UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended
December 31, 2014
or
☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _______________ to _______________
Commission
File Number:
333-173040
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ENER-CORE,
INC.
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(Exact
name of issuer as specified in its charter)
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Nevada
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46-0525350
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S.
Employer
Identification Number)
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9400
Toledo Way
Irvine,
California
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92618
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code
(949) 616-3300
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to section 12(g) of the Act:
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Common
stock, $0.0001 par value
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☒
No ☐
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every, Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒
No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
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Large Accelerated
Filer ☐
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Accelerated
Filer ☐
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Non-accelerated filer
☐
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Smaller reporting company
☒
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As
of June 30, 2014, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $44.2
million, based on a closing price of $0.61 per share of common stock as reported on the OTC Bulletin Board on such date.
As
of March 23, 2015, the registrant had 114,106,439 shares of common stock outstanding.
TABLE
OF CONTENTS
TO
ANNUAL REPORT ON FORM 10-K
FOR
YEAR ENDED DECEMBER 31, 2014
Forward
Looking Statements
This
report contains forward-looking statements. All forward-looking statements are inherently uncertain as they are based
on current expectations and assumptions concerning future events or future performance of the registrant. Readers are
cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the
date hereof. Forward-looking statements usually contain the words “estimate,” “anticipate,”
“believe,” “expect,” or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In
evaluating such statements, prospective investors should carefully review various risks and uncertainties identified in this report,
including the matters set forth under the captions “Risk Factors” and in the registrant’s other SEC filings. These
risks and uncertainties could cause the registrant’s actual results to differ materially from those indicated in the forward-looking
statements. The registrant undertakes no obligation to update or publicly announce revisions to any forward-looking
statements to reflect future events or developments.
Although
forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based
on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks
and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes
include, without limitation, those specifically addressed under the heading “
Risks Relating to Our Business
”
below, as well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We file reports with the Securities and
Exchange Commission (“
SEC
”). You can read and copy any materials we file with the SEC at the SEC’s
Public Reference Room located at 100 F. Street, NE, Washington, D.C. 20549, on official business days during the hours of 10 a.m.
to 3 p.m. You can obtain additional information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC, including the registrant.
We
undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that
may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures
made throughout the entirety of this report, which attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, results of operations and prospects.
PART
I
Overview
We design, develop,
and manufacture products based on proprietary technologies that aim to expand the power-generation range of gaseous fuels. We consider
“power” to consist of industrial grade heat used to generate electricity, create steam through a boiler, or used in
heat exchanger applications. We also strive to use our technologies to provide a power generating solution with a significantly
reduced air emissions profile. We refer to these technologies collectively as “
Power Oxidization
”
or “
Power Oxidizer
” (previously called “
Gradual Oxidation
” and “
Gradual Oxidizer
,”
respectively in our prior SEC filings). Our products aim to expand power generation to low quality gas fuel sources
that have previously been uneconomical or outright non-feasible fuels for generating energy. At the same time, our products
reduce gaseous emissions from industrial processes that contribute to air pollution and climate change.
Power
Oxidization allows for the extraction of heat energy from previously unusable low quality fuels, while significantly reducing
harmful pollutants and creating useful energy products such as heat and electricity. Power Oxidation can potentially
unlock power generation (electricity and/or steam) for a wide range of low-quality fuels that extend beyond traditional gas turbine
and reciprocating engine operating limits. Our goal is to enable our customers to profitably generate heat energy from
their existing waste gases, while, at the same time, reduce the cost of our customers’ compliance with local, state, and
federal air quality regulations by avoiding the chemicals, catalysts, and complex permitting required by competing systems.
We
currently commercialize a 250 kilowatt (“
kW
”) and a 333 kW power-station, and expect to scale up our technology
to be integrated with a variety of larger turbines, resulting in larger power-stations that will provide an alternative to typical
combustion-based power generation. We also expect to integrate our Power Oxidizer technology with traditional steam
boilers, thereby enabling the commercialization and deployment of systems that will convert low-quality waste gases to steam (with
no electrical power) for certain customers that value industrial steam more than electrical power within their operations. Our
first commercial products, the Ener-Core Power-Station EC250 (“
EC250
”, previously called “
FP250
”)
and EC333 (“
EC333
”), combine our Power Oxidizer with a 250 kW or a 333 kW gas turbine, respectively, that were
initially developed by Ingersoll-Rand, plc (“
Ingersoll-Rand
”), and subsequently enhanced by our predecessor,
FlexEnergy, Inc. (“
FlexEnergy
,” “
Parent
,” or “
Predecessor
”). Because
our Power Oxidizer replaces a turbine’s standard combustor, the EC250 and EC333 can operate on a wide range of gaseous fuels
that are much lower in quality than required by conventional turbines or engines, and with substantially lower emissions.
After
deployment of EC250 development and field test units in 2011 and 2012, we shipped the first commercial EC250 on November 14, 2013
to the Netherlands per the terms of our agreement with Efficient Energy Conversion TurboMachinery, B.V. (“
EECT
”).
That Power-station was officially commissioned and celebrated with a ribbon-cutting ceremony in June, 2014.
We are currently
developing our third commercial product, the Ener-Core Power-Station KG2-3GEF/GO (“
KG2 with Power Oxidizer
”,
or “
KG2
”), that will combine our Power Oxidizer with a two megawatt (“
MW
”) gas turbine developed
by Dresser-Rand a.s., a subsidiary of Dresser-Rand Group Inc. (“
Dresser Rand
”).
On November 14, 2014,
Ener-Core, Inc. (“
Ener-Core
”) entered into a global licensing agreement with the Dresser Rand Company (the
“
D-R Agreement
”) to develop and market the Dresser Rand KG2-3GEF two MW gas turbine coupled with the Ener-Core
Power Oxidizer. The D-R Agreement grants Dresser Rand exclusive rights to commercialize the Ener-Core Power Oxidizer, within ranges
of 1-4 MW of power capacity, bundled with the Dresser Rand KG2 gas-turbine product line. As part of the agreement, Dresser Rand
agreed to pay a $1.6 million initial license fee under the condition that Ener-Core is able to successfully scale up the technology
from the current size of 250 kW to a size of 1.75 MW. Dresser Rand also agreed to achieve annual sales thresholds agreed to by
both companies in order to retain the exclusivity of the commercial license. Upon payment of the initial license fee in full,
Dresser Rand shall have an exclusive license to sell the Ener-Core Power Oxidizer within ranges of 1-4 MW of power capacity, bundled
with a gas-turbine to generate electricity. Beginning in the fifth year, so long as Dresser Rand sells a minimum quantity of units,
or pays a “top up” license payment, Dresser Rand shall retain an exclusive license in the aforementioned 1-4 MW range
of power capacity.
The D-R Agreement
calls for a series of technical milestones, which we expect to be completed in 2015, including field tests of the larger KG2 sized
oxidizer, both on a stand-alone basis and once integrated with the Dresser Rand turbine. We expect to ship the first two commercial
KG2 units in early 2016 to a Dresser Rand customer. As of the date of this report, we have completed the system layout and analytic
models integrating our Power Oxidizer with the turbine and have initiated design and development of the KG2.
The D-R Agreement
also calls for the satisfaction of certain non-technical milestones (“
Binding Conditions
”) including: (i) proof
by Ener-Core to Dresser Rand that Ener-Core’s intellectual property regarding its Power Oxidizer, has no existing claims
or liens in existence; (ii) posting of a $1.6 million bond by Ener-Core on behalf of Dresser Rand for security on the license fee
payments; (iii) proof to the satisfaction of Dresser Rand that Ener-Core has sufficient operating capital, and (iv) Dresser Rand
provides a written acknowledgement of an initial binding customer purchase order for a KG2-3GEF/GO unit. To date, only two of these
four binding conditions have been satisfied. Until all four binding conditions have been satisfied, the D-R Agreement is not mutually
binding and may be cancelled by either party. The Company satisfied the first binding condition in January 2015. In March 2015
the Agreement was amended to change the second binding condition to consist of an escrow agreement whereby Dresser Rand would pay
the quarterly license fee payments into a mutually controlled escrow account and the requirement for the bond was eliminated. As
of the date of this filing, neither of the remaining two conditions have been satisfied but both are expected to be satisfied in
the second quarter of 2015.
We currently anticipate the future development of additional Power Oxidizer commercial systems integrated with
larger gas turbines and steam boilers from a select group of manufacturers. As of the date of this filing, we have not signed
any agreements with any additional manufacturers.
Our
Corporate History
The
Company’s founder began developing a solution to convert low-quality waste gases into electricity in 1999, first through
FlexEnergy International, LLC, a California limited liability company, and then through FlexEnergy, Inc., a California corporation
(“
FlexEnergy-California
”). In 2008, the founder and his team began development of a Gradual Oxidizer
(now called the Power Oxidizer). In April 2008, Flex-Energy-California was converted into a Delaware limited liability
company known as FlexEnergy, LLC, which, in turn, was converted into our predecessor FlexEnergy, a Delaware corporation.
On
December 31, 2010, FlexEnergy acquired selected assets and liabilities of Ingersoll-Rand’s energy systems division, including
its MT250 micro-turbine (“
MT250
”) and manufacturing facility in Portsmouth, New Hampshire. During
2010 and 2011, the FP250 (now called the EC250, within Ener-Core’s product offering), which combines a Power Oxidizer with
the MT250, reached significant development milestones. FlexEnergy began developing a commercial product and a sales pipeline for
the FP250. In 2012, following a change in management, FlexEnergy changed its strategic direction, and elected to primarily
focus its activities on turbine sales to the oil and gas industry. The marketing and sales efforts of the Power Oxidizer
and FP250 were deemphasized, although the engineering team took final steps toward technical completion, operational testing and
product validation. FlexEnergy’s management and board of directors then decided to separate its turbine and Power
Oxidizer businesses.
Effective
November 12, 2012, FlexEnergy (i) transferred all of its Power Oxidizer assets (including intellectual property) and liabilities
to Ener-Core Power, Inc., a Delaware corporation (“
Ener-Core Power
”), and then (ii) “spun off”
(the “
spin-off
”) Ener-Core Power pursuant to the terms of the Contribution Agreement dated November 12, 2012
(the “
Contribution Agreement
”) by and among FlexEnergy, FlexEnergy Energy Systems, Inc., and Ener-Core Power. Ener-Core
Power was incorporated on July 31, 2012, as a Delaware corporation under the name “Flex Power Generation, Inc.” Prior
to November 12, 2012, however, Ener-Core Power did not operate as a separate legal entity.
On
April 16, 2013, Ener-Core Power entered into an Agreement and Plan of Merger, dated as of the same date and as amended June 4,
2013 (the “
Merger Agreement
”), with Ener-Core, and Flex Merger Acquisition Sub, Inc., a Delaware corporation
and our wholly owned subsidiary (“
Merger Sub
”) where the Merger Sub merged with Ener-Core Power with Ener-Core
Power as the surviving entity, and Ener-Core Power’s common stock converted into Ener-Core common stock ( the “
Merger
”).
Ener-Core
was incorporated on April 29, 2010, as a Nevada corporation under the name “Inventtech Inc.” Prior to the
Merger, it was a shell company with limited operations. In contemplation of the Merger, Ener-Core:
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Filed
an Amended and Restated Articles of Incorporation on April 23, 2013, to change its name
to “Ener-Core, Inc.,” and to increase its total number of authorized common
stock from 100,000,000 to 200,000,000; and
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Effectuated
a 30-for-1 forward stock split of its issued and outstanding common stock on May 6, 2013,
by way of a stock dividend.
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On
July 1, 2013, the Merger closed, and Ener-Core issued 45,692,103 shares of its common stock to the then stockholders of Ener-Core
Power in the aggregate, in one-for-one exchange for their shares of common stock of Ener-Core Power. The Merger was accounted
for as a “reverse merger.” Immediately prior to the closing of the Merger, Ener-Core was a “shell
company,” as defined in Rule 12b-2 of the Securities and Exchange Act of 1934, as amended (the “
Exchange Act
”). As
the result of the completion of the Merger, Ener-Core is no longer a shell company. Ener-Core began trading on the Nasdaq OTC
market under the symbol ENCR on July 1, 2013.
In
connection with the Merger, Ener-Core raised approximately $5.0 million of capital (consisting of approximately $4.2 million in
new equity and approximately $0.8 million from conversion of debt), through the sale and issuance of approximately 6.6 million
shares of its common stock at $0.75 per share (the “
Merger-related private placement
”). Ener-Core
filed a registration statement with the SEC on Form S-1 to register for resale the shares of common stock that such persons were
issued in connection therewith. The registration statement was declared effective on January 16, 2014 by the SEC.
Concurrently
on July 1, 2013, Ener-Core entered into an escrow agreement with five persons who then collectively held 5,000,000 shares of its
common stock, or approximately 7.07% of its issued and outstanding shares immediately after the Merger. The escrow
terminated on the first anniversary of the closing of the Merger.
As
used hereinafter, “we,” “our”, “us” or “Company” refers jointly to Ener-Core and
Ener-Core Power, unless otherwise indicated.
Our
Products
Our
first commercial product, the EC250, combines our Power Oxidizer with a 250 kW gas turbine that was initially developed by Ingersoll-Rand
and subsequently enhanced by FlexEnergy. Because our Power Oxidizer replaces a turbine’s standard combustor,
the EC250 can operate on a gaseous fuel that is much lower in quality, and with fewer emissions than a conventional turbine. After
deployment of EC250 development and field test units in 2011-2012, we shipped the first commercial EC250 system on November 14,
2013. This unit was commissioned in June 2014.
In
2014, FlexEnergy announced its intention to start manufacturing and commercializing a 333 kW gas turbine, that is technically
similar to its existing 250 kW gas turbine. Based on this change in the product offering of FlexEnergy, Ener-Core management decided
to commercialize a slightly modified version of its existing EC250 product, by integrating its Power Oxidizer with FlexEnergy’s
new 333 kW turbine. The resulting Ener-Core product is the EC333, and Ener-Core began proposing this slightly larger solution
to prospective customers in late 2014.
On
January 2, 2013, we entered into an OEM Supply Agreement with Dresser Rand, whereby Dresser Rand agreed to sell us certain of
its gas turbines and parts including the parts and equipment to be integrated with our 1.75 MW Power Oxidizer. Additionally, Dresser
Rand has agreed to provide us with certain training to enable us to resell its turbines, whether packaged by us with our Power
Oxidizer or modified or improved by us through application of our other proprietary technologies. More specifically,
we are entitled to sell the turbines (i) with Power Oxidizer on a worldwide basis and (ii) on a stand-alone basis in North America,
Europe, Russia and the countries of the former Soviet Union, and, with the prior written agreement of Dresser Rand, on a case-by-case
basis, in other countries. The agreement initially ends on December 31, 2021, and provides for automatic renewals for
additional two-year terms.
In November 2014,
the level of collaboration between Ener-Core and Dresser Rand increased when the parties entered into an agreement to develop
and market the Dresser Rand KG2-3GEF two MW gas turbine coupled with a scaled up 1.75 MW version of the Ener-Core Power Oxidizer.
The D-R Agreement grants Dresser Rand exclusive rights to commercialize the Ener-Core 1.75 MW Power Oxidizer bundled with the Dresser
Rand KG2 gas-turbine product line, within the 1-4 MW size category. As part of the agreement, Dresser Rand agreed to pay a $1.6
million initial license fee, under the condition that Ener-Core is able to successfully scale up the technology from the current
size of 250 kW to a size of 1.75 MW. Dresser Rand will retain an exclusive license for electric turbine solutions within the
1-4MW size as long as the initial license fee is paid in full and Dresser Rand meets certain minimum order quantities, beginning
in 2019, or pays a monetary fee to the Company for each system under the performance threshold.
We currently anticipate future
development of additional commercial systems integrating our Power Oxidizer with larger gas turbines, as well as steam boilers,
from a select group of manufacturers.
Our
Technology
Our
Power Oxidizer extends a historical trend in engine technology seeking to improve emissions and expand the gaseous fuel operating
range. We believe that our approach provides a unique value proposition, by allowing for the extraction of energy from
previously unusable fuels, while significantly reducing harmful pollutants and creating useful energy products such as heat and
electricity.
The Power Oxidizer
works by enhancing a naturally occurring process, which typically requires over 12 years in the case of methane oxidization, and
accelerates the oxidization process to a few seconds’ time. By doing so, the reaction generates a significant amount of heat,
in a controlled environment, which can then be used in a variety of industrial applications. Our commercial solutions provide an
alternative to the industry standard combustion reaction heat sources with a chemically similar, but slower chemical oxidation
reaction that occurs at lower temperatures than combustion, and has a much lower air pollution profile. We offer two system configurations
for various size Power Oxidizers (low-quality fuels and ultra-low emissions) depending on specific customer needs.
We believe that
our Power Oxidizer is well positioned and we plan to achieve the Lowest Achievable Emission Rate (“
LAER
”) for
several major air pollutants in non-attainment areas and to become Best Available Control Technology (“
BACT
”)
for these pollutants in attainment areas, as determined under the U.S. Environmental Protection Agency (“
EPA
”)
New Source Review program as part of the 1977 Clean Air Act and its subsequent amendments.
The key milestones
to date for the commercialization of our Power Oxidation technology include:
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In
2012, our technology underwent testing and verification by Southern Research Institute
(“
SRI
”) as part of a U.S. Department of Defense (“
DoD
”)
demonstration program. SRI commissioned the testing, which was performed by
Integrity Air Monitoring, Inc. SRI is a not-for-profit 501(c)(3) scientific
research organization that conducts advanced research in environmental, energy, and other
fields, and we were one of its subcontractors. As part of that testing program, we shipped
a prototype EC250 unit in 2012, for 1-year of field tests and operations in 2012 and
2013.
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In
2013 through a partnership with the University of California, Irvine (“
UCI
”),
we installed a fully operationalEC250 unit at UCI. This facility location was chosen
due to its proximity to our corporate headquarters. The unit continues to operate and
is used for in-field evaluations for research and development as well as to showcase
our technology for potential customers.
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In June, 2014, our first commercial EC250 Power-station was installed at a landfill in Netherlands that is
owned and operated by Attero, one of the leading waste management companies in the Netherlands. With the exception of regular maintenance
and warranty related downtime, that system has continued to operate since it was commissioned.
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The Power Oxidizer
works by replacing a combustion reaction with a chemically similar, but slower chemical oxidation reaction that occurs at lower
temperatures than combustion. We offer two system configurations (low-quality fuels and ultra-low emissions) for various size Power
Oxidizers depending on specific customer needs.
Low-quality
fuels configuration
.
This configuration is designed for customers intending to generate energy from low-quality
fuels, including previously unusable gases that are typically vented or flared by the industries that produce them. The
process steps for our low-quality fuels Power Oxidizer configuration are as follows:
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Fuel
gas is mixed with ambient air, diluting the fuel and air mixture to approximately 1.5% concentration of fuel by volume.
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The
approximately 1.5% fuel and air mixture is compressed through a radial compressor constituting an integral part of the gas
turbine. A small amount of the mixture flows through engineered cooling paths in the gas turbine. The
mixture is then pre-heated in a high-temperature heat exchanger.
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Next,
the mixture enters our Power Oxidizer, our proprietary packed-bed reactor. The fuel in the mixture oxidizes, generating
heat and oxidation byproducts (carbon dioxide and water). The Power Oxidation process is maintained such that the
reaction is hot enough to destroy all carbon monoxide (“
CO
”), yet cold enough to preclude the formation
of oxides of nitrogen (“
NO
x
”).
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The
hot, pressurized gas exiting the Power Oxidizer then expands through the turbine, generating electricity and heat with low
emissions that meet the strictest NO
x
emissions standards, and most other air quality regulatory standards.
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Ultra-low
emissions configuration.
This configuration is designed for customers intending to meet emissions regulations
in areas with significant air quality problems or restrictions. Generally, installation of new power generating equipment
in such areas requires complicated air permitting and compliance with very strict air quality regulations and controls. The
process steps for our ultra-low emissions Power Oxidizer configuration are as follows:
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Ambient
air feeds into the radial compressor of the gas turbine. A small amount of the compressed air flows through engineered
cooling paths in the gas turbine. The compressed air may be additionally pre-heated in a high-temperature heat
exchanger depending on customer configurations. At this point, the fuel is injected into such high temperature,
compressed and pre-heated air stream, such that approximately 1.5% concentration of fuel by volume is maintained in the mixture.
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Next,
all of the mixture enters our Power Oxidizer. The fuel in the mixture oxidizes, generating heat and oxidation byproducts
(carbon dioxide and water). The Power Oxidation process is maintained such that the reaction is hot enough to destroy
all CO, yet cold enough to preclude the formation of NO
x
.
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The
hot, pressurized gas exiting the Power Oxidizer then expands through the turbine, generating electricity and heat with ultra-low
emissions of NO
x
, CO, and Volatile Organic Compounds (“
VOCs
”) that meet even the strictest air
quality regulatory standards.
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Advantages
of Power Oxidation.
As compared to alternative technologies, Power Oxidation may provide certain advantages
over alternative technologies, including the following:
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Designed
to operate on a wider range of fuels
. When configured for low-quality fuels, our system is designed to operate
on gas with concentrations as low as 50 Btu/scf (1700 kJ/m3). By comparison, most turbine, engine, and fuel cell
systems require fuel quality of significantly higher concentrations.
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Less
fuel conditioning may be required
. When configured for low-quality fuels, our system is designed to require
minimal fuel pre-treatment or conditioning. When configured for ultra-low emissions, we may require some additional
fuel conditioning. However, regardless of configuration, our system is designed to require substantially less fuel
pre-treatment than competing systems.
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Lower
air emissions
. Particularly when configured for ultra-low emissions, our Power Oxidizer technology may produce
substantially lower emissions of NO
x
, CO, and VOCs than competitive systems.
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No
chemicals or catalysts for emissions control
. Unlike other emissions control systems, such as selective catalytic
reduction, our Power Oxidizer does not use chemicals or catalysts and, thus, cannot be rendered inactive from catalyst poisoning.
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Markets
We believe that
our Power Oxidizer technology, once properly commercialized, has the potential to be sold into several available multibillion-dollar
gas markets worldwide, including landfill and biogas, coal mines, associated petroleum gas, and ultimately mainstream power generation
markets. We also believe that our Power Oxidizer technology, once integrated into a steam boiler, could be sold into other markets
and into industries that currently run their processes with steam.
We anticipate that
our unique low-quality fuels configuration can open up new steam and electricity generation markets by allowing cost effective
power generation from previously wasted gases, all while maintaining low emissions, and that our ultra-low emissions configuration
can open up new markets by substantially reducing costs of emission controls, including eliminating the use, and costs of chemicals
and catalysts, while achieving even lower emissions.
Sales,
Marketing and Distribution
EC250/EC333
– 250-333 Kilowatt Units:
The EC250 and EC333, our
first commercial products, are currently available for sale. We currently market these power-stations for sales through
distributors and, we will continue to sell the EC250 or EC333 directly to end users. On November, 14, 2013, we shipped
the first commercial EC250 to EECT, our distributor in the Netherlands. The transaction through EECT represents our
first commercial order of the EC250. In developing our sales opportunities for the EC250 and EC333, we have focused on vertical
markets that we have identified as having the greatest near-term potential, and we have been working closely with our network
of regional agents and distributors, as well as signing on new agents and distributors around the world.
KG2
– 1.75 Megawatt Unit:
We have completed
system layout and analytic models integrating our Power Oxidizer with the Dresser Rand KG2-3GEF turbine and have initiated design
and development of our 1.75 MW Power Oxidation system that will be integrated to become the KG2. The global Dresser Rand organization
will be leading the sales efforts of this 1.75 MW Power-station, as per the terms of the D-R Agreement. We expect to focus a significant
amount of sales and marketing support including customer evaluation, project evaluation, and product evangelization in the early
stages of commercialization as we begin to develop a market for these units.
In
developing our sales opportunities for the 1.75 MW Power Oxidizer, we have been working closely with the Dresser Rand organization,
to educate their various commercial teams around the world, such that they can identify the markets that have the greatest near-term
potential, as well as begin commercializing the KG2-3GEF/PO Power-station to their existing customers.
For the next year,
excluding the first two units of the KG2 for which we have a conditional non-binding order for installation in early 2016 at an
ethanol distillery in the United States, we expect that the majority of our binding purchase orders and revenues will be derived
from the EC250 and EC333. In parallel, we believe that Dresser Rand, our commercial licensee for the 1.75MW unit, will continue
to ramp up its sales efforts for our larger 1.75 MW Power Oxidizer. We expect to begin to receive additional purchase orders for
our larger system beginning in the fourth quarter of 2015, after certain pre-agreed key milestones are completed that are related
to the KG2 integration efforts underway.
The development
and deployment of the larger power oxidizer, to be integrated and deployed with Dresser Rand’s KG2-3GEF gas turbine, will
enable operators of this larger power-station to produce power at significantly lower costs than the electricity produced by the
operators of the EC250 or the EC333 Power-stations. We anticipate that this enhanced ability to produce power at lower
costs, combined with the product’s appropriate size for larger market applications, will result in a greater demand from
the same wide range of markets, and enable Ener-Core to penetrate countries and regions with lower market electricity tariffs and/or
less financial incentives for clean power generation. Once the larger 1.75 MW Power Oxidizer unit is available for full
commercial deployment, we expect that the improved economics will open significantly more vertical markets described below. Our
longer-term development efforts include larger Power Oxidizers that we believe will result in further economic improvements and
additional market penetration.
Value
Proposition
Our sales and marketing
efforts include the communication of our economic and environmental value proposition. Since the application of our technology
into our expected markets is very early, it is difficult to communicate effectively to the decision makers on large asset purchases.
Our value proposition is based on the total cost of ownership that requires an understanding of the value of our technology coupled
with a detailed financial and operational analysis. Some potential customers will place a higher level of importance on environmental
benefits, while others on their economic return on investment. We must communicate that we have a viable solution and convince
customers that our value proposition makes good business and economic sense. We are at an early stage in our commercialization
of our technology and are continually refining the value proposition message and expect to do so for the foreseeable future as
additional industrial applications are commercialized. As of the date of this report, we believe that our value proposition is
compelling and which includes:
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Utilization of fuel that is “free”, nearly free or, in some
cases, costly to dispose of, to generate heat with our Power Oxidizer technology. In turn this heat can be used to create
steam from a boiler, to drive an electricity-generating turbine, or in other industrial applications that require industrial
scale heat.
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Ability to reduce gaseous pollution to levels significantly below those of existing competitive pollution
control solutions. This includes an ability to reduce the overall carbon emissions of a facility,
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Ability to eliminate costly “flaring” of waste gases.
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Ability to retrofit existing heat sources and electricity sources with more economic solutions.
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Ability to “de-bottleneck” production shutdowns caused by companies who otherwise reduce their production in order to comply with pollution standards.
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Vertical
Markets:
Until 2014, our
sole vertical market consisted of landfills and biogas opportunities. Beginning in 2014, we began to branch into other vertical
markets and into additional applications for the heat output of our Power Oxidizers. We see three primary applications for our
heat output: electricity generation, steam generation, and heat exchangers. In 2014, we sold our first electric turbine solution
in the 250 KW range and in November 2014 signed a development agreement to expand into the 1-4 MW range. In 2015, we expect to
expand into steam generation and heat exchanger applications and into a larger sized electric turbine.
We evaluate our
vertical markets by performing feasibility studies and pilot projects for potential customers, prior to producing a proposal for
a turbine solution, and we see this information as an integral part of our sales and marketing approach as well as for the communication
of our value proposition. Each study provides our sales and marketing team with additional information on the wide range of waste
gases produced and allows our team to better evaluate sales opportunities within each vertical market and for new vertical markets.
Until 2014, our team focused primarily on landfill and biogas opportunities for electricity generation. In 2014 we performed studies
for a distillery opportunity as part of the pre-sales efforts done to close the D-R Agreement and received funds paid by a potential
customer for a successful pilot study for an oil and gas opportunity. Through 2014, these studies were conducted at the EC250 unit
located at the University of California, Irvine. Moving forward into 2015, we expect to continue to receive funds from potential
customers to pay for feasibility studies and pilot projects for new vertical markets and for new customer evaluation and which
we see as an indicator for potential future business opportunities in new markets. Future evaluations will be performed at the
UCI facility and on our new multi-fuel test facility currently under construction at our corporate facility in Irvine, California
with tests and evaluations beginning in the second quarter of 2015.
We
see our vertical markets in the electricity generation markets to include:
Landfills
and Biogas
Our
systems can leverage the currently anticipated worldwide trend toward increasing biogas collection and utilization. In most
cases, the solid wastes currently deposited in landfills generate methane for between 25 and 100 years. In many active
landfills, a trend towards recycling and the diversion of organic materials is lowering available gas quality. Some
operators of existing landfill projects that utilize reciprocating engines and gas turbines for the collection and disposal of
landfill-generated gases (“
LFGs
”) may explore the possibility of a transition to our technology as the fuel
quality of those landfill projects decreases to levels below the normal operating range of reciprocating engines and gas turbines. Our
low-quality fuel capability allows a greater percentage of the LFGs created from landfill-waste to be used for local electricity
generation.
We
believe that low NO
x
emissions and less fuel conditioning provide us with a potential advantage in regions that
regulate air emissions and require fuel cleanup. The reduced fuel conditioning requirements of our Power Oxidizer may
also lower overall lifetime operating costs when compared to other technologies.
Coal
Mines
We
currently expect increased global demand for systems that can convert coal mine ventilated methane into electricity. Our
systems may be a particularly attractive solution for methane generated in closed or abandoned coal mines, as well as for ventilation
air methane (“
VAM
”). We believe that our systems may provide advantages over other low-quality coal
mine methane power generating alternatives, such as integration of a thermal oxidizer and steam turbine, because our Power Oxidation
system generates electricity directly without the complex design, operation, water usage, and costs associated with a steam turbine.
We currently expect
that a small percentage of EC250, EC333 and KG2 customers will come from the coal mining industry. Currently, when
configured for low-quality fuel, our Power Oxidizer is designed to dilute fuel gas to 1.5% concentration by volume. In
some countries, VAM is currently regulated at levels below 1.5% concentration. Accordingly, our low-quality fuels configuration
may require additional development to operate on some VAM sources. If we could develop a version of our Power Oxidizer
technology that could operate effectively on VAM at levels below 1.5% concentration (as to which successful development there
can be no assurance), sales opportunities for the EC250, EC333 and the KG2 in this market could be enhanced.
Associated
Petroleum Gas
We currently anticipate
a strong worldwide trend toward the reduction of venting, flaring, and waste of associated petroleum gas, also known as flare gas
or associated gas, which is a form of natural gas that is commonly found associated with deposits of petroleum. For
example, the Russian Federation has mandates that require beneficial use of associated petroleum gas. We currently expect
more restrictive regulations on NO
x
emissions from power generation in a variety of oil and gas producing countries,
such as the Russian Federation and United States. The EC250 both destroys harmful pollutants and produces electricity
from this resource, which is often currently wasted, creating significant cost savings over time. We expect the KG2,
when developed, to do the same.
At the request of
a major Canadian integrated oil company, in September 2014 at is facility at UCI, Ener-Core successfully demonstrated the ability
of its full-scale EC250 to operate on an ultra-low energy density fuel (~50 Btu/scf) similar in composition to the associated petroleum
gases flared around the world during the exploration, refining and production of petroleum and natural gas. The exhaust emissions
and energy production were measured and independently verified by the UCI combustion laboratory, and the oil company that retained
Ener-Core to perform the test deemed the demonstration a success.
We believe that
this successful demonstration will enable us to cultivate more commercial opportunities for the EC250 and EC333 within the associated
gas market in 2015. Nonetheless, the volume of waste gas that is typically emitted by most associated gas sites is more aligned
with the scale of the 1.75 MW Power Oxidizer, rather than the smaller 250kW and 333kW products. We currently expect that a small
percentage of our EC250 and EC333 customers will come from the associated petroleum gas market; whereas, we currently anticipate
that a significant percentage of our 1.75 MW Power Oxidizer KG2 customers will come from this market.
Mainstream
Power Generation
The
Power Oxidizer is designed to meet the most stringent emissions regulations, providing a potential advantage over conventional
reciprocating engines and gas turbines currently used for mainstream power generation. The Power Oxidizer may provide
a more cost-effective alternative to upgrading older existing gas-powered generation systems through the use of chemicals, catalysts,
and add-on systems to comply with most recent environmental regulations. We currently anticipate a strong worldwide
trend towards upgrading and replacing older systems. However, we do not plan to compete directly with mainstream power generation
for natural gas turbines in the foreseeable future except for unique and specific opportunities where our economic and environmental
benefits create a compelling solution. Mainstream power generation is highly competitive and is dominated by manufacturers with
significantly more financial resources and industry experience with time tested and well-known brands and mature equipment solutions.
We believe our value proposition for the near term will be best received by those industries with the need to couple power generation
with pollution abatement.
Steam
Generation
We believe that
our Power Oxidizer units provide an inexpensive and environmentally friendly solution to consumers of industrial steam. Industrial
steam is used in a multitude of industries and is created by applying a heat source to a boiler. The heat source is typically created
by burning a typically expensive fossil fuel and generates pollution as a result. In contrast, our Power Oxidizer can create the
heat source for a boiler without combustion and from low quality, less expensive fuels and with less pollution. Although we have
not as yet quantified the total opportunity we believe it to be in excess of $20 billion per year and that the market for steam
generation could become significant for the Company. In 2015, we expect to engage with companies that provide steam solutions,
such as boilers, as potential new business partners. We anticipate that the business opportunities are significant and the integration
risk for steam applications is very low compared to the integration risk for electricity turbines due to the reduction of moving
parts and increased tolerances for the heat output from our Power Oxidizer units. We expect to develop our markets, go-to-market
strategy, and sales approach later in 2015 as our steam business opportunities mature.
