to an offer letter from the registrant dated May 19, 2014, which provides for an option under the registrant’s 2013 Equity Award Incentive Plan (the “Incentive Plan”) to purchase 300,000 shares of the registrant’s common stock at an exercise price equal to the per share closing price on May 28, 2014, being the fair market value on such date.  In addition, Mr. Horn will be entitled to reimbursement for reasonable travel expenses incurred to attend meetings of the Board, as well as to indemnity in his capacity as a director.  Mr. Horn is also entitled to an annual director’s fee of $40,000.

In connection with the option provided by the offer letter, the registrant and Mr. Horn entered into a stock option agreement.  The agreement provides for 1/36 of the total number of shares to vest each month commencing from the grant date.   

Copies of the foregoing offer letter and stock option agreement are attached hereto as Exhibits 99.1 and 99.1(a).

Mr. Horn’s career spanned over 34 years at Caterpillar Inc., including most recently as Managing Director of Caterpillar Power Generation Systems in Houston beginning in January 2009, before retiring in January 2012.  Caterpillar Inc. is not related to or affiliated with the registrant.  Mr. Horn received his B.S. degree in Economics from the University of Wisconsin, Madison, in 1977.  The Board concluded that Mr. Horn’s background in the power equipment sector, coupled with his work experience in the mining industry which is a target market for the registrant’s products, made his appointment to the Board appropriate.

There is no family relationship between Mr. Horn and any of the registrant’s current directors, executive officers or persons nominated or charged to become directors or executive officers, or those of the registrant’s subsidiary.  There are no transactions between the registrant and Mr. Horn that would require disclosure under Item 404(a) of Regulation S-K.

(d)           Material Contracts with Named Executive Officers

On May 23, 2014, the registrant entered into an Amendment to Executive Employment Agreement (the “Amendment”) with each of its chief executive officer Alain J. Castro, president and chief operating officer Boris A. Maslov, and chief financial officer Kelly Anderson.  The Amendment modifies the terms of each such officer’s employment agreement with the registrant, and is entered into in connection with such officer’s participation in the registrant’s voluntary wage reduction plan.  Under such plan, the registrant would issue each participant an option to purchase up to 15 shares of the registrant’s common stock under the Incentive Plan in exchange for each $1.00 that such participant voluntarily foregoes under the wage reduction plan.

Pursuant to the Amendment:

 
·
Mr. Castro’s annual base salary is adjusted to $120,000 from May 1, 2014 to July 31, 2014, and readjusted to $200,000 thereafter;

 
·
Mr. Maslov’s annual base salary is adjusted to $180,000 from May 9, 2014 to June 15, 2014, and readjusted to $225,000 thereafter; and

 
·
Ms. Anderson’s annual base salary is adjusted to $140,000 from May 16, 2014 to June 15, 2014, and readjusted to $175,000 thereafter.

Except for the foregoing, all other terms of each officer’s employment agreement with the registrant remain unchanged.  Copies of the Amendments are attached hereto as Exhibits 99.2, 99.3 and 99.4.

In connection with the Amendment, the registrant entered into a stock option agreement (the “Option Agreement”) with each officer.  Pursuant to the Option Agreement:

 
·
The registrant granted Mr. Castro an option to purchase 323,000 shares of common stock under the Incentive Plan at $0.48 per share commencing May 13, 2014, which option is immediately exercisable;
 
 
2
 
 
 
·
The registrant granted Mr. Maslov an option to purchase 75,700 shares of common stock under the Incentive Plan at $0.48 per share commencing May 13, 2014, which option is immediately exercisable; and

 
·
The registrant granted Ms. Anderson an option to purchase 47,100 shares of common stock under the Incentive Plan at $0.48 per share commencing May 13, 2014, which option is immediately exercisable.

Copies of the Option Agreements are attached hereto as Exhibits 99.2(a), 99.3(b) and 99.4(c).

Item 9.01
Financial Statement and Exhibits.

(d)
EXHIBITS

Exhibit Number
 
Description
99.1
 
Offer Letter from the registrant to Jeff Horn dated as of May 19, 2014.
99.1(a)
 
Stock Option Agreement between the registrant and Jeff Horn.
99.2
 
Amendment to Executive Employment Agreement between the registrant and Alain J. Castro, dated as of May 23, 2014.
99.2(a)
 
Stock Option Agreement between the registrant and Alain J. Castro.
99.3
 
Amendment to Executive Employment Agreement between the registrant and Boris A. Maslov, dated as of May 23, 2014.
99.3(a)
 
Stock Option Agreement between the registrant and Boris A. Maslov.
99.4
 
Amendment to Executive Employment Agreement between the registrant and Kelly Anderson, dated as of May 23, 2014.
99.4(a)
 
Stock Option Agreement between the registrant and Kelly Anderson.
 
 
3
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
ENER-CORE, INC.
Date: May 30, 2014
(Registrant)
     
 
By:
/s/ Alain J. Castro
   
Alain J. Castro
   
Chief Executive Officer

4
 
Exhibit 99.1
 
 
May 19, 2014
 
Jeff Horn
703 Hollybriar Lane
Naples, FL 34108
 
Dear Jeff,
 
On behalf of Ener-Core Inc., a Nevada corporation (the “Company”) or its successors, I am pleased to invite you to join the Company’s Board of Directors (the “Board”) and the Chairman of the Audit Committee, subject to your election to the Board by the stockholders or directors, as appropriate (the date of such election being the “Effective Date”), which we anticipate will be approximately May 26, 2014. You will serve as a director from the Effective Date until the date upon which you are not re-elected or your earlier removal or resignation.
 
In consideration for your service on the Board and subject to approval by the Board, you will be granted an option under the Company's Stock Incentive Plan (the “Plan”) to purchase 300,000 shares of the Company's common stock at an exercise price equal to the fair market value of the common stock on the date the Board approves the option grant.
 
We will recommend that the Board set your vesting schedule as follows: 1/36 of the total number of shares will be granted after each month.
 
In addition to the shares granted to you under the Company's Stock Incentive Plan, you will receive an annual director's fee of $40,000 payable monthly for your services as an independent director (“Annual Stipend”). There are no assurances that the Company will pay you the Annual Stipend, in addition to the shares being granted to you under the Plan, however, it is the Company's intention to provide cash compensation to board members in the future.
 
The Company will reimburse you for all reasonable travel expenses that you incur in connection with your attendance at meetings of the Board, in accordance with the Company’s expense reimbursement policy as in effect from time to time. In addition, you will receive indemnification as a director of the Company to the maximum extent extended to directors of the Company generally, as set forth in the Company’s certificate of incorporation, bylaws, an indemnification agreement between the Company and you (which will be provided to you upon the Effective Date), and any reasonable Director and Officer Insurance the Company may have and maintain from time to time.
 
Every January the Board’s compensation committee will conduct an annual review of your compensation to ensure that the compensation remains adjusted to the Company’s and market conditions with final approval of any changes to the structure upon the approval of the Board and potentially a shareholder vote.
 
In accepting this offer, you are representing to us that (i) you do not know of any conflict which would restrict your service on the Board and (ii) you will not provide the Company with any documents, records, or other confidential information belonging to other parties.
 
This letter sets forth the initial compensation you will receive for your service on the Board. The Board's compensation committee will conduct an annual review of the Board compensation to ensure that the compensation remains adjusted to the company's and market conditions. Nothing in this letter should be construed as an offer of employment. If the foregoing terms are agreeable, please indicate your acceptance by signing the letter in the space provided below and returning this letter to the Company.
 
Sincerely,
 
   
ENER-CORE, Inc.
 
   
By:  
/s/ Michael J. Hammons
 
   
Michael J. Hammons
 
Chairman
 
   
Accepted and Agreed:
 
   
/s/ Jeff Horn
 
Jeff Horn
 
 

 
Exhibit 99.1(a)
 
ENER-CORE, INC.
2013 EQUITY AWARD INCENTIVE PLAN
STOCK OPTION AGREEMENT
 
Unless otherwise defined herein, the terms defined in the 2013 Equity Award Incentive Plan shall have the same defined meanings in this Stock Option Agreement (the “ Option Agreement ”).
 
I.            NOTICE OF GRANT
 
Optionee’s Name:                    Jeff Horn
 
Optionee’s Address:
 
You have been granted an option to purchase common stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows:
 
Grant Number
 
Date of Grant
May 28, 2014
   
Vesting Commencement Date
June 28, 2014
   
Exercise Price per Share
$0.44
   
Total Number of Shares Granted
300,000
   
Total Exercise Price
$ 132,000
   
Type of Option:
__________ Incentive Stock Option
   
 
           X          Nonstatutory Stock Option
   
Term/Expiration Date:
May 28, 2020
 
Exercise and Vesting Schedule :
 
This Option shall be exercisable in whole or in part, and this Option (and any Shares with respect to which the Optionee exercises this Option) shall vest according to the following vesting schedule, subject to the terms and conditions of the Plan and this Option Agreement, as follows:
 
Monthly vesting at 1/36th of Total Number of Shares Granted beginning……….. June 28, 2017
 
 
1
 
 
Termination Period :
 
This Option may be exercised, to the extent it is then vested, for three (3) months after Optionee ceases to be a Service Provider.  Upon death or Disability of the Optionee, this Option may be exercised, to the extent it is then vested, for twelve (12) months after Optionee ceases to be Service Provider.  In no event shall this Option be exercised later than the Term/Expiration Date as provided above.
 
II.            AGREEMENT
 
A.             Grant of Option .  The Administrator of the Company hereby grants to the Optionee named in the Notice of Grant above (the “ Optionee ”), an option (the “ Option ”) to purchase the number of Shares set forth in the Notice of Grant above, at the exercise price per Share set forth in the Notice of Grant above (the “ Exercise Price ”), and subject to the terms and conditions of the Plan, which is incorporated herein by reference.  Subject to Section 14(c) of the Ener-Core, Inc. 2013 Equity Award Incentive Plan (the “ Plan ”), in the event of a conflict between the terms and conditions of the Plan and this Option Agreement, the terms and conditions of the Plan shall prevail.
 
If designated in the Notice of Grant as an Incentive Stock Option (“ ISO ”), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code.  Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated as a Nonstatutory Stock Option (“ NSO ”).
 
B.              Exercise of Option .  This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows:
 
1.              Right to Exercise .
 
(a)           This Option shall be exercisable cumulatively according to the vesting schedule set forth in the Notice of Grant.  Alternatively, at the election of the Optionee, this Option may be exercised in whole or in part at any time as to Shares that have not yet vested.  Vested Shares shall not be subject to the Company’s repurchase right (as set forth in the Restricted Stock Purchase Agreement, attached hereto as Exhibit C-1 ).
 
(b)           As a condition to exercising any rights granted under this Option for Unvested Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.
 
(c)           As a condition to exercising any rights granted under this Option, the Optionee shall execute the Company’s then-current stockholders agreement(s) applicable to holders of common stock in the Company.
 
(d)           This Option may not be exercised for a fraction of a Share.
 
2.            Method of Exercise .  This Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the “ Exercise Notice ”), which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company.  The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Shares with respect to which the Optionee exercises this Option (the “ Exercised Shares ”).  This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price.
 
 
2
 
 
No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise complies with Applicable Laws.  Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares.  Upon an exercise of this Option, all Exercised Shares shall
 
C.             Optionee’s Representations .  In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B .
 
D.             Lock-Up Period .  Optionee hereby agrees that, if so requested by the Company or any representative of the underwriters (the “ Managing Underwriter ”) in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the “ Market Standoff Period ”) following the effective date of a registration statement of the Company filed under the Securities Act.  Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act.  The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period.
 
E.             Method of Payment .  Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:
 
1.           cash;
 
2.           check;
 
3.           consideration received by the Company under a formal cashless exercise program adopted by the Company (in its discretion) in connection with the Plan; or
 
4.           surrender of other Shares which, (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
 
F.             Restrictions on Exercise .  This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any Applicable Law.
 
 
3
 
 
G.             Non-Transferability of Option .  This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee.  The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.
 
H.             Term of Option .  This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option.
 
I.              Tax Consequences .  Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares.  THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.  THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
 
1.            Exercise of NSO .  There may be a regular federal income tax liability upon the exercise of an NSO.  The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price.  If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee’s compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.
 
2.            Exercise of ISO .  If this Option qualifies as an ISO, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise.
 
3.            Exercise of ISO Following Disability .  If the Optionee ceases to be an Employee as a result of a disability that is not a total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Optionee must exercise an ISO within three months after such termination for the ISO to be qualified as an ISO.
 