Other
Industrial Applications
We believe that
our Power Oxidizer units may also be usable in other as yet unnamed industrial applications that could use heat generated from
waste gases or organic volatile materials. Our intention in 2015 is to evaluate different opportunities and identify potential
fuel sources to build compelling value propositions in a multitude of markets. This work is expected to begin in the middle of
2015 after the completion of the Dresser Rand initial tests and using our multi-fuel test facility currently under construction.
Geographical
Markets:
North
America
In
North America, we are focused on opportunities where our low-quality fuels configuration and our ultra-low emissions configuration
may provide competitive advantages. We are also focused on specific regions where the wholesale electricity prices tend to be
the highest, as this typically results in the highest return on investment scenarios for prospective customers. These regions
with high electricity prices include all of Canada, and within the US they include California, New Jersey, New York, Pennsylvania,
Maine, New Hampshire, Massachusetts, Connecticut, Rhode Island and Vermont.
For
our low-quality fuels configuration, we have identified several opportunities for the EC250 and EC333 to operate in low-quality
fuel environments, such as closed landfills. Our domestic biogas market focus includes public entities that operate
landfill and biogas facilities, including cities, counties, and federal government agencies, such as the DoD. We have
also identified potential projects and customers, who may wish to generate electricity from a variety of waste gas streams that
would otherwise be flared or vented. Such potential projects include gas processing facilities, oil fields, and coal
mines.
For our ultra-low emissions
configuration, we have focused on territories with strict environmental and air pollution regulations, such as the South Coast
Air Quality Management District, San Joaquin Air Pollution Control District, and other areas in air quality nonattainment as defined
by the federal Clean Air Act. In such areas, we believe that our system can greatly reduce the time and cost associated
with air permitting and compliance under Title V of the Clean Air Act when compared with other systems. This potential
opportunity may be of more significance for our larger system, the 1.75 MW Power Oxidizer coupled with the KG2. We
currently expect that we will introduce our products to many stakeholders in non-attainment areas, including project developers,
engineering firms, government regulators, and other potential partners, and currently anticipate significant domestic revenues
as a result.
Our
sales and marketing strategy in North America has been to develop and strengthen distributor relationships in the West Coast,
and in the Northeastern US, as these are the regions with the highest electricity prices as well as the most stringent industrial
air emissions laws, and hence the regions where our power-stations will have the most attractive value proposition. We
currently expect to enter into distribution agreements with several companies throughout North America for the resale of our products. Many
of these distributors will serve multiple markets in their select geographic regions. We cannot provide any assurance
that we will enter into any such agreements or that such distributors will be successful in selling our products.
International
In international
markets, we have been primarily focused on identifying and developing opportunities where our low-quality fuels configuration may
provide us with a competitive advantage, particularly LFGs and coal mine gases that are low quality and biogas with the potential
reduced need for fuel conditioning.
In relation to the
EC250 and EC333, our sales and marketing strategy has been to develop and strengthen distributor relationships. We currently
expect to enter into distribution agreements with a number of companies throughout Asia, Europe, and Russia for the resale of our
products. We would expect that many of these prospective distributors will serve multiple markets in their select geographic
regions.
In relation to the
1.75 MW Power Oxidizer coupled with the KG2, our sales and marketing strategy involves educating and then supporting the global
Dresser Rand organization, as they deploy their own sales and marketing initiatives to commercialize the integrated power-station.
We
believe that there are potential, immediate opportunities with existing landfills in the Netherlands, Belgium, the United Kingdom,
Italy, France, and Spain. We also believe that there are potential, immediate opportunities in Germany, Ukraine, and Russia with
ventilation air methane gas and abandoned coal mine gas, and in Russia with associated petroleum gas. The quality of
such gases in Europe and Russia may be trending to lower quality, which potentially fits into our technology’s competitive
advantage.
The
environmental policy trend in these regions for reduction in venting and flaring of methane gases is potentially supportive of
our technology’s low quality gas capacity. These policies also have the potential of increasing the price paid
for electricity generated by our products using low quality gas.
Licensing
Approach
In November, 2014, we
entered into a global commercial license agreement with Dresser Rand, enabling the Dresser Rand organization to develop and market
the Dresser Rand KG2-3GEF two MW gas turbine coupled with the Ener-Core’s Power Oxidizer. The D-R Agreement grants Dresser
Rand exclusive rights to commercialize the Ener-Core 1.75 MW Power Oxidizer bundled with the Dresser Rand KG2 gas-turbine product
line, within the 1-4 MW size category. As part of the agreement, Dresser Rand agreed to pay a $1.6 million initial license fee,
under the condition that Ener-Core is able to successfully scale up the technology from the current size of 250 kW to a size of
1.75 MW. As part of the agreement, Dresser Rand also agreed to achieve annual sales thresholds agreed to by both companies in
order to retain the commercial license.
We also plan to
enter into additional license agreements with multinational manufacturers of gas turbines (for sizes greater than 4 MW) and industrial
steam boilers. We expect that our license partners will work with us integrate their traditional power and steam generation systems
with Ener-Core’s Power Oxidizers, and this will enable their systems to now run productively and reliably on these waste
gases as the input fuel. We believe that this, in turn, will create value for industrial customers that produce low-quality waste
gases as a by-product of their industrial processes, as those waste gases are typically vented or flared, rather than used to produce
energy. These commercial license agreements will also enable the power generation equipment and steam equipment companies to sell
their traditional equipment into an entirely new and untapped range of industrial markets. We believe that by licensing our technology
to these large, established multi-national power equipment companies, their existing commercial networks will accelerate the deployment
of our systems into a variety of industries around the world.
Our licensing strategy
enables us to commercialize our Power Oxidizers through a series of large multinational sales channels already existing in these
companies, while also enabling the end-customers to procure their power generation (or steam) generation equipment from large,
multinational companies with large balance sheets and established brands. Over the next two years, we plan to sign more license
agreements with more manufacturers of turbines and steam boilers. We will support those companies in commercializing their technology
retrofitted with our Power Oxidizers such that we build more markets and opportunities for the deployment of Ener-Core’s
technology.
At this time, we
will be restricting all of our commercial license agreements to commercial licenses of the Power Oxidizer technology, whereby Ener-Core
will continue to manufacture the Power Oxidizers and supply them to the licensees. However, as the commercial momentum continues
to grow, we expect that our multinational licensees will enter into manufacturing licenses with Ener-Core that will enable them
to manufacture our Power Oxidizers as well as sell them to their end customers.
Competition
and Barriers to Entry
The target markets
for the Power Oxidizer are highly developed and mature for solutions using combustion as a heat source but are new and fairly
undeveloped for applications of our Power Oxidizer technologies.
Our technology represents
a value-added pre-process for power generation equipment such as gas turbines, reciprocating engines or steam generation equipment
such as steam boilers. We do not consider ourselves competitors with the providers of this equipment. If a site already has
gas with high enough energy density to generate power with these standard equipment, and the resulting emissions levels do not
exceed regulatory limits, then we deem such site to be outside of our target market.
We compete with
existing co-generation solutions and other power generation solutions for our current and future customers. Those existing solutions
have typically more mature technology and have a lower equipment cost than our Power Oxidizer units. Our Power Oxidizers are typically
more expensive per kilowatt of power generated when compared to the initial cost of equipment and competing products typically
have lower upfront costs than our Power Oxidizers. However, we believe that in many situations, once the total cost of a co-generation
project including fuel costs is quantified, that our Power Oxidizers provide a superior rate of return for our customers since
our units effectively run on low-quality fuels that have little or no fuel costs.
We believe that
there are very few, if any, companies that are actively pursuing the commercial utilization of oxidization technologies for generation
of on-site energy. In addition to our efforts to replace existing combustion technologies, we compete against other companies
in two sectors, each with its distinct competitive landscape:
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Low-quality
fuels
– Within applications where the gas source has an energy density (BTU/ft3) below the minimum level required
by reciprocating engines and standard gas turbines, we believe that our Power Oxidizer does not have a direct technological
or manufacturing competitor. In these situations, the prospective customer can elect to do nothing and allow low
BTU gas to simply be emitted into the atmosphere. Alternatively, the customer can purchase gas such as propane
or natural gas, mix it with the low BTU gas to make combustion feasible, and then flare the mixture. Because such
alternative results in the destruction of the low BTU gas instead of converting the gas into a form of energy that could be
sold or monetized, we do not consider it a direct form of competition.
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Ultra-low
emissions
– Within applications where a customer is required, typically by national, regional or local legislation,
to meet emissions regulations and controls limits, our systems compete with pollution control technologies, such as Selective
Catalytic Reduction, Dry-Low-NO
x
, or Dry-Low-Emissions systems, and in some cases, with low-emission flares and
thermal oxidizers. As many of our competitors are large, well-established companies, they derive advantages from
production economies of scale, worldwide presence, and greater resources, which they can devote to product development or
promotion.
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Although we are
occasionally compared to wind and solar power production, we do not consider existing renewable energy solutions to be direct competitors.
Existing renewable sources such as wind or solar are site specific to particular geographic locations whereas our solution is applicable
to any area with a sufficient quantity of low quality gases. Further, we see our Power Oxidizers as being able to provide “base
load” power at availability rates in excess of 95% while typically wind and solar solutions can only provide power for 20%-40%
of the time. As a result, although the capital cost per kilowatt is similar, the availability of the Power Oxidizer provides a
significantly lower overall cost of power produced.
Research
and Development
Our
engineering team is led by a group of experienced mechanical and electrical engineers who have worked together on the Power Oxidizer
for the last seven years. Our engineers have worked in a number of larger firms, including Honeywell International,
Inc., General Motors Company, Inc., AlliedSignal, Inc., Capstone Turbine Corporation, General Electric Company, Underwriters Laboratories
Inc., and Solar Turbines Incorporated. Combined, they have many decades of experience developing and commercializing
a number of gas turbines, reciprocating engines, and related products.
Our
research and development efforts since 2011 have been focused on building a Power Oxidizer capable to produce sufficient heat
to power a 250kW turbine, to build prototypes and initial commercial units, and to prove the commercial viability of the technology:
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In
November 2011, SRI commissioned the first EC250 field test unit at the U.S. Army base at Fort Benning, Georgia. The
project was funded by the DoD Environmental Security Technology Certification Program (“
ESTCP
”), which
seeks innovative and cost-effective technologies to address high-priority environmental and energy requirements for the
DoD. As part of the ESTCP protocol, SRI conducted independent verification tests in October 2012. Exhaust emission
measurements were taken in accordance with standard EPA reference methods. The EC250 emissions were far below
the allowable NO
x
limits of the California Air Resources Board 2013 waste gas standards, which standards
are considered to be among the strictest in the world.
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In June, 2014, our first commercial EC250 power-station was installed at a landfill in Netherlands that is
owned and operated by a Dutch company called Attero, which is one of the one of the leading waste management companies in the Netherlands.
With the exception of regular maintenance activities and warranty related downtime, that system has continued to operate in the
Netherlands since June, 2014.
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In
January, 2015, we commenced efforts to install a Multi-Fuel Test Facility (“
MFTF
”) beside our office, in
Irvine, California. The MFTF is expected to be fully operational by May, 2015. We anticipate that it will
become a critical element within our ongoing development initiatives, enabling our engineering team to continue to test
a wider range of low-quality gases that could be used to fuel Ener-Core’s Power Oxidizers in the future, and also to
experiment with (and prove feasibility of) different sizes of future Power Oxidizer systems.
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Current
and Future Efforts
Our research and
development efforts are now focused on the following activities:
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Develop the 1.75 MW Power Oxidizer and integrate with the Dresser Rand KG2-3GEF turbine:
We are currently in joint development with Dresser Rand on the KG2, which incorporates our Power Oxidation technology with Dresser
Rand’s KG2-3GEF two MW gas turbine. We have completed system layout and analytic models integrating our Power Oxidizer with
this turbine.
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Construct
the first two commercial 1.75 MW Power Oxidizer units
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We expect to deliver in 2016 against the initial order that Dresser Rand closed with
an ethanol distillery shortly after signing the D-R Agreement with Ener-Core.
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Scale
up to other large gas turbines
: We have already established
close working relationships with several other gas turbine manufacturers and large industrial
partners to facilitate the potential development of additional systems. We have evaluated
the feasibility of several larger gas turbines and have exchanged technical information
and have received positive responses from manufacturers and industry partners
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Complete
construction of our MFTF
: We are currently building and installing the MFTF to provide a simulated
environment (alternative fuel sources and oxidizer operating conditions) to enhance further the performance, efficiency, and
fuel flexibility of our Power Oxidizer (including potential application to coal mine VAM and testing of various synthetic
gases as input fuels). We anticipate the MFTF to be operational by May, 2015.
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Expand
license arrangement beyond turbines
: We intend to engage into discussions regarding potential
license agreements with global manufacturers of industrial steam boilers.
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Continue
development of academic relationships:
Over the past five years, we have developed
a number of strong research relationships with the University of Cincinnati and UCI. In conjunction with the University
of Cincinnati, we have developed analysis tools to simulate our Power Oxidation process. We currently anticipate
further strengthening these relationships.
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Manufacturing
To
date, our manufacturing requirements have been limited to our first commercial unit shipped in 2013, our prototype units, and
the assembly of our MFTF used in research and development. This year, we will develop and commence manufacturing of our first
2 commercial units within the 1.75 MW Power Oxidizer category, and we aim to be in a position to deliver those first 2 units in
2016, to satisfy the commercial order that Dresser Rand closed with an ethanol distillery shortly after signing the D-R Agreement
with Ener-Core. We currently manufacture and assemble our Power Oxidizer units in stages. We receive parts and assemble certain
sub-assembly components at our facilities in Irvine, California. The sub-assemblies are shipped to the installation site and assembled
by our personnel into a completed unit. We believe that our production assembly capacity at our Irvine, California facility is
sufficient to produce up to 25 units per year, which will exceed our expected production requirements for 2015.
Intellectual
Property Protection
Management
believes that a policy of protecting intellectual property is an important component of our strategy and will provide us with
a long-term competitive advantage.
We
are pursuing an aggressive intellectual property strategy, including development of what we expect will become a strong patent
portfolio. We believe that Power Oxidation technology is a patent domain largely independent from combustion. Within
the patent domain, the technology has been described as “Gradual Oxidation,” as the patents were filed prior to Ener-Core’s
management decision in late 2014 to change the process name to “Power Oxidation.” The following is a summary of our
current patent filings and patent grants:
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Total
applications filed overall: 66
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Of
which, patents already granted: 18 (with 13 granted during or prior to 2014 and 5 granted to date in 2015)
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We
have hundreds of pages of descriptive support, with over 150 independent claims and over 1,000 dependent claims. We
aim to continue to protect our Power Oxidation technology in multiple applications for various implementations, markets, and uses. We
currently expect to file a number of additional patent applications further protecting our intellectual property and reflecting
most recent research and development efforts and corresponding results. We cannot predict when our patent applications
may result in issued patents, if at all, or, if issued, such patents will cover all or a substantial portion of the claims currently
set forth in the applications. There can be no assurance that any patents issued will provide us with any competitive
advantages, will not be challenged by any third parties, or that such third parties will not design competitive products around
the patents. In addition, there can be no assurance that any of our patents would be held valid by a court of law of
competent jurisdiction or, if held valid, that we will have sufficient economic resources to enforce or defend our patent rights. In
the event we are found to have infringed upon the patent rights of others, there can be no assurance that we would be able to
obtain a license to use any of such patents.
In
addition, we have confidentiality agreements with our suppliers, distributors, employees, and certain visitors. With
respect to proprietary know-how, we rely on trade secret protection and confidentiality agreements. Monitoring the
unauthorized use of our proprietary technology is difficult and the steps we have taken may not prevent unauthorized disclosure
or use of such technology. The disclosure or misappropriation of our trade secrets and other proprietary information
could harm our ability to protect our rights and our competitive position.
Government
Regulations
Air
pollutants, such as NO
x
, CO, and VOCs, are produced as by-products of combustion. Within the US, these pollutants
are regulated by the EPA as well as by state and local air districts, because they are associated with negative health consequences
and/or damage to the environment. Throughout most other countries around the world, these pollutants are regulated
by each country’s Ministry of Environment, or a similar government agency. Our Power Oxidation technology can achieve emissions
of NO
x
that are noticeably lower than traditional combustion techniques without compromising the emissions of
CO or VOCs.
Emissions
regulations requiring a reduction in commonly found air pollutants such as NO
x
, CO, and VOCs could enhance market demand
for our technology. An example of the advantages of ultra-low levels of NO
x
emissions is with
respect to EPA’s New Source Review requirements under the Title V of the Federal Clean Air Act. Accordingly,
potential legislation on greenhouse gases or general reductions in required criteria pollutant levels could assist with our achieving
our business objectives. Although the timing of such regulations is uncertain, the general trend in recent decades
continues to be increases in governmentally mandated reductions for all criteria pollutants and the addition of new emissions
to those regulated.
We
continue to engage with federal and state policymakers to develop government programs to promote the deployment of our products.
Since 2010, we have developed relationships with many regulators and legislators of interest, both at the federal and state levels,
and we continue to pursue government funding, legislative, and regulatory opportunities.
Ultimately,
it may be possible for our technology to achieve EPA, BACT and LAER designations, as determined under the EPA New Source Review
program.
Environmental
Laws
We
have not incurred and do not anticipate incurring any expenses associated with compliance with environmental laws. Our
products may provide a more cost-effective alternative to upgrading older existing gas-powered generation systems through the
use of chemicals, catalysts, and add-on systems to comply with most recent environmental regulations
Employees
As
of the date of this report, we have 23 full-time employees and two part-time employees. None of our employees are covered
by a collective bargaining agreement, and we believe our relationship with our employees is good. We also employ consultants,
including technical advisors and other advisors, on an as-needed basis to supplement existing staff. When we engage
consultants or technical advisors, we typically enter into intellectual property assignment and non-disclosure agreements with
them.
RISK
FACTORS
You
should carefully consider the risks described below together with all of the other information included in this report before
making an investment decision with regard to our securities. The statements contained in or incorporated into
this report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could
cause actual results to differ materially from those set forth in or implied by forward-looking statements. If
any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In
that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks
Relating to Our Business in General
Our
future is dependent upon our ability to obtain additional financing. If we do not obtain such financing, we may have
to cease our activities and investors could lose their entire investment.
There
is no assurance that we will operate profitably or generate positive cash flow in the future. We will require additional
financing in order to proceed with the manufacture and distribution of our products, including our EC250, EC333, KG2, and other
Power Oxidizer products. During the next 12 months, we currently project our cash needs to be in excess of $9.0 million,
currently budgeted for employee and related costs ($3.0 million), for research and development programs ($3.5 million), for professional
fees, corporate filings, and business development costs ($1.0 million) and for working capital ($1.5 million). We may
require more funds if the costs of the development and operation of our existing technologies are greater than we have currently
anticipated. We will also require additional financing to sustain our business operations if we are not successful
in earning revenues. Our sales and fulfillment cycle can exceed 24 months and, as noted, we do not expect to generate
sufficient revenue in the next 12 months to cover our operating costs. Our short- and medium-term future is dependent
upon our ability to obtain financing and upon future profitable operations. We anticipate that we will rely on debt
or equity capital in order to continue to fund our business operations. Issuances of additional shares will result
in dilution to our existing stockholders. We may not be able to obtain financing on commercially reasonable terms or
terms that are acceptable to us when it is required. If we do not obtain such financing, our business could fail and
investors could lose their entire investment.
If
we are unable to continue as a going concern, our securities will have little or no value.
The
reports of our independent registered public accounting firms that accompanies our audited consolidated financial statements for
the years ended December 31, 2014 and 2013, contain going concern qualifications and each such firm expressed substantial doubt
about our ability to continue as a going concern. In addition to our history of losses, our accumulated deficits as
of December 31, 2014 and December 31, 2013 were approximately $18.0 million and $7.5 million, respectively. At December
31, 2014 and 2013, we had cash and cash equivalents (including restricted cash) of $2.2 million and $1.2 million, respectively.
In
order to continue as a going concern, we will need, among other things, additional capital resources. Our management’s
plan is to obtain such resources by seeking additional equity and/or debt financing. During 2014, we raised a total
of $7.8 million in debt and equity financing and repaid $1.9 million of that financing. These financing arrangements resulted
in significant dilution to existing shareholders. While our intention is to limit future shareholder dilution, we may be required
to raise capital at unfavorable terms, if at all. If we are unable to obtain additional capital, such inability would have an
adverse effect on our financial position, results of operations, cash flows, and business prospects, and ultimately on our ability
to continue as a going concern. If we are unable to obtain adequate capital, we could be forced to cease operations.
Because
we may never earn recurring revenues from our operations, our business may fail and investors may lose all of their investment
in our Company.
We
are a company with a limited operating history and our future profitability is uncertain. We have yet to generate recurring
sales or positive earnings and there can be no assurance that we will ever operate profitably. If our business plan
is not successful and we are not able to operate profitably, then our stock may become worthless and investors may lose all of
their investment in our Company.
Prior
to obtaining customers and distribution for our products, we currently anticipate that we will incur increased operating expenses
without realizing any revenues. We, therefore, currently expect to incur significant losses into the foreseeable future. We
recognize that, if we are unable to generate recurring revenues from the sale of our products in the future, we will not be able
to earn profits or continue operations. There is no history upon which to base any assumption as to the likelihood
that we will prove successful, and we can provide no assurance that we will generate recurring revenues or ever achieve profitability. If
we are unsuccessful in addressing these risks, our business will fail and investors may lose all of their investment in our Company.
Our
limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment.
We
have a limited operating history on which investors can base an evaluation of our business, operating results, and prospects. Of
even greater significance is that fact that we have limited operating history with respect to designing and manufacturing systems
for producing continuous energy from a broad range of sources, including previously unusable ultra-low quality gas.
While
the basic technology has been verified, we only recently have begun offering the EC250 and EC333 as commercial systems, and have
yet to commercialize the KG2 or other Power Oxidizer systems. This limits our ability to accurately forecast the cost
of producing and distributing our systems or technology or to determine a precise date on which our systems or technology will
be widely released.
Our
plan to complete the initial commercialization of our gas-to-heat and electricity conversion technology is dependent upon the
timely availability of funds and upon our finalizing the engineering, component procurement, build out, and testing in a timely
manner. Any significant delays would materially adversely affect our business, prospects, operating results, and financial
condition. Consequently, it is difficult to predict our future revenues and appropriately budget for our expenses,
and we have limited insight into trends that may emerge and affect our business. In the event that actual results differ
from our estimates or we adjust our estimates in future periods, our operating results and financial position could be materially
affected. If the market for transforming methane gas, especially ultra-low quality gas from landfills, coal mines,
oil fields, and other low-quality methane sources into continuous electricity does not develop as we currently expect or develops
more slowly than we currently expect, our business, prospects, operating results, and financial condition will be materially harmed.
We
may incur significant warranty related costs which may result in decreased gross profit per unit sold and reduce the ability for
the Company to achieve its profitability targets.
We
expected to incur, and have incurred significant warranty expense related to our initial commercial units shipped to date. While
we expect these costs to decrease significantly on a per unit basis, the limited operating time for our commercial units makes
our warranty and other post-sale charges difficult to estimate. During 2014, for our initial EC250 commercial unit, we provided
for a significant warranty reserve to allow for full replacement of key components primarily related to sub-components furnished
by our suppliers. If our commercial units have greater than expected warranty related expenses or if we experience warranty costs
associated with our oxidizer units, we may experience lower gross product margins or we may be required to increase our expenses
to re-engineer our Power Oxidizer products.
A
sustainable market for our technology may never develop or may take longer to develop than we currently anticipate which would
materially adversely affect our results of operations.
Our
products are being sold into mature markets and represent an emerging and unproven technology solution. We do not know whether
our targeted customers will accept our technology or will purchase our products in sufficient quantities to allow our business
to grow. To succeed, demand for our products must increase significantly in existing markets, and there must be strong
demand for products that we introduce in the future. If a sustainable market fails to develop or develops more slowly
than we currently anticipate, we may be unable to recover the losses we have incurred to develop our products, we may have further
impairment of assets, and we may be unable to meet our operational expenses. The development of a sustainable market
for our systems may be hindered by many factors, including some that are out of our control. Examples include:
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customer
reluctance to try a new product or concept;
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regulatory
requirements;
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perceived
cost competitiveness of our EC250, EC333, KG2 and other Power Oxidizer products that we may develop;
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costs
associated with the installation and commissioning of our EC250, EC333, KG2 and other Power Oxidizer products that we may
develop;
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maintenance
and repair costs associated with our products;
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economic
downturns and reduction in capital spending;
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customer
perceptions of our products’ safety and quality;
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emergence
of newer, more competitive technologies and products;
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financial
stability of our turbine partners;
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inability
of our turbine partners to fulfill orders in a timely manner;
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excessive
warranty-related costs associated with parts replacement for Power Oxidizer or turbine components for power-stations operating
in the field; and
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Inability
of our commercial partners to successfully sell and market our co-branded Power Oxidizer products
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Market
acceptance of our technology and products is difficult to predict. If our technology and products do not achieve market
acceptance, our business could fail.
A
number of factors may affect the market acceptance of our products and technology, including, among others, the perception by
consumers of the effectiveness of our products and technology, the operational reliability of our products and technology over
an extended period of time in the field, our ability to fund our sales and marketing efforts, and the effectiveness of our sales
and marketing efforts. If our products and technology do not gain acceptance by our intended customers, we may not
be able to fund future operations, including the development of new products, and/or our sales and marketing efforts for our current
and currently anticipated products. Such inability would have a material adverse effect on our business, prospects,
operating results, and financial condition.
Further,
market acceptance of our technology and business is difficult to predict. If our technology does not achieve market
acceptance, our business could fail. If we are unable to develop effectively and promote our technology timely and
gain recognition in our market segment, we may not be able to achieve acceptable sales revenue and our results of operations and
financial condition would then suffer. Our ability to achieve future revenue will depend highly upon the awareness
of our potential customers of our products, services, and solutions. While we plan to achieve this awareness over time,
there cannot be assurance that awareness of our Company and technology will develop in a manner or pace that is necessary for
us to achieve profitability in the near term.
We
cannot predict the rate of adoption or acceptance of our technology by potential customers or prospective channel partners. While
we may be able to effectively demonstrate the feasibility of our technology, this does not guarantee the market will accept it,
nor can we control the rate at which such acceptance may be achieved. In certain of our market segments, there is a
well-established channel with a limited number of companies engaged in reselling to our target customers. Failure to
achieve productive relations with a sufficient number of these prospective partners may impede adoption of our solutions. Additionally,
some potential customers in our target industries are historically risk-averse and, on occasion, have been slow to adopt new technologies. If
our technology is not accepted in the market, we may not generate sufficient revenue by selling or licensing our technology to
support our operations, recover our research and development costs, or become profitable and our business could fail.
Our
products involve a lengthy sales cycle and we may not currently anticipate sales levels appropriately, which could impair our
results of operations. Our customers may not be willing to provide us with sufficient cash payments in advance of delivery which
may result in additional capital demands.
The
sale of our products typically involves a significant commitment of capital by customers, with the attendant delays frequently
associated with large capital expenditures. Once a customer makes a formal decision to purchase our product, the fulfillment
of the sales order by us and our turbine partners will require a substantial amount of additional time. For these and
other reasons, the sales and fulfillment cycle associated with our products is typically lengthy and subject to a number of significant
risks over which we have little or no control. We currently expect to plan our production and inventory levels based
on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. If sales in
any period fall significantly below currently anticipated levels, our financial condition, results of operations and cash flow
would suffer. If demand in any period increases well above currently anticipated levels, we may have difficulties in
responding, incur greater costs to respond, or be unable to fulfill the demand in sufficient time to retain the order, which would
negatively impact our operations. In addition, our operating expenses are based on currently anticipated sales levels,
and a high percentage of our expenses are generally fixed in the short term. As a result of these factors, a small
fluctuation in timing of sales could cause operating results to vary materially from period to period and a small fluctuation
in timing of cash payments by our customers could result in additional capital to be required to fund our operating and inventory
needs.
We
face intense competition and currently expect competition to increase in the future, which could prohibit us from developing a
customer base and generating revenue.
Many
of our potential competitors have greater financial and commercial resources than us, and it may be difficult to compete against
them. The energy industry is characterized by intense competition. Many of our potential competitors have
better name recognition and substantially greater financial, technical, manufacturing, marketing, personnel, and/or research capabilities
than we do. Although at this time we do not believe that any of our potential competitors have technology similar to
ours, if and when we release products based on our technology, potential competitors may respond by developing and producing similar
products. Many firms in the energy industry have made and continue to make substantial investments in improving their
technologies and manufacturing processes. In addition, they may be able to price their products below the marginal
cost of production in an attempt to establish, retain, or increase market share. Because of these circumstances, it
may be difficult for us to compete successfully in the energy market.
We
anticipate the need to be able to provide a third party financing option to our current and future customers for our existing
and future Power Oxidizer products in order to facilitate our planned growth. We have very limited operational history for our
Power Oxidizer products which may make financing these products very difficult. Any changes in business credit availability or
cost of borrowing could adversely affect our business.
We
compete with products and solutions that have significantly more operating history than our Power Oxidizers. As such, traditional
lending solutions such as capital lease providers or banks, have a substantial amount of information available for these products
and have established credit parameters for end user customers. Our Power Oxidizers are new to the market and we have not established
credit parameters specific to our Power Oxidizer units. This puts us at a competitive disadvantage.
Declines
in the availability of business credit and increases in corporate borrowing costs could negatively impact the number of systems
we can install. Substantial declines in the business and operations of our customers could have a material adverse
effect on our business, results of operations and financial condition. In addition, the disruption in the capital markets
that began in 2008 has reduced the availability of debt financing to support many of the businesses in which our potential customers
operate. If our potential customers are unable to access credit, it would impair our ability to grow our business.
We
may face risks from doing business internationally.
We
have, and expect to license, sell, or distribute products outside of the United States of America and derive revenues from these
sources. Our revenues and results of operations may be vulnerable to currency fluctuations and we do not currently
hedge any foreign currency. As of the date of this report, we have installed one of our EC250 systems to a customer
in the Netherlands. We will report our revenues and results of operations in U.S. dollars, but, in various reporting
periods, a significant portion of our revenues might be earned outside of the U.S. We cannot accurately predict the
impact of future exchange rate fluctuations on our revenues and operating margins. Such fluctuations could have a material
adverse effect on our business, results of operations, and financial condition. Our business will be subject to other
risks inherent in the international marketplace, many of which are beyond our control. These risks include:
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laws
and policies affecting trade, investment, and taxes, including laws and policies relating to the repatriation of funds and
withholding taxes, and changes in these laws;
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changes
in local regulatory requirements, including restrictions on gas-to-heat and electricity conversions;
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differing
degrees of protection for intellectual property;
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instability
of foreign economies and governments; and
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war
and acts of terrorism.
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Any
of the foregoing could have a material adverse effect on our business, financial condition, and results of operations.
Turbine
prices, sub-component availability and sub-component reliability factors impact our price competitiveness, reliability and warranty
costs. Product quality expectations may not be met, causing slower market acceptance or warranty cost exposure.
Our
Power Oxidizer products are currently commercialized in a manner that is fully integrated with a gas turbine, thus providing a
complete power-station to the ultimate customer and operator. We purchase the turbines from an independent third party. The
availability of these turbines is dependent on the current commercial backlog and financial stability of their manufacturers.
A lengthy sub-component fulfillment timeframe could impact our ability to timely deliver a power-station and therefore could delay
our revenues. The turbines are typically long lead time components and the pricing of these turbines could increase
over time, causing the overall price of the integrated power-station to become commercially uncompetitive, which would hinder
sales of our Power Oxidizer products or prohibitively expensive resulting in decreased profit margins. Once operational,
any issues in the reliability of the turbine, either due to issues with the Power Oxidizer or the inherent reliability flaws in
the turbine, could result in excessive warranty obligations for our company and a level of operational reliability that is deemed
unsatisfactory by our customers, which could not only hurt our relationships with our customers, but materially and adversely
affect our business, prospects, operating results and financial condition.
In
order to achieve our goal of improving the quality and lowering the total costs of ownership of our products, we may require engineering
changes. Such improvement initiatives may render existing inventories obsolete or excessive. Despite our
continuous quality improvement initiatives, we may not meet our customers’ expectations. Any significant quality
issues with our products or those of our turbine manufacturing partners could have a material adverse effect on our rate of product
adoption, results of operations, financial condition, and cash flow. Moreover, as we develop new configurations for
our gas-to-heat and electricity conversion systems and as our customers place existing configurations in commercial use, our products
may perform below expectations. Any significant performance below expectations could materially adversely affect our
operating results, financial condition, and cash flow and affect the marketability of our products.
If
we are unable to adequately control the costs associated with operating our business, including our costs of sales and materials,
our business, prospects, operating results, and financial condition will suffer.
If
we are unable to maintain a sufficiently low level of costs for designing, marketing, selling and distributing our gas transforming
systems relative to their selling prices, our operating results, gross margins, business, and prospects could be materially and
adversely impacted. We have made, and will be required to continue to make, significant investments for the design
and sales of our system and technologies. There can be no assurances that our costs of producing and delivering our
system and technologies will be less than the revenue we generate from sales, licenses and/or royalties or that we will achieve
our currently expected gross margins.