4.            Disposition of Shares .  In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.  In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes.  If Shares purchased under an ISO are disposed of within one year after exercise or two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price of the Exercised Shares and the lesser of (i) the Fair Market Value of the Exercised Shares on the date of exercise, or (ii) the sale price of the Exercised Shares.  Different rules may apply if the Shares are subject to a substantial risk of forfeiture (within the meaning of Section 83 of the Code) at the time of purchase.  Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held.
 
 
4
 
 
5.            Notice of Disqualifying Disposition of ISO Shares .  If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (i) the date two years after the Date of Grant, or (ii) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition.  Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee.
 
6.            Section 83(b) Election for Unvested Shares Purchased Pursuant to Options .  With respect to the exercise of an Option for Unvested Shares, an election (the “ Election ”) may be filed by the Optionee with the Internal Revenue Service, within 30 days after the purchase of the Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase.  In the case of an NSO, this will result in a recognition of taxable income to the Optionee on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised over the purchase price for the Exercised Shares.  Absent such an election, taxable income will be measured and recognized by Optionee at the time or times on which the Company’s Repurchase Option lapses.  In the case of an ISO, such an election will result in a recognition of income to the Optionee for alternative minimum tax purposes on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised, over the purchase price for the Exercised Shares.  Absent such an election, alternative minimum taxable income will be measured and recognized by Optionee at the time or times on which the Company’s Repurchase Option lapses.  Optionee is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code.  A form of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference.
 
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE’S SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO DETERMINE THE EFFECT OF AND OPTIONEE’S ABILITY TO MAKE AND TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE’S BEHALF.
 
J.               Entire Agreement; Governing Law .  The Plan is incorporated herein by reference.  The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee.  This Option Agreement is governed by the internal substantive laws but not the choice of law rules of   the State of Nevada.
 
K.             No Guarantee of Continued Service .  OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER).  OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
 
 
5
 
 
L.              Familiarity with the Plan .  Optionee acknowledges receipt of a copy of the Plan and represents that Optionee is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof.  Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option.  Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option.  Optionee further agrees to notify the Company upon any change in the residence address indicated below.
 
OPTIONEE   ENER-CORE, INC.
     
/s/ Jeff Horn   /s/ Alain Castro
Signature   By:  Alain Castro
   
Title: Chief Executive Officer
Jeff Horn    
Print Name    
     
     
Spouse signature    
     
     
Print Name    
     
Residence Address:
 
 
6
Exhibit 99.2

AMENDMENT
TO
EXECUTIVE EMPLOYMENT AGREEMENT

This Amendment to Executive Employment Agreement (this “ Amendment ”), dated as of May 23, 2014, amends that certain Executive Employment Agreement, dated as of April 25, 2013 (the “ Agreement ”) between FlexPower Generation, Inc., a Delaware corporation now known as Ener-Core Power, Inc. (the “ Subsidiary ”), and Alain J. Castro (“ Executive ”), which Agreement and the obligations of the Subsidiary thereunder has been assumed by Ener-Core, Inc., a Nevada corporation (the “ Company ”).  The Company and Executive are each referred to individually as a “ Party ,” and collectively as the “ Parties ”.  All capitalized terms used herein but not otherwise defined shall have the same meaning as set forth in the Agreement.

WHEREAS, Executive has notified the Company of his intention to participate in the Company’s voluntary wage reduction plan (the “ Reduction Plan ”) available to all of its employees, whereby the Company will issue option under the Company’s 2013 Equity Award Incentive Plan, to purchase up to fifteen (15) shares of the Company’s common stock, par value $0.0001 per share to each employee participating in the Reduction Plan in exchange for each One Dollar ($1.00) that such employee voluntarily foregoes under the Reduction Plan (such options collectively the “ Options ”); and

WHEREAS, the Parties wish to, as of the May 1, 2014 (the “ Effective Date ”), amend the Agreement as set forth herein in connection with the foregoing intention of Executive.

NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1.            Amendments to Section 3(a) of the Agreement .
 
 
1.1
From and after the Effective Date until July 31, 2014 (the “ Resumption Date ”), Section 3(a) of the Agreement is amended and restated in its entirety as follows:
 
“(a)            Base Salary . During the Employment Term, the Company will pay Executive as compensation for Executive’s services a base salary at rate of $10,000 per month for a total base salary of $120,000 per year (which salary may be increased but not decreased by the Board in its sole discretion) (the “ Base Salary ”). The Base Salary will be paid in regular installments in accordance with the Company’s normal payroll practices, subject to applicable deductions and withholdings. The first and last payment will be adjusted, if necessary, to reflect a commencement or termination date other than the first or last working day of a pay period.”
 
 
1.2
From and after the Resumption Date, Section 3(a) of the Agreement is further amended and restated in its entirety as follows:

“(a)            Base Salary . During the Employment Term, the Company will pay Executive as compensation for Executive’s services a base salary at rate of $16,666.67 per month for a total base salary of $200,000 per year (which salary may be increased but not decreased by the Board in its sole discretion) (the “ Base Salary ”). The Base Salary will be paid in regular installments in accordance with the Company’s normal payroll practices, subject to applicable deductions and withholdings. The first and last payment will be adjusted, if necessary, to reflect a commencement or termination date other than the first or last working day of a pay period.”
 
 
Amendment to Executive Employment Agreement
 
 
1
 
 
2            Full Force and Effect . From and after the Effective Date, all references herein and in the Agreement shall mean the Agreement, as amended by the amendments set forth in this Amendment, such that the changes and amendments to the Executive’s roles, rights and responsibilities take effect from such date through the end of the Employment Period.  Except as specifically amended hereby, the Agreement shall remain unchanged and in full force and effect.

3            Acknowledgment .  The Executive hereby acknowledges that the changes to his compensation contemplated herein were initiated at his request in connection his voluntary participation in the Reduction Plan, and acknowledges and agrees that the determination by the Company of the number of Options issuable to him in connection therewith shall be conclusive and issued pursuant to such terms and conditions as set forth in an agreement to be entered into between the Company and Executive.

4            Conflicting Terms .  In the event of any inconsistency or conflict between the Agreement and this Amendment, the terms, conditions and provisions of this Amendment shall govern and control.

5            Entire Agreement .  The Agreement, as amended hereby, constitutes the full and entire understanding and agreement between the Parties regarding the matters set forth herein. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the Parties.