We
may be required to incur substantial marketing costs and expenses to promote our systems and technologies, even though our marketing
expenses to date have been relatively limited. If we are unable to keep our operating costs aligned with the level
of revenues we generate, our operating results, gross margins, business, and prospects will be harmed. Many of the
factors that impact our operating costs are beyond our control. For example, the costs of our components could increase
due to shortages if global demand for these products increases.
We
will be dependent on our suppliers, some of which are single or limited source suppliers, and the inability of these suppliers
to continue to deliver, or their refusal to deliver, necessary components at prices, volumes, and schedules acceptable to us would
have a material adverse effect on our business, prospects, operating results, and financial condition.
We
are continually evaluating, qualifying, and selecting suppliers for our gas-to-heat and electricity conversion systems. We
will source globally from a number of suppliers, some of whom may be single source suppliers for these components, in particular
for the gas turbine sub-component. While we attempt to maintain the availability of components from multiple sources
whenever possible, it may not always be possible to avoid purchasing from a single source. To date, we have no qualified
alternative sources for any of our single-sourced components.
While
we believe that we may be able to establish alternate supply relationships and can obtain or engineer replacements for our single-source
components, we may be unable to do so in the short term or at all at prices or costs that are favorable to us. In particular,
while we believe that we will be able to secure alternate sources of supply for almost all of our single-sourced components in
a relatively short time-frame, qualifying alternate suppliers or developing our own replacements for certain highly customized
components may be time consuming and costly.
The
supply chain will expose us to potential sources of delivery failure or component shortages. If we experience significant
increased demand, or need to replace our existing suppliers, there can be no assurance that additional supplies of component parts
will be available if or when required on terms that are favorable to us, or at all, or that any supplier would allocate sufficient
supplies to us in order to meet our requirements or fill our orders in a timely manner. The loss of any single- or
limited-source supplier or the disruption in the supply of components from these suppliers could lead to delays to our customers,
which could hurt our relationships with our customers and also materially adversely affect our business, prospects, operating
results, and financial condition.
Changes
in our supply chain may result in increased cost and delay. A failure by our suppliers to provide the necessary components
could prevent us from fulfilling customer orders in a timely fashion, which could result in negative publicity, damage our brand,
and have a material adverse effect on our business, prospects, operating results, and financial condition.
Commodity
market factors impact our costs and availability of materials.
Our
products contain a number of commodity materials from metals, which include steel, special high temperature alloys, copper, nickel,
and molybdenum, to computer components. The availability of these commodities could impact our ability to acquire the
materials necessary to meet our production requirements. The cost of metals has historically fluctuated and we currently
do not hedge against our materials inflation risk. An increase in materials pricing could impact the costs to manufacture
our products. If we are not able to acquire commodity materials at prices and on terms satisfactory to us or at all,
our operating results may be materially adversely affected.
We
may not be able to effectively manage our growth, expand our production capabilities or improve our operational, financial and
management information systems, which would impair our results of operations.
If
we are successful in executing our business plan, we will experience growth in our business that could place a significant strain
on our business operations, management and other resources. Our ability to manage our growth will require us to expand
our production capabilities, continue to improve our operational, financial and management information systems, and to motivate
and effectively manage our employees. We cannot provide assurance that our systems, procedures and controls or financial
resources will be adequate, or that our management will keep pace with this growth. We cannot provide assurance that
our management will be able to manage this growth effectively.
Our
business plan is to sell future products with warranties. There can be no assurance that the provision for estimated
product warranty will be sufficient to cover our warranty expenses in the future. We cannot ensure that our efforts
to reduce our risk through warranty disclaimers will effectively limit our liability. Any significant incurrence of
warranty expense in excess of estimates could have a material adverse effect on our operating results, financial condition, and
cash flow. Further, we may at times undertake programs to enhance the performance of units previously sold. These
enhancements may at times be provided at no cost or below our cost. If we choose to offer such programs, such actions
could result in significant additional costs to our business.
If
we do not respond effectively and on a timely basis to rapid technological change, our business could suffer.
Our
industry is characterized by rapidly changing technologies, industry standards, customer needs, and competition, as well as by
frequent new product and service introductions. We must respond to technological changes affecting both our customers
and suppliers. We may not be successful in developing and marketing, on a timely and cost-effective basis, new services
that respond to technological changes, evolving industry standards or changing customer requirements. Our success will
depend, in part, on our ability to accomplish all of the following in a timely and cost-effective manner:
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effective
use and integration of new technologies;
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continual
development of our technical expertise;
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enhancement
of our engineering and system designs;
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retention
of key engineering personnel, which have played a critical role in the development of our technology;
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development
of products that meet changing customer needs;
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advertisements
and marketing of our products; and
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influence
of and response to emerging industry standards and other changes.
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The
market for alternative energy products is characterized by significant and rapid technological change and innovation. Although
we intend to employ our technological capabilities to create innovative products and solutions that are practical and competitive
in today’s marketplace, future research and discoveries by others may make our products and solutions less attractive or
even obsolete compared to other alternatives that may emerge.
If
we are unable to enforce our intellectual property rights or if our intellectual property rights become obsolete, our competitive
position could be adversely impacted.
We
utilize a variety of intellectual property rights in our products and technology. We view our portfolio of process
and design technologies as one of our competitive strengths and we use it as part of our efforts to differentiate our product
offerings. We may not be able to preserve these intellectual property rights successfully in the future and these rights
could be invalidated, circumvented, challenged, or infringed upon. In addition, the laws of some foreign countries
in which our products may be sold do not protect intellectual property rights to the same extent as the laws of the United States. If
we are unable to protect and maintain our intellectual property rights, or if there are any successful intellectual property challenges
or infringement proceedings against us, our ability to differentiate our product offerings could diminish. In addition,
if our intellectual property rights or work processes become obsolete, we may not be able to differentiate our product offerings
and some of our competitors may be able to offer more attractive products to our customers. As a result, our business
and financial performance could be materially and adversely affected.
Developments
or assertions by us or against us relating to intellectual property rights could materially impact our business.
We
currently own or license significant intellectual property, including patents, and intend to be involved in numerous licensing
arrangements. We expect our intellectual property to play an important role in establishing and maintaining a competitive
position in a number of the markets we intend to serve. We will attempt to protect proprietary and intellectual property
rights to our products and gas system through available patent laws and licensing and distribution arrangements with reputable
domestic and international companies. Despite these precautions, patent laws afford only limited practical protection
in certain countries.
Litigation
may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary
rights of others or to defend against claims of invalidity. Such litigation could result in substantial costs and the
diversion of resources. As we create or adopt new technology, we will also face an inherent risk of exposure to the
claims of others that we have allegedly violated their intellectual property rights.
We
cannot assure that we will not experience any intellectual property claim losses in the future or that we will not incur significant
costs to defend such claims nor can we assure that infringement or invalidity claims will not materially adversely affect our
business, results of operations and financial condition. Regardless of the validity or the success of the assertion
of these claims, we could incur significant costs and diversion of resources in enforcing our intellectual property rights or
in defending against such claims, which could have a material adverse effect on our business, results of operations and financial
condition.
Confidentiality
agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information.
Our
success depends upon the skills, knowledge, and experience of our technical personnel, our consultants and advisors, as well as
our licensees and contractors. Because we operate in a highly competitive field, we rely almost wholly on trade secrets
to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We
enter, and currently expect that we will continue to enter, into confidentiality and intellectual property assignment agreements
with our corporate partners, employees, consultants, outside scientific collaborators, developers, licensees and other advisors. These
agreements generally require that the receiving party keep confidential and not disclose to third parties confidential information
developed by us during the course of the receiving party’s relationship with us. These agreements also generally
provide that inventions conceived by the receiving party in the course of rendering services to us will be our exclusive property. However,
these agreements may be breached and may not effectively assign intellectual property rights to us. Our trade secrets
also could be independently discovered by competitors, in which case we would not be able to prevent use of such trade secrets
by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade secrets
could be difficult, expensive, and time consuming and the outcome would be unpredictable. In addition, courts outside
the United States may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade
secret protection could adversely affect our competitive position.
Our
research and commercialization efforts may not be sufficient to adapt to changes in gas-to-heat and electricity conversion technology.
As
technologies change, we plan to upgrade or adapt our gas-to-heat and conversion systems and technology in order to continue to
provide customers with the latest technology, in particular gas-to-heat and electricity conversion technology. However,
our technology may not compete effectively with alternative technologies if we are not able to source and integrate the latest
technology into our gas-to-heat and electricity conversion systems. Any failure to keep up with advances in gas-to-heat
and electricity conversion systems and technology would result in a decline in our competitive position that would materially
adversely affect our business, prospects, operating results, and financial condition.
We
operate in a highly regulated business environment, and changes in regulation could impose significant costs on us or make our
products less economical, thereby affecting demand for our products.
Our
products are subject to federal, state, local, and foreign laws and regulations, governing, among other things, emissions and
occupational health and safety. Regulatory agencies may impose special requirements for the implementation and operation
of our products or that may significantly affect or even eliminate some of our target markets. We may incur material
costs or liabilities in complying with government regulations. In addition, potentially significant expenditures could
be required in order to comply with evolving environmental and health and safety laws, regulations and requirements that may be
adopted or imposed in the future. Furthermore, our potential utility customers must comply with numerous laws and regulations. The
deregulation of the utility industry may also create challenges for our marketing efforts. For example, as part of
electric utility deregulation, federal, state, and local governmental authorities may impose transitional charges or exit fees,
which would make it less economical for some potential customers to switch to our products. We can provide no assurances
that we will be able to obtain these approvals and changes in a timely manner, or at all. Non-compliance with applicable
regulations could have a material adverse effect on our operating results.
The
market for electricity and generation products is heavily influenced by federal and state government regulations and policies. The
deregulation and restructuring of the electric industry in the United States and elsewhere may cause rule changes that may reduce
or eliminate some of the advantages of such deregulation and restructuring. We cannot determine how any deregulation
or restructuring of the electric utility industry may ultimately affect the market for our products. Changes in regulatory
standards or policies could reduce the level of investment in the research and development of alternative power sources, including
gas-to-heat and electricity conversion systems. Any reduction or termination of such programs could increase the cost
to our potential customers, making our systems less desirable, and thereby materially adversely affect our revenue and other operating
results.
Our
business depends substantially on the continuing efforts of certain personnel and our business may be severely disrupted if we
lose their services.
Our
future success depends substantially on the continued services of our executive officers, especially our Chief Executive Officer,
Alain J. Castro, our President, Boris A. Maslov, Ph.D., our Chief Financial Officer, Domonic Carney, as well as our engineering
vice president, Douglas Hamrin. If one or more of these persons are unable or unwilling to continue in their present
positions, we may not be able to replace them readily or timely, if at all. Therefore, our business may be severely
disrupted, and we may incur additional expenses to recruit and retain their replacements, if any acceptable persons may be found. In
addition, if any of our executive or engineering officers joins a competitor or forms a competing company, we may lose some of
our customers or potential customers.
If we are unable to attract, train, and retain engineering and sales personnel, our business may be materially adversely affected.
Our
future success depends, to a significant extent, on our ability to attract, train, and retain engineering and sales personnel. Recruiting
and retaining capable personnel, particularly those with expertise in our chosen industry, are vital to our success. There
is substantial competition for qualified technical and sales personnel with experience in our industry, and there can be no assurance
that we will be able to attract or retain them. If we are unable to attract and retain qualified employees, our business
may be materially adversely affected.
Our
internal controls and accounting methods may require modification. We currently have significant and material internal control
weaknesses which will require additional resources to mitigate.
We
had significant turnover in the Accounting and Finance department during 2014, including the resignation of the Chief Financial
Officer in June 2014 and the appointment of a replacement Chief Financial Officer in August 2014. Our significant turnover within
our Finance department increased our internal control risk.
Further,
for a significant portion of 2013 and 2014 the Company had insufficient in-house technical accounting staff and management that
resulted in several of our material control weaknesses that we have identified. Due to our limited size, we rely heavily on key
management for day to day operations and for key cash and spending internal controls and we have size limitations that give rise
to additional internal control weaknesses including our information technology controls and disclosure controls.
We
continue to review and develop controls and procedures sufficient to accurately report our financial performance on a timely basis
and we continue to mitigate our existing material and significant internal control weaknesses. If we do not develop
and implement effective controls and procedures, we may not be able to report our financial performance on a timely and materially
accurate basis and our business and stock price would be adversely affected.
If
we fail to achieve and maintain an effective system of internal controls in the future, we may not be able to accurately report
our financial results or prevent fraud. As a result, investors may lose confidence in our financial reporting.
The
Sarbanes-Oxley Act of 2002 requires that we report annually on the effectiveness of our internal control over financial reporting. Among
other things, we must perform systems and processes evaluation and testing. We must also conduct an assessment of our
internal controls to allow management to report on our assessment of our internal control over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act. Our assessment has revealed significant deficiencies or material weaknesses
in our internal controls, which are disclosed in this Form 10-K. Disclosures of this type can cause investors to lose
confidence in our financial reporting and may negatively affect the price of our common stock. Moreover, effective
internal controls are necessary to produce reliable financial reports and to prevent fraud. Deficiencies in our internal
controls over financial reporting may negatively impact our business and operations.
Risks
Related to Our Securities
If
an orderly and active trading market for our common stock does not develop or is not sustained, the value and liquidity of your
investment in our common stock could be adversely affected.
We
cannot assure you that an orderly and active trading market in our common stock will ever develop or be sustained. This
may be attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume,
and that even if we came to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven
company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As
a consequence, there may be periods of several days, weeks or months when trading activity in our shares is minimal or non- existent,
as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price.
The
historic bid and asked quotations for our common stock should not be viewed as an indicator of the current market price for our
common stock. We cannot give you any assurance that a broader or more active public trading market for our common
stock will develop or be sustained, or that current trading levels will be sustained or not diminish.
If
a significant public market for our common stock develops, we expect to experience volatility in the price of our common stock. This
may result in substantial losses to investors if they are unable to sell their shares at or above their purchase price.
If
a significant public market for our common stock develops, we expect the market price of our common stock to fluctuate substantially
for the foreseeable future, primarily due to a number of factors, including:
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our
status as a company with a limited operating history and limited revenues to date, which may make risk-averse investors more
inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the shares of
a seasoned issuer in the event of negative news or lack of progress;
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announcements
of technological innovations or new products by us or our competitors;
|
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●
|
the
timing and development of our products;
|
|
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●
|
general
and industry-specific economic conditions;
|
|
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●
|
actual
or anticipated fluctuations in our operating results;
|
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●
|
actions
by our stockholders;
|
|
|
●
|
changes
in our cash flow from operations or earnings estimates;
|
|
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●
|
changes
in market valuations of similar companies;
|
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●
|
our
capital commitments; and
|
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●
|
the
loss of any of our key management personnel.
|
In
addition, the financial markets have experienced extreme price and volume fluctuations. The market prices of the securities
of technology companies, particularly companies like ours without consistent revenues and earnings, have been highly volatile
and may continue to be highly volatile in the future, some of which may be unrelated to the operating performance of particular
companies. The sale or attempted sale of a large amount of common stock into the market may also have a significant
impact on the trading price of our common stock. Many of these factors are beyond our control and may decrease the
market price of our common stock, regardless of our operating performance. In the past, securities class action litigation
has often been brought against companies that experience volatility in the market price of their securities. Whether
or not meritorious, litigation brought against us could result in substantial costs, divert management’s attention and resources
and harm our financial condition and results of operations.
During
2014, we issued approximately 41.6 million shares including approximately 13.5 million shares issued in August 2014 to satisfy
and eliminate our April 2014 Convertible Debentures and 27.6 million shares issued in September 2014 in exchange for our $4.0
million private equity investment round. Approximately 42 million were registered for resale with the SEC.
The
public sale of our common stock by existing stockholders could adversely affect the price of our common stock.
As
of March 23, 2015, we have a total of 114,106,349 shares of common stock outstanding. Approximately 76 million of our outstanding
shares have either been registered with the SEC or are eligible for an exemption from registration under Rule 144.
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Approximately
52 million of such total shares are freely tradable in the public market,
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●
|
The
remaining approximately 62 million shares constitute “restricted securities” and may be sold in the public market
only if they have been registered or if they qualify for an exemption from registration under Rule 144 of the Securities Act. Of
the 62 million shares, approximately 14 million shares are registered for resale under an effective registration statement
and approximately 35 million represent original shares held with restrictive legends but which could be eligible for an exemption
from registration under Rule 144.
|
The
market price of our common stock could thereafter decline as a result of sales by our existing stockholders, or even by the perception
that these sales will occur. These sales also might make it difficult for us to sell equity securities in the future at a time
and at a price that we deem appropriate.
We
have a substantial number of options and warrants outstanding which could give rise to additional issuances of our common stock.
These options and warrants have set exercise prices which may be below the prevailing market price in the future. Certain warrants
have anti-dilution price protection.
We
have a total of approximately 23 million options and warrants at exercise prices ranging from $0.11 to $1.00 per share. Of these,
approximately 13.3 million represent employee options at exercise prices ranging from $0.15 to $0.48 per share and approximately
9.8 million warrants at exercise prices of $0.11 to $1.00 per share. Approximately 4.1 million warrants issued in April 2014 have
price reset antidilution protection whereby if the Company issues or is deemed to have issued any common stock or common stock
equivalents, excluding employee stock options, at a price per share below their exercise price, the Company is obligated to reduce
the exercise price of the approximately 4.1 million warrant to the deemed issued price per share. The warrant holders waived their
price reset rights for our September 2014 private equity placement but retained an additional one-time price reset on March 24,
2015 to the lower of (i) the then effective exercise price of the April 2014 Warrants, and (ii) seventy percent (70%) of the arithmetic
average of the weighted average prices of the Company’s common stock for the ten (10) consecutive trading days immediately
preceding March 24, 2015. On March 24, 2015 the 4.1 million warrants had the exercise price reset to $0.11 per warrant. Further
issuances of common stock or common stock equivalents below $0.11 per share may reduce the exercise price below $0.11 per warrant.
We
may be required to raise additional financing by issuing new securities, which may have terms or rights superior to those of our
shares of common stock, which could adversely affect the market price (if any) of our shares of common stock and our business. Further,
if we issue additional securities in the future, it could result in the dilution of our existing stockholders.
Our
Amended and Restated Articles of Incorporation authorizes the issuance of up to 200,000,000 shares of common stock with a par
value of $0.0001 per share, and 50,000,000 shares of preferred stock with a par value of $0.0001 per share. Our Board
may choose to issue some or all of such shares to acquire one or more companies or properties and to fund our overhead and general
operating requirements. The issuance of any such shares may reduce the book value per share and may contribute to a
reduction in the market price (if any) of the outstanding shares of our common stock or preferred stock. If we issue
any such additional shares, such issuance could reduce the proportionate ownership and voting power of all current stockholders. Further,
such issuance may result in a change of control of our Company.
We
have granted investment participation rights to certain investors in our April 2014 convertible debt financing. These participation
rights may limit our ability to raise capital or may require additional consideration to raise the capital we believe is required
for our growth objectives.
The
warrants issued in conjunction with the 2014 convertible debt offering provide participation rights of up to 50% of any future
financing to the five investors who provided the Company with the convertible debt in April 2014. These participation rights expire
in 2016 and require notice periods and allow response times of up to 15 business days. The participation rights may make future
financings more difficult to close or may delay or prevent the closing of future financings which would otherwise be in the best
interests of the Company.
Our
principal stockholders own a large percentage of our voting stock, which will allow them to influence substantial control over
matters requiring stockholder approval.
Currently,
our executive officers, employees, directors, and Sail Capital, our principal stockholders and their affiliates own approximately
25.9% of our outstanding common stock. If these stockholders act together, and our principal stockholders and their
affiliates by themselves, they would be able to elect our Board of Directors (our “
Board
”) and control all
other matters requiring approval by stockholders, including the approval of mergers, going private transactions, and other extraordinary
transactions, as well as the terms of any of these transactions. This concentration of ownership could have the effect
of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control
of us, which could in turn have an adverse effect on the market price of our common stock or prevent our stockholders from realizing
a premium over the then-prevailing market price for their shares of common stock.
Our
operating results may fluctuate significantly, and these fluctuations may cause our common stock price to fall.
Our
quarterly operating results may fluctuate significantly in the future due to a variety of factors that could affect our revenues
or our expenses in any particular quarter. You should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. Factors that may affect our quarterly results include:
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market
acceptance of our products and those of our competitors;
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●
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our
ability to attract and retain key personnel;
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●
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development
of new designs and technologies; and
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●
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our
ability to manage our anticipated growth and expansion.
|
Trading
of our common stock may be volatile and sporadic, which could depress the market price of our common stock and make it difficult
for our stockholders to resell their shares.
There
is currently a limited market for our common stock and the volume of our common stock traded on any day may vary significantly
from one day to another. Our common stock is currently quoted on the OTCQB tier of the OTC Market (“
OTCQB
”)
and the OTC Bulletin Board (“
OTCBB
”). Trading in stock quoted on the OTCQB and the OTCBB is often
characterized by low trading volume and by wide fluctuations in trading prices due to many factors that may have little to do
with our operations or business prospects. The availability of buyers and sellers represented by this volatility could
lead to a market price for our common stock that is unrelated to operating performance. Moreover, neither the OTCQB
nor the OTCBB is not a stock exchange, and trading of securities quoted on the OTCQB and the OTCBB is often more sporadic than
the trading of securities listed on a national stock exchange like. There is no assurance that there will be a sufficient
market in our stock, in which case it could be difficult for our stockholders to resell their shares.
Our
stock is categorized as a penny stock. Trading of our stock may be restricted by the SEC’s penny stock
regulations which may limit a shareholder’s ability to buy and sell our stock.
Our
stock is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny stock”
to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional
sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The
penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver
a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations,
and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting
the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition,
the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer
must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s
written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny
stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in and limit the marketability of our common stock.
You
should be aware that, according to SEC Release No. 34-29093, the market for “penny stocks” has suffered in recent
years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic
price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers;
and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management
is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in
a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within
the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The
occurrence of these patterns or practices could increase the future volatility of our share price.
FINRA sales
practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In
addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“
FINRA
”)
has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds
for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities
to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers.
The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock,
which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
The
indemnification rights provided to our directors, officers and employees may result in substantial expenditures by the Company
and may discourage lawsuits against its directors, officers, and employees.
Our
Amended and Restated Articles of Incorporation and bylaws contain provisions permitting us to enter into indemnification agreements
with our directors, officers, and employees. We also have contractual obligations to provide such indemnification protection
to the extent not covered by directors’ and officers’ liability insurance. The foregoing indemnification obligations
could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers,
which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit
against our directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative
litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit
us and our stockholders.
To
date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.
We
do not currently anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient
funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless
decide not to pay any dividends. We presently intend to retain all earnings for our operations.
|
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Our
current headquarters is located at 9400 Toledo Way, Irvine, California 92618. The property consists of a mixed use
commercial office, production, and warehouse facility of 32,649 square feet.
On
September 26, 2013, we entered into an Assignment and Assumption of Lease (the “
Assignment
”) with FlexEnergy
for such property, with an effective date of August 1, 2013. Pursuant to the Assignment, we are now formally obligated
under the Standard Industrial/Commercial Single-Tenant Lease, dated May 26, 2011 (the “
Lease
”), originally
between FlexEnergy and Meehan Holdings, LLC (“
Meehan
”).
Previously,
as provided in the Contribution Agreement, we had occupied a portion of the property, and assumed one-third of all liabilities,
under the Lease (with FlexEnergy remaining responsible for the remaining two-third). Notwithstanding such arrangement,
Meehan did not view us as formally obligated under the Lease.
Prior
to the Assignment, on September 4, 2013, Meehan executed a Lessor’s Consent to Assignment and Sublease with FlexEnergy and
us. We also entered into a letter agreement with Meehan, by which we agreed to the following rent prepayments under
the Lease:
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●
|
$26,044
by September 30, 2013, to be applied to the December 2014 rent payment, and
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●
|
$26,825
by July 31, 2014, to be applied to the December 2015 rent payment.
|
The
Lease terminates on December 31, 2016. Our unpaid, outstanding obligation for the remainder of the Lease is $642,357
as of December 31, 2014. The current monthly rent under the Lease is $26,044, which increases to $26,825 on August
1, 2015, and to $27,630 on August 1, 2016.
We
also leased space from the Regents of the University of California, Irvine, for the installation and demonstration of the EC250
equipment. The lease expired on January 31, 2015 and the monthly payment was $7,780 from August 1, 2013 through January
31, 2015. The university provided us with certain goods and services including certain research and development services.
The lease became month-to-month after January 31, 2015.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
We
know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding
or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any
registered or beneficial stockholder, is an adverse party or has a material interest adverse to our company.
|
ITEM
4.
|
MINE
SAFETY DISCLOSURES
|
Not
applicable.
PART II
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
|
Market
Information
Our
common stock has been eligible for quotation since December 22, 2011; but, quotations on the OTCBB and on the OTCQB only commenced
in the first quarter of 2013. Initially, our symbol was “ITTC” until May 16, 2013, at which time our symbol
was changed to “ENCR.” The following table sets forth the high and low closing bid prices for our common
stock for the periods indicated, as reported by OTC Markets Group, Inc. and OTCBB. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions. Our
common stock was split on a 30-for-1 basis, effective May 6, 2013.
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Closing Bid
|
|
|
|
|
High ($)
|
|
|
Low ($)
|
|
|
Year ending December 31, 2013
|
|
|
|
|
|
|
|
First Quarter
|
|
|
0.50
|
|
|
|
0.50
|
|
|
Second Quarter (through May 6, 2013)
|
|
|
1.50
|
|
|
|
0.50
|
|
|
Second Quarter (May 7, 2013, through
June 28, 2013)
|
|
|
0.75
|
|
|
|
0.15
|
|
|
Third Quarter
|
|
|
1.50
|
|
|
|
1.00
|
|
|
Fourth Quarter
|
|
|
1.54
|
|
|
|
1.46
|
|
|
|
|
Closing Bid
|
|
|
|
|
High ($)
|
|
|
Low ($)
|
|
|
Year ending December 31, 2014
|
|
|
|
|
|
|
|
First Quarter
|
|
|
1.52
|
|
|
|
0.70
|
|
|
Second Quarter
|
|
|
0.73
|
|
|
|
0.28
|
|
|
Third Quarter
|
|
|
0.61
|
|
|
|
0.08
|
|
|
Fourth Quarter
|
|
|
0.26
|
|
|
|
0.13
|
|
Based
on the records of our transfer agent, we had approximately 114.1 million shares of common stock issued and outstanding as of March
23, 2015.
Holders
Based
on the records of our transfer agent, there were 100 stockholders of record of our common stock as of March 23, 2015 (not
including beneficial owners who hold shares at broker/dealers in “street name”).
Transfer
Agent
Our
transfer agent is V-Stock Transfer, LLC, whose address is 18 Lafayette Place, Woodmere, New York 11598, and whose telephone number
is (212) 828-8436.
Dividends
While
there are no restrictions that limit our ability to pay dividends, we have not paid, and do not currently intend to pay cash dividends
on our common stock in the foreseeable future. Our policy is to retain all earnings, if any, to provide funds
for operation and expansion of our business. The declaration of dividends, if any, will be subject to the discretion
of our board of directors, which may consider such factors as our results of operations, financial condition, capital needs and
acquisition strategy, among others.
Securities
Authorized for Issuance under Equity Compensation Plans
Please
see the discussion in Item 12 titled “
Equity Compensation Plan Information
” below.
Recent
Sales of Unregistered Securities
None.
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
Not
applicable.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
|
The
following discussion and analysis of our results of operations and financial condition for fiscal years ended December 31, 2013
and 2014, should be read in conjunction with our financial statements and the notes to those financial statements that are included
elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results
and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number
of factors, including those set forth under the “Risk Factors” and “Description of Business” sections
and elsewhere in this report. We use words such as “anticipate,” “estimate,” “plan,”
“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”
“may,” “will,” “should,” “could,” “predict” and similar expressions
to identify forward-looking statements. Although we believe the expectations expressed in these forward-looking
statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ
materially from those discussed in these statements. Factors that could contribute to such differences include,
but are not limited to, those discussed in the “Risk Factors” section of this report. We undertake
no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other
events occur in the future.
Overview
We
design, develop, and manufacture Power Oxidizer products and technology that aim to expand the power-generation range of gaseous
fuels while improving emissions. Our products aim to expand power generation to low quality gas fuel sources which
have previously been uneconomical or outright non-feasible fuels for generating energy, while, at the same time, reduce gaseous
emissions from industrial processes that contribute to air pollution and climate change.
We
currently commercialize a 250 kW and 333 kW power-station, and expect to scale up our technology to be integrated with a variety
of larger turbines, resulting in larger power-stations that will provide an alternative to typical combustion-based power generation.
We also expect to integrate our Power Oxidizer technology with traditional steam boilers, thereby enabling the commercialization
and deployment of systems that will convert low-quality waste gases to steam (with no electrical power) for certain customers
that value industrial steam more than electrical power within their operations.
Our
first commercial products, the Power-Station EC250 and EC333, combine our Power Oxidizer with a 250 kW or a 333 kW gas turbine,
respectively, that were initially developed by Ingersoll-Rand, and subsequently enhanced by our predecessor, FlexEnergy.
We shipped the first commercial EC250 on November 14, 2013 to the Netherlands per the terms of our agreement with EECT. That power-station
was then officially commissioned in June, 2014 and is in commercial operation. We are currently developing our third commercial
product, the Power-Station KG2 with Power Oxidizer, which will combine our Power Oxidizer with a KG2-3GEF two-MW gas turbine developed
by Dresser Rand.
We
entered into the D-R Agreement with Dresser Rand on November 14, 2014 to develop and market the Dresser Rand KG2-3GEF gas turbine
coupled with the Ener-Core Power Oxidizer. The license agreement grants Dresser Rand exclusive rights to commercialize the Ener-Core
Power Oxidizer, within ranges of 1-4 MW of power capacity, bundled with the Dresser Rand KG2 gas-turbine product line. As part
of the agreement, Dresser Rand agreed to pay a $1.6 million initial license fee, under the condition that Ener-Core is able to
successfully scale up the technology from the current size of 250 kW to a size of 1.75 MW. As part of the D-R Agreement, Dresser
Rand also agreed to achieve annual sales thresholds agreed to by both companies in order to retain the commercial license.
Dresser Rand has already facilitated an initial non-binding order for two commercial KG2 units, which we expect to ship out by
early 2016 if we meet certain development milestones.
The
D-R Agreement calls for a series of technical milestones which we expect to be completed in 2015, including field tests of the
larger KG2 sized oxidizer both on a stand-alone basis and once integrated with the Dresser Rand turbine. As of the date of this
report, we have completed the system layout and analytic models integrating our Power Oxidizer with the turbine and have initiated
design and development of the KG2.
Year
ended December 31, 2014 highlights
:
Commercial
Activities
Attero
Installation
For
the year ended December 31, 2014, we installed and commissioned our initial commercial EC250 Power Oxidizer unit to Attero in
the Netherlands through our contractor EECT. We deemed our contract complete and recorded revenue related to the contract plus
change orders. This contract represents our first full commercial installation of our Power Oxidizer technology. Subsequent to
the installation, the EC250 Power Oxidizer unit sustained damage to the turbine portion of the unit which was caused by debris
entering the turbine unit. The Power Oxidizer unit was not impacted. The Company incurred approximately $69,000 of warranty related
expenses in Q4 related to this damage and the Company accrued an additional $220,000 for future replacement of portions of the
turbine unit which may require retrofit or replacement later in 2015. The Company believes it has a sub-warranty claim against
certain turbine unit vendors but has not accrued an offset for this claim.
Waste
Gas Consulting
During
the year ended December 31, 2014, we completed the first phase of a three phase commercial project with an oil and gas producer
located in Canada. Our prototype unit located at UCI successfully oxidized waste gases with identical qualities to waste gases
currently being flared at petroleum production facilities in Alberta, Canada. We received $60,000 in consulting fees for the waste
gas test and we are currently working with the customer for the second phase of the project which we expect will be to install
a 250 kW commercial unit in a cold weather environment in Canada. At present, this customer has temporarily placed the second
phase on hold due to market conditions in the petroleum exploration industry related to reduced capital spending in the industry.
We expect to restart discussions in the middle of 2015. We believe the third phase of the project will be a substantial order
which would not occur until 2017, if at all.
Dresser
Rand Licensing Agreement
On
November 14, 2014, Ener-Core entered into the D-R Agreement, a global licensing agreement with Dresser Rand, to develop and market
the Dresser Rand KG2-3GEF 1.75 MW gas turbine coupled with the Ener-Core Power Oxidizer. This agreement grants Dresser Rand exclusive
rights to commercialize the Ener-Core 1-4 MW Power Oxidizer bundled with the Dresser Rand KG2 gas-turbine product line. We have
included the agreement, as amended and with proprietary technical information redacted, as an exhibit to this filing.
Contract
Terms
The
D-R Agreement calls for the satisfaction of certain non-technical milestones after which the agreement is mutually binding and
may be cancelled by either party (the “Binding Conditions”). These Binding Conditions include: (i) proof provided
by Ener-Core to Dresser Rand that Ener-Core’s Power Oxidizer intellectual property has no existing claims or liens in existence
and patents are owned by Ener-Core and recorded at the appropriate patent office; (ii) posting of a $1.6 million bond by Ener-Core
on behalf of Dresser Rand for security on the license fee payment; (iii) Dresser Rand provides a written acknowledgement of an
initial binding customer purchase order for a KG2-3GEF/GO, and (iv) proof to the satisfaction of Dresser Rand that Ener-Core has
sufficient capital to operate and submission of a budget reasonably satisfactory to Dresser Rand. To date, these four binding
conditions have not been satisfied and as of the date of this filing, the D-R Agreement is not mutually binding. The Company satisfied
the first binding condition in January 2015. In March 2015, the Agreement was amended to change the second binding condition to
consist of an escrow agreement whereby Dresser Rand would pay the license fee payments into a mutually controlled escrow account
and the requirement for the bond was eliminated. Both of the remaining conditions are expected to be satisfied in the second quarter
of 2015.
In
general terms, there are two primary technical milestones that Ener-Core and Dresser Rand shall mutually develop and complete:
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●
|
On
or before July 31, 2015, Ener-Core must successfully demonstrate the ability to generate
a controlled thermal reaction for certain mixtures of gases with a heat content sufficient
to successfully power the expected 1.75 MW KG2 turbine, called the “
Sub-scale
Acceptance Test
” or “
SSAT
.”
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●
|
By
Q1-2016, Ener-Core and Dresser Rand shall mutually develop and install a fully functioning
KG2 prototype and demonstrate the ability to generate, on a sustained basis, the power
and emissions specified in the development agreement, called the “
Full-scale
Acceptance Test
” or “
FSAT
.”
|
The
success of both the SSAT and the FSAT drive certain payments incorporated into the contract.
Initial
KG2 Order
On
January 12, 2015, Pacific Ethanol, Inc. announced publicly that it had placed an order with Dresser Rand Company for approximately
$12 million that included two 1.75 MW KG2-3GEF units for a 3.5MW cogeneration plant at a location in California. In March 2015,
Dresser Rand provided the Company with a letter of intent to purchase 2 Oxidizers for approximately $2.1 million subject to the
satisfaction of the Binding Conditions and with an expected purchase price payment as described below. After the Binding Conditions
are completed, which we expect to do by July 2015, Dresser Rand expects to provide the Company with a binding, formal purchase
order. Since we do not have a binding agreement and we have not received a purchase order, we do not consider the initial KG2
order to be backlog as of the date of this filing.
Commercial
Terms
The
commercial terms of the D-R Agreement are as follows:
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|
●
|
An upfront license
fee of $1,600,000 payable by Dresser Rand will be paid into an escrow account upon satisfaction of four binding conditions,
with payments thereafter each calendar quarter into the escrow account. After Ener-Core successfully passes the FSAT, expected
in 2016, all amounts remaining in escrow and all future license fee payments shall be remitted directly to Ener-Core.
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●
|
Full payment of
the license fee provides Dresser Rand with an exclusive license to commercialize turbines that have incorporated Power Oxidizers
in the 1-4MW range as long as Dresser Rand sells a minimum quantity of units per year beginning in 2019.
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●
|
Up to $500,000 of
engineering time and materials shall be performed by Dresser Rand. Dresser Rand shall be allowed to receive payments from
amounts placed in escrow until the escrow release and thereafter by direct payments from Ener-Core.
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●
|
As described in
a letter of intent received in March 2015, the initial KG2 order from Dresser Rand to Ener-Core shall consist of 2 Power Oxidizers
in the 1.75MW range. We expect to receive a total purchase price of approximately $2.1 million from this order. The letter
indicates that Dresser Rand intends to issue a formal purchase order upon satisfaction of the Binding Conditions.
However, there can be no assurance that we will be able to successfully complete all of the Binding Conditions or that Dresser
Rand will issue the formal purchase order.
|
The
agreement also calls for Dresser Rand and Ener-Core, Inc. to mutually discuss and negotiate a manufacturing agreement within six
months’ time of the November 2014 D-R Agreement signing date. As of the date of this report, no such manufacturing agreement
has been signed. If Dresser Rand and Ener-Core mutually agree to a manufacturing agreement, future sales of Power Oxidizers that
are produced by Dresser Rand shall result in additional license payments of an as yet undetermined amount.
Financing
Activities:
September
2014 Private Equity Issuance
On
September 22, 2014, we sold and issued 26,666,658 shares of our common stock to 36 accredited investors at $0.15 per share (the
“
September 2014 PIPE
”). We received net cash proceeds of $3,844,000 consisting of approximately $4,000,000
in gross proceeds reduced by $156,000 in cash offering costs consisting of cash placement fees of $73,000 and legal fees of $32,000.
In addition to the cash offering costs, we also issued: (1) 1,000,000 restricted shares of the Company’s common stock valued
at $150,000; and (2) warrants to purchase up to 1,325,000 shares of the registrant’s common stock at an exercise price of
$0.50 per share. The warrants issued for placement agent fees are exercisable for a period of four years after their issuance
dates. The warrants issued to the placement agents were recorded to offering costs at a fair value of $296,000. This amount was
based on the Black-Scholes option pricing model using a market price of $0.27 per share on the date of issuance, a risk free rate
of 1.8%, a dividend rate of 0%, and volatility of 150.8%.
We
also entered into a Waiver and Amendment Agreement (the “
Waiver
”) with the holders of warrants (the “
April
2014 Warrants
”) issued pursuant to that certain securities purchase agreement by and among the Company and five accredited
investors dated April 15, 2014 (the “
April 2014 SPA
”). Pursuant to the terms of the Waiver, the holders of
the April 2014 Warrants agreed to waive their anti-dilution rights and participation rights as set forth in the April 2014 Warrants
and the April 2014 SPA, with respect to the September 2014 PIPE. The holders of the April 2014 Warrants also agreed to amend certain
provisions of the April 2014 Warrants, including the reduction of the exercise price per share to $0.50 per share, and also conditions
for the exercise price to adjust further in March 2015 if certain events occur. In addition, provided that the holders of the
April 2014 Warrants each limit their sales in the Company’s common stock during the 10-Day Period (as defined below) to
not more than 20% of the total number of shares of the Company’s common stock issuable to such April 2014 Holder upon exercise
of the April 2014 Warrant (without regard to any limitation or restriction on the exercise thereof), the exercise price of the
April 2014 Warrants shall be reset on March 24, 2015 (the “
Adjustment Date
”), whereby the exercise price then
in effect shall be adjusted to equal the lower of (i) the then effective exercise price of the April 2014 Warrants, and (ii) seventy
percent (70%) of the arithmetic average of the weighted average prices of the Company’s common stock for the ten (10) consecutive
trading days immediately preceding the Adjustment Date (the “
10-Day Period
”), with such price rounded to the
nearest $0.01 per share. On March 24, 2015, the April 2014 Warrants had the exercise price adjusted to $0.11 per share under the
revised terms of the Warrant as amended by the Waiver.
In
connection with the September 2014 PIPE transaction, the Company entered into a Registration Rights Agreement with the Investors
(the “
Registration Rights Agreement
”), pursuant to which the Company was required to file a registration statement
related to the September 2014 PIPE transaction with the SEC covering the resale of the Shares that were issued to the Investors.
The Company filed the initial registration statement in October, 2014 and such registration statement was declared effective by
the SEC on November 12, 2014.
April
16, 2014 Secured Notes
On
April 16, 2014, we consummated the sale of approximately $4.6 million of convertible secured promissory notes (the “
Secured
Notes
”) with an original issue discount of $0.6 million, as well as warrants to purchase up to 4.1 million shares of
our common stock in a private placement to a five institutional investors. We received gross proceeds of $4.0 million, less transaction
expenses of approximately $0.2 million, of which $2.3 million has been placed in a control account and its usage restricted and
$1.5 million was received for our use towards working capital requirements and general corporate requirements. In connection with
the issuance of the Secured Notes, we agreed to pay our placement agent 6.5% of the total principal amount of the Secured Notes,
of which $0.2 million will be paid as the funds are released from the control account. We also issued our placement agent warrants
to purchase up to 0.7 million shares of common stock. The warrants are exercisable at $0.78 and expire on April 15, 2019. We intend
to use the proceeds for general corporate purposes.
On
July 11, 2014, we entered into a letter agreement with the investors who are parties to April 2014 SPA. The letter agreement amends
certain terms of the April 2014 SPA and the Secured Notes issued thereunder.
The
letter agreement amended the April 2014 SPA as follows:
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●
|
The
period of time during which the Company may sell and issue up to $2.0 million of its equity securities without the consent
of the investors was increased from 45 days commencing April 16, 2014, to 120 days.
|
The
letter agreement amended the Secured Notes as follows:
|
|
●
|
The
date of the Company’s first monthly installment payment was changed from July 16, 2014, to August 15, 2014;
|
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●
|
The
date of the Company’s final monthly installment, as well as the maturity date of the Secured Notes, was changed from
October 16, 2015, to November 16, 2015;
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|
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●
|
The
required closing price of the Company’s common stock in order to satisfy certain equity conditions was changed from
$0.50 to $0.35; and
|
|
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●
|
The
percentage used to determine the Market Price (as defined in the Secured Notes) of the Company’s common stock, was changed
from 85% to 82%.
|
Except
for the foregoing amendments, the remaining terms of the April 2014 SPA and the Secured Notes remained unchanged. The investors
who were signatories to the letter agreement collectively constitute the Required Holders (as defined in the April 2014 SPA and
the Secured Notes) necessary to effectuate the foregoing amendments.
Conversion
and Redemption of Secured Notes Payable
On
August 14, 2014, we entered into a Conversion and Redemption Agreement (each, an "
Agreement
" and together the
"
Agreements
") with each holder of the Secured Notes. Pursuant to the Agreements:
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●
|
The
conversion price of the Secured Notes was adjusted to $0.20 per share. As a result of this change, we adjusted the fair value
of the conversion feature to $103,000 immediately prior to the conversion
|
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●
|
The
holders of the Secured Notes converted a portion of the Secured Notes held by them, in an aggregate amount of $2,711,000,
into 13,555,000 shares of our common stock in the aggregate based on the adjusted conversion price;
|
|
|
●
|
The
holders of the Secured Notes redeemed a portion of the Secured Notes held by them for cash, in the aggregate amount of $1,866,000,
from the funds held in the control account;
|
|
|
●
|
The
Secured Notes were cancelled immediately following the foregoing conversion and redemption. The fair value of the conversion
feature was accelerated to income and we recorded a loss on conversion of $2,414,000; and
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●
|
$405,000,
net of $17,000 of legal fees, of the funds held in the control account was transferred to us immediately after the closing
of the Agreements
.
|
The
closing of the Agreements occurred on August 15, 2014, and we received funds from the control account on August 18, 2014. The
following reflect changes to our financial statements resulted upon the conversion and redemption of the secured notes payable:
|
|
|
Increase
(decrease)
|
|
|
Operating Cash
|
|
$
|
405,000
|
|
|
Restricted Cash
|
|
$
|
(2,288,000
|
)
|
|
Convertible Note
|
|
$
|
(4,575,000
|
)
|
|
Discount on convertible note
|
|
$
|
(2,515,000
|
)
|
|
Derivative liabilities
|
|
$
|
(104,000
|
)
|
|
Common stock
|
|
$
|
1,000
|
|
|
Paid in capital
|
|
$
|
2,710,000
|
|
|
Outstanding shares
|
|
|
13,555,000
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|
Corporate
Information
Ener-Core
was incorporated in Nevada in April 2010. Ener-Core’s operating subsidiary, Ener-Core Power, was incorporated in Delaware
in July 2012 under the name “Flex Power Generation, Inc.” Ener-Core Power became Ener-Core’s subsidiary in July
2013 by merging with Flex Merger Acquisition Sub, Inc., a Delaware corporation wholly owned by Ener-Core.
The
address of our corporate headquarters is 9400 Toledo Way, Irvine, California 92618, and our telephone number is (949) 616-3300.
Our website can be accessed at www.ener-core.com. All of our operations are located in the United States. Our fiscal year ends
December 31.
Going
Concern
Our
consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles
generally accepted in the United States of America (“
GAAP
”) and have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities in the normal course of business. Since our inception,
we have made a substantial investment in research and development to develop the Power Oxidizer, have successfully deployed an
EC250 field test unit at the U.S. Army base at Fort Benning, Georgia, and installed and commissioned our first commercial unit
in the Netherlands in the second quarter of 2014.
We
have sustained recurring net losses and negative cash flows since inception and have not yet established an ongoing source of
revenues sufficient to cover our operating costs and allow us to continue as a going concern. Despite a capital raise of
approximately $4.0 million in September 2014, we expect to require additional sources of capital to support the Company’s
growth initiatives. We must secure additional funding to continue as a going concern and execute our business plan.
Management’s
plan is to obtain such resources by obtaining capital sufficient to meet our operating expenses by seeking additional equity and/or
debt financing. The cash and cash equivalents balance (including restricted cash) on December 31, 2014 and March 16, 2015, was
approximately $2.2 million and $0.8 million (including restricted cash of $50,000), respectively.
We
project that our unrestricted cash balance of $0.8 million as of March 16, 2014, will continue to fund our working capital needs,
general corporate purposes, and related obligations for the short term at our current spending levels. However, we expect to require
significantly more cash for working capital and as financial security to support our growth initiatives.
We
will pursue raising additional debt or equity financing to fund our operations and product development. If future funds
are raised through issuance of stock or debt, these securities could have rights, privileges, or preferences senior to those of
common stock and debt covenants that could impose restrictions on the Company’s operations. The sale of additional equity
securities or debt financing will likely result in additional dilution to the Company’s current shareholders. We
cannot make any assurances that any additional financing will be completed on a timely basis, on acceptable terms or at all.
Management’s inability to successfully complete any other financing will adversely impact our ability to continue as a going
concern. If our business fails or we are unable to seek immediate financing, our investors may face a complete loss of their investment.
The
accompanying consolidated financial statements do not give effect to any adjustments that might be necessary if we were unable
to meet our obligations or continue operations as a going concern.
Reverse
Merger
We
entered into the Merger Agreement with Ener-Core Power and the Merger Sub, pursuant to which the Merger Sub merged with and into
Ener-Core Power, with Ener-Core Power as the surviving entity. Prior to the Merger, we were a public reporting “shell company,”
as defined in Rule 12b-2 of the Exchange Act. The Merger Agreement was approved by the boards of directors of each of the parties
to the Merger Agreement. In April 2013, the pre-merger public shell company effected a 30-for-1 forward split of its common
stock. All share amounts have been retroactively restated to reflect the effect of the stock split.
As
provided in the Contribution Agreement, dated November 12, 2012, by and among FlexEnergy, FlexEnergy Energy Systems, Inc., and
Ener-Core Power, Ener-Core Power was spun-off from FlexEnergy as a separate corporation. As a part of that transaction, Ener-Core
Power received all assets (including intellectual property) and certain liabilities pertaining to the Gradual Oxidizer business
(Predecessor), the business carved out of Parent. The owners of Predecessor did not distribute ownership of Successor
entity pro rata. The assets and liabilities were transferred to the Company and recorded at their historical carrying
amounts since the transaction was a transfer of net assets between entities under common control.
On
July 1, 2013, Ener-Core Power completed the Merger with us. Upon completion of the Merger, the operating company immediately became
a public company. The Merger was accounted for as a “reverse merger” and recapitalization. As part of the reverse
merger, the pre-merger public shell company shareholders cancelled 120,520,000 of common stock which were then outstanding. This
cancellation has been retroactively accounted for as of the inception of Ener-Core Power, Inc. on November 12, 2012. Accordingly,
Ener-Core Power was deemed to be the accounting acquirer in the transaction and, consequently, the transaction was treated as
a recapitalization of Ener-Core Power. Accordingly, the assets and liabilities and the historical operations that are reflected
in the financial statements are those of Ener-Core Power and are recorded at the historical cost basis of Ener-Core Power. Our
assets, liabilities and results of operations were de minimis at the time of Merger.
Critical
Accounting Policies and Estimates
While
our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere
in this report, we believe that the following accounting policies are the most critical to aid you in fully understanding and
evaluating this management discussion and analysis.
Segments
We
operate in one segment. All of our operations are located domestically.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period. Significant items subject to such estimates and assumptions
include but are not limited to: collectability of receivables; the valuation of certain assets, useful lives, and carrying amounts
of property and equipment, valuation of equity instruments and share-based compensation including estimates of volatility used
in the equity and derivative liability valuation calculations; provision for contract losses; valuation allowances for deferred
income tax assets; valuation of derivative liabilities; and exposure to warranty and other contingent liabilities. We base our
estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates.
Concentrations
of Credit Risk
Cash
and Cash Equivalents
We
maintain our non-interest bearing transactional cash accounts at financial institutions for which the Federal Deposit Insurance
Corporation (“
FDIC
”) provides insurance coverage of up to $250,000. For interest bearing cash accounts, from
time to time, balances exceed the amount insured by the FDIC. We have not experienced any losses in such accounts and believe
we are not exposed to any significant credit risk related to these deposits. At December 31, 2014, we had $1.9 million in excess
of the FDIC limit.
We
consider all highly liquid investments available for current use with an initial maturity of three months or less and are not
restricted to be cash equivalents. We invest our cash in short-term money market accounts.
Restricted
Cash
Collateral
Account
Under
a credit card processing agreement with a financial institution that was entered in 2013, we are required to maintain funds on
deposit with the financial institution as collateral. The amount of the deposit is at the discretion of the financial institution
was $50,000 on December 31, 2014 and 2013.
Accounts
Receivable
Our
accounts receivable are typically from credit worthy customers or, for international customers are supported by guarantees or
letters of credit. For those customers to whom we extend credit, we perform periodic evaluations of them and maintain allowances
for potential credit losses as deemed necessary. We generally do not require collateral to secure accounts receivable. We have
a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in existing
accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an
analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account
balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.
At
December 31, 2014, we reserved $34,000 related to rents receivable from our sublessees. At December 31, 2013, we did not have
any allowance for doubtful accounts. Although we expect to collect amounts due, actual collections may differ from the recorded
amounts.
As
of December 31, 2014 and December 31, 2013, one and one customer, respectively, accounted for 100% of net accounts receivable
for each year. One customer accounted for 100% of net revenues for the twelve months ended December 31, 2014. Two customers
accounted for 100% of net revenues for the twelve months ended September 30, 2013.
Accounts
Payable
As
of December 31, 2014 and December 31, 2013, six and two vendors collectively accounted for approximately 54% and 48% of total
accounts payable.
Inventory
Inventory,
which consists of raw materials, is stated at the lower of cost or net realizable value, with cost being determined by the average-cost
method, which approximates the first-in, first-out method. At each balance sheet date, we evaluate our ending inventory for excess
quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand in relation to the inventory
on hand, among consideration of other factors. Based upon the evaluation, provisions are made to reduce excess or obsolete inventories
to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis
of the respective inventories. At December 31, 2014 and 2013, we did not have a reserve for slow-moving or obsolete inventory.
Costs
in Excess of Billings on Uncompleted Contracts
Costs
in excess of billings on uncompleted contracts in the accompanying consolidated balance sheets represents accumulation of costs
for labor, materials, overhead and other costs that have been incurred. These costs will be recognized as costs of goods sold
when the contract is considered complete in accordance with the completed-contract method. Costs in excess of billings on uncompleted
contracts were $0 and $801,000 at December 31, 2014 and 2013, respectively. In June 2014, our contract with EECT was completed,
resulting in the recognition of revenue related to the contract plus change orders and all associated costs.
Property
and Equipment
Property
and equipment are stated at cost, and are being depreciated using the straight-line method over the estimated useful lives of
the related assets, ranging from three to ten years. Maintenance and repairs that do not improve or extend the lives of the respective
assets are expensed. At the time property and equipment are retired or otherwise disposed of, the cost and related accumulated
depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are reflected in the consolidated
statements of operations.
Deposits
Deposits
primarily consist of amounts incurred or paid in advance of the receipt of fixed assets or are deposits for rent and insurance.
Accrued
Warranties
Accrued warranties
represent the estimated costs that will be incurred during the warranty period of our products. We make an estimate of expected
costs that will be incurred by us during the warranty period and charge that expense to the consolidated statement of operations
at the date of sale. We also reevaluate the estimate at each balance sheet date and if the estimate is changed, the effect is reflected
in the consolidated statement of operations. We made our initial commercial sale to EECT with a six month warranty and later extended
that warranty at our discretion. There was no warranty for the unit shipped to the Fort Benning site. We expect our future warranty
period to be between six months and one year depending on the warranties provided and the products sold. Accrued warranties for
expected expenditures within the next year are classified as current liabilities and as non-current liabilities for expected expenditures
for time periods beyond one year.
Deferred
Rent
We
record deferred rent expense, which represents the temporary differences between the reporting of rental expense on the financial
statements and the actual amounts remitted to the landlord. The deferred rent portion of lease agreements are leasing inducements
provided by the landlord. Also, tenant improvement allowances provided are recorded as a deferred rent liability and recognized
ratably as a reduction to rent expense over the lease term.
Intangible
Assets
We
amortize our intangible assets with finite lives over their estimated useful lives.
Impairment
of Long-Lived Assets
We
account for our long-lived assets in accordance with the accounting standards which require that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the historical carrying value of an asset may no longer
be appropriate. We consider the carrying value of assets may not be recoverable based upon its review of the following events
or changes in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in
future periods; loss of legal ownership or title to the assets; significant changes in our strategic business objectives and utilization
of the asset; or significant negative industry or economic trends. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset are less than its carrying amount. As of December 31, 2014 and 2013, we
do not believe there have been any other impairments of our long-lived assets. There can be no assurance, however, that market
conditions will not change or demand for our products will continue, which could result in impairment of long-lived assets in
the future.
Fair
Value of Financial Instruments
Our
financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts receivable, accounts payable,
derivative liabilities, Secured Notes payable and related debt discounts and capital lease liabilities. Fair value estimates discussed
herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2014 and
2013. The carrying amounts of short-term financial instruments are reasonable estimates of their fair values due to their short-term
nature or proximity to market rates for similar items.
We
determine the fair value of our financial instruments based on a three-level hierarchy established for fair value measurements
under which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable
inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s market assumptions.
This hierarchy requires the use of observable market data when available. These two types of inputs have created the following
fair-value hierarchy:
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|
●
|
Level
1: Valuations based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities. Currently, we classify our cash and cash equivalents as Level 1 financial instruments.
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●
|
Level 2: Valuations
based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date quoted
prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the
full term of the asset or liability. We do not currently have any accounts under Level 2.
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●
|
Level
3: Valuations based on inputs that require inputs that are both significant to the fair value measurement and unobservable
and involve management judgment (i.e., supported by little or no market activity). Currently, we classify our warrants accounted
for as derivative liabilities as level 3 financial instruments.
|
If
the inputs used to measure fair value fall in different levels of the fair value hierarchy, a financial security’s hierarchy
level is based upon the lowest level of input that is significant to the fair value measurement.
Derivative
Financial Instruments
The
Company issues derivative financial instruments in conjunction with its debt and equity offerings and to provide additional incentive
to investors and placement agents. The Company’s uses derivative financial instruments in order to obtain the lowest cash
cost-source of funds. Derivative liabilities are recognized in the consolidated balance sheets at fair value based on the criteria
specified in Financial Accounting Standards Board (“
FASB
”) Accounting Standards Codification (“
ASC
”)
topic 815-40 “
Derivatives and Hedging – Contracts in Entity’s own Equity
.” The estimated fair
value of the derivative liabilities is calculated using either the Black-Scholes-Merton or Monte Carlo simulation model method.
The
Company issued common stock warrants and convertible secured notes payable with conversion features in April 2014. These embedded
derivatives were evaluated under ASC topic 815-40, were bifurcated from the debt host and are classified as liabilities on the
consolidated balance sheet. The Company records the warrants and embedded derivative liabilities at fair value and adjusts the
carrying value of the common stock warrants and embedded derivatives to their estimated fair value at each reporting date with
the increases or decreases in the fair value of such warrants and derivatives at each reporting date, recorded as a gain or (loss)
in the consolidated statements of operations (See Notes 8, 9, and 11).
The
Company issued common stock warrants for services during 2014. These derivative securities were evaluated under ASC topic 815-40
and determined that they did not need to be recorded as liabilities on the consolidated balance sheet. The warrants were valued
on the date of issuance at fair value.
Revenue
Recognition
We
generate revenue from the sale of our clean power energy systems and from consulting services. Revenue is recognized when there
is persuasive evidence of an arrangement, product delivery and acceptance have occurred, the sales price is fixed or determinable
and collectability of the resulting receivable is reasonable assured. Amounts billed to clients for shipping and handling are
classified as sales of product with related costs incurred included in cost of sales.
Provisions
for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period
the related revenue is recorded. We defer any revenue for which the services have not been performed or are subject to refund
until such time that we and our customer jointly determine that the services have been performed or no refund will be required.
Revenues
under long-term construction contracts are generally recognized using the completed-contract method of accounting. Long-term construction-type
contracts for which reasonably dependable estimates cannot be made or for which inherent hazards make estimates difficult are
accounted for under the completed-contract method. Revenues under the completed-contract method are recognized upon substantial
completion – that is acceptance by the customer, compliance with performance specifications demonstrated in a factory acceptance
test or similar event. Accordingly, during the period of contract performance, billings and costs are accumulated on the balance
sheet, but no profit or income is recorded before completion or substantial completion of the work. Anticipated losses on contracts
are recognized in full in the period in which losses become probable and estimable. Changes in estimate of profit or loss on contracts
are included in earnings on a cumulative basis in the period the estimate is changed. We had deferred all amounts received on
our contract with EECT until the contract is substantially completed, which occurred in June 2014, at which time the entire contract,
including change orders, was recorded as revenue. As of December 31, 2014 and 2013, we had a provision for contract loss of $0
and $100,000, respectively, related to our contract with EECT for the Attero EC250 sale in the Netherlands.
Research
and Development Costs
Research
and development costs are expensed as incurred. Research and development was $3.2 million and $2.3 million, for the
years ended December 31, 2014 and 2013, respectively.
Share-Based
Compensation
We
maintain a stock option plan through our 2013 Equity Incentive Award Plan (the “
Plan
”) and record
expenses attributable to the Plan. We amortize share-based compensation from the date of grant on a weighted average basis
over the requisite service (vesting) period for the entire award.
We
account for equity instruments issued to consultants and vendors in exchange for goods and services at fair value. The measurement
date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for
performance by the consultant or vendor is reached or (ii) the date at which the consultant’s or vendor’s performance
is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over
the term of the consulting agreement.
In
accordance with the accounting standards, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity
instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity
instrument is granted for accounting purposes. Accordingly, we record the fair value of the fully vested, non-forfeitable common
stock issued for future consulting services as prepaid expense in our consolidated balance sheets.
Income
Taxes
We
account for income taxes under the provisions of the accounting standards. Under the accounting standards, deferred
tax assets and liabilities are recognized for the expected future tax benefits or consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred
tax assets when it is more likely than not that such asset will not be realized through future operations. Our deferred tax assets
and liabilities are primarily related to our Net Operating Losses and timing differences between book and tax accounting for depreciation
and our net deferred tax assets were fully reserved as of December 31, 2014 and December 31, 2013.
The
accounting guidance for uncertainty in income taxes provides that a tax benefit from an uncertain tax position may be recognized
when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals
or litigation processes, based on the technical merits. We recognize any uncertain income tax positions on income tax
returns at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An
uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. As of
December 31, 2014 and 2013 and there were no unrecognized tax benefits included in the consolidated balance sheet that would,
if recognized, affect the effective tax rate. Our practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. We had no accrual for interest or penalties on our consolidated balance sheets at
December 31, 2014 and 2013 and have not recognized interest and/or penalties in the consolidated statement of operations
for the year ended December 31, 2014 or 2013.
We
are subject to taxation in the U.S. and various state and foreign jurisdictions.
We
do not foresee material changes to our gross uncertain income tax position liability within the next twelve months.
Earnings
(Loss) per Share
Basic
loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares
assumed to be outstanding during the period of computation. Diluted loss per share is computed similar to basic loss
per share except that the denominator is increased to include the number of additional common shares that would have been outstanding
if the potential shares had been issued and if the additional common shares were dilutive. Options and warrants to
purchase approximately 23.1 million and 9.5 million were outstanding at December 31, 2014 and 2013, respectively, but were excluded
from the computation of diluted loss per share due to the anti-dilutive effect on net loss per share.
|
|
|
Year
ended
December 31,
2014
|
|
|
Year
ended
December 31,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,534,000
|
)
|
|
$
|
(7,130,000
|
)
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
85,381,000
|
|
|
|
67,803,000
|
|
|
Net loss attributable to common stockholders
per share:
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.11
|
)
|
Recently
Issued Accounting Pronouncements
Effective
January 1, 2014, we adopted FASB Accounting Standards Update (“
ASU
”) 2013-07, Presentation of Financial Statements
(Topic 205): Liquidation Basis of Accounting (“
ASU 2013-07
”). The amendments in ASU 2013-07 clarify when an
entity should apply the liquidation basis of accounting and provide principles for the recognition and measurement of associated
assets and liabilities. In accordance with the amendments, the liquidation basis is used when liquidation is imminent. Liquidation
is considered imminent when the likelihood is remote that the organization will return from liquidation and either: (a) a plan
for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote
that the execution of the plan will be blocked by other parties; or (b) a plan for liquidation is being imposed by other forces.
The adoption of ASU 2013-07 did not have a material impact on our consolidated financial statements.
Effective
January 1, 2014, we adopted FASB ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“
ASU 2013-11
”). The amendments
in ASU 2013-11 clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented
in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In
situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting
date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does
not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements
as a liability and should not be combined with deferred tax assets. The adoption of ASU 2013-11 did not have a material impact
on our consolidated financial statements.
In
May, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("
ASU 2014-09
"). ASU
2014-09 provides a framework for addressing revenue recognition issues and, upon its effective date, replaces almost all existing
revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles.
ASU 2014-09 is effective beginning with the calendar year ended December 31, 2017. The Company has not yet assessed the impact
ASU 2014-09 will have upon adoption on its financial position, results of operations or cash flows.
In
August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity's Ability to Continue as a Going Concern (“
ASU 2014-15
”). ASU 2014-15 requires
that an entity's management evaluate whether there are conditions or events, considered in the aggregate, that raise substantial
doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are
issued. Substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events,
considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become
due within one year after the date that the financial statements are issued. Certain disclosures are necessary in the footnotes
to the financial statements in the event that conditions or events raise substantial doubt about an entity's ability to continue
as a going concern. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and
interim periods thereafter and early application is permitted. The Company has not yet assessed the impact ASU 2014-15 will have
upon adoption.
In
November 2014, the FASB issued ASU 2014-16 – Derivatives and Hedging: Determining Whether the Host Contract in a Hybrid
Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity (“
ASU 2014-16
”). ASU 2014-16
clarifies how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a
hybrid financial instrument that is issued in the form of a share. ASU 2014-16 is effected for the interim and annual periods
beginning after December 15, 2015. The Company has not yet assessed the impact ASU 2014-16 will have upon adoption.
Results
of Operations for the Fiscal Years Ended December 31, 2014 and 2013
|
|
|
Year
Ended
December 31,
2014
|
|
|
Year
Ended
December 31,
2013
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Revenues
from unrelated parties
|
|
$
|
868,000
|
|
|
$
|
7,000
|
|
|
Revenues
from related parties
|
|
|
—
|
|
|
|
9,000
|
|
|
Total revenues
|
|
|
868,000
|
|
|
|
16,000
|
|
|
Cost of Goods Sold
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
to unrelated parties
|
|
|
1,170,000
|
|
|
|
106,000
|
|
|
Cost of goods sold
to related parties
|
|
|
—
|
|
|
|
6,000
|
|
|
Total
costs of goods sold
|
|
|
1,170,000
|
|
|
|
112,000
|
|
|
Gross
Profit (Loss)
|
|
|
(302,000
|
)
|
|
|
(96,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
|
5,449,000
|
|
|
|
4,802,000
|
|
|
Research and
development
|
|
|
3,156,000
|
|
|
|
2,257,000
|
|
|
Total operating
expenses
|
|
|
8,605,000
|
|
|
|
7,059,000
|
|
|
Operating loss
|
|
|
(8,907,000
|
)
|
|
|
(7,155,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
1,000
|
|
|
|
36,000
|
|
|
Loss on Debt Conversion
|
|
|
(2,414,000
|
)
|
|
|
—
|
|
|
Gain on revaluation of derivative liabilities,
net
|
|
|
1,574,000
|
|
|
|
—
|
|
|
Interest expense
|
|
|
(787,000
|
)
|
|
|
(10,000
|
)
|
|
Total other income
(expense), net
|
|
|
(1,626,000
|
)
|
|
|
(26,000
|
)
|
|
Loss before provision for income taxes
|
|
|
(10,533,000
|
)
|
|
|
(7,129,000
|
)
|
|
Provision for
income taxes
|
|
|
1,000
|
|
|
|
1,000
|
|
|
Net loss
|
|
$
|
(10,534,000
|
)
|
|
$
|
(7,130,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
– basic and diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.11
|
)
|
|
Weighted average common shares – basic and diluted
|
|
|
85,381,000
|
|
|
|
67,803,000
|
|
Revenue
Our
revenue primarily consists of Power Oxidizer sales as well as engineering services. For the year ended December 31, 2014, we had
revenue of $868,000, as compared to $16,000 for the same periods of the prior year. The 2014 revenue was primarily from the sale
of a Power Oxidizer unit to EECT in the second quarter of 2014 and consulting services to an oil and gas company in the third
quarter of 2014. For the prior year, the revenue consisted of $9,000 engineering services to a related party and $7,000 of other
revenue.
Cost
of Goods Sold
For
the year ended December 31, 2014, cost of goods sold was $1,170,000 compared to $112,000 for the same period of the prior year.