6            Counterparts . This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  A facsimile or .pdf copy of a signature of a party will have the same effect and validity as an original signature.

[ Remainder of Page Intentionally Left Blank ]
 
 
 
Amendment to Executive Employment Agreement
 
 
2
 

  Company :  
     
  Ener-Core, Inc.  
     
 
By:
/s/ Kelly Anderson
 
  Name:
Kelly Anderson
 
  Title:
Chief Financial Officer
 
       
  EXECUTIVE:  
     
 
/s/ Alain J. Castro
 
  Alain J. Castro  

 
Signature Page to Amendment to Executive Employment Agreement
 
 
 3
 
Exhibit 99.2(a)
 
ENER-CORE, INC.
2013 EQUITY AWARD INCENTIVE PLAN
STOCK OPTION AGREEMENT
 
Unless otherwise defined herein, the terms defined in the 2013 Equity Award Incentive Plan shall have the same defined meanings in this Stock Option Agreement (the “ Option Agreement ”).
 
I.            NOTICE OF GRANT
 
Optionee’s Name: Alain Castro
   
Optionee’s Address: 2669 N. Greenview, Unit A
Chicago, IL 60614
 
You have been granted an option to purchase common stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows:
 
Grant Number 2014-40
   
Date of Grant
May 13, 2014
   
Vesting Commencement Date
May 13, 2014
   
Exercise Price per Share
$0.48
   
Total Number of Shares Granted
323,000
   
Total Exercise Price
$ 155,040
   
Type of Option:
__________ Incentive Stock Option
   
 
           X          Nonstatutory Stock Option
   
Term/Expiration Date:
May 13, 2020
 
Exercise and Vesting Schedule :
 
This Option shall be exercisable in whole or in part, and this Option (and any Shares with respect to which the Optionee exercises this Option) shall vest according to the following vesting schedule, subject to the terms and conditions of the Plan and this Option Agreement, as follows:
 
100% of Total Number of Shares Granted ……….. May 13, 2014
 
 
1
 
 
Termination Period :
 
This Option may be exercised, to the extent it is then vested, for three (3) months after Optionee ceases to be a Service Provider.  Upon death or Disability of the Optionee, this Option may be exercised, to the extent it is then vested, for twelve (12) months after Optionee ceases to be Service Provider.  In no event shall this Option be exercised later than the Term/Expiration Date as provided above.
 
II.            AGREEMENT
 
A.             Grant of Option .  The Administrator of the Company hereby grants to the Optionee named in the Notice of Grant above (the “ Optionee ”), an option (the “ Option ”) to purchase the number of Shares set forth in the Notice of Grant above, at the exercise price per Share set forth in the Notice of Grant above (the “ Exercise Price ”), and subject to the terms and conditions of the Plan, which is incorporated herein by reference.  Subject to Section 14(c) of the Ener-Core, Inc. 2013 Equity Award Incentive Plan (the “ Plan ”), in the event of a conflict between the terms and conditions of the Plan and this Option Agreement, the terms and conditions of the Plan shall prevail.
 
If designated in the Notice of Grant as an Incentive Stock Option (“ ISO ”), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code.  Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated as a Nonstatutory Stock Option (“ NSO ”).
 
B.              Exercise of Option .  This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows:
 
1.              Right to Exercise .
 
(a)           This Option shall be exercisable cumulatively according to the vesting schedule set forth in the Notice of Grant.  Alternatively, at the election of the Optionee, this Option may be exercised in whole or in part at any time as to Shares that have not yet vested.  Vested Shares shall not be subject to the Company’s repurchase right (as set forth in the Restricted Stock Purchase Agreement, attached hereto as Exhibit C-1 ).
 
(b)           As a condition to exercising any rights granted under this Option for Unvested Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.
 
(c)           As a condition to exercising any rights granted under this Option, the Optionee shall execute the Company’s then-current stockholders agreement(s) applicable to holders of common stock in the Company.
 
(d)           This Option may not be exercised for a fraction of a Share.
 
2.            Method of Exercise .  This Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the “ Exercise Notice ”), which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company.  The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Shares with respect to which the Optionee exercises this Option (the “ Exercised Shares ”).  This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price.
 
 
2
 
 
No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise complies with Applicable Laws.  Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares.  Upon an exercise of this Option, all Exercised Shares shall
 
C.             Optionee’s Representations .  In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B .
 
D.             Lock-Up Period .  Optionee hereby agrees that, if so requested by the Company or any representative of the underwriters (the “ Managing Underwriter ”) in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the “ Market Standoff Period ”) following the effective date of a registration statement of the Company filed under the Securities Act.  Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act.  The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period.
 
E.             Method of Payment .  Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:
 
1.            cash;
 
2.            check;
 
3.           consideration received by the Company under a formal cashless exercise program adopted by the Company (in its discretion) in connection with the Plan; or
 
4.           surrender of other Shares which, (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
 
F.             Restrictions on Exercise .  This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any Applicable Law.
 
 
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G.             Non-Transferability of Option .  This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee.  The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.
 
H.             Term of Option .  This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option.
 
I.              Tax Consequences .  Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares.  THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.  THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
 
1.            Exercise of NSO .  There may be a regular federal income tax liability upon the exercise of an NSO.  The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price.  If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee’s compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.
 
2.            Exercise of ISO .  If this Option qualifies as an ISO, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise.
 
3.            Exercise of ISO Following Disability .  If the Optionee ceases to be an Employee as a result of a disability that is not a total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Optionee must exercise an ISO within three months after such termination for the ISO to be qualified as an ISO.
 
4.            Disposition of Shares .  In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.  In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes.  If Shares purchased under an ISO are disposed of within one year after exercise or two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price of the Exercised Shares and the lesser of (i) the Fair Market Value of the Exercised Shares on the date of exercise, or (ii) the sale price of the Exercised Shares.  Different rules may apply if the Shares are subject to a substantial risk of forfeiture (within the meaning of Section 83 of the Code) at the time of purchase.  Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held.
 
 
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5.            Notice of Disqualifying Disposition of ISO Shares .  If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (i) the date two years after the Date of Grant, or (ii) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition.  Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee.
 
6.            Section 83(b) Election for Unvested Shares Purchased Pursuant to Options .  With respect to the exercise of an Option for Unvested Shares, an election (the “ Election ”) may be filed by the Optionee with the Internal Revenue Service, within 30 days after the purchase of the Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase.  In the case of an NSO, this will result in a recognition of taxable income to the Optionee on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised over the purchase price for the Exercised Shares.  Absent such an election, taxable income will be measured and recognized by Optionee at the time or times on which the Company’s Repurchase Option lapses.  In the case of an ISO, such an election will result in a recognition of income to the Optionee for alternative minimum tax purposes on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised, over the purchase price for the Exercised Shares.  Absent such an election, alternative minimum taxable income will be measured and recognized by Optionee at the time or times on which the Company’s Repurchase Option lapses.  Optionee is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code.  A form of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference.
 
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE’S SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO DETERMINE THE EFFECT OF AND OPTIONEE’S ABILITY TO MAKE AND TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE’S BEHALF.
 
J.               Entire Agreement; Governing Law .  The Plan is incorporated herein by reference.  The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee.  This Option Agreement is governed by the internal substantive laws but not the choice of law rules of   the State of Nevada.
 
K.             No Guarantee of Continued Service .  OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER).  OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
 
 
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L.              Familiarity with the Plan .  Optionee acknowledges receipt of a copy of the Plan and represents that Optionee is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof.  Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option.  Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option.  Optionee further agrees to notify the Company upon any change in the residence address indicated below.
 
OPTIONEE   ENER-CORE, INC.
     
/s/ Alain Castro
  /s/ Kelly Anderson
Signature   By:  Kelly Anderson
   
Title: Chief Financial Officer
Alain Castro    
Print Name    
     
     
Spouse signature    
     
     
Print Name    
     
Residence Address:
 
2669 N. Greenview, Unit A
Chicago, IL  60614
 
 
6
Exhibit 99.3

AMENDMENT
TO
EXECUTIVE EMPLOYMENT AGREEMENT

This Amendment to Executive Employment Agreement (this “ Amendment ”), dated as of May 23, 2014, amends that certain Executive Employment Agreement, dated as of December 31, 2012 (the “ Agreement ”) between FlexPower Generation, Inc., a Delaware corporation now known as Ener-Core Power, Inc. (the “ Subsidiary ”), and Boris Maslov (“ Executive ”), which Agreement and the obligations of the Subsidiary thereunder have been assumed by Ener-Core, Inc., a Nevada corporation (the “ Company ”).  The Company and Executive are each referred to individually as a “ Party ,” and collectively as the “ Parties ”.  All capitalized terms used herein but not otherwise defined shall have the same meaning as set forth in the Agreement.

WHEREAS, Executive has notified the Company of his intention to participate in the Company’s voluntary wage reduction plan (the “ Reduction Plan ”) available to all of its employees, whereby the Company will issue option under the Company’s 2013 Equity Award Incentive Plan, to purchase up to fifteen (15) shares of the Company’s common stock, par value $0.0001 per share to each employee participating in the Reduction Plan in exchange for each One Dollar ($1.00) that such employee voluntarily foregoes under the Reduction Plan (such options collectively the “ Options ”); and

WHEREAS, the Parties wish to, as of the May 9, 2014 (the “ Effective Date ”), amend the Agreement as set forth herein in connection with the foregoing intention of Executive.

NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1.            Amendments to Section 3(a) of the Agreement .
 
 
1.1
From and after the Effective Date until June 15, 2014 (the “ Resumption Date ”), Section 3(a) of the Agreement is amended and restated in its entirety as follows:
 
“(a)            Base Salary . During the Employment Term, the Company will pay Executive as compensation for Executive’s services a base salary at rate of $15,000 per month for a total base salary of $180,000 per year (which salary may be increased but not decreased by the Board in its sole discretion) (the “ Base Salary ”). The Base Salary will be paid in regular installments in accordance with the Company’s normal payroll practices, subject to applicable deductions and withholdings. The first and last payment will be adjusted, if necessary, to reflect a commencement or termination date other than the first or last working day of a pay period.”
 
 
1.2
From and after the Resumption Date, Section 3(a) of the Agreement is further amended and restated in its entirety as follows:

“(a)            Base Salary . During the Employment Term, the Company will pay Executive as compensation for Executive’s services a base salary at rate of $18,750 per month for a total base salary of $225,000 per year (which salary may be increased but not decreased by the Board in its sole discretion) (the “ Base Salary ”). The Base Salary will be paid in regular installments in accordance with the Company’s normal payroll practices, subject to applicable deductions and withholdings. The first and last payment will be adjusted, if necessary, to reflect a commencement or termination date other than the first or last working day of a pay period.”
 
 
 
Amendment to Executive Employment Agreement
 
 
1
 
 
2.            Full Force and Effect . From and after the Effective Date, all references herein and in the Agreement shall mean the Agreement, as amended by the amendments set forth in this Amendment, such that the changes and amendments to the Executive’s roles, rights and responsibilities take effect from such date through the end of the Employment Period.  Except as specifically amended hereby, the Agreement shall remain unchanged and in full force and effect.

3.            Acknowledgment .  The Executive hereby acknowledges that the changes to his compensation contemplated herein were initiated at his request in connection his voluntary participation in the Reduction Plan, and acknowledges and agrees that the determination by the Company of the number of Options issuable to him in connection therewith shall be conclusive and issued pursuant to such terms and conditions as set forth in an agreement to be entered into between the Company and Executive.

4.            Conflicting Terms .  In the event of any inconsistency or conflict between the Agreement and this Amendment, the terms, conditions and provisions of this Amendment shall govern and control.

5.           Entire Agreement .  The Agreement, as amended hereby, constitutes the full and entire understanding and agreement between the Parties regarding the matters set forth herein. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the Parties.

6.           Counterparts . This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  A facsimile or .pdf copy of a signature of a party will have the same effect and validity as an original signature.

[ Remainder of Page Intentionally Left Blank ]
 
 
 
Amendment to Executive Employment Agreement
 
 
2
 

  Company :  
     
  Ener-Core, Inc.  
     
 
By:
/s/ Alain J. Castro
 
  Name:
Alain J. Castro
 
  Title:
Chief Executive Officer
 
       
  EXECUTIVE:  
     
 
/s/ Boris Maslov  
 
 
Boris Maslov
 

 
Signature Page to Amendment to Executive Employment Agreement
 
 
 3
 
Exhibit 99.3(a)
 
ENER-CORE, INC.
2013 EQUITY AWARD INCENTIVE PLAN
STOCK OPTION AGREEMENT
 
Unless otherwise defined herein, the terms defined in the 2013 Equity Award Incentive Plan shall have the same defined meanings in this Stock Option Agreement (the “ Option Agreement ”).
 