For the year ended December 31, 2014 cost of goods sold consisted of costs to build our commercial EC250 unit sold to EECT including
materials, labor, overhead costs and warranty cost materials, shipping, commissioning, and warranty accrual and engineering labor
and travel expenses related to the consulting services provided. In particular, during 2014 we accrued significant costs related
to the EC250 unit sold to EECT for post-sale warranty expenses. While we are not contractually obligated to provide these services,
our intention is to remove key components of this unit in order to verify that future production units are properly designed and
engineered.
Cost
of goods for the 2013 periods was primarily cost of labor for engineering services.
Gross
Profit (Loss)
As
sales are generated and potentially increase, management anticipates that costs of sales will continue to decrease as a percentage
of sales as we will experience economics of scale. We also expect that our warranty expense will decrease significantly for future
units sold.
Operating
expenses:
Total
operating expenses for the years ended December 31, 2014 and 2013 were $8.6 million and $7.1 million respectively. The $1.5 million
increase in expenses or 21.1% from 2013 to 2014 is due to the net effect of an increase of non-cash expenses of $2.1 million and
cash basis expense reductions of $0.6 million.
Cash
basis expenses consist of employee salaries and benefits paid in cash, rents and overhead, research and development materials,
consulting expenses, professional services, and insurance. From 2013 to 2014, total expenses paid in cash decreased by $0.6 million
resulting from:
|
|
●
|
$0.2
million increase in employee salaries and benefits due to increased staff in 2014 and
increased executive payroll compared to 2013.
|
|
|
|
|
|
|
●
|
$0.3
million increase for additional rent and overhead, resulting from higher rents in 2014.
In July 2013, the Company assumed the lease from its predecessor company. Until July
2013, the Company paid a substantially lower sublease payment.
|
|
|
|
|
|
|
●
|
$0.1
million increase in insurance costs.
|
|
|
|
|
|
|
●
|
($0.7)
million decrease in professional services due to cost savings and replacement of expensive
consultant costs for legal and accounting with less expensive employees.
|
|
|
|
|
|
|
●
|
($0.4)
million decrease in research and development related spending. In 2013, the Company spent
funds to finalize the EC250 unit. In 2014, the Company began to spend to develop the
Dresser Rand KG-2 unit but not until late in 2014 after the agreement with Dresser Rand
was signed in November 2014.
|
|
|
|
|
|
|
●
|
($0.1)
million reduction in fees, travel, and other miscellaneous expenses.
|
Non-cash
basis expenses consist of employee stock option compensation expense, the fair value of warrants issued for services and for legal
settlements, and depreciation. From 2013 to 2014, total non-cash expenses increased by $2.1 million resulting from:
|
|
●
|
$1.7
million increase in employee stock compensation. The increase was due to the combined
effect of the $0.8 million charge resulting from the cancellation and reissuance of all
employee stock options in April 2014 and $0.9 million of additional expense due to timing
of the issuances of employee stock options in 2013. In 2013, most of the employee stock
options were granted in July 2013 and only 6 months of vesting and expense was recorded.
In 2014, a full year of vesting was recorded.
|
|
|
|
|
|
|
●
|
$0.4
million expense related to warrants issued for services and warrants issued to settle
potential disputed legal claims.
|
Selling,
general and administrative expenses
Selling,
general and administrative (“
SGA
”) expenses include officer compensation, salaries and benefits, stock-based
compensation expense, consulting fees, legal expenses, intellectual property costs, accounting and auditing fees, investor relations
costs, insurance, public company reporting costs and listing fees, and corporate overhead related costs. SGA expenses increased
$647,000 or 13.5% from $4,802,000 for the year ended December 31, 2013 to $5,449,000 for the year ended December 31, 2014. The
increase was due to the net effect of an increase in non-cash expense increase of $1,381,000 and net decrease of expenses payable
in cash of $482,000.
The
decrease of expenses payable in cash was due to a reduction in professional services paid in cash of $583,000 offset by an increase
in employee payroll and related headcount and related overhead costs of approximately $99,000. The Company incurred significant
expenses in 2013 related to the reverse merger including accounting and legal expenses. These services were conducted by expensive
outside consultants. During 2014, the company replaced these consultants with less expensive employees and the work load was substantially
reduced since the reverse merger activity was isolated to 2013.
The
non-cash expenses increase from 2013 to 2014 were primarily due to increased expenses for employee stock-based compensation which
increased $1,094,000 or 118% from $930,000 in 2013 to $2,024,000 in 2014. The stock-based compensation expense increase was due
to expenses incurred in 2014 related to the cancellation and reissuance of employee stock options as well as a longer period of
stock compensation amortization of 2013 grants. In 2013, options were granted in July 2013 and therefore only had 6 months of
vesting as compared to an entire year for 2014. The remaining increase was due to the fair value of warrants issued for services
and settlements in 2014 of $289,000 with no comparable expense in 2013.
Research
and development
Research
and development costs include development expenses for the Power Oxidizer, including salaries and benefits, stock based compensation
expense, consultant fees, cost of supplies and materials for samples and prototypes, depreciation, as well as outside services
costs.
Research
and development expenses increased $899,000 or 39.8% from $2,257,000 for the year ended December 31, 2013 to $3,156,000 for the
year ended December 31, 2014. The increase was due to the net effect of a $689,000 increase in non-cash stock-based compensation
expenses; a decrease of $195,000 in project materials costs, and an increase of $133,000 in headcount and overhead related costs
paid in cash. The stock-based compensation expense increase was due to expenses incurred in 2014 related to the cancellation and
reissuance of employee stock options as well as a longer period of stock compensation amortization of 2013 grants. In 2013, options
were granted in July 2013 and therefore only had 6 months of vesting as compared to an entire year for 2014 The decrease in project
materials costs was primarily due to a reduced spending in 2014 compared to 2013 time periods related to the Company’s development
efforts on the EC250 unit. In November 2013, the Company finalized the EC250 unit and incurred additional materials costs, testing
costs, and consulting costs associated with the EC250 unit which did not occur in 2014. The increase in payroll and overhead related
costs was due to increased hiring late in 2014 as well as increased overhead costs in 2014.
Other
Income (Expenses):
Other
income and expenses for the year ended December 31, 2014 of ($1,626,000) consists primarily of combined interest expense and amortization
of debt discount of ($787,000) and loss on debt conversion of ($2,414,000), offset by a gain on the fair value adjustment of our
derivative liabilities of $1,574,000, all of which were associated with the convertible debt offering which was entered into in
April 2014 and settled in August 2014. For the year ended December 31, 2013, other income (expense) was for interest expense on
a related party note payable.
Net
Loss
For
the year ended December 31, 2014, our net loss was approximately 10.5 million, primarily from $0.3 million in negative gross profit,
operating expenses of $8.6 million, of which $3.9 million was for employee stock compensation and the value of expensed non-employee
warrants issued; and other expense of $1.6 million related to the convertible debt offering entered into in April 2014 and settled
in August 2014.
The
increases from the net loss of $7.1 million for the year ended December 31, 2013 to $10.5 million for the year ended December
31, 2014 was due an increase in other expenses of $1.6 million related to the April 2014 Secured Notes which did not exist in
2013 and for an increase in an operating loss of $1.8 million, as described above.
Liquidity
Cash
Flows used in Operating Activities
Our
cash used in operating activities was approximately $4.5 million and $4.9 million for the year ended December 31, 2014 and 2013
respectively. Cash used in operations resulting primarily from net losses of $10.5 million and $7.1 million respectively. For
the year ending December 31, 2014, the significant reconciling items included $3.5 million of stock-based compensation expense,
$2.5 million due to the accelerated amortization of debt discount on the August 2014 debt conversion, $0.7 million of debt amortization,
$0.4 million in fair value warrants issued for services and settlements, $0.2 million in warranty expenses, $0.2 million in depreciation
and $0.1 million in working capital, offset by a $1.7 million gain on the reduction in fair value of our derivative liabilities.
For
the year ending December 31, 2013, the significant reconciling items included stock based compensation of $1.7 million, depreciation
and amortization of $0.2 million, and a $1.1 million change in working capital.
Cash
Flows from Investing Activities
Our
cash used in investing activities was primarily purchases of property and equipment year ended December 31, 2014 and 2013 of $188,000
and $54,000 respectively.
Cash
Flows from Financing Activities
Net
cash provided by financing activities was $5.7 million for the year ended December 31, 2014 consisting of the $3.8 million equity
raise in September 2014, net and the net effect of $3.8 million in proceeds from the convertible secured notes offset by a $1.9
million repayment. Net cash provided by financing activities was $6.0 million for the year ended December 31, 2013 related to
the sale of our common stock which resulted in proceeds of $5.5 million and issuance of related party advances and notes totaling
$1.0 million and repayment of $0.5 million of related party notes payable in cash with $0.5 million of related party notes payable
converted into the Company’s common stock.
Capital
Resources
Our
principal capital requirements are to fund our working capital requirements, invest in research and development and capital equipment,
and the continued costs of public company filing requirements. We have historically funded our operations through debt and equity
financings. In July and August 2013, we completed private placements and received net proceeds of approximately $4.1 million,
after deduction of offering expenses. In November 2013, we raised approximately $1.4 million after deductions of offering expenses
as part of a private placement offering. In April 2014, we issued $4.6 million of the Secured Notes, from which we received net
proceeds of $3.8 million, of which $2.3 million was deposited into a control account to be released to us at the lender representative’s
option. In August 2014 we redeemed and converted all of the Secured Notes by issuing 13.5 million shares of common stock, the
investors released $0.4 million of the $2.3 million in the control account, and we returned $1.9 million remaining in the control
account to the investors. In September 2014, we sold approximately 26.7 million shares of common stock for net cash proceeds of
$3.8 million, net of $0.2 million in cash fees.
For
the year ended December 31, 2014, we incurred losses from operations, have an accumulated deficit of approximately $18.0 million
and net loss of approximately $10.5 million, and used cash in operations of approximately $4.5 million, which raises substantial
doubt about our ability to continue as a going concern.
We
expect to continue to incur substantial additional operating losses from costs related to the continuation of product and technology
development and administrative activities. Our cash on hand at December 31, 2014 and March 16, 2015 was approximately $2.2 million
and $0.8 million (including restricted cash of $50,000 for each date), respectively. We project that our unrestricted cash balance
of $0.8 million as of March 16, 2015, will continue to meet our working capital needs, general corporate purposes, and related
obligations until the second quarter of 2015. However, we expect that we will require additional debt or equity financing to maintain
operations and to fulfill our growth initiatives continuing into 2015.
Our
sales cycle can exceed 24 months and we do not expect to generate sufficient revenue in the next twelve months to cover our operating
and compliance costs. We will also need to raise additional debt or equity financing to fund new product development and execute
on the commercialization of our product plans. We cannot make any assurances that management's strategies will be effective or
that any additional financing will be completed on a timely basis, on acceptable terms or at all. Our inability to successfully
implement our strategies or to complete any other financing may mean that we would have to significantly reduce costs and/or delay
projects, which would adversely affect our business, customers and program development, and would adversely impact our ability
to continue as a going concern.
We
have not yet achieved profitable operations and have yet to establish an ongoing source of revenue to cover operating costs and
meet our ongoing obligations. Our cash needs for the next twelve months may be highly variable and dependent on the timing and
likelihood of contracts underlying business development projects including our 2MW Power Oxidizer product with Dresser Rand. Our
current monthly cash expenditures of approximately $0.4 million per month could increase significantly and may be in excess of
$9.5 million which would include the following:
|
|
●
|
employee, occupancy
and related costs: $3.0 million;
|
|
|
|
|
|
|
●
|
professional fees
and business development costs: $1.0 million;
|
|
|
|
|
|
|
●
|
research and development
programs: $3.5 million;
|
|
|
|
|
|
|
●
|
legal compliance:
$0.5 million; and
|
|
|
|
|
|
|
●
|
working capital:
$1.5 million.
|
Off-Balance
Sheet Arrangements
We
have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties.
We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity
that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets
transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have
any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or
engages in leasing, hedging or research and development services with us.
Inflation
We
believe that inflation has not had a material effect on our operations to date.
Contractual
Obligations
As
of the date of this report, we have certain fixed contractual obligations and commitments that include future estimated payments. Changes
in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing
from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented
below a summary of the most significant obligations in order to assist in the review of this information within the context of
our consolidated financial position, results of operations, and cash flows.
|
Estimated amounts due ($)
|
|
1 year
|
|
|
2-3
years
|
|
|
4-5
years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease payables
|
|
$
|
19,000
|
|
|
$
|
26,000
|
|
|
$
|
4,000
|
|
|
$
|
49,000
|
|
|
Lease and other
commitments
|
|
$
|
327,000
|
|
|
$
|
331,000
|
|
|
$
|
2,000
|
|
|
$
|
660,000
|
|
|
Total
|
|
$
|
346,000
|
|
|
$
|
357,000
|
|
|
$
|
6,000
|
|
|
$
|
709,000
|
|
Off-Balance
Sheet Arrangements
We
have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties.
We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity
that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets
transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have
any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or
engages in leasing, hedging or research and development services with us.
Warrants
From
time to time, we issue warrants to purchase shares of our common stock to investors, note holders and to non-employee consultants
for services rendered or to be rendered in the future. Warrants issued in conjunction with equity, are recorded to equity as exercised.
A
list of the warrants outstanding as of December 31, 2014 is as follows:
|
|
|
Warrants
Outstanding
|
|
|
|
|
Number
of
Warrants
|
|
|
Weighted-Average
Exercise Price per Share
|
|
|
Balance outstanding at January 1, 2014
|
|
|
631,087
|
|
|
$
|
0.80
|
|
|
Warrants issued
|
|
|
9,152,929
|
|
|
|
0.52
|
|
|
Warrants exercised
|
|
|
—
|
|
|
|
—
|
|
|
Balance outstanding
at December 31, 2014
|
|
|
9,784,016
|
|
|
$
|
0.54
|
|
Related
Party Transactions
There
were no related party transactions for the year ended December 31, 2014.
Commencing
with the spin-off, Ener-Core Power entered into a series of debt and equity transactions with our major stockholder group - the
SAIL Entities, a group of affiliated entities (each a “
SAIL Entity
”) described in Item 12 under “
Security
Ownership of Certain Beneficial Owners and Management
” below. As a result of such transactions, the SAIL
Entities were issued a sufficient quantity of Ener-Core Power’s capital stock which, when converted into shares of our common
stock in connection with the Merger-related private placement, constitutes a controlling interest in us - some of the issuances
were for cash consideration and others were for the conversion of debt directly owed by Ener-Core Power to one or more of the
SAIL Entities or were incurred by one or more of the SAIL Entities on its behalf. A description of those transactions
is set forth in Note 14 (Related Party Transactions) to our audited financial statements elsewhere in this report. Further,
two of our six directors are affiliated with the SAIL Entities, which are managed by SAIL Capital Partners, LLC. Michael J. Hammons
has an equity interest in a limited partner of SAIL Capital Partners, LLC, and Christopher J. Brown is an employee of SAIL Capital
Partners, LLC.
Following
the November, 2012 spin-off, in January 2013, Ener-Core Power borrowed $250,000 from RNS Flex, LLC, one of its then-significant
stockholder and the controlling stockholder of its former parent FlexEnergy, under a secured convertible note payable that was
due at the earliest of February 28, 2013 or upon completion of a $1,000,000 financing event. The note accrued interest
at the rate of 12% and was convertible at the lender’s option into common stock at 85% of the price of a future financing
or $3.6056 per share. Such note and accrued interest was repaid in March 2013 using funds that Ener-Core Power obtained from a
new $260,200 note that it wrote in favor of the SAIL Entities (the “
March Note
”).
Per
the terms of the March Note, in March 2013 we borrowed $260,200 from a SAIL Entity, under a note payable that was due March 28,
2014, or earlier, upon completion of the Merger. The March Note accrued interest at the rate of 12% and was convertible
at the lender’s option into common stock at $0.75 per share. The note was subsequently converted in April 2013.
In
March 2013, a SAIL Entity advanced Ener-Core Power $184,127 for operating capital. The advance did not bear interest
and was due on demand. In April 2013, the SAIL Entity converted the advance into shares of common stock of Ener-Core
Power at $0.75 per share.
In
April 2013, Ener-Core Power sold and issued to the SAIL Entities 666,667 shares of its common stock at $0.75 per share for an
aggregate purchase price of $500,000.
In
April 2013, an aggregate of approximately $671,618 that was owed by Ener-Core Power to SAIL Entities was converted into an aggregate
of approximately 895,491 shares of its common stock. Such economic obligations consisted of (i) $260,200 payable pursuant
to the March Note, (ii) $180,000 that had been advanced to Ener-Core Power in March 2013, (iii) $219,710 that had been advanced
on Ener-Core Power’s behalf under a letter of credit entered into in connection with the spin-off transaction under the
Contribution Agreement; and (iv) $11,708 for certain reimbursable legal expenses incurred in February, March, and April 2013.
In
June 2013, Ener-Core Power sold and issued to the SAIL Entities 304,509 shares of its common stock at $0.75 per share for an aggregate
purchase price of $228,382.
In
June 2013, we borrowed $100,000 each from three significant Company stockholders, Peter Geddes, Morrie Tobin and Jonathan Spanier,
under notes payable that were due on the earlier of the completion of the Merger or December 31, 2013. The notes accrued
interest at the rate of 8% and are convertible at the lenders’ option into shares of our common stock at $0.75 per share. On
July 1, 2013, the note payable owed to Mr. Geddes was converted into shares of our common stock in the Merger-related private
placement and the remaining notes payable for $200,025 (inclusive of $25 in accrued interest), was repaid at the closing of the
Merger.
In
July 2013, all of the shares of Ener-Core Power’s common stock held by the SAIL Entities were converted into shares of our
common stock as a part of the Merger-related private placement.
Revenue
During
2013, we recorded $9,000 in revenue associated with providing engineering services to Professional Energy Solutions which is owned
by our VP of Engineering. Costs associated with these revenues totaled $6,000.
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not
applicable.
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our
audited financial statements for the years ended December 31, 2014 and 2013, together with the report of the independent registered
public accounting firms thereon and the notes thereto, are presented beginning at page F-1.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
On
July 1, 2013, we dismissed Weinberg & Baer LLC (“
W&B
”) as our independent registered accounting firm
effective on such date. The reports of W&B on our financial statements for fiscal year 2012 did not contain an
adverse opinion or a disclaimer of opinion, were not qualified or modified as to uncertainty, audit scope, or accounting principles,
with the exception of a qualification with respect to uncertainty as to our ability to continue as a going concern. We
engaged Kelly & Company (“
Kelly
”) as our new independent registered accounting firm effective as of July
1, 2013. The decision to change accountants was recommended and approved by our Board in connection with the Merger.
During
fiscal years 2012, the fiscal quarter ended March 31, 2013, and the subsequent interim period through July 1, 2013, the date of
dismissal, there were no disagreements with W&B on any matter of accounting principles or practices, financial statement disclosures,
or auditing scope or procedures, which disagreement(s), if not resolved to the satisfaction of W&B, would have caused it to
make reference to the subject matter of the disagreement(s) in connection with its report, nor were there any reportable events
as defined in Item 304(a)(1)(iv) of Regulation S-K.
During
fiscal years 2012, the fiscal quarter ended March 31, 2013, and the subsequent interim period through July 1, 2013, neither we
nor anyone on our behalf engaged Kelly regarding either the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or any matter that was
either the subject of a “disagreement” or a “reportable event,” both as such terms are defined in Item
304 of Regulation S-K.
On
December 4, 2014, we dismissed Kelly as our independent registered accounting firm effective on such date. The reports
of Kelly on our financial statements for fiscal year 2013 did not contain an adverse opinion or a disclaimer of opinion, were
not qualified or modified as to uncertainty, audit scope, or accounting principles, with the exception of a qualification with
respect to uncertainty as to our ability to continue as a going concern. We engaged SingerLewak, LLP (“
SingerLewak
”)
as our new independent registered accounting firm effective as of December 4, 2014. The decision to change accountants
was recommended and approved by our Board in connection with the need to provide additional services in advance of expected company
growth initiatives.
During
2013 and the subsequent interim reporting periods through September 30, 2014, and through the date of dismissal, there were no
disagreements with Kelly on any matter of accounting principles or practices, financial statement disclosures, or auditing scope
or procedures, which disagreement(s), if not resolved to the satisfaction of Kelly, would have caused it to make reference to
the subject matter of the disagreement(s) in connection with its report, nor were there any reportable events as defined in Item
304(a)(1)(iv) of Regulation S-K.
During
2013 and the subsequent interim reporting periods through September 30, 2014, and through the date of dismissal of Kelly, neither
we nor anyone on our behalf engaged SingerLewak regarding either the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or any matter that
was either the subject of a “disagreement” or a “reportable event,” both as such terms are defined in
Item 304 of Regulation S-K.
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules
and forms, and that such information is accumulated and communicated to our management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily
is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As
of December 31, 2014, the end of the fiscal year covered by this report, our management, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer, has performed an evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).
Based
on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2014, our disclosure
controls and procedures were ineffective at the reasonable assurance level. Such conclusion is due to the presence
of material weaknesses in internal control over financial reporting as described below. Management anticipates
that our disclosure controls and procedures will remain ineffective until such material weaknesses are remediated.
Internal
Control over Financial Reporting
We
are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)). Under the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in
Internal Control - Integrated Framework
issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management concluded that our
internal control over financial reporting was not effective as of December 31, 2014 due to the following material weaknesses:
|
|
1.
|
We
do not have written documentation of our internal control policies and procedures. Management evaluated the impact
of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls
and procedures and has concluded that the control deficiency that resulted, represented a material weakness.
|
|
|
2.
|
We do not have sufficient
segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature,
segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent
possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate
individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of
our disclosure controls and procedures and has concluded that the control deficiency that resulted, represented a material
weakness.
|
|
|
|
|
|
|
3.
|
For the year ending
December 31, 2014 we did not have accounting and finance staff with sufficient technical accounting training and experience
capable to manage and process the Company’s derivative equity accounting including stock options and warrants. In
addition, the Company had 100% turnover during the year of accounting and finance management and staff. This turnover
resulted in periods of time where there was insufficient review of internal and external reports and proof of key internal
controls. Management evaluated the impact of our failure to have adequate technical accounting experience, coupled with
the turnover, on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that
resulted, represented a material weakness.
|
|
|
|
|
|
|
4.
|
For the year ending
December 31, 2014 we did not have a majority of our Directors considered to be independent Directors. Until December
1, 2014, we had a majority of our Board of Directors considered to the not independent. Between December 1, 2014
and December 31, 2014 our Board was split evenly between independent Directors and non-independent Directors. Management
evaluated the impact of our failure to have a fully independent Board of Directors, on our assessment of our disclosure controls
and procedures and has concluded that the control deficiency that resulted, represented a material weakness.
|
|
|
|
|
|
|
5.
|
For the year ending
December 31, 2014, our audit committee consisted of the Chairman of the committee only. Management evaluated the
impact of our failure to have an adequate audit committee and an internal audit function on our assessment of our disclosure
controls and procedures and has concluded that the control deficiency that resulted, represented a material weakness.
|
|
|
|
|
|
|
6.
|
For
the year ending December 31, 2014, management concluded that the Company’s management information systems and information
technology internal control design was deficient because the potential for unauthorized access to certain information
systems and software applications existed during 2014 in several departments, including corporate accounting. Additionally,
certain key controls for maintaining the overall integrity of systems and data processing were not properly designed and
operating effectively. These deficiencies increased the likelihood of potential material errors in our financial reporting.
Management evaluated the impact of our failure to have adequate information technology controls, on our assessment of
our disclosure controls and procedures and has concluded that the control deficiency that resulted, represented a material
weakness.
|
Notwithstanding
the assessment that our internal control over financial reporting was not effective and that there were material weaknesses as
identified above, management has reviewed the financial statements and underlying information included herein in detail and believes
the procedures performed are adequate to fairly present our financial position, results of operations and cash flows for the periods
presented in all material respects.
This
Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control
over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting
firm pursuant to the rules of the SEC that permit us to provide only management’s report in this Annual Report.
Changes
in Internal Control over Financial Reporting
Remediation
of Material Weaknesses
To
address the material weaknesses described above, management performed additional analyses and other procedures to ensure that
the financial statements included herein fairly present, in all material respects, our financial position, results of operations
and cash flows for the periods presented.
We
are attempting to remediate the material weaknesses in our disclosure controls and procedures and internal controls over financial
reporting identified above by refining our internal procedures (see below). We have initiated the following corrective
actions, which management believes are reasonably likely to materially affect our financial reporting as they are designed to
remediate the material weaknesses as described above:
|
|
●
|
We enhanced our
internal finance and accounting organizational structure, which includes hiring additional resources. In August
2014 we hired a new Chief Financial Officer and in December 2014 we hired a Corporate Controller.
|
|
|
●
|
We are in the process
of further enhancing the supervisory procedures to include additional levels of analysis and quality control reviews within
the accounting and financial reporting functions.
|
|
|
●
|
We are in the process
of strengthening our internal policies and enhancing our processes for ensuring consistent treatment and recording of reserve
estimates and that validation of our conclusions regarding significant accounting policies and their application to our business
transactions are carried out by personnel with an appropriate level of accounting knowledge, experience and training.
|
|
|
●
|
We have added additional
independent Directors in 2014 and expect to add additional independent Directors in 2015 so as to have a majority of independent
Directors. We expect to appoint one or more of these newly appointed Directors to the Audit, Compensation, and
Compliance Committees.
|
|
|
|
|
|
|
●
|
We have engaged and will continue to
engage additional Information Technology consultants to improve and update our information technology systems and enhance
our internal controls over information technology.
|
We
do not expect to have fully remediated these material weaknesses until management has tested those internal controls and found
them to have been remediated. We expect to continue to improve our internal controls and to test the improvements during
our annual testing for fiscal 2015.
Limitations
on Controls
Management
does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent or detect
all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions
and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation
of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been detected.
|
ITEM
9B.
|
OTHER INFORMATION
|
None.
PART
III
|
ITEM
10.
|
DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
|
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table sets forth the names, ages, and principal positions of our executive officers and directors as of the date of
this prospectus:
|
Name
|
|
Age
|
|
Positions Held
|
|
Alain J. Castro
|
|
45
|
|
Chief
Executive Officer and Director
|
|
Boris A. Maslov,
Ph.D.
|
|
54
|
|
President,
Chief Operating Officer, and Chief Technology Officer
|
|
Domonic J.
Carney
|
|
48
|
|
Chief
Financial Officer, Secretary, Treasurer
|
|
Michael J. Hammons
|
|
45
|
|
Chairman
of the Board of Directors
|
|
Christopher
J. Brown, Ph.D.
|
|
38
|
|
Director
|
|
Jeffrey A.
Horn
|
|
60
|
|
Director
|
|
Bennet P.
Tchaikovsky
|
|
45
|
|
Director,
Chairman of the Audit Committee
|
|
Ian Copeland
|
|
52
|
|
Director
|
Michael
T. Levin, who served as our Secretary and Vice President of Legal and Regulatory Affairs since the Merger, resigned from all such
positions as well as from his positions with Ener-Core Power, effective March 31, 2014.
Stephen
L. Johnson, who served on our Board since the Merger, resigned from the Board and its compensation committee, effective May 26,
2014.
Kelly
Anderson, who served as our Treasurer and Chief Financial Officer, resigned from her position effective July 3, 2014.
Biographical
Information
Alain
J. Castro
became our Chief Executive Officer and a Director as of the closing of the Merger. He has also been the Chief Executive
Officer and a Director of Ener-Core Power since May 14, 2013. He founded International Energy Ventures Limited, a United
Kingdom-based investor into clean tech companies and renewable energy projects, in May of 2003 and remains active with it. Between
February of 2008 and June of 2011, Mr. Castro served in various capacities (including president and a director) of the North and
South America divisions of Akuo Energy, an international developer and operator of renewable energy projects. Prior
to his career in the renewable energy sector, he was a partner at Ernst & Young Consulting (in the Mercosur region of Latin
America), an international advisory services firm. Mr. Castro participated in the Sloan Executive Masters Program at
the London Business School and received his B.S. in Industrial and Mechanical Engineering from the University of Texas. We
concluded that Mr. Castro’s experience with clean tech companies and renewable energy projects, as well as his previous
executive-level experience, coupled with his position as our Chief Executive Officer, made his appointment as one of our Directors
appropriate.
Boris
A. Maslov, Ph.D.
, became our President, Chief Operating Officer, and Chief Technology Officer as of the closing of the Merger. Commencing
with the inception of Ener-Core Power until the closing of the Merger, he served as its President, Chief Operating Officer, and
Chief Technology Officer, and served as its interim Chief Executive Officer from inception until May 14, 2013. Previously,
between January of 2011 and November of 2012 (the inception of Ener-Core Power), Dr. Maslov was Vice President of FlexEnergy. Prior
to that, between October of 2007 and January of 2011, he was Chief Executive Officer of Energy One Management LLC, a renewable
energy project development company located in McLean, Virginia. He received his Ph.D. in Electrical Engineering and
his B.S. and M.S. in Electrical Engineering and Computer Science, all from the Moscow Institute of Physics and Technology.
Domonic
J. Carney
was appointed as the Company’s Chief Financial Officer, effective on August 25, 2014. Until his appointment,
Mr. Carney was an independent consultant providing finance, accounting and business strategy services. From March 30, 2012 to
October 2012, Mr. Carney served as the Chief Financial Officer for T3 Motion, Inc. (TTTM.PK), an electric vehicle technology company.
From March 2005 to February 2012, Mr. Carney served as the Chief Financial Officer for Composite Technology Corporation (CPTC.OB),
a manufacturer of high efficiency carbon composite electric transmission conductors and renewable energy wind turbines. Mr. Carney
has a Masters in Accounting from Northeastern University and a Bachelor’s Degree in Economics from Dartmouth College.
Michael
J. Hammons
became Chairman of the Board as of the closing of the Merger. Commencing with the inception of Ener-Core
Power until the closing of the Merger, he served as its Chairman of the Board. From June 2009 to February 2014, Mr. Hammons was
a partner at SAIL Venture Partners II, LLC, an investor in energy and water technology companies, which was the management company
and general partner of SAIL Venture Partners II, LP. From September of 2008 through March of 2009, he was the Chief
Executive Officer of Vigilistics, Inc., a Mission Viejo, California-based software company and, from August of 2007 to May of
2008, the Chief Executive Officer of Nexiant, Inc., an Irvine, California-based a provider of proprietary technology solutions
for the maintenance, repair, and operations inventory space. Mr. Hammons received his B.S. in Industrial Engineering
from California Polytechnic State University, San Luis Obispo, and his M.B.A. from Harvard Business School. We concluded
that Mr. Hammons’ experience as a partner SAIL Venture Partners II, LLC, with their investment portfolio, his management
expertise in respect of companies similarly situated, and his familiarity with us, both prior and subsequent to the spin-off,
coupled with his service as the Chairman of Ener-Core Power’s board prior to the closing of the Merger, made his appointment
as one of our Directors appropriate.
Christopher
J. Brown, Ph.D.
, became one of our directors as of the closing of the Merger. Commencing with the inception of
Ener-Core Power until the closing of the Merger, he served as one of its directors. Since December of 2010, Dr. Brown
has been a principal of SAIL Capital Partners, LLC. From May through August of 2009, he was a business development
consultant for Stion Corporation, a San Jose, California-based high-efficiency, low-cost thin film solar panel manufacturer and,
from October 2005 through October 2008, the Chief Executive Officer of Chromafix, a Raleigh, North Carolina-based cleantech textile
dye manufacturing company. Dr. Brown received his M.B.A. from Harvard Business School in 2010, his Ph.D. in physics
from North Carolina State University in 2008, and his B.S. in physics from the College of Charleston in 1999. We concluded
that Dr. Brown’s experience as a principal in SAIL Capital Partners, LLC, with their investment portfolio, and his familiarity
with us, both prior and subsequent to the spin-off, coupled with his service on Ener-Core Power’s board prior to the closing
of the Merger, made his appointment as one of our Directors appropriate.
Jeffrey
A. Horn
became one of our directors on May 28, 2014. 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.
Bennet
P. Tchaikovsky
became one of our directors and chairman of our audit committee on November 25, 2013. Since August
2014, Mr. Tchaikovsky is a full time Assistant Professor at Irvine Valley College where he teaches courses in financial and managerial
accounting. From April 2010 through August 2013, Mr. Tchaikovsky served as the Chief Financial Officer of VLOV Inc., a China-based
clothing designer and distributor that was also a U.S. publicly traded company. From September 2009 to July 2011, Mr.
Tchaikovsky served as Chief Financial Officer of China Jo-Jo Drugstores, Inc., a U.S. public company operating a chain of pharmacies
in China, where he also served as a director from August 2011 through January 2013. From May 2008 to April 2010, Mr.
Tchaikovsky served as the Chief Financial Officer of Skystar Bio-Pharmaceutical Company, a U.S. public company that manufactures
and distributes veterinary medicines and related products in China, which he performed on a part-time basis and assisted primarily
with preparing its financial statements and other financial reporting obligations. From March 2008 through November
2009, Mr. Tchaikovsky was a director of Ever-Glory International Group, a U.S. public company and apparel manufacturer based in
China, and served on the audit committee as chairman and on the compensation committee as a member. From December 2008
through November 2009, Mr. Tchaikovsky was a director of Sino Clean Energy, Inc., which was a U.S. public company that manufactured
coal fuel substitute in China, and served on the audit committee as chairman and on both the compensation and nominating committees
as a member. None of the foregoing companies is related to or affiliated with us. Mr. Tchaikovsky is a licensed
Certified Public Accountant and an active member of the California State Bar. He received a B.A. in Business Economics
from the University of California at Santa Barbara, and a J.D. from Southwestern University School of Law. We concluded
that Mr. Tchaikovsky’s experience with U.S. public companies, as well as his legal and accounting backgrounds, made his
appointment as one of our Directors appropriate.