I.            NOTICE OF GRANT
 
Optionee’s Name:
Boris Maslov
   
Optionee’s Address:
128 weathervane
Irvine, CA  92603
 
You have been granted an option to purchase common stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows:
 
Grant Number 2014-31
   
Date of Grant
May 13, 2014
   
Vesting Commencement Date
May 13, 2014
   
Exercise Price per Share
$0.48
   
Total Number of Shares Granted
75,700
   
Total Exercise Price
$ 36,336
   
Type of Option:
__________ Incentive Stock Option
   
 
           X          Nonstatutory Stock Option
   
Term/Expiration Date:
May 13, 2020
 
Exercise and Vesting Schedule :
 
This Option shall be exercisable in whole or in part, and this Option (and any Shares with respect to which the Optionee exercises this Option) shall vest according to the following vesting schedule, subject to the terms and conditions of the Plan and this Option Agreement, as follows:
 
100% of Total Number of Shares Granted ……….. May 13, 2014
 
 
1
 
 
Termination Period :
 
This Option may be exercised, to the extent it is then vested, for three (3) months after Optionee ceases to be a Service Provider.  Upon death or Disability of the Optionee, this Option may be exercised, to the extent it is then vested, for twelve (12) months after Optionee ceases to be Service Provider.  In no event shall this Option be exercised later than the Term/Expiration Date as provided above.
 
II.            AGREEMENT
 
A.             Grant of Option .  The Administrator of the Company hereby grants to the Optionee named in the Notice of Grant above (the “ Optionee ”), an option (the “ Option ”) to purchase the number of Shares set forth in the Notice of Grant above, at the exercise price per Share set forth in the Notice of Grant above (the “ Exercise Price ”), and subject to the terms and conditions of the Plan, which is incorporated herein by reference.  Subject to Section 14(c) of the Ener-Core, Inc. 2013 Equity Award Incentive Plan (the “ Plan ”), in the event of a conflict between the terms and conditions of the Plan and this Option Agreement, the terms and conditions of the Plan shall prevail.
 
If designated in the Notice of Grant as an Incentive Stock Option (“ ISO ”), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code.  Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated as a Nonstatutory Stock Option (“ NSO ”).
 
B.              Exercise of Option .  This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows:
 
1.              Right to Exercise .
 
(a)           This Option shall be exercisable cumulatively according to the vesting schedule set forth in the Notice of Grant.  Alternatively, at the election of the Optionee, this Option may be exercised in whole or in part at any time as to Shares that have not yet vested.  Vested Shares shall not be subject to the Company’s repurchase right (as set forth in the Restricted Stock Purchase Agreement, attached hereto as Exhibit C-1 ).
 
(b)           As a condition to exercising any rights granted under this Option for Unvested Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.
 
(c)           As a condition to exercising any rights granted under this Option, the Optionee shall execute the Company’s then-current stockholders agreement(s) applicable to holders of common stock in the Company.
 
(d)           This Option may not be exercised for a fraction of a Share.
 
2.            Method of Exercise .  This Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the “ Exercise Notice ”), which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company.  The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Shares with respect to which the Optionee exercises this Option (the “ Exercised Shares ”).  This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price.
 
 
2
 
 
No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise complies with Applicable Laws.  Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares.  Upon an exercise of this Option, all Exercised Shares shall
 
C.             Optionee’s Representations .  In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B .
 
D.             Lock-Up Period .  Optionee hereby agrees that, if so requested by the Company or any representative of the underwriters (the “ Managing Underwriter ”) in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the “ Market Standoff Period ”) following the effective date of a registration statement of the Company filed under the Securities Act.  Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act.  The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period.
 
E.             Method of Payment .  Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:
 
1.           cash;
 
2.           check;
 
3.           consideration received by the Company under a formal cashless exercise program adopted by the Company (in its discretion) in connection with the Plan; or
 
4.           surrender of other Shares which, (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
 
F.             Restrictions on Exercise .  This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any Applicable Law.
 
 
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G.             Non-Transferability of Option .  This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee.  The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.
 
H.             Term of Option .  This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option.
 
I.              Tax Consequences .  Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares.  THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.  THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
 
1.            Exercise of NSO .  There may be a regular federal income tax liability upon the exercise of an NSO.  The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price.  If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee’s compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.
 
2.            Exercise of ISO .  If this Option qualifies as an ISO, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise.
 
3.            Exercise of ISO Following Disability .  If the Optionee ceases to be an Employee as a result of a disability that is not a total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Optionee must exercise an ISO within three months after such termination for the ISO to be qualified as an ISO.
 
4.            Disposition of Shares .  In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.  In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes.  If Shares purchased under an ISO are disposed of within one year after exercise or two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price of the Exercised Shares and the lesser of (i) the Fair Market Value of the Exercised Shares on the date of exercise, or (ii) the sale price of the Exercised Shares.  Different rules may apply if the Shares are subject to a substantial risk of forfeiture (within the meaning of Section 83 of the Code) at the time of purchase.  Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held.
 
 
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5.            Notice of Disqualifying Disposition of ISO Shares .  If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (i) the date two years after the Date of Grant, or (ii) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition.  Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee.
 
6.            Section 83(b) Election for Unvested Shares Purchased Pursuant to Options .  With respect to the exercise of an Option for Unvested Shares, an election (the “ Election ”) may be filed by the Optionee with the Internal Revenue Service, within 30 days after the purchase of the Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase.  In the case of an NSO, this will result in a recognition of taxable income to the Optionee on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised over the purchase price for the Exercised Shares.  Absent such an election, taxable income will be measured and recognized by Optionee at the time or times on which the Company’s Repurchase Option lapses.  In the case of an ISO, such an election will result in a recognition of income to the Optionee for alternative minimum tax purposes on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised, over the purchase price for the Exercised Shares.  Absent such an election, alternative minimum taxable income will be measured and recognized by Optionee at the time or times on which the Company’s Repurchase Option lapses.  Optionee is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code.  A form of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference.
 
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE’S SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO DETERMINE THE EFFECT OF AND OPTIONEE’S ABILITY TO MAKE AND TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE’S BEHALF.
 