Ian
C. Copeland
became one of our directors on December 1, 2014. Mr. Copeland brings over 25 years of global experience
in developing, financing and managing world-class projects and companies in the power, rail, water and mining markets. Before
retiring at the end of 2012, Mr. Copeland was a Senior Vice President of Bechtel Corporation. During his 15-year tenure with Bechtel
Corporation he served in various capacities including President of the Fossil Power, Communications and Renewable Power businesses
and Managing Director of Bechtel Enterprises. Previously Mr. Copeland held senior management positions with Wärtsilä
Corporation and Hannon Armstrong & Company. Mr. Copeland began his career with the utility consulting practice of Booz Allen
Hamilton after graduating from Rutgers University with degrees in physics and mechanical engineering. We concluded that Mr. Copeland’s
background in international business including experience developing, financing, and managing projects in the power and infrastructure
markets made his appointment to the Board appropriate.
Our
Board and Its Committees
Our
Board is currently composed of six members, three of which, as discussed further under “
Certain Relationships and Related
Transactions; Director Independence
” below, have been determined to be “independent” directors. All
members of our Board serve in this capacity until their terms expire or until their successors are duly elected and qualified. Our
Board is led by Michael Hammons, who has served as our Chairman since 2009, and Alain Castro who has served as our Chief Executive
Officer since May 2013. The two positions are not served by the same individual to avoid concentrating leadership in one
person.
Our
Board directs the management of the business and affairs of our Company as provided in our articles of incorporation and our by-laws,
and the Nevada Revised Statutes. Board members keep informed about our business through discussions with senior management,
by reviewing analyses and reports sent to them, and by participating in board and committee meetings.
Our
Board leadership structure is used by other smaller public companies in the Unites States, and we believe that this leadership
structure is effective and is the correct form of leadership for us. We have oversight of our operations by experienced
directors, two of whom are also committee chairs. We believe that our directors provide effective oversight of the risk management
function, especially through the work of our audit committee and dialogue between the full Board and our management.
The
Company does not currently consider diversity in identifying nominees for director. Due to the small size of the Company, the
priority has been in attracting qualified directors, and issues such as diversity have not yet been considered.
Our
Board formally established separate audit, nominating and compensation committees by adopting their charters on November 25, 2013.
Audit
Committee
Bennet
Tchaikovsky is currently the sole member of the audit committee. Our Board has determined, based on information that
Mr. Tchaikovsky furnished and other available information, that he meets the requirements of an “audit committee financial
expert” as such term is defined in the rules promulgated under the Securities Act and the Exchange Act, and has accordingly
designated him as such as well as chairman of the committee.
The
responsibilities of our audit committee include:
|
|
●
|
meeting
with our management periodically to consider the adequacy of our internal control over financial reporting and the objectivity
of our financial reporting;
|
|
|
●
|
appointing
our independent registered public accounting firm, determining its compensation and pre-approving its engagement for audit
and non-audit services;
|
|
|
●
|
overseeing
our independent registered public accounting firm, including reviewing independence and quality control procedures and experience
and qualifications of audit personnel that are providing us audit services;
|
|
|
●
|
meeting
with our independent registered public accounting firm and reviewing the scope and significant findings of the audits performed
by them, and meeting with management and internal financial personnel regarding these matters; and
|
|
|
|
|
|
|
●
|
reviewing
our financing plans, the adequacy and sufficiency of our financial and accounting controls, practices and procedures, the
activities and recommendations of the auditors and our reporting policies and practices, and reporting to our Board.
|
Compensation
Committee
The
compensation committee will oversee and, as appropriate, make recommendations to the Board regarding the annual salaries and other
compensation of our executive officers and our employees, and other policies, and provide assistance and recommendations with
respect to our compensation policies and practices. The compensation committee currently does not have any members.
Nominating
Committee
The
nominating committee will assist in the selection of director nominees, approves director nominations to be presented for stockholder
approval at our annual general meeting and assist in filling any vacancies on our Board, and consider any nomination of director
candidates validly made by stockholders. The nominating committee currently does not have any members.
Other
Information
There
are no family relationships among our directors or among our executive officers.
Securities
holders may send communications to our Board by writing to 9400 Toledo Way, Irvine, California 92618, attention: Board of Directors
or any specific director. Any correspondence received at the foregoing address to the attention of one or more directors
is promptly forwarded to such director or other directors.
Corporate
Governance
We
promote accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable
disclosure in reports and documents that we file with the SEC and in other public communications we make, and strive to be compliant
with applicable governmental laws, rules and regulations. On September 24, 2013, our Board formally adopted a written
code of ethics that governs our employees, officers and directors.
Our
Board is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope,
results and effectiveness of the annual audit of our financial statements and other services provided by our independent public
accountants. Our Chief Executive Officer and Chief Financial Officer review our internal accounting controls, practices
and policies.
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
Executive
Compensation
The
following executive compensation disclosure reflects all compensation for the periods ended December 31, 2014, 2013 and 2012,
received by our principal executive officer, principal financial officer, and most highly compensated executive officers. We
refer to these individuals in this report as “named executive officers.”
|
Name and Principal Position
|
|
Fiscal
Year
Ended
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)(1)
|
|
|
Option
Awards
($)(2)
|
|
|
Non-
Equity
Incentive
Plan
Comp
($)
|
|
|
Non-
qualified
Deferred
Comp
Earnings
($)
|
|
|
All
Other
Comp
($)
|
|
|
Total
($)
|
|
|
Alain J. Castro
|
|
2014
|
|
|
181,667
|
|
|
|
—
|
|
|
|
—
|
|
|
|
728,602
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
910,269
|
|
|
Chief Executive Officer (3)
|
|
2013
|
|
|
136,410
|
|
|
|
—
|
|
|
|
—
|
|
|
|
469,161
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
605,571
|
|
|
|
|
2012
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boris A. Maslov
|
|
2014
|
|
|
220,313
|
|
|
|
2,000
|
|
|
|
39,150
|
|
|
|
351,186
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
612,649
|
|
|
President, COO, and CTO (4)
|
|
2013
|
|
|
225,000
|
|
|
|
67,875
|
|
|
|
68,817
|
|
|
|
168,436
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
530,128
|
|
|
|
|
2012
|
|
|
225,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
146,493
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
371,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domonic J. Carney
|
|
2014
|
|
|
63,750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,339
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
88,089
|
|
|
Secretary/Treasurer
|
|
2013
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Chief Financial Officer (5)
|
|
2012
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kelly Anderson
|
|
2014
|
|
|
85,873
|
|
|
|
—
|
|
|
|
—
|
|
|
|
355,322
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
441,195
|
|
|
Treasurer/Chief Financial
|
|
2013
|
|
|
21,875
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,240
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
54,115
|
|
|
Officer (6)
|
|
2012
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael T. Levin
|
|
2014
|
|
|
41,093
|
|
|
|
—
|
|
|
|
1,135
|
|
|
|
25,954
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
68,182
|
|
|
VP Government Affairs (7)
|
|
2013
|
|
|
162,400
|
|
|
|
13,470
|
|
|
|
8,044
|
|
|
|
63,163
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
247,077
|
|
|
|
|
2012
|
|
|
162,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,981
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
179,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James M. Thorburn, former
|
|
2013
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
154,388
|
|
|
|
154,388
|
|
|
interim Treasurer/Chief Financial Officer
(8)
|
|
2012
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
(1)
|
The
amounts shown in this column represent the dollar amount recognized for financial statement reporting purposes for the years
ended December 31 2014, 2013 and 2012 with respect to the shares issued pursuant to the stock option agreement that are
subject to company buy-back rights.
|
|
(2)
|
The
amounts shown in this column represent the dollar amount recognized for financial statement reporting purposes for the years
ended December 31, 2014, 2013 and 2012 with respect to stock options granted, as determined pursuant to the accounting standards. See
Note 12 of the notes to our audited consolidated financial statements for a discussion of valuation assumptions made in determining
the grant date fair value and compensation expense of our stock options.
|
|
(3)
|
Mr.
Castro became the Chief Executive Officer of the operating company under the terms of his employment agreement on April 25,
2013. His base compensation was $200,000 per annum for 2013 and for most of 2014, except as noted below. In 2013,
Mr. Castro received 1,250,000 options granted at $1.00 per option and 900,000 options at $1.30 per option. On April
28, 2014 Mr. Castro’s previously issued options were cancelled and 2,150,000 options were issued to Mr. Castro at an
exercise price of $0.35 per option with 15% of the options vesting upon grant and the remainder vesting in equal monthly amounts
over the next 36 months. Between May 1, 2014 and July 31, 2014, Mr. Castro reduced his base pay to a $120,000
annual rate under the Company’s furlough plan and was issued 323,000 additional fully vested options at an exercise
price of $0.48 per option in lieu of $20,000 of base compensation. Mr. Castro’s base pay reverted to a $200,000
annual rate on August 1, 2014. In November 2014, Mr. Castro received 235,000 options at an exercise price of $0.16
per option with 25% of the options vesting in November 2015 and thereafter vesting ratably on a monthly basis over three years.
|
|
(4)
|
Dr.
Maslov served in a variety of officer roles with Ener-Core Power subsequent to the spin-out and with FlexEnergy prior to the
spin-out. His 2012 compensation represents Dr. Maslov’s compensation from FlexEnergy or Ener-Core Power, as relevant.
Dr. Maslov’s base pay rate in 2013 and for most of 2014 was at a $225,000 annual rate, except as noted below.
Effective December 31, 2012, Dr. Maslov was granted options under our Predecessor’s 2012 Equity Incentive Plan for the
purchase of up to 1,200,000 shares of Ener-Core Power’s Series D Preferred Stock and 187,500 shares of the operating
company’s common stock, all of which he exercised in January 2013. The term was five years; the exercise price was $0.001;
one-third of the options vest six months from the date of grant and the remainder vest ratably over the succeeding 30 months.
The options could be exercised prior to vesting, but were subject to certain repurchase rights in favor of us. Dr. Maslov
exercised these options and in 2013 the shares of Series D Preferred Stock were converted into 1,500,000 shares of common
stock of the Predecessor immediately prior to the Merger. In 2013, Dr. Maslov received 800,000 options granted
at $1.30 per option. On April 28, 2014 Dr. Maslov’s previously issued options were cancelled and 800,000
options were issued to Dr. Maslov at an exercise price of $0.35 per option with 15% of the options vesting upon grant and
the remainder vesting in equal monthly amounts over the next 36 months. During 2014, Dr. Maslov received 75,700
additional fully vested options at an exercise price of $0.48 per option in lieu of a reduction in base pay of $4,688 under
the Company’s furlough plan. In November 2014, Dr. Maslov received 235,000 options at an exercise price of $0.16 per
option with 25% of the options vesting in November 2015 and thereafter vesting ratably on a monthly basis over three years.
|
|
(5)
|
Mr.
Carney became our Secretary, Treasurer and Chief Financial Officer effective August 19, 2014. His base compensation
is $180,000 per annum per the terms of his employment agreement. On August 19, 2014, Mr. Carney was granted 1,500,000 options
with an exercise price of $0.15 per option vesting 12.5% on February 19, 2014, 12.5% on August 19, 2015 and thereafter vesting
ratably on a monthly basis over three years. In November 2014, Mr. Carney received 235,000 options at an exercise
price of $0.16 per option with 25% of the options vesting in November 2015 and thereafter vesting ratably on a monthly basis
over three years.
|
|
(6)
|
Ms.
Anderson became our Treasurer and Chief Financial Officer effective November 15, 2013, to replace Mr. Thorburn. Her
compensation is $175,000 per annum per the terms of her employment agreement. Ms. Anderson resigned as Treasurer and Chief
Financial Officer effective July 3, 2014. In 2013, Ms. Anderson received 1,000,000 options granted at $1.53 per
option. On April 28, 2014 Ms. Anderson’s previously issued options were cancelled and 1,500,000 options were
issued to Ms. Anderson at an exercise price of $0.35 per option with 15% of the options vesting upon grant and the remainder
vesting in equal monthly amounts over the next 36 months. On May 1, 2014, Ms. Anderson received 47,100 additional
fully vested options at an exercise price of $0.48 per option in lieu of a reduction in base pay under the Company’s
furlough plan between May 1, 2014 and July 31, 2014. All of Ms. Anderson’s options expired unexercised during
2014.
|
|
(7)
|
Mr.
Levin has resigned effective March 31, 2014. Prior to his resignation, Mr. Levin served as VP Legal and Secretary
with FlexEnergy prior to the spin-out. His 2012 compensation represents Mr. Levin’s compensation from FlexEnergy
or Ener-Core Power, as relevant. Effective December 31, 2012, Mr. Levin was granted options under our Predecessor’s
2012 Equity Incentive Plan for the purchase of up to 50,000 shares of the operating company’s Series D Preferred Stock
and 135,333 shares of the operating company’s common stock, all of which he exercised in January 2013. The
term was five years; the exercise price was $0.001; one-third of the options vest six months from the date of grant and the
remainder vest ratably over the succeeding 30 months. The options was exercised in full prior to vesting, but was
subject to certain repurchase rights in favor of us. The shares of Series D Preferred Stock were converted into 62,500 shares
of common stock of the Predecessor immediately prior to the Merger. The Company repurchased 92,324 shares of common
stock after Mr. Levin’s resignation.
|
|
(8)
|
Mr.
Thorburn was not affiliated with us or with Ener-Core Power (the “operating company”) during 2012. He
became interim Treasurer/Chief Financial Officer of Ener-Core Power under the terms of his Consulting Agreement on May 8,
2013. Mr. Thorburn’s Consulting Agreement expired on November 11, 2013.
|
Compensation
Philosophy
Our
basic objectives for executive compensation are to recruit and keep top quality executive leadership focused on attaining long-term
corporate goals and increasing stockholder value.
Employment
Agreements
We
have entered into various employment and employment-related agreements with certain of our executive officers. Set
forth below is a summary of many of the material provisions of such agreements, which summaries do not purport to contain all
of the material terms and conditions of each such agreement.
Our
Agreements with Mr. Castro and Dr. Maslov:
We
employ Mr. Castro pursuant to his Executive Employment Agreement, dated April 25, 2013, with Ener-Core Power, which agreement
we assumed as of the closing of the Merger. Under the agreement, the term of his employment is one year, renewing automatically
for successive one-year terms as of April 25 of each year unless either party gives the other party notice of non-renewal not
less than 30 day prior to the end of the relevant term. We will pay Mr. Castro a base salary of $200,000 per year that
may be increased but not decreased by our Board in its sole discretion. Mr. Castro is eligible (i) for an annual bonus
and/or other annual incentive compensation in accordance with any applicable executive bonus plan as our Board may adopt in its
sole discretion and (ii) to participate in our equity incentive plan or incentive option plan, as applicable, with grants and
vesting schedules as determined by the Board from time to time. In connection to Mr. Castro’s participation in our voluntary
wage reduction plan from May 1, 2014 to July 31, 2014, on May 23, 2014, we entered into an Amendment to Executive Employment Agreement
with Mr. Castro, in which we issued Mr. Castro an option to purchase of to 15 shares of our common stock under the Plan in exchange
for $1.00 that he voluntarily forwent under the wage reduction plan. As a result, we entered into a stock option agreement with
Mr. Castro on May 13, 2014, granting Mr. Castro an option to purchase 323,000 shares of our common stock at $0.48 per share, which
vested immediately on the date of grant.
We
employ Dr. Maslov pursuant to his Amended and Restated Executive Employment Agreement, dated December 31, 2012, with Ener-Core
Power, which agreement we assumed as of the closing of the Merger. Under the agreement, the term of his employment
is one year, renewing automatically for successive one-year terms as of December 31 of each year unless either party gives the
other party notice of non-renewal not less than 30 day prior to the end of the relevant term. We will pay Dr. Maslov
a base salary of $225,000 per year that may be increased but not decreased by our Board in its sole discretion. Dr.
Maslov is eligible (i) for an annual bonus and/or other annual incentive compensation in accordance with any applicable executive
bonus plan as our Board may adopt in its sole discretion and (ii) to participate in our equity incentive plan or incentive option
plan, as applicable, with grants and vesting schedules as determined by the Board from time to time. In connection to Dr. Maslov’s
participation in our voluntary wage reduction plan from May 9, 2014 to June 15, 2014, on May 23, 2014, we entered into an Amendment
to Executive Employment Agreement with Dr. Maslov, in which we issued Dr. Maslov an option to purchase of to 15 shares of our
common stock under the Plan in exchange for $1.00 that he voluntarily forwent under the wage reduction plan. As a result, we entered
into a stock option agreement with Dr. Maslov on May 13, 2014, granting Dr. Maslov an option to purchase 75,700 shares of our
common stock at $0.48 per share, which vested immediately on the date of grant.
The
termination provisions for Mr. Castro’s or Dr. Maslov’s employment are substantially similar and are set forth below. If
we terminate Mr. Castro or Dr. Maslov’s services for cause (whether during or at the end of an employment year), then we
are obligated to pay him the sum of (i) his salary and bonuses, if any, through the date of termination, (ii) any earned but unused
vacation and PTO time, and (iii) any unreimbursed expenses. “Cause” means his (A) willful dishonesty or
fraud with respect to our business affairs, (B) willful falsification of any employment or other of our records, (C) misappropriation
of or intentional damage to our business or property of the Company, (D) his conviction (including any plea of guilty or
nolo
contendere
) of a felony or crime that involves moral turpitude, (E) his willful and continued failure to comply with
our reasonable written directives after his receipt of written notice from us of such refusal and a reasonable opportunity to
cure, or (F) the misappropriation of any corporate opportunity, or otherwise obtaining personal profit from any transaction which
is adverse to our interests or to the benefits of which we are entitled.
If
we terminate Mr. Castro or Dr. Maslov’s services upon his death or disability, then we are obligated to pay him or his estate
(i) the same economic benefits as if his services were terminated for cause and (ii) upon a determination by our Board in its
sole discretion, he or his estate may also be granted (A) additional vesting of then-unvested stock or stock options, (B) a proportional
amount of any earned and unpaid annual bonus based on his performance through the date of termination, and/or (C) severance payments. “Disability”
means his inability to perform one or more of the essential functions of his job due to his physical or mental impairment, with
or without reasonable accommodation as required by law, for any period aggregating more than 120 days in any 365-consecutive day
period.
If
we terminate Mr. Castro or Dr. Maslov’s services for any other reason, then we are obligated to pay him (i) the same economic
benefits as if his services were terminated for cause and (ii) monthly cash severance payments at his then-salary rate during
the six-month period immediately following the termination date, subject to earlier termination in the event that he obtains new
employment or engages (or assists any other person or entity to engage) in any activity competitive with our business. Further,
if, during the six-month period immediately preceding or following a “Change of Control,” we terminate his employment
without Cause, then all of his then-unvested outstanding options shall immediately vest. “Change of Control”
occurs when (i) any person becomes the beneficial owner of our securities that then represents 50% or more of the total voting
power of our outstanding voting securities, unless such person was the beneficial owner of at least 20% of our voting power as
of February 1, 2012, and does not become the beneficial owner of 80% or more of our voting power, (ii) we consummate the sale,
exchange, lease, or other disposition of all or substantially all of our assets to a person or group of related persons, (iii)
we consummate a merger, reorganization, recapitalization, consolidation, or similar transaction with any other corporation or
other business entity, in one transaction or a series of related transactions (except one in which (A) the holders of our
voting securities outstanding immediately before such transaction continue to hold at least 50% of the voting power in the surviving
entity or (B) a transaction in which a single party (or a group of affiliated parties) acquires voting securities of the Company
and the holders of our voting securities immediately before the transaction do not dispose of a majority of their interests in
us in connection with that transaction), or (iii) we dissolve or liquidate.
Mr.
Castro or Dr. Maslov may terminate his employment relationship with us at any time and for any reason. If he does so,
he has agreed to make himself available to us during the 30-day period following his termination, without any compensation, (i)
to facilitate an efficient transition of his job-related responsibilities and duties and (ii) to respond to questions from us
regarding information and/or activities in which he had been engaged while employed by us.
On
April 28, 2014, the Board approved the re-pricing and vesting schedules of outstanding stock options to purchase an aggregate
of 8,630,000 shares of common stock of the Company previously granted to officers, directors, employees and consultants of the
Company pursuant to the Plan. As a result of this cancellation and reissuance of the options, the Company entered into a stock
option cancellation agreement (“
Stock Option Cancellation Agreement
”) and concurrently entered into new stock
option agreements (“
Reissued Stock Option Agreement
”) with each of the officers, directors, employees and consultants
who held shares as of that date, which included Mr. Castro and Dr. Maslov. The number of stock options covered by each award remained
unchanged as a result of the re-pricing and vesting schedule change.
On
November 28, 2014, the Board approved a compensation plan which provides equity grants to the executive officers and Chairman
of the Board of the registrant. In connection with such plan, the registrant entered into a stock option agreement with Mr. Castro
and Dr. Maslov dated November 28, 2014, granting Mr. Castro and Dr. Maslov an option to purchase up to 235,000 shares of common
stock each at the per share fair market value on the date that the Board approved the grant. The agreement provides for the option
to vest as follows: (i) 1/4 of the total number of shares on the one year anniversary of the grant date, and (ii) 1/36 of the
total number of shares each month thereafter.
Our
Agreements with Mr. Carney
:
Our
offer letter to Mr. Carney dated August 19, 2014 provided for an annual base salary of $180,000 and an option under Plan to purchase
1,500,000 shares of our common stock at an exercise price equal to the per share closing price on August 19, 2014, being the fair
market value on such date.
In
addition to the offer letter, we entered into an executive employment agreement with Mr. Carney dated as of August 19, 2014, which,
in addition to his annual compensation as described in the offer letter, provides for his eligibility to annual bonus and other
annual incentive compensation that the Board may adopt, as well as benefits that we make available to other employees. We
will also reimburse Mr. Carney for reasonable expenses that he incurs in performing his duties.
We
may terminate Mr. Carney’s employment for cause upon written notice if at any time he: (a) engages in willful dishonesty
or fraud with respect to our business affairs; (b) willfully falsifies any employment or our records; (c) misappropriates or intentionally
damaged our business or property, including confidential or proprietary information; (d) is convicted of a felony or crime that
involves moral turpitude (including any plea of guilty or nolo contendere); (e) willfully and continuously fails to comply with
our reasonable written directives after written notice thereof and a reasonable opportunity to cure (as described below); or (f)
misappropriates any corporate opportunity, or otherwise obtaining personal profit from any transaction which is adverse to our
interests or to the benefits of which we are entitled. Upon termination for cause, Mr. Carney shall be entitled to
his accrued but unpaid base salary, bonuses, benefits and expense reimbursement through his termination date (collectively the
“accrued obligations”).
If
at any time we terminate or do not renew his employment without cause, Mr. Carney shall, in addition to the accrued obligations,
be entitled to monthly cash severance payment at his base salary rate (less standard withholdings and deductions) for up to six
months or until he obtains new employment or competes against our business, whichever occurs sooner; provided, however, that if
the termination occurs during the six months before or after our change in control, then all of Mr. Carney’s unvested options
shall also immediately vest.
Mr.
Carney may terminate his employment at any time by written notice to the Board; provided that: (a) his resignation will become
effective on the earlier of 90 days after his notice or a date that we specify; and (b) he will be available for 30 days following
his effective resignation date to facilitate and cooperate with transition.
The
executive employment agreement also contains restrictive covenants prohibiting: (a) competition with us during his employment
and for a period of up to 12 months after termination (including contact with or solicitation of our customers, employees or suppliers),
(b) disparagement of us or our affiliates, and (c) the use or disclosure of confidential business information during or at any
time after termination of his employment.
In
connection with the option granted under the executive employment agreement, we entered into a stock option agreement with Mr.
Carney dated as of August 19, 2014. The agreement provides for the option to vest as follows: (i) 1/8 of the total
number of shares after six months from the grant date, and (ii) 1/48 of the total number of shares each month thereafter.
On
November 28, 2014, the Board approved a compensation plan which provides equity grants to the executive officers and Chairman
of the Board of the registrant. In connection with such plan, the registrant entered into a stock option agreement with Mr. Carney
dated November 28, 2014, granting Mr. Carney an option to purchase up to 235,000 shares of common stock at the per share fair
market value on the date that the Board approved the grant. The agreement provides for the option to vest as follows: (i) 1/4
of the total number of shares on the one year anniversary of the grant date, and (ii) 1/36 of the total number of shares each
month thereafter.
Our
Agreements with Ms. Anderson
:
Our
offer letter to Ms. Anderson dated November 1, 2013 provided for an annual base salary of $175,000 and an option under Plan
to purchase 1,000,000 shares of our common stock at an exercise price equal to the per share closing price on November 15,
2013, being the fair market value on such date. She will also be eligible for a one-time bonus of $50,000 if we successfully
raise at least $10 million in a public offering of our common stock.
In
addition to the offer letter, we entered into an executive employment agreement with Ms. Anderson dated as of November 15, 2013,
which, in addition to her annual compensation as described in the offer letter, provides for her eligibility to annual bonus and
other annual incentive compensation that the Board may adopt, as well as benefits that we make available to other employees. We
will also reimburse Ms. Anderson for reasonable expenses that she incurs in performing her duties.
We
may terminate Ms. Anderson’s employment for cause upon written notice if at any time she: (a) engages in willful dishonesty
or fraud with respect to our business affairs; (b) willfully falsifies any employment or our records; (c) misappropriates or intentionally
damaged our business or property, including confidential or proprietary information; (d) is convicted of a felony or crime that
involves moral turpitude (including any plea of guilty or nolo contendere); (e) willfully and continuously fails to comply with
our reasonable written directives after written notice thereof and a reasonable opportunity to cure (as described below); or (f)
misappropriates any corporate opportunity, or otherwise obtaining personal profit from any transaction which is adverse to our
interests or to the benefits of which we are entitled. Upon termination for cause, Ms. Anderson shall be entitled to
her accrued but unpaid base salary, bonuses, benefits and expense reimbursement through her termination date (collectively the
“accrued obligations”).
If
at any time we terminate or do not renew her employment without cause, Ms. Anderson shall, in addition to the accrued obligations,
be entitled to monthly cash severance payment at her base salary rate (less standard withholdings and deductions) for up to six
months or until she obtains new employment or competes against our business, whichever occurs sooner; provided, however, that
if the termination occurs during the six months before or after our change in control, then all of Ms. Anderson’s unvested
option shall also immediately vest.
Ms.
Anderson may terminate her employment at any time by written notice to the Board; provided that: (a) her resignation will become
effective on the earlier of 90 days after her notice or a date that we specify; and (b) she will be available for 30 days following
her effective resignation date to facilitate and cooperate with transition. Ms. Anderson tendered her resignation on June 30,
2014 which was immediate accepted by the Company. Ms. Anderson continued to provide her services to the Company as a paid consultant
until August 31, 2014.
The
executive employment agreement also contains restrictive covenants prohibiting: (a) competition with us during her employment
and for a period of up to 12 months after termination (including contact with or solicitation of our customers, employees or suppliers),
(b) disparagement of us or our affiliates, and (c) the use or disclosure of confidential business information during or at any
time after termination of her employment.
In
connection with the option granted under the executive employment agreement, we entered into a stock option agreement with Ms.
Anderson dated as of November 15, 2013. The agreement provides for the option to vest as follows: (i) 1/4 of the total
number of shares after twelve months from the grant date, and (ii) 1/48 of the total number of shares each month thereafter. On
April 28, 2014, her options were cancelled and reissued pursuant to the terms of the Stock Cancellation Agreement and Reissued
Stock Option Agreement.
We
also entered into a stock option agreement with Ms. Anderson in connection to Ms. Anderson’s participation in our voluntary
wage reduction plan from May 16, 2014 to June 15, 2014, pursuant to the Amendment to Executive Employment Agreement with Ms. Anderson
dated May 23, 2014. The stock option agreement granted Ms. Anderson an option to purchase 47,100 shares of our common stock at
$0.48 per share, which vested immediately on the date of grant.
Upon
her resignation, all unvested options issued to Ms. Anderson were immediately cancelled. All vested options remained exercisable
until November 30, 2014. On December 1, 2014, all unexercised options issued to Ms. Anderson were cancelled.
Outstanding
Equity Awards
The
following disclosure reflects all outstanding equity awards at the end of our 2014 fiscal year for each named executive officer,
who served in such capacity as of December 31, 2014.
|
Option
Awards (1)
|
|
Stock
Awards
|
|
|
All
Awards
|
|
|
Name
|
|
Number of
securities
underlying
unexercised options (#)
exercisable
|
|
|
Number of
securities
underlying
unexercised
options (#)
unexercisable
|
|
|
Equity
incentive
plan awards: Number of
securities
underlying
unexercised
unearned
options
(#)
|
|
|
Weighted
Average
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date (4)
|
|
Number
of Shares or Units of Stock That Have Not
Vested (#)(2)
|
|
|
Value of
Shares or Units
of Stock That Have Not Vested
($)(3)
|
|
|
Alain Castro
|
|
|
1,051,607
|
|
|
|
1,656,393
|
|
|
|
—
|
|
|
|
0.35
|
|
|
April
28, 2020 -
November 28, 2020
|
|
|
—
|
|
|
|
805,935
|
|
|
Boris Maslov
|
|
|
346,808
|
|
|
|
763,892
|
|
|
|
—
|
|
|
|
0.32
|
|
|
April 28, 2020
-
November 28, 2020
|
|
|
450,000
|
|
|
|
375,221
|
|
|
Domonic J. Carney
|
|
|
—
|
|
|
|
1,735,000
|
|
|
|
—
|
|
|
|
0.15
|
|
|
August 19, 2020 - November 28, 2020
|
|
|
—
|
|
|
|
255,731
|
|
|
(1)
|
The
shares referenced above are on an as-converted into common stock basis.
|
|
(2)
|
The
shares referenced represent the shares issued pursuant to the stock option agreement that are subject to company buy-back
rights.
|
|
(3)
|
Represents
the remaining dollar amount to be recognized for financial statement reporting purposes with respect to all option awards
and stock awards.
|
|
|
|
|
(4)
|
All
options granted in 2014 to Officers were issued with a six year life.
|
Director
Compensation and Agreement
The
following table provides compensation information for our directors during the fiscal years ended December 31, 2014 and 2013:
|
Director
Compensation Table
|
|
Name
|
|
Fiscal
Year
ended
|
|
Fees Earned
or Paid in
Cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)(2)
|
|
|
Non-Equity
Incentive Plan Compensation ($)
|
|
|
Nonqualified
Deferred
Compensation Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
|
Alain J. Castro (1)
|
|
2014
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Hammons (3)
|
|
2014
|
|
|
-
|
|
|
|
-
|
|
|
|
26,206
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,206
|
|
|
|
|
2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chris Brown
|
|
2014
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen L. Johnson (4)
|
|
2014
|
|
|
18,067
|
|
|
|
95,121
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
113,188
|
|
|
|
|
2013
|
|
|
-
|
|
|
|
54,115
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bennet P. Tchaikovsky (5)
|
|
2014
|
|
|
30,000
|
|
|
|
-
|
|
|
|
107,596
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
137,596
|
|
|
|
|
2013
|
|
|
-
|
|
|
|
-
|
|
|
|
6,245
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey Horn (6)
|
|
2014
|
|
|
23,333
|
|
|
|
-
|
|
|
|
29,151
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ian Copeland (7)
|
|
2014
|
|
|
3,333
|
|
|
|
-
|
|
|
|
1,440
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,440
|
|
|
(1)
|
Mr.
Castro is the Company’s Chief Executive Officer. His compensation is reflected in the Executive Compensation
Table above.
|
|
(2)
|
The
amounts shown in this column represent the dollar amount recognized for financial statement reporting purposes for the years
ended December 31, 2014 and 2013 with respect to stock options granted, as determined pursuant to the accounting standards.
See Note 12 of the notes to our audited consolidated financial statements for a discussion of valuation assumptions made in
determining the grant date fair value and compensation expense of our stock options.
|
|
|
|
|
(3)
|
Mr.
Hammons serves as our Chairman of the Board of Directors. On November 28, 2014, we entered into a stock option
agreement with Mr. Hammons dated as of November 28, 2014 to purchase 300,000 shares of the Company’s common stock at
a price per share equal to the market price on the grant date. The agreement provides for the option to vest as
follows: (i) 1/2 of the total number of shares on the grant date, and (ii) 1/18 of the total number of shares each month thereafter.
|
|
|
|
|
(4)
|
Dr.
Johnson served as a Director from May 1, 2013 until May 2014. On May 26, 2014 Dr. Johnson resigned from our Board
of Directors but remained on our advisory board. On July 1, 2013 we issued Dr. Johnson an option to purchase 250,000
shares of the Company’s common stock at a price per share of $1.30. On April 28, 2014, the Company cancelled
these options and issued Dr. Johnson an option to purchase 250,000 shares of the Company’s common stock at an exercise
price of $0.35 per option with 15% of the option grant vesting on the grant date and the remainder vesting over 36 months. After
Dr. Johnson’s resignation, the Company vested an additional 84,723 options and cancelled the remaining unvested options. Dr.
Johnson’s vested options shall remain outstanding and exercisable while he continues to participate on our advisory
board. As of December 31, 2014, 122,223 options were vested and exercisable.
|
|
|
|
|
(5)
|
Mr.