J.               Entire Agreement; Governing Law .  The Plan is incorporated herein by reference.  The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee.  This Option Agreement is governed by the internal substantive laws but not the choice of law rules of   the State of Nevada.
 
K.             No Guarantee of Continued Service .  OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER).  OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
 
 
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L.              Familiarity with the Plan .  Optionee acknowledges receipt of a copy of the Plan and represents that Optionee is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof.  Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option.  Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option.  Optionee further agrees to notify the Company upon any change in the residence address indicated below.
 
OPTIONEE   ENER-CORE, INC.
     
/s/ Boris Maslov
  /s/ Alain Castro
Signature   By:   Alain Castro
   
Title: Chief Executive Officer
Boris Maslov    
Print Name    
     
     
Spouse signature    
     
     
Print Name    
     
Residence Address:
 
128 Weathervane
Irvine, CA  92603
 
 
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Exhibit 99.4

AMENDMENT
TO
EXECUTIVE EMPLOYMENT AGREEMENT

This Amendment to Executive Employment Agreement (this “ Amendment ”), dated as of May 23, 2014, amends that certain Executive Employment Agreement, dated as of November 15, 2013 (the “ Agreement ”) between Ener-Core, Inc., a Nevada corporation (the “ Company ”), and Kelly J. Anderson (“ Executive ”).  The Company and Executive are each referred to individually as a “ Party ,” and collectively as the “ Parties ”.  All capitalized terms used herein but not otherwise defined shall have the same meaning as set forth in the Agreement.
 
WHEREAS, Executive has notified the Company of her intention to participate in the Company’s voluntary wage reduction plan (the “ Reduction Plan ”) available to all of its employees, whereby the Company will issue option under the Company’s 2013 Equity Award Incentive Plan, to purchase up to fifteen (15) shares of the Company’s common stock, par value $0.0001 per share to each employee participating in the Reduction Plan in exchange for each One Dollar ($1.00) that such employee voluntarily foregoes under the Reduction Plan (such options collectively the “ Options ”); and
 
WHEREAS, the Parties wish to, as of the May 16, 2014 (the “ Effective Date ”), amend the Agreement as set forth herein in connection with the foregoing intention of Executive.
   
NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

1.            Amendments to Section 3(a) of the Agreement .
 
 
1.1
From and after the Effective Date until June 15, 2014 (the “ Resumption Date ”), Section 3(a) of the Agreement is amended and restated in its entirety as follows:
 
“(a)            Base Salary . During the Employment Term, the Company will pay Executive as compensation for Executive’s services a base salary at rate of $140,000 per year (which salary may be increased but not decreased by the Board in its sole discretion) (the “ Base Salary ”). The Base Salary will be paid in regular installments in accordance with the Company’s normal payroll practices, subject to applicable deductions and withholdings. The first and last payment will be adjusted, if necessary, to reflect a commencement or termination date other than the first or last working day of a pay period.”
 
 
1.2
From and after the Resumption Date, Section 3(a) of the Agreement is further amended and restated in its entirety as follows:

“(a)            Base Salary . During the Employment Term, the Company will pay Executive as compensation for Executive’s services a base salary at rate of $175,000 per year (which salary may be increased but not decreased by the Board in its sole discretion) (the “ Base Salary ”). The Base Salary will be paid in regular installments in accordance with the Company’s normal payroll practices, subject to applicable deductions and withholdings. The first and last payment will be adjusted, if necessary, to reflect a commencement or termination date other than the first or last working day of a pay period.”
 
 
Amendment to Executive Employment Agreement
 
 
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2.          Full Force and Effect . From and after the Effective Date, all references herein and in the Agreement shall mean the Agreement, as amended by the amendments set forth in this Amendment, such that the changes and amendments to the Executive’s roles, rights and responsibilities take effect from such date through the end of the Employment Period.  Except as specifically amended hereby, the Agreement shall remain unchanged and in full force and effect.
 
3.           Acknowledgment .  The Executive hereby acknowledges that the changes to her compensation contemplated herein were initiated at her request in connection her voluntary participation in the Reduction Plan, and acknowledges and agrees that the determination by the Company of the number of Options issuable to her in connection therewith shall be conclusive and issued pursuant to such terms and conditions as set forth in an agreement to be entered into between the Company and Executive.
 
4.           Conflicting Terms .  In the event of any inconsistency or conflict between the Agreement and this Amendment, the terms, conditions and provisions of this Amendment shall govern and control.
 
5.           Entire Agreement .  The Agreement, as amended hereby, constitutes the full and entire understanding and agreement between the Parties regarding the matters set forth herein. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the Parties.
 
6.           Counterparts . This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.  A facsimile or .pdf copy of a signature of a party will have the same effect and validity as an original signature.

[ Remainder of Page Intentionally Left Blank ]
 
 
 
Amendment to Executive Employment Agreement
 
 
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  Company :  
     
  Ener-Core, Inc.  
     
 
By:
/s/ Alain J. Castro
 
  Name:
Alain J. Castro
 
  Title:
Chief Executive Officer
 
       
  EXECUTIVE:  
     
 
/s/ Kelly J. Anderson
 
 
Kelly J. Anderson
 

 
Signature Page to Amendment to Executive Employment Agreement
 
 
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Exhibit 99.4(a)
 
ENER-CORE, INC.
2013 EQUITY AWARD INCENTIVE PLAN
STOCK OPTION AGREEMENT
 
Unless otherwise defined herein, the terms defined in the 2013 Equity Award Incentive Plan shall have the same defined meanings in this Stock Option Agreement (the “ Option Agreement ”).
 
I.            NOTICE OF GRANT
 
Optionee’s Name:
Kelly Anderson
   
Optionee’s Address:
310 Fernando St., #407
Newport Beach, CA  92661
 
You have been granted an option to purchase common stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows:
 
Grant Number 2014-25
   
Date of Grant
May 13, 2014
   
Vesting Commencement Date
May 13, 2014
   
Exercise Price per Share
$0.48
   
Total Number of Shares Granted
47,100
   
Total Exercise Price
$ 22,608
   
Type of Option:
__________ Incentive Stock Option
   
 
           X          Nonstatutory Stock Option
   
Term/Expiration Date:
May 13, 2020
 
Exercise and Vesting Schedule :
 
This Option shall be exercisable in whole or in part, and this Option (and any Shares with respect to which the Optionee exercises this Option) shall vest according to the following vesting schedule, subject to the terms and conditions of the Plan and this Option Agreement, as follows:
 
100% of Total Number of Shares Granted ……….. May 13, 2014
 
 
1
 
 
Termination Period :
 
This Option may be exercised, to the extent it is then vested, for three (3) months after Optionee ceases to be a Service Provider.  Upon death or Disability of the Optionee, this Option may be exercised, to the extent it is then vested, for twelve (12) months after Optionee ceases to be Service Provider.  In no event shall this Option be exercised later than the Term/Expiration Date as provided above.
 