Tchaikovsky has served as a Director and as our audit committee chairman since November
2013. Beginning in April 2014, we began to pay Mr. Tchaikovsky an annual fee of $40,000.
On November 22, 2013 we issued Mr. Tchaikovsky an option to purchase 250,000 shares of
the Company’s common stock at a price per share of $1.52. On April 28, 2014, the
Company cancelled these options and issued Mr. Tchaikovsky an option to purchase 250,000
shares of the Company’s common stock at an exercise price of $0.35 per option with
15% of the option grant vesting on the grant date and the remainder vesting over 36 months.
|
|
|
|
|
(6)
|
Mr.
Horn has served as a Director since May 2014 and is paid an annual fee of $40,000. On
May 28, 2014 we issued Mr. Horn an option to purchase 300,000 shares of the Company’s
common stock at a price per share of $0.44 vesting ratably over 36 months.
|
|
|
|
|
(7)
|
Mr.
Copeland has served as a Director since December 2014 and is paid an annual fee of $40,000. On November 28, 2014,
2014 we issued Mr. Copeland an option to purchase 300,000 shares of the Company’s common stock at a price per share
of $0.16 vesting ratably over 36 months.
|
Dr.
Johnson and Messrs. Tchaikovsky, Horn, and Copeland have written agreements with us for their services on our Board. Mr. Hammons
has a written option agreement as described above.
Our
Agreement with Mr. Hammons
:
On
November 28, 2014, we granted Mr. Hammons an option to purchase 300,000 shares of Ener-Core Power’s common stock at an exercise
price equal to the per share fair market value on the date that the Board approved the grant and entered into a stock option agreement
with Mr. Hammons. The agreement provides for the option to vest as follows: (i) 1/2 of the total number of shares on
the grant date and (ii) 1/18 of the total number of shares each month thereafter.
Our
Agreement with Dr. Johnson
:
In
April 2013, Ener-Core Power entered into a letter agreement with Dr. Johnson to serve on its board, commencing May 1, 2013. The
agreement provides as compensation and subject to the approval of the board, a grant to Dr. Johnson of an option to purchase up
to 250,000 shares of Ener-Core Power’s common stock at an exercise price equal to the per share fair market value on the
date that the board of directors approve the grant. One-fourth of the option vests 12 months from May 1, 2013, with
the balance to vest in 48 monthly installments thereafter. In addition, the agreement provides for reimbursement of
all reasonable travel expenses in connection with attending board meetings. The agreement also provides for indemnity
of Dr. Johnson.
Dr.
Johnson joined our Board at the closing of the Merger, and we assumed his letter agreement with Ener-Core Power accordingly. In
connection therewith, and pursuant to the letter agreement, we entered into a stock option agreement with Dr. Johnson on July
3, 2013, granting him an option to purchase up to 250,000 shares of our common stock under the Plan. On April 28, 2014, his options
were cancelled and reissued pursuant to the terms of the Stock Cancellation Agreement and Reissued Stock Option Agreement. On
May 26, 2014, Dr. Johnson resigned from our Board of Directors but remained on our Advisory Board. On his resignation date, Dr.
Johnson had 122,223 options vested and we cancelled 127,777 unvested options. So long as Dr. Johnson remains on our Advisory Board,
his vested options shall remain outstanding and exercisable.
Our
Agreement with Mr. Tchaikovsky
:
On
November 22, 2013, Mr. Tchaikovsky accepted his appointment to our Board and as chairman of our audit committee pursuant to our
offer letter dated November 10, 2013, which provides for an option under the Plan to purchase 250,000 shares of our common stock
at an exercise price equal to the per share closing price on November 25, 2013, being the fair market value on such date. In
addition, we agreed to reimburse Mr. Tchaikovsky for reasonable travel expenses incurred to attend Board meetings, and to indemnify
him in his capacity as a director. The offer letter also contemplates an annual director’s fee of $40,000 commencing
sometime next year, subject to review by the Compensation Committee and approval by the Board and stockholders as appropriate.
The Company began paying Mr. Tchaikovsky his annual fee in April, 2014.
On April 28, 2014, his options were cancelled and reissued pursuant to the terms of the Stock Cancellation Agreement and Reissued
Stock Option Agreement.
In
connection with the option granted under the offer letter, we entered into a stock option agreement with Mr. Tchaikovsky dated
as of November 25, 2013. The agreement provides for the option to vest as follows: (i) 1/4 of the total number of shares
after twelve months from the grant date, and (ii) 1/48 of the total number of shares each month thereafter.
Our
Agreements with Mr. Horn
:
On
May 28, 2014, Mr. Horn accepted his appointment to our Board pursuant to our offer letter dated May 19, 2014, which provides for
an option under the Plan to purchase 300,000 shares of our common stock at an exercise price equal to the per share closing price
on May 28, 2014 of $0.44, being the fair market value on such date. In addition, we agreed to reimburse Mr. Horn for
reasonable travel expenses incurred to attend Board meetings, and to indemnify him in his capacity as a director. The
offer letter also contemplates an annual director’s fee of $40,000, subject to review by the Compensation Committee and
approval by the Board and stockholders as appropriate.
In
connection with the option granted under the offer letter, we entered into a stock option agreement with Mr. Horn dated as of
May 28, 2014. The agreement provides for the option to vest as follows: 1/36 of the total number of shares each month
beginning June 28, 2014 and ii) 1/36 of the total number of shares each month thereafter.
Our
Agreement with Mr. Copeland
:
On
December 1, 2014, Mr. Copeland accepted his appointment to our Board pursuant to our offer letter dated November 24, 2014, which
provides for an option under the Plan to purchase 300,000 shares of our common stock at an exercise price equal to the per share
closing price on November 28, 2014, being the fair market value on such date. In addition, we agreed to reimburse Mr.
Copeland for reasonable travel expenses incurred to attend Board meetings, and to indemnify him in his capacity as a director. The
offer letter also contemplates an annual director’s fee of $40,000, subject to review by the Compensation Committee and
approval by the Board and stockholders as appropriate.
In
connection with the option granted under the offer letter, we entered into a stock option agreement with Mr. Copeland dated as
of November 28, 2014. The agreement provides for the option to vest as follows: (i) 1/36 of the total number of shares
each month beginning on January 1, 2015 and (ii) 1/36 of the total number of shares each month thereafter.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
Equity
Compensation Plan Information
|
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants and rights
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
|
|
Number
of securities remaining available for future issuance under equity compensation plans
|
|
|
Equity compensation plans approved
by security holders
|
|
13.3 million
|
|
$
|
0.29
|
|
|
|
0.7
million
|
*
|
|
Equity compensation plans not approved
by security holders
|
|
3.8 million
|
|
$
|
0.60
|
|
|
|
—
|
|
|
Total
|
|
17.0 million
|
|
$
|
0.36
|
|
|
|
0.7
million
|
|
Our
Plan was adopted by our Board and approved by our stockholders in June 2013. The Plan provides for the granting to
employees of incentive stock options and for the granting to any individual selected by our Board of non-qualified stock options
or stock purchase rights.
*As
of December 31, 2014, the Plan had 14,000,000 shares of our common stock authorized to be issued and 0.8 million were available
for future issuance. On March 25, 2015, the Board of Directors increased the number of authorized shares to 21,000,000. Our
Board administers the Plan.
On
the date of the grant, the exercise price of incentive stock options must equal at least 100% of the fair market value, or 110%
of the fair market value with respect to optionees who own more than 10% of the total combined voting power of all classes of
stock. On the date of the grant, the exercise price of non-qualified stock options must equal at least 100% of the
fair market value. The fair market value is (i) the closing price of our common stock on the last market trading day
prior to the grant of the award, if our common stock is listed on an established stock exchange, (ii) the arithmetic mean of our
high bid and low asked stock prices on the last market trading day prior to the grant of the award, if our common stock is regularly
quoted by a recognized securities dealer, but selling prices are not reported, or (iii) if our common stock is not publicly traded
or quoted, by our Board in good faith and consistent with the definition of fair market value under the regulations promulgated
under Section 409A of the Internal Revenue Code of 1986.
Options
generally must be exercised during the optionee’s continuing status as an employee or within three months after the optionee’s
termination of employment. If an optionee’s employment is terminated because the optionee becomes disabled, the
options may be exercised within one year after the optionee’s termination. If an optionee dies while under our
employ or within three months after termination of employment, the optionee’s legatees or personal representatives may exercise
the options for a period of up to one year after the optionee’s death, but not after ten years from the grant of the option.
Stock
purchase rights granted under the plan are subject to the same terms and restrictions as the option grants and may be granted
independent of, or in connection with, the grant of options. Our Board determines the price of stock purchase rights. Unless
otherwise determined by our Board, the relevant restricted stock purchase agreement shall also grant to us a right of repurchase.
Awards
granted under the plan are generally not transferable by the participant except by will or the laws of descent and distribution,
and each award is exercisable, during the lifetime of the participant, only by the participant or his or her guardian or legal
representative, unless permitted by our Board.
Under
certain circumstances in connection with a merger or other extraordinary corporate transaction, accelerated vesting of such awards
may occur, all as set forth in the plan. Our Board may amend, alter, suspend, or terminate the plan at any time. We
may not alter the rights and obligations under any award granted before amendment of the plan without the consent of the affected
participant. Unless terminated sooner, the plan will terminate automatically in July of 2023.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth certain information regarding the shares of common stock beneficially owned or deemed to be beneficially
owned as of March 31, 2015, by (i) each person known to beneficially own more than 5% of our common stock, (ii) each of our directors,
(iii) our executive officers named in the summary compensation table, and (iv) all such directors and executive officers as a
group.
Except
as indicated by the footnotes below, we believe, based on the information furnished to us, that the beneficial owners named in
the table below have sole voting and investment power with respect to all shares of our common stock that they beneficially own,
subject to applicable community property laws.
In
computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we
deemed outstanding shares of common stock subject to options or warrants held by that person that are currently exercisable or
exercisable within 60 days of March 31, 2015. We did not deem those shares outstanding, however, for the purpose of
computing the percentage ownership of any other person.
|
Name of Beneficial Owner / Management and Address
(1)
|
|
Shares of
Common Stock Beneficially
Owned (2)
|
|
|
Percent of
Common Stock Beneficially
Owned (2)
|
|
|
Alain J. Castro
(3)
|
|
|
1,689,527
|
|
|
|
1.46
|
%
|
|
Boris A. Maslov (4)
|
|
|
2,147,644
|
|
|
|
1.85
|
%
|
|
Domonic J. Carney (5)
|
|
|
520,840
|
|
|
|
*
|
|
|
Michael J. Hammons
(6)
|
|
|
17,530,812
|
|
|
|
13.32
|
%
|
|
Christopher J. Brown
(7)
|
|
|
146,667
|
|
|
|
*
|
|
|
Bennet P. Tchaikovsky (8)
|
|
|
120,139
|
|
|
|
*
|
|
|
Jeff Horn (9)
|
|
|
166,667
|
|
|
|
*
|
|
|
Ian Copeland
(10)
|
|
|
41,667
|
|
|
|
*
|
|
|
All directors and executive officers
as a group (8 persons)
|
|
|
22,363,963
|
|
|
|
16.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Five
Percent Beneficial Owners:
|
|
|
|
|
|
|
|
|
|
SAIL Exit Partners, LLC (11)
|
|
|
29,300,170
|
|
|
|
25.68
|
%
|
|
SAIL Pre-Exit Acceleration Fund, LP
(12)
|
|
|
261,584
|
|
|
|
*
|
|
|
Empery Asset Management, LP (13)
|
|
|
5,941,698
|
|
|
|
5.21
|
%
|
*
Less than 1%
|
(1)
|
Unless
otherwise noted, the business address for the person is 9400 Toledo Way, Irvine, California 92618.
|
|
|
|
|
(2)
|
The
applicable percentage ownership is based on 114,106,439 shares of common stock outstanding as at March 31, 2015. The number
of shares of common stock owned are those “beneficially owned” as determined under the rules of the Commission,
including any shares of common stock as to which a person has sole or shared voting or investment power and any shares of
common stock that the person has the right to acquire within 60 days through the exercise of any option, warrant, or right.
|
|
|
|
|
(3)
|
Consists
of 333,333 shares purchased on September 22, 2014 in conjunction with the Company’s September 2014 PIPE transaction
and 1,356,194 shares of common stock underlying options that are exercisable within 60 days of March 31, 2015. Does not include
1,351,806 shares of common stock underlying options that are not exercisable within 60 days of March 31, 2015. These stock
options were granted to Mr. Castro on April 15, 2014 and November 28, 2014.
|
|
|
|
|
(4)
|
Consists
of 1,687,500 shares subject to our repurchase right. 1,350,000 of such shares vested as of March 31, 2015, such that our repurchase
rights have lapsed. In respect of the other 337,500 shares, 25,000 shares are vested and released from our repurchase right
on a monthly basis. Consists of 460,144 shares of common stock underlying options that are exercisable within 60 days of March
31, 2015. Does not include 650,556 shares of common stock underlying options that are not exercisable within 60 days of March
31, 2015. These stock options were granted to Dr. Maslov on April 15, 2014 and November 28, 2014.
|
|
|
|
|
(5)
|
Consists
of 200,000 shares of common stock issued to Charles Schwab & Co. Inc. FBO Domonic Carney IRA and 133,340 shares issued
to Charles Schwab & Co. Inc. FBO Domonic Carney Roth IRA, and which shares are controlled by Mr. Carney and, as such,
holds voting and investing power with respect to such shares. These shares were issued in connection to the September 2014
PIPE. Consists of 187,500 shares of common stock underlying options that are exercisable within 60 days of March 31, 2015.
Does not include 1,547,500 shares of common stock underlying options that are not exercisable within 60 days of March 31,
2015. These stock options were granted to Mr. Carney on August 19, 2014 and November 28, 2014.
|
|
|
|
|
(6)
|
Consists
of the 66,667 shares issued in connection to the September 2014 PIPE and 191,667 shares of common stock underlying options
that are exercisable within 60 days of March 31, 2015. Does not include 108,333 shares of common stock underlying options
that are not exercisable within 60 days of March 31, 2015. These stock options were granted to Mr. Hammons on November
28, 2014. Also consists of 17,272,478 shares for which Mr. Hammons may be deemed to have beneficial ownership because he has
a carried interest in such shares as a partner in SAIL Exit Partners, LLC. Mr. Hammons disclaims beneficial ownership in the
shares owned by SAIL Exit Partners, LLC except to the extent of his pecuniary interests therein. Mr. Hammons’ business
address is 3161 Michelson Drive, Suite 750, Irvine, California 92612.
|
|
(7)
|
Consists
of 66,667 shares of common stock issued to Dr. Brown as an individual and 80,000 shares issued to Christopher J. Brown Contributing
IRA, issued in connection with the September 2014 PIPE and which shares are controlled by Dr. Brown and as such, Dr. Brown
holds voting and investing power with respect to such shares. Dr. Brown’s business address is 3161 Michelson Drive,
Suite 750, Irvine, California 92612.
|
|
|
|
|
(8)
|
Consists
of 120,139 shares of common stock underlying options that are exercisable within 60 days of March 31, 2015. Does not include
129,861 shares of common stock underlying options that are not exercisable within 60 days of March 31, 2015. These stock options
were granted to Mr. Tchaikovsky on April 15, 2014. Mr. Tchaikovsky’s business address is 6571 Morningside Drive, Huntington
Beach, California 92648.
|
|
|
|
|
(9)
|
Consists
of the 66,667 shares issued to Mr. Horn in connection to the September 2014 PIPE. Also consists of 100,000 shares of common
stock underlying options that are exercisable within 60 days of March 31, 2015. Does not include 200,000 shares of common
stock underlying options that are not exercisable within 60 days of March 15, 2015. These stock options were granted to Mr.
Horn on May 28, 2014. Mr. Horn’s business address is 703 Hollybriar Lane, Naples, Florida 34108.
|
|
|
|
|
(10)
|
Consists
of 41,667 shares of common stock underlying options that are exercisable within 60 days
of March 31, 2015. Does not include 258,333 shares of common stock underlying options
that are not exercisable within 60 days of March 31, 2015. These stock options were granted
to Mr. Copeland on November 28, 2014. Mr. Copeland’s business address is 13007
Mimosa Farm Court, Rockville, Maryland 20850.
|
|
|
|
|
(11)
|
F.
Henry Habicht II and Walter L. Schindler are the managers of SAIL Exit Partners, LLC. As such, Mr. Habicht and Mr. Schindler
are deemed to have shared voting and investment power in respect of the shares of common stock owned of record or beneficially
SAIL Exit Partners, LLC. SAIL Exit Partners, LLC’s business address is 3161 Michelson Drive, Suite 750, Irvine, California
92612.
|
|
|
|
|
(12)
|
SAIL
Capital Partners, LLC is the general partner and management company of SAIL Pre-Exit Acceleration Fund, LP. F. Henry Habicht
II and Walter L. Schindler are the managing partners of SAIL Capital Partners, LLC. As such, SAIL Capital Partners, LLC, Mr.
Habicht and Mr. Schindler are deemed to have shared voting and investment power in respect of the shares of common stock owned
of record or beneficially SAIL Pre-Exit Acceleration Fund, LP. SAIL Capital Partners, LLC’s business address is 3161
Michelson Drive, Suite 750, Irvine, California 92612.
|
|
|
|
|
(13)
|
Obtained
via Schedule 13G filed with the SEC. Includes 5,941,698 shares of common stock held by Empery Asset Management
L.P. (“
EAM
”). Does not include 1,343,284 warrants to purchase a like number of shares of common stock. Pursuant
to the terms of the warrants, EAM cannot exercise any of its warrants if EAM would beneficially own, after any such exercise,
more than 4.99% of the outstanding shares of Common Stock. Ryan M. Lane and Martin D. Hoe are the managing partners
of EAM. As such, EAM, Mr. Lane, and Mr. Hoe are deemed to have shared voting and investment power in respect of the shares
of common stock owned of record or beneficially. EAM’s address is 1 Rockefeller Plaza, Suite 1205 New York, New
York 10020.
|
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS; DIRECTOR INDEPENDENCE
|
As
disclosed in “
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Related
Party Transactions
” above, we have been parties to a series of debt and equity transactions with, among other then-related,
and now currently related parties. Commencing with the spin-off, our major stockholder group has been the SAIL Entities,
currently held by SAIL Exit Partners, LLC and SAIL Pre-Exit Acceleration Fund, LP, as described in “
Security Ownership
of Certain Beneficial Owners and Management
” above. A description of those transactions is set forth in Note
14 to our audited consolidated financial statements elsewhere in this prospectus. Mr. Hammons has a carried interest
as a partner in SAIL Exit Partners, LLC and Dr. Brown is a principal of SAIL Capital Partners, LLC, the general partner and management
company of SAIL Pre-Exit Acceleration Fund, LP.
The
following officers and directors of the Company participated in the September 2014 PIPE.
|
Name of Stockholder
|
|
Position
with Company
|
|
Number
of Shares Purchased
in September 2014
Private Placement
|
|
Alain J. Castro
|
|
Director and
Chief Executive Officer
|
|
333,333
|
|
Domonic Carney (1)
|
|
Treasurer and
Chief Financial
Officer
|
|
333,340
|
|
Michael J. Hammons
|
|
Director
|
|
66,667
|
|
Christopher J. Brown (2)
|
|
Director
|
|
146,667
|
|
Jeffrey A. Horn
|
|
Director
|
|
66,667
|
|
(1)
|
Consists
of 200,000 shares of common stock issued to Charles Schwab & Co. Inc. FBO Domonic Carney IRA and 133,340 shares issued
to Charles Schwab & Co. Inc. FBO Domonic Carney Roth IRA, and which shares are controlled by Mr. Carney and as such, Mr.
Carney holds voting and investing power with respect to such shares.
|
|
|
|
|
(2)
|
Consists
of 66,667 shares of common stock issued to Dr. Brown as an individual and 80,000 shares issued to Christopher J. Brown Contributing
IRA, which shares are controlled by Dr. Brown and as such, Dr. Brown holds voting and investing power with respect to such
shares.
|
Based
upon information submitted by Mr. Horn, Mr. Copeland, and Mr. Tchaikovsky, our Board has determined that each of them is “independent”
under Rule 5605(a)(2) of NASDAQ Listing Rules, even though such definition does not currently apply to us because we are not listed
on NASDAQ.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
On
December 4, 2014, we engaged SingerLewak LLP as our principal independent auditor. We incurred no fees for SingerLewak during
2014 or 2013.
Our
principal independent auditor in 2013 and until December 1, 2014 was Kelly, whom we engaged on July 1, 2013. The
following table shows the fees for audit and other services provided by Kelly in relation to our 2014 and 2013 fiscal years:
|
|
|
2014
|
|
|
2013
|
|
|
Audit Fees (1)
|
|
$
|
89,375
|
|
|
$
|
220,380
|
|
|
Audit-related Fees (2)
|
|
|
10,440
|
|
|
|
8,650
|
|
|
Tax Fees (3)
|
|
|
-
|
|
|
|
-
|
|
|
All Other Fees
(4)
|
|
|
3,425
|
|
|
|
2,500
|
|
|
Total
|
|
$
|
103,240
|
|
|
$
|
231,530
|
|
Our
former accountant until July 1, 2013 was W&B. The following table shows the fees that were billed for audit and
other services provided by W&B, during the 2013 fiscal years:
|
|
|
2013
|
|
|
Audit Fees (1)
|
|
$
|
-
|
|
|
Audit-related Fees (2)
|
|
|
-
|
|
|
Tax Fees (3)
|
|
|
-
|
|
|
All
Other Fees (4)
|
|
|
1,800
|
|
|
Total
|
|
$
|
1,800
|
|
|
(1)
|
Audit
Fees
– This category includes the audit of our annual financial statements, review of financial statements
included in our Quarterly Reports on Form 10-Q, and services that are normally provided by independent auditors in connection
with statutory and regulatory filings or the engagement for fiscal years. This category also includes advice on
audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
|
|
|
|
|
(2)
|
Audit-Related
Fees
– This category consists of assurance and related services by our independent auditors that are reasonably
related to the performance of the audit or review of our financial statements and are not reported above under “Audit
Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence
with the SEC and services performed for SEC registration statements
|
|
|
|
|
(3)
|
Tax
Fees
– This category consists of professional services rendered by our independent auditors for tax compliance
and tax advice. The services for the fees disclosed under this category include tax return preparation and technical
tax advice.
|
|
|
|
|
(4)
|
All Other Fees
–
This category consists of fees for other miscellaneous items.
|
Pre-Approval
Policies and Procedures of the Board of Directors
Our
Board approved the engagement of our independent auditors for 2012 and 2013, and also pre-approved all audit and non-audit expenses.
PART
IV
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
The
following consolidated financial statements for the years ended December 31, 2014 and 2013 are included in Part II, Item 8 of
this Report:
|
Reports
of Independent Registered Public Accounting Firms
|
F-2
|
|
Consolidated Balance
Sheets as of December 31, 2014 and 2013
|
F-3
|
|
Consolidated Statements
of Operations for the Years Ended December 31, 2014 and 2013
|
F-4
|
|
Consolidated Statements
of Stockholders’ Equity for the Years Ended December 31, 2014 and 2013
|
F-5
|
|
Consolidated Statements
of Cash Flows for the Years Ended December 31, 2014 and 2013
|
F-6
|
|
Notes to Consolidated
Financial Statements
|
F-8
|
|
(2)
|
Financial Statement
Schedules
|
Schedules
are omitted because the required information is not present or is not present in amounts sufficient to require submission of the
schedule or because the information required is given in the consolidated financial statements or the notes thereto.
|
EXHIBIT NO.
|
|
DESCRIPTION
|
|
|
|
|
3.1
|
(1)
|
Articles of Incorporation, filed with
the Secretary of State of the State of Nevada on April 29, 2010.
|
|
|
|
|
3.1(a)
|
(3)
|
Amended and Restated
Articles of Incorporation, filed with the Secretary of State of the State of Nevada on April 29, 2010.
|
|
|
|
|
3.2
|
(1)
|
Bylaws of the Registrant.
|
|
|
|
|
3.2(a)
|
(3)
|
Amendment to Bylaws of the Registrant.
|
|
|
|
|
3.2(b)
|
(4)
|
Amended and Restated Bylaws of the Registrant.
|
|
|
|
|
3.3
|
(4)
|
Articles of Merger as filed with the
Secretary of State of the State of Delaware on July 1, 2013.
|
|
EXHIBIT NO.
|
|
DESCRIPTION
|
|
4.1*
|
(4)
|
2013 Equity Incentive Award Plan.
|
|
|
|
|
|
4.1(a)*
|
(6)
|
2013 Equity Incentive Award Plan,
as amended on August 23, 2013.
|
|
|
|
|
|
4.1(b)*
|
(21)
|
2013 Equity Incentive Award Plan, as amended on March 25, 2015.
|
|
|
|
|
|
4.1
|
(12)
|
Warrant issued to Merriman Capital,
Inc., dated March 3, 2014.
|
|
|
|
|
|
4.2
|
(10)
|
Senior Secured Promissory Notes
issued pursuant to the April 2014 SPA, dated April 16, 2014.
|
|
|
|
|
|
4.2(a)
|
(14)
|
Form of Letter Agreement dated July
10, 2014.
|
|
|
|
|
|
4.2(b)
|
(15)
|
Form of Conversion and Redemption
Agreement dated August 14, 2014.
|
|
|
|
|
|
4.3
|
(10)
|
Warrants issued pursuant to the
April 2014 SPA, dated April 16, 2014.
|
|
|
|
|
|
4.3(a)
|
(17)
|
Waiver and Amendment Agreement dated
September 18, 2014.
|
|
|
|
|
|
4.4
|
(18)
|
Warrant issued to CI USVI, LLC,
dated September 29, 2014.
|
|
|
|
|
|
4.5
|
(18)
|
Warrant issued to Chardan Capital
Markets, LLC, dated September 29, 2014.
|
|
|
|
|
|
4.6
|
(18)
|
Warrant issued to The Special Equities
Group, LLC, dated September 29, 2014.
|
|
|
|
|
|
4.7
|
(18)
|
Warrant issued to Ramin Azar, dated
September 29, 2014.
|
|
|
|
|
|
4.8
|
(18)
|
Warrant issued to Colorado Financial
Service Corporation, dated September 29, 2014.
|
|
|
|
|
|
4.9
|
(22)
|
Warrant issued to Rufus Dufus
LLC, dated December 1, 2014.
|
|
|
|
|
|
4.10
|
(22)
|
Warrant issued to Dylana Dreams.
LLC, dated December 1, 2014.
|
|
|
|
|
|
4.11
|
(22)
|
Warrant issued to Island Pickle,
LLC, dated December 16, 2014.
|
|
|
|
|
|
4.12
|
(22)
|
Warrant issued to Pilly Boy,
LLC, dated December 16, 2014.
|
|
|
|
|
|
10.1
|
(5)
|
Commercial
Lease Agreement between Meehan Holdings, LLC, FlexEnergy, Inc., dated May 26, 2011.
|
|
|
|
|
|
10.1(a)
|
(7)
|
Assignment
and Assumption of Lease between Ener-Core, Inc. and FlexEnergy, Inc., effective August 1, 2013.
|
|
|
|
|
|
10.1(b)
|
(7)
|
Lessor’s
Consent to Assignment and Sublease, dated September 4, 2013.
|
|
|
|
|
|
10.2
|
(6)
|
Sales
and Service Agreement between Ener-Core Power, Inc. and the Regents of the University of California University of California,
Irvine, dated April 19, 2013.
|
|
|
|
|
|
10.3
|
(10)
|
Securities Purchase Agreement between
Ener-Core, Inc. and five investors, dated April 15, 2014.
|
|
|
|
|
|
10.4
|
(10)
|
Registration Rights
Agreement entered by Ener-Core, Inc. in connection with the April 2014 SPA, dated April 15, 2014.
|
|
|
|
|
|
10.5
|
(10)
|
Pledge and Security Agreement entered
by Ener-Core, Inc. in connection with the April 2014 SPA, dated April 15, 2014.
|
|
|
|
|
|
10.6
|
(10)
|
Special Deposit Account Control
Agreement entered by Ener-Core, Inc. in connection with the April 2014 SPA, dated April 15, 2014.
|
|
|
|
|
|
10.7*
|
(11)
|
Stock Option Agreement by and between
the Company and certain officers and directors dated April 28, 2014.
|
|
|
|
|
|
10.8*
|
(11)
|
Stock Option Cancellation Agreement
by and between the Company and certain officers and directors dated April 28, 2014.
|
|
|
|
|
|
10.9*
|
(12)
|
Offer Letter from the registrant
to Jeff Horn dated as of May 19, 2014.
|
|
|
|
|
|
10.10*
|
(12)
|
Stock Option Agreement between the
registrant and Jeff Horn dated May 19, 2014.
|
|
|
|
|
|
10.11*
|
(12)
|
Amendment to Executive Employment
Agreement of Alain J. Castro, dated as of May 23, 2014.
|
|
|
|
|
|
10.12*
|
(12)
|
Stock Option Agreement for Alain
J. Castro dated May 23, 2014.
|
|
|
|
|
|
10.13*
|
(12)
|
Amendment to Executive Employment
Agreement of Boris A. Maslov, dated as of May 23, 2014.
|
|
|
|
|
|
10.14*
|
(12)
|
Stock Option Agreement for Boris
A. Maslov dated May 23, 2014.
|
|
|
|
|
|
10.15*
|
(12)
|
Amendment to Executive Employment
Agreement of Kelly Anderson, dated as of May 23, 2014.
|
|
EXHIBIT NO.
|
|
DESCRIPTION
|
|
10.16*
|
(12)
|
Stock Option Agreement for Kelly Anderson dated May 23, 2014.
|
|
|
|
|
|
10.17
|
(13)
|
Independent Consulting Agreement between the registrant and BKA Enterprises, Inc., dated as of June 26, 2014.
|
|
|
|
|
|
10.18*
|
(16)
|
Offer Letter from the registrant to Domonic J. Carney dated as of August 19, 2014.
|
|
|
|
|
10.19*
|
(16)
|
Executive Employment Agreement between the registrant and Domonic J. Carney dated as of August 19, 2014.
|
|
|
|
|
10.20
|
(17)
|
Securities Purchase Agreement between Ener-Core, Inc. and certain accredited investors dated September 18, 2014.
|
|
|
|
|
10.21
|
(17)
|
Registration Rights Agreement between Ener-Core, Inc. and certain accredited investors dated September 18, 2014.
|
|
|
|
|
|
10.22**
|
(22)
|
Commercial License Agreement by and between Dresser Rand Company and Ener Core Power dated November 14, 2014.
|
|
|
|
|
10.23*
|
(19)
|
Offer Letter from the registrant to Ian C. Copeland dated as of November 28, 2014.
|
|
|
|
|
|
10.24*
|
(19)
|
Stock Option Agreement between the registrant and Ian C. Copeland dated as of November 28, 2014.
|
|
|
|
|
|
10.25*
|
(19)
|
Stock Option Agreement between the registrant and Alain J. Castro dated as of November 28, 2014.
|
|
|
|
|
|
10.26*
|
(19)
|
Stock Option Agreement between the registrant and Boris A. Maslov dated as of November 28, 2014.
|
|
|
|
|
|
10.27*
|
(19)
|
Stock Option Agreement between the registrant and Domonic J. Carney dated as of November 28, 2014.
|
|
|
|
|
|
10.28*
|
(19)
|
Stock Option Agreement between the registrant and Michael J. Hammons dated as of November 28, 2014.
|
|
|
|
|
|
10.29
|
(22)
|
Amendment and Waiver Agreement
between the registrant and certain accredited investors dated December 1, 2014.
|
|
|
|
|
|
10.30
|
(22)
|
Form of Settlement Agreement and Mutual Release between the registrant and certain accredited investors dated December 16, 2014.
|
|
|
|
|
|
10.31**
|
(22)
|
First Amendment to Commercial License Agreement dated March 17, 2015.
|
|
|
|
|
14.1
|
(10)
|
Code of Ethics adopted on September 24, 2013.
|
|
|
|
|
|
16.1
|
(20)
|
Letter from Kelly & Co. Inc. dated December 9, 2014.
|
|
|
|
|
21.1
|
(6)
|
Subsidiaries of the Registrant.
|
|
|
|
|
31.1
|
(22)
|
Certification Pursuant to Rule 13a-14(a) and 15d-14(a) (4) of Chief Executive Officer.
|
|
|
|
|
|
31.2
|
(22)
|
Certification Pursuant to Rule 13a-14(a) and 15d-14(a) (4) of Chief Financial Officer.
|
|
|
|
|
|
32.1
|
(22)
|
Certification Pursuant to Section 1350 of Title 18 of the United States Code of Chief Executive Officer.
|
|
|
|
|
|
32.2
|
(22)
|
Certification Pursuant to Section 1350 of Title 18 of the United States Code of Chief Financial Officer.
|
|
|
|
|
|
101.INS ***
|
(22)
|
XBRL Instance Document.
|
|
|
|
|
|
101.SCH ***
|
(22)
|
XBRL Taxonomy Extension Schema Document.
|
|
|
|
|
|
101.CAL ***
|
(22)
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
|
|
|
101.DEF ***
|
(22)
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
|
|
|
|
101.LAB ***
|
(22)
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
|
|
|
|
101.PRE ***
|
(22)
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
*
|
Management contract or compensatory plan or arrangement.
|
|
**
|
Confidential treatment has been requested for a portion of this document.
|
|
***
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
|
|
(1)
|
Incorporated by reference to the Registrant’s Form S-1 filed on March 24, 2011.
|
|
(2)
|
Incorporated by reference to the Registrant’s Form 8-K filed on April 17, 2013.
|
|
(3)
|
Incorporated by reference to the Registrant’s Form 8-K filed on April 24, 2013.
|
|
(4)
|
Incorporated by reference to the Registrant’s Form 8-K filed on July 10, 2013.
|
|
(5)
|
Incorporated by reference to the Registrant’s Form 8-K filed on August 19, 2013.
|
|
(6)
|
Incorporated by reference to the Registrant’s Form 8-K/A filed on August 29, 2013.
|
|
(7)
|
Incorporated by reference to the Registrant’s Form 8-K filed on October 2, 2013.
|
|
(8)
|
Incorporated by reference to the Registrant’s Form 8-K/A filed on November 6, 2013.
|
|
(9)
|
Incorporated by reference to the Registrant’s Form 8-K filed on November 22, 2013.
|
|
(10)
|
Incorporated by reference to the Registrant’s Form 8-K filed on April 16, 2014.
|
|
(11)
|
Incorporated by reference to the Registrant’s Form 8-K filed on May 2, 2014.
|
|
(12)
|
Incorporated by reference to the Registrant’s Form 8-K filed on May 30, 2014.
|
|
(13)
|
Incorporated by reference to the Registrant’s Form 8-K filed on June 27, 2014.
|
|
(14)
|
Incorporated by reference to the Registrant’s Form 8-K filed on July 11, 2014.
|
|
(15)
|
Incorporated by reference to the Registrant’s Form 8-K filed on August 15, 2014.
|
|
(16)
|
Incorporated by reference to the Registrant’s Form 8-K filed on August 20, 2014.
|
|
(17)
|
Incorporated by reference to the Registrant’s Form 8-K filed on September 19, 2014.
|
|
(18)
|
Incorporated by reference to the Registrant’s Form S-1 filed on October 22, 2014.
|
|
(19)
|
Incorporated by reference to the Registrant’s Form 8-K filed on December 4, 2014.
|
|
(20)
|
Incorporated by reference to the Registrant’s Form 8-K filed on December 10, 2014.
|
|
(21)
|
Incorporated by reference to the Registrant’s Form 8-K filed on March 30, 2015.
|
|
(22)
|
Filed herewith.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|
|
(Registrant)
|
|
|
|
|
|
|
By:
|
/s/
Alain J. Castro
|
|
|
|
Alain J. Castro
|
|
|
|
Chief Executive Officer
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
By:
|
/s/
Domonic J. Carney
|
|
|
|
Domonic J. Carney
|
|
|
|
Chief Financial Officer
|
|
|
|
(Principal Financial and Accounting Officer)
|
In
accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Alain J. Castro
|
|
Chief Executive Officer and Director
|
|
March 31, 2015
|
|
Alain J. Castro
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Boris A. Maslov
|
|
President, Chief Operating Officer, and
Chief Technology Officer
|
|
March 31, 2015
|
|
Boris A. Maslov
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Domonic J. Carney
|
|
Treasurer, Secretary and Chief Financial
Officer
|
|
March 31, 2015
|
|
Domonic J. Carney
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael J. Hammons
|
|
Director
|
|
March 31, 2015
|
|
Michael J. Hammons
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Christopher J. Brown
|
|
Director
|
|
March 31, 2015
|
|
Christopher J. Brown
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Bennet P. Tchaikovsky
|
|
Director
|
|
March 31, 2015
|
|
Bennet P. Tchaikovsky
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jeffrey Horn
|
|
Director
|
|
March 31, 2015
|
|
Jeffrey Horn
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Ian C. Copeland
|
|
Director
|
|
March 31, 2015
|
|
Ian C. Copeland
|
|
|
|
|
FINANCIAL
STATEMENTS
Index
to the Financial Statements
REPORT
OF INDEPENDENT
REGISTERED
PUBLIC ACCOUNTING
FIRM
To
the Board of Directors and Stockholders
Ener-Core,
Inc.