II.            AGREEMENT
 
A.             Grant of Option .  The Administrator of the Company hereby grants to the Optionee named in the Notice of Grant above (the “ Optionee ”), an option (the “ Option ”) to purchase the number of Shares set forth in the Notice of Grant above, at the exercise price per Share set forth in the Notice of Grant above (the “ Exercise Price ”), and subject to the terms and conditions of the Plan, which is incorporated herein by reference.  Subject to Section 14(c) of the Ener-Core, Inc. 2013 Equity Award Incentive Plan (the “ Plan ”), in the event of a conflict between the terms and conditions of the Plan and this Option Agreement, the terms and conditions of the Plan shall prevail.
 
If designated in the Notice of Grant as an Incentive Stock Option (“ ISO ”), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code.  Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated as a Nonstatutory Stock Option (“ NSO ”).
 
B.              Exercise of Option .  This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows:
 
1.              Right to Exercise .
 
(a)           This Option shall be exercisable cumulatively according to the vesting schedule set forth in the Notice of Grant.  Alternatively, at the election of the Optionee, this Option may be exercised in whole or in part at any time as to Shares that have not yet vested.  Vested Shares shall not be subject to the Company’s repurchase right (as set forth in the Restricted Stock Purchase Agreement, attached hereto as Exhibit C-1 ).
 
(b)           As a condition to exercising any rights granted under this Option for Unvested Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.
 
(c)           As a condition to exercising any rights granted under this Option, the Optionee shall execute the Company’s then-current stockholders agreement(s) applicable to holders of common stock in the Company.
 
(d)           This Option may not be exercised for a fraction of a Share.
 
2.            Method of Exercise .  This Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the “ Exercise Notice ”), which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company.  The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Shares with respect to which the Optionee exercises this Option (the “ Exercised Shares ”).  This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price.
 
 
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No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise complies with Applicable Laws.  Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares.  Upon an exercise of this Option, all Exercised Shares shall
 
C.             Optionee’s Representations .  In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B .
 
D.             Lock-Up Period .  Optionee hereby agrees that, if so requested by the Company or any representative of the underwriters (the “ Managing Underwriter ”) in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the “ Market Standoff Period ”) following the effective date of a registration statement of the Company filed under the Securities Act.  Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act.  The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period.
 
E.             Method of Payment .  Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee:
 
1.           cash;
 
2.           check;
 
3.           consideration received by the Company under a formal cashless exercise program adopted by the Company (in its discretion) in connection with the Plan; or
 
4.           surrender of other Shares which, (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
 
F.             Restrictions on Exercise .  This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any Applicable Law.
 
 
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G.             Non-Transferability of Option .  This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee.  The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.
 
H.             Term of Option .  This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option.
 
I.              Tax Consequences .  Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares.  THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.  THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
 
1.            Exercise of NSO .  There may be a regular federal income tax liability upon the exercise of an NSO.  The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price.  If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee’s compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise.
 
2.            Exercise of ISO .  If this Option qualifies as an ISO, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise.
 
3.            Exercise of ISO Following Disability .  If the Optionee ceases to be an Employee as a result of a disability that is not a total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Optionee must exercise an ISO within three months after such termination for the ISO to be qualified as an ISO.
 
4.            Disposition of Shares .  In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes.  In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes.  If Shares purchased under an ISO are disposed of within one year after exercise or two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price of the Exercised Shares and the lesser of (i) the Fair Market Value of the Exercised Shares on the date of exercise, or (ii) the sale price of the Exercised Shares.  Different rules may apply if the Shares are subject to a substantial risk of forfeiture (within the meaning of Section 83 of the Code) at the time of purchase.  Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held.
 
 
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5.            Notice of Disqualifying Disposition of ISO Shares .  If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (i) the date two years after the Date of Grant, or (ii) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition.  Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee.
 
6.            Section 83(b) Election for Unvested Shares Purchased Pursuant to Options .  With respect to the exercise of an Option for Unvested Shares, an election (the “ Election ”) may be filed by the Optionee with the Internal Revenue Service, within 30 days after the purchase of the Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase.  In the case of an NSO, this will result in a recognition of taxable income to the Optionee on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised over the purchase price for the Exercised Shares.  Absent such an election, taxable income will be measured and recognized by Optionee at the time or times on which the Company’s Repurchase Option lapses.  In the case of an ISO, such an election will result in a recognition of income to the Optionee for alternative minimum tax purposes on the date of exercise, measured by the excess, if any, of the Fair Market Value of the Exercised Shares, at the time the Option is exercised, over the purchase price for the Exercised Shares.  Absent such an election, alternative minimum taxable income will be measured and recognized by Optionee at the time or times on which the Company’s Repurchase Option lapses.  Optionee is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code.  A form of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference.
 
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE’S SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO DETERMINE THE EFFECT OF AND OPTIONEE’S ABILITY TO MAKE AND TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE’S BEHALF.
 
J.               Entire Agreement; Governing Law .  The Plan is incorporated herein by reference.  The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the Company and Optionee.  This Option Agreement is governed by the internal substantive laws but not the choice of law rules of   the State of Nevada.
 
K.             No Guarantee of Continued Service .  OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER).  OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
 
 
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L.              Familiarity with the Plan .  Optionee acknowledges receipt of a copy of the Plan and represents that Optionee is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof.  Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option.  Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option.  Optionee further agrees to notify the Company upon any change in the residence address indicated below.
 
OPTIONEE   ENER-CORE, INC.
     
/s/ Kelly Anderson
  /s/ Alain Castro
Signature   By:   Alain Castro
   
Title: Chief Executive Officer
Kelly Anderson    
Print Name    
     
     
Spouse signature    
     
     
Print Name    
     
Residence Address:
 
310 Fernando St., #407
Newport Beach, CA  92661
 
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