Irvine,
California
We
have audited
the
accompanying
consolidated balance
sheet
of Ener-Core, Inc.
and
subsidiary (collectively, the “Company”)
as
of
December
31,
2014,
and
the
related
consolidated
statements
of
operations,
stockholders’
equity and cash
flows
for the
year
then
ended.
These
financial
statements
are
the
responsibility
of
the
Company's management.
Our responsibility
is
to
express
an
opinion
on
these
financial
statements
based
on
our
audit.
We
conducted our
audit
in
accordance with
the
standards
of the
Public Company
Accounting
Oversight
Board
(United States).
Those
standards require
that
we
plan and
perform
the
audit to
obtain
reasonable
assurance
about whether the
financial
statements
are
free
of
material
misstatement.
The
Company
is
not
required
to
have,
nor
were
we
engaged
to
perform,
an
audit
of
its
internal
control
over financial
reporting.
Our
audit
included
consideration
of
internal
control
over financial
reporting
as
a
basis for
designing
audit procedures
that
are
appropriate
in
the
circumstances, but not for
the
purpose of expressing
an
opinion
on
the
effectiveness
of
the
Company’s internal
control
over
financial
reporting.
Accordingly,
we
express
no
such opinion. An
audit
also
includes
examining,
on
a
test basis,
evidence
supporting
the
amounts and
disclosures
in
the
financial
statements,
assessing
the
accounting
principles
used
and
significant
estimates
made
by
management,
as
well
as
evaluating
the
overall
financial
statement
presentation.
We
believe
that our
audit
provides
a
reasonable
basis for
our opinion.
In
our opinion, the
consolidated
financial
statements
referred
to
above
present fairly,
in
all
material
respects, the financial
position
of
the Company
as
of
December
31, 2014,
and
the
results
of
its
operations
and
its
cash flows
for the
year then
ended
in
conformity
with
U.S.
generally
accepted
accounting
principles.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has
negative cash flows from operations and has an accumulated deficit. This raises substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters are also described in Note 1 to the consolidated
financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/SingerLewak
LLP
Los
Angeles, California
March
31, 2015
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Ener-Core, Inc.
We
have audited the accompanying consolidated balance sheet of Ener-Core, Inc. (the “Company”) as of December 31,
2013 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December
31, 2013, Ener-Core, Inc.’s management is responsible for these consolidated financial statements. Our responsibility
is to express an opinion on these consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Ener-Core, Inc. as of December 31, 2013 and the results of its operations and its cash flows for the year ended December 31,
2013 in conformity with accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed
in Note 1 to the consolidated financial statements, the Company has suffered recurring net losses and negative cash flows since
inception and have not yet established an ongoing source of revenues sufficient to cover its operating costs. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning
these matters are also discussed in Note 1 to the consolidated financial statements. The accompanying consolidated financial statements
do not give effect to any adjustments that might result from the outcome of this uncertainty.
Kelly
& Company
Costa
Mesa, California
April
15, 2014
Ener-Core,
Inc.
Consolidated
Balance Sheets
|
|
|
December
31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,176,000
|
|
|
$
|
1,201,000
|
|
|
Accounts
receivable, net
|
|
|
107,000
|
|
|
|
16,000
|
|
|
Restricted cash
|
|
|
50,000
|
|
|
|
50,000
|
|
|
Costs in excess
of billings on uncompleted contracts
|
|
|
—
|
|
|
|
801,000
|
|
|
Inventory
|
|
|
53,000
|
|
|
|
29,000
|
|
|
Prepaid
expenses and other current assets
|
|
|
91,000
|
|
|
|
46,000
|
|
|
Total current assets
|
|
|
2,477,000
|
|
|
|
2,143,000
|
|
|
Property and equipment, net
|
|
|
755,000
|
|
|
|
764,000
|
|
|
Intangibles, net
|
|
|
34,000
|
|
|
|
41,000
|
|
|
Deposits
|
|
|
27,000
|
|
|
|
28,000
|
|
|
Total assets
|
|
$
|
3,293,000
|
|
|
$
|
2,976,000
|
|
|
Liabilities and
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
612,000
|
|
|
|
419,000
|
|
|
Accrued expenses
|
|
|
456,000
|
|
|
|
266,000
|
|
|
Unearned revenue
|
|
|
—
|
|
|
|
701,000
|
|
|
Provision for contract
loss
|
|
|
—
|
|
|
|
100,000
|
|
|
Accrued warranty
expense
|
|
|
242,000
|
|
|
|
—
|
|
|
Derivative liabilities
|
|
|
402,000
|
|
|
|
—
|
|
|
Capital
leases payable
|
|
|
19,000
|
|
|
|
8,000
|
|
|
Total current
liabilities
|
|
|
1,731,000
|
|
|
|
1,494,000
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
23,000
|
|
|
|
6,000
|
|
|
Capital
lease payable
|
|
|
30,000
|
|
|
|
29,000
|
|
|
Total liabilities
|
|
|
1,784,000
|
|
|
|
1,529,000
|
|
|
Commitments and
contingencies (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock,
$0.0001 par value.
|
|
|
|
|
|
|
|
|
|
Authorized 50,000,000
shares; no shares issued and outstanding at December 31, 2014 and December 31, 2013
|
|
|
—
|
|
|
|
—
|
|
|
Common stock,
$0.0001 par value.
|
|
|
|
|
|
|
|
|
|
Authorized
200,000,000 shares; 114,106,000 and 72,554,000 shares issued and outstanding at December 31, 2014 and December 31, 2013,
respectively
|
|
|
11,000
|
|
|
|
7,000
|
|
|
Additional
paid in capital
|
|
|
19,537,000
|
|
|
|
8,945,000
|
|
|
Accumulated deficit
|
|
|
(18,039,000
|
)
|
|
|
(7,505,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
1,509,000
|
|
|
|
1,447,000
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
3,293,000
|
|
|
$
|
2,976,000
|
|
See
accompanying notes to consolidated financial statements.
Ener-Core,
Inc
Consolidated
Statements of Operations
|
|
|
Year
Ended
December 31,
2014
|
|
|
Year
Ended
December 31,
2013
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Revenues
from unrelated parties
|
|
$
|
868,000
|
|
|
$
|
7,000
|
|
|
Revenues
from related parties
|
|
|
—
|
|
|
|
9,000
|
|
|
Total revenues
|
|
|
868,000
|
|
|
|
16,000
|
|
|
Cost of Goods Sold
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold to unrelated parties
|
|
|
1,170,000
|
|
|
|
106,000
|
|
|
Cost
of goods sold to related parties
|
|
|
—
|
|
|
|
6,000
|
|
|
Total
costs of goods sold
|
|
|
1,170,000
|
|
|
|
112,000
|
|
|
Gross Profit (Loss)
|
|
|
(302,000
|
)
|
|
|
(96,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
|
5,449,000
|
|
|
|
4,802,000
|
|
|
Research and
development
|
|
|
3,156,000
|
|
|
|
2,257,000
|
|
|
Total operating
expenses
|
|
|
8,605,000
|
|
|
|
7,059,000
|
|
|
Operating loss
|
|
|
(8,907,000
|
)
|
|
|
(7,155,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
1,000
|
|
|
|
36,000
|
|
|
Loss on debt conversion
|
|
|
(2,414,000
|
)
|
|
|
—
|
|
|
Gain on revaluation of derivative liabilities,
net
|
|
|
1,574,000
|
|
|
|
—
|
|
|
Interest expense
|
|
|
(787,000
|
)
|
|
|
(10,000
|
)
|
|
Total other income
(expenses), net
|
|
|
(1,626,000
|
)
|
|
|
(26,000
|
)
|
|
Loss before provision for income taxes
|
|
|
(10,533,000
|
)
|
|
|
(7,129,000
|
)
|
|
Provision for
income taxes
|
|
|
1,000
|
|
|
|
1,000
|
|
|
Net loss
|
|
$
|
(10,534,000
|
)
|
|
$
|
(7,130,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
– basic and diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.11
|
)
|
|
Weighted average common shares –
basic and diluted
|
|
|
85,381,000
|
|
|
|
67,803,000
|
|
See
accompanying notes to consolidated financial statements.
Ener-Core,
Inc.
Consolidated
Statements of Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Common stock
|
|
|
Preferred
Stock
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1,
2013
|
|
|
60,883,000
|
|
|
$
|
6,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
978,000
|
|
|
$
|
(375,000
|
)
|
|
$
|
609,000
|
|
|
Issuance
of common stock for conversion of related party debt
|
|
|
1,028,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
771,000
|
|
|
|
—
|
|
|
|
771,000
|
|
|
Issuance
of common stock for cash, net of offering Costs of $533,000
|
|
|
7,499,000
|
|
|
|
1,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,465,000
|
|
|
|
—
|
|
|
|
5,466,000
|
|
|
Stock-based
compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,729,000
|
|
|
|
—
|
|
|
|
1,729,000
|
|
|
Exercise of stock options
|
|
|
3,221,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
2,000
|
|
|
Repurchase of non-vested shares
|
|
|
(77,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,130,000
|
)
|
|
|
(7,130,000
|
)
|
|
Balances at December 31, 2013
|
|
|
72,554,000
|
|
|
$
|
7,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
8,945,000
|
|
|
$
|
(7,505,000
|
)
|
|
$
|
1,447,000
|
|
|
Issuance
of common stock to settle convertible debt
|
|
|
13,555,000
|
|
|
|
1,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,710,000
|
|
|
|
—
|
|
|
|
2,711,000
|
|
|
Issuance
of common stock for cash, net of offering costs of $156,000
|
|
|
26,667,000
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,841,000
|
|
|
|
—
|
|
|
|
3,844,000
|
|
|
Shares
issued for financing costs
|
|
|
1,000,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Issuance
of warrants for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
180,000
|
|
|
|
—
|
|
|
|
180,000
|
|
|
Issuance
of warrants for fees related to convertible debt offering
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
155,000
|
|
|
|
—
|
|
|
|
155,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock and warrants for legal settlement
|
|
|
422,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
246,000
|
|
|
|
—
|
|
|
|
246,000
|
|
|
Stock-based
compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,460,000
|
|
|
|
—
|
|
|
|
3,460,000
|
|
|
Repurchase of non-vested shares
|
|
|
(92,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,534,000
|
)
|
|
|
(10,534,000
|
)
|
|
Balances at December 31, 2014
|
|
|
114,106,000
|
|
|
$
|
11,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
19,537,000
|
|
|
$
|
(18,039,000
|
)
|
|
$
|
1,509,000
|
|
See
accompanying notes to consolidated financial statements.
Ener-Core,
Inc.
Consolidated
Statements of Cash Flows
|
|
|
Year
Ended
December 31,
2014
|
|
|
Year
Ended
December 31,
2013
|
|
|
Cash flows used in operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,534,000
|
)
|
|
$
|
(7,130,000
|
)
|
|
Adjustments to reconcile net loss to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Amortization of
debt discount
|
|
|
720,000
|
|
|
|
—
|
|
|
Loss on debt conversion
|
|
|
2,414,000
|
|
|
|
—
|
|
|
Gain on change in
fair value of derivative liability
|
|
|
(1,574,000
|
)
|
|
|
—
|
|
|
Depreciation and
amortization
|
|
|
233,000
|
|
|
|
213,000
|
|
|
Stock-based compensation
|
|
|
3,460,000
|
|
|
|
1,729,000
|
|
|
Provision for contract
loss
|
|
|
—
|
|
|
|
100,000
|
|
|
Warranty expense
|
|
|
220,000
|
|
|
|
—
|
|
|
Warrants issued
for services
|
|
|
180,000
|
|
|
|
—
|
|
|
Common stock and
warrants issued for legal settlement
|
|
|
246,000
|
|
|
|
—
|
|
|
Changes in assets
and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables
|
|
|
(91,000
|
)
|
|
|
(16,000
|
)
|
|
Inventory
|
|
|
(24,000
|
)
|
|
|
(29,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Costs in excess of billings on uncompleted
contracts
|
|
|
801,000
|
|
|
|
(801,000
|
)
|
|
Prepaid expenses and other current assets
|
|
|
(45,000
|
)
|
|
|
(37,000
|
)
|
|
Deposit
|
|
|
1,000
|
|
|
|
(28,000
|
)
|
|
Restricted cash
|
|
|
—
|
|
|
|
(50,000
|
)
|
|
Accounts payable and accrued expenses
|
|
|
214,000
|
|
|
|
613,000
|
|
|
Accrued interest
|
|
|
20,000
|
|
|
|
(121,000
|
)
|
|
Deferred revenue
|
|
|
(701,000
|
)
|
|
|
701,000
|
|
|
Payments on contract loss
|
|
|
(79,000
|
)
|
|
|
—
|
|
|
Other liabilities
|
|
|
—
|
|
|
|
6,000
|
|
|
Net cash used
in operating activities
|
|
|
(4,539,000
|
)
|
|
|
(4,850,000
|
)
|
|
Cash flows used in
investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property
and equipment
|
|
|
(188,000
|
)
|
|
|
(54,000
|
)
|
|
Net cash used
in investing activities
|
|
|
(188,000
|
)
|
|
|
(54,000
|
)
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable
|
|
|
3,757,000
|
|
|
|
—
|
|
|
Payments on convertible notes payable
|
|
|
(1,883,000
|
)
|
|
|
—
|
|
|
Proceeds from related party notes payable
and advance
|
|
|
—
|
|
|
|
994,000
|
|
|
Proceeds from line of credit
|
|
|
—
|
|
|
|
400,000
|
|
|
Repayment of capital leases payable
|
|
|
(16,000
|
)
|
|
|
—
|
|
|
Proceeds from exercise of stock options
|
|
|
—
|
|
|
|
2,000
|
|
|
Proceeds from issuance of common stock,
net
|
|
|
3,844,000
|
|
|
|
5,466,000
|
|
|
Repayment of line of credit
|
|
|
—
|
|
|
|
(400,000
|
)
|
|
Repayment of
related party notes payable
|
|
|
—
|
|
|
|
(450,000
|
)
|
|
Net cash provided
by financing activities
|
|
|
5,702,000
|
|
|
|
6,012,000
|
|
|
Net increase
in cash and cash equivalents
|
|
|
975,000
|
|
|
|
1,108,000
|
|
|
Cash and cash
equivalents at beginning of period
|
|
|
1,201,000
|
|
|
|
93,000
|
|
|
Cash and cash equivalents
at end of period
|
|
$
|
2,176,000
|
|
|
$
|
1,201,000
|
|
See
accompanying notes to consolidated financial statements.
Ener-Core,
Inc.
Consolidated
Statements of Cash Flows (continued)
|
|
|
Year
ended December 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Supplemental disclosure of cash flow
information:
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
Interest
|
|
$
|
68,000
|
|
|
$
|
13,000
|
|
|
Supplemental disclosure
of non-cash activities:
|
|
|
|
|
|
|
|
|
|
Conversion
of accounts payable into common stock
|
|
$
|
-
|
|
|
$
|
227,000
|
|
|
Conversion
of advances from related party into common stock
|
|
$
|
-
|
|
|
$
|
184,000
|
|
|
Conversion
of notes payable into common stock
|
|
$
|
-
|
|
|
$
|
360,000
|
|
|
Equipment
purchased under capital leases
|
|
$
|
29,000
|
|
|
$
|
38,000
|
|
|
Debt
discount and derivative liabilities recorded upon issuance of warrants and convertible secured notes
|
|
$
|
2,078,000
|
|
|
$
|
-
|
|
|
Original
issue discount of convertible secured note issued
|
|
$
|
572,000
|
|
|
$
|
-
|
|
|
Debt
discount and accrued broker fees upon issuance of convertible secured note
|
|
$
|
186,000
|
|
|
|
|
|
|
Debt
discount for warrants issued for broker fee in convertible secured note
|
|
$
|
155,000
|
|
|
$
|
-
|
|
|
Warranty
liability recorded for product commissioned
|
|
$
|
242,000
|
|
|
$
|
-
|
|
|
Conversion
of convertible notes and accrued interest into common stock
|
|
$
|
2,711,000
|
|
|
$
|
-
|
|
|
Issuance
of warrants for services
|
|
$
|
180,000
|
|
|
$
|
-
|
|
|
Issuance
of common stock for placement fees
|
|
$
|
150,000
|
|
|
$
|
-
|
|
|
Issuance
of warrants for placement fees
|
|
$
|
296,000
|
|
|
$
|
-
|
|
|
Issuance
of warrants for legal settlement
|
|
$
|
246,000
|
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements
Note
1 - Organization
Organization
Ener-Core,
Inc. (the “Company”, “we”, “us”, “our”), a Nevada corporation, was formed on April
29, 2010 as Inventtech, Inc. On July 1, 2013, we acquired our wholly owned subsidiary, Ener-Core Power, Inc., (formerly
Flex Power Generation, Inc.), a Delaware corporation. The shareholders of Ener-Core Power, Inc. are now our majority
shareholders and the management of Ener-Core Power, Inc. is now our management. Therefore the acquisition is treated
as a “reverse merger” and our financial statements are those of Ener-Core Power, Inc. All equity amounts
presented have been retroactively restated to reflect the reverse merger as if it had occurred November 12, 2012.
Reverse
Merger
We
entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ener-Core Power, Inc. (“Ener-Core
Power”), a Delaware corporation, and Flex Merger Acquisition Sub, Inc., a Delaware corporation and our wholly owned subsidiary
(“Merger Sub”), pursuant to which the Merger Sub would merge with and into Ener-Core Power, with Ener-Core Power as
the surviving entity (the “Merger”). Prior to the merger, we were a public reporting “shell company,”
as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. The Merger Agreement was approved by the
boards of directors of each of the parties to the Merger Agreement. In April 2013, the pre-merger public shell company effected
a 30-for-1 forward split of its common stock. All share amounts have been retroactively restated to reflect the effect of
the stock split.
As
provided in the Contribution Agreement dated November 12, 2012 (the “Contribution Agreement”) by and among FlexEnergy,
Inc. (“FlexEnergy”, “Parent”), FlexEnergy Energy Systems, Inc. (“FEES”), and Ener-Core Power,
Inc. (“Successor”), Ener-Core Power, Inc. was spun-off from FlexEnergy, Inc. as a separate corporation. As
a part of that transaction, Ener-Core Power, Inc. received all assets (including intellectual property) and certain liabilities
pertaining to the Gradual Oxidizer business (Predecessor), the business carved out of Parent. The owners of Predecessor
did not distribute ownership of Successor entity pro rata. The assets and liabilities were transferred to us and recorded
at their historical carrying amounts since the transaction was a transfer of net assets between entities under common control.
On
July 1, 2013, Ener-Core Power completed the Merger with us. Upon completion of the merger, the operating company immediately
became a public company. The Merger was accounted for as a “reverse merger” and recapitalization. As part
of the reverse merger, the pre-merger public shell company shareholders cancelled 120,520,000 of common stock which were then
outstanding. This cancellation has been retroactively accounted for as of the inception of Ener-Core Power, Inc. on November
12, 2012. Accordingly, Ener-Core Power was deemed to be the accounting acquirer in the transaction and, consequently, the transaction
was treated as a recapitalization of Ener-Core Power. Accordingly, the assets and liabilities and the historical operations
that are reflected in the financial statements are those of Ener-Core Power and are recorded at the historical cost basis of Ener-Core
Power. Our assets, liabilities and results of operations were de minimis at the time of merger.
Description
of the Business
We
design, develop, and manufacture products based on proprietary technologies that aim to expand the operating range of gaseous
fuel while improving emissions, which technologies we refer to collectively as “Gradual Oxidization” or “Gradual
Oxidizer.” Our products aim to expand power generation into previously uneconomical markets while, at the same
time, reduce gaseous emissions from industrial processes that contribute to air pollution and climate change. The Gradual
Oxidizer integrates with a gas turbine and generator to create a power station.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Our
product, the FP250, is a complete system consisting of our designed and patented gradual oxidizer, integrated with a gas turbine
and generator. The FP250 has been designed to operate on fuels from 100% combustible gas down to concentrations of
5% or less combustible gas content. The FP250 has applications in landfill, oil production, coal mining, and other
operations, and offers our customers two distinct value propositions: the destruction of low quality waste gases with no harmful
emissions and the generation of energy from a renewable fuel source.
We
are currently developing our second commercial product, the Ener-Core Powerstation KG2-3G/GO (“KG2”), which will combine
our Gradual Oxidizer with a two megawatt gas turbine developed by Dresser-Rand a.s., a subsidiary of Dresser-Rand Group Inc. (“Dresser
Rand”). We have completed system layout and analytic models integrating our Gradual Oxidizer with the turbine
and have initiated design and development of the KG2. We expect to field test units in late 2014 or 2015, with initial
commercial shipments shortly thereafter.
We sell
our products directly and through distributors in two countries, the United States and Netherlands.
Going
Concern
Our
consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles
generally accepted in the United States of America (“
GAAP
”) and have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities in the normal course of business. Since our inception,
we have made a substantial investment in research and development to develop the Power Oxidizer, have successfully deployed an
EC250 field test unit at the U.S. Army base at Fort Benning, Georgia, and installed and commissioned our first commercial unit
in the Netherlands in the second quarter of 2014.
We
have sustained recurring net losses and negative cash flows since inception and have not yet established an ongoing source of
revenues sufficient to cover our operating costs and allow us to continue as a going concern. Despite a capital raise of
approximately $4.0 million in September 2014, we expect to require additional sources of capital to support the Company’s
growth initiatives. We must secure additional funding to continue as a going concern and execute our business plan.
Management’s
plan is to obtain such resources by obtaining capital sufficient to meet our operating expenses by seeking additional equity and/or
debt financing. The cash and cash equivalents balance (including restricted cash) on December 31, 2014 and March 16, 2015, was
approximately $2.2 million and $0.8 million (including restricted cash of $50,000), respectively.
We
project that our unrestricted cash balance of $0.8 million as of March 16, 2014, will continue to fund our working capital needs,
general corporate purposes, and related obligations for the short term at our current spending levels. However, we expect to require
significantly more cash for working capital and as financial security to support our growth initiatives.
We
will pursue raising additional debt or equity financing to fund our operations and product development. If future funds
are raised through issuance of stock or debt, these securities could have rights, privileges, or preferences senior to those of
common stock and debt covenants that could impose restrictions on the Company’s operations. The sale of additional equity
securities or debt financing will likely result in additional dilution to the Company’s current shareholders. We
cannot make any assurances that any additional financing will be completed on a timely basis, on acceptable terms or at all.
Management’s inability to successfully complete any other financing will adversely impact our ability to continue as a going
concern. If our business fails or we are unable to seek immediate financing, our investors may face a complete loss of their investment.
The
accompanying consolidated financial statements do not give effect to any adjustments that might be necessary if we were unable
to meet our obligations or continue operations as a going concern.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Note
2 - Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements include our accounts and our wholly-owned subsidiary, Ener-Core Power, Inc. All
significant intercompany transactions and accounts have been eliminated in consolidation. All amounts are rounded to the nearest
$000, except certain per share amounts within the footnotes.
The accompanying
financial statements have been prepared in accordance with GAAP.
Reclassifications
Certain
amounts in the 2013 consolidated financial statements have been reclassified to conform with the current year presentation. These
reclassifications have no effect on previously reported net loss.
Segments
We
operate in one segment. All of our operations are located domestically.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period. Significant items subject to such estimates and assumptions
include but are not limited to: collectability of receivables; the valuation of certain assets, useful lives, and carrying amounts
of property and equipment, equity instruments and share-based compensation; provision for contract losses; valuation allowances
for deferred income tax assets; valuation of derivative liabilities; and exposure to warranty and other contingent liabilities.
We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Foreign
Currency Adjustments
Our
functional currency for all operations worldwide is the U.S. dollar. Nonmonetary assets and liabilities are translated at historical
rates and monetary assets and liabilities are translated at exchange rates in effect at the end of the year. Income statement
accounts are translated at average rates for the year. At December 31, 2014 and 2013, we did not hold any foreign currency asset
or liability amounts. Gains and losses resulting from foreign currency transactions are reported as other income in the period
they occurred.
Concentrations
of Credit Risk
Cash
and Cash Equivalents
We
maintain our non-interest bearing transactional cash accounts at financial institutions for which the Federal Deposit Insurance
Corporation (“FDIC”) provides insurance coverage of up to $250,000. For interest bearing cash accounts, from time
to time, balances exceed the amount insured by the FDIC. We have not experienced any losses in such accounts and believe we are
not exposed to any significant credit risk related to these deposits. At December 31, 2014, we had $1.9 million in excess of the
FDIC limit.
We
consider all highly liquid investments available for current use with an initial maturity of three months or less and are not
restricted to be cash equivalents. We invest our cash in short-term money market accounts.
Restricted
Cash
Collateral
Account
Under
a credit card processing agreement with a financial institution that was entered in 2013, we are required to maintain funds on
deposit with the financial institution as collateral. The amount of the deposit is at the discretion of the financial institution
was $50,000 on December 31, 2014 and 2013.
Accounts
Receivable
Our
accounts receivable are typically from credit worthy customers or, for international customers are supported by guarantees or
letters of credit. For those customers to whom we extend credit, we perform periodic evaluations of them and maintain allowances
for potential credit losses as deemed necessary. We generally do not require collateral to secure accounts receivable. We have
a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in existing
accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an
analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account
balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.
At
December 31, 2014, we reserved $34,000 related to rents receivable from our sublessees. At December 31, 2013, we did not have
any allowance for doubtful accounts. Although we expect to collect amounts due, actual collections may differ from the recorded
amounts.
As
of December 31, 2014 and December 31, 2013, one and one customer, respectively, accounted for 100% of net accounts receivable
for each year. One customer accounted for 100% of net revenues for the twelve months ended December 31, 2014. Two customers
accounted for 100% of net revenues for the twelve months ended September 30, 2013.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Accounts
Payable
As
of December 31, 2014 and December 31, 2013, six and two vendors, respectively, collectively accounted for approximately 54% and
48% of total accounts payable.
Inventory
Inventory,
which consists of raw materials, is stated at the lower of cost or net realizable value, with cost being determined by the average-cost
method, which approximates the first-in, first-out method. At each balance sheet date, we evaluate our ending inventory for excess
quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand in relation to the inventory
on hand, among consideration of other factors. Based upon the evaluation, provisions are made to reduce excess or obsolete inventories
to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis
of the respective inventories. At December 31, 2014 and 2013, we did not have a reserve for slow-moving or obsolete inventory.
Costs
in Excess of Billings on Uncompleted Contracts
Costs
in excess of billings on uncompleted contracts in the consolidated balance sheets represents accumulation of costs for labor,
materials, overhead and other costs that have been incurred. These costs will be recognized as costs of goods sold when the contract
is considered complete in accordance with the completed-contract method. Costs in excess of billings on uncompleted contracts
were $0 and $801,000 at December 31, 2014 and 2013, respectively. In June 2014, our contract with EECT was completed, resulting
in the recognition of revenue related to the contract plus change orders and all associated costs.
Property
and Equipment
Property
and equipment are stated at cost, and are being depreciated using the straight-line method over the estimated useful lives of
the related assets, ranging from three to ten years. Maintenance and repairs that do not improve or extend the lives of the respective
assets are expensed. At the time property and equipment are retired or otherwise disposed of, the cost and related accumulated
depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are reflected in the consolidated
statements of operations.
Deposits
Deposits
primarily consist of amounts incurred or paid in advance of the receipt of fixed assets or are deposits for rent and insurance.
Accrued
Warranties
Accrued warranties represent the estimated
costs that will be incurred during the warranty period of our products. We make an estimate of expected costs that will be incurred
by us during the warranty period and charge that expense to the consolidated statement of operations at the date of sale. We also
reevaluate the estimate at each balance sheet date and if the estimate is changed, the effect is reflected in the consolidated
statement of operations. We made our initial commercial sale to EECT with a six month warranty and later extended that warranty
at our discretion. There was no warranty for the unit shipped to the Fort Benning site. We expect our future warranty period to
be between six months and one year depending on the warranties provided and the products sold. Accrued warranties for expected
expenditures within the next year are classified as current liabilities and as non-current liabilities for expected expenditures
for time periods beyond one year.
Deferred
Rent
We
record deferred rent expense, which represents the temporary differences between the reporting of rental expense on the financial
statements and the actual amounts remitted to the landlord. The deferred rent portion of lease agreements are leasing inducements
provided by the landlord. Also, tenant improvement allowances provided are recorded as a deferred rent liability and recognized
ratably as a reduction to rent expense over the lease term.
Intangible
Assets
We
amortize our intangible assets with finite lives over their estimated useful lives.
Impairment
of Long-Lived Assets
We
account for our long-lived assets in accordance with the accounting standards which require that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the historical carrying value of an asset may no longer
be appropriate. We consider the carrying value of assets may not be recoverable based upon its review of the following events
or changes in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in
future periods; loss of legal ownership or title to the assets; significant changes in our strategic business objectives and utilization
of the asset; or significant negative industry or economic trends. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset are less than its carrying amount. As of December 31, 2014 and 2013, we
do not believe there have been any impairments of our long-lived assets. There can be no assurance, however, that market conditions
will not change or demand for our products will continue, which could result in impairment of long-lived assets in the future.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Fair
Value of Financial Instruments
Our
financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts receivable, accounts payable,
derivative liabilities, Secured Notes payable and related debt discounts and capital lease liabilities. Fair value estimates discussed
herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2014 and
2013. The carrying amounts of short-term financial instruments are reasonable estimates of their fair values due to their short-term
nature or proximity to market rates for similar items.
We
determine the fair value of our financial instruments based on a three-level hierarchy established for fair value measurements
under which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable
inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s market assumptions.
This hierarchy requires the use of observable market data when available. These two types of inputs have created the following
fair-value hierarchy:
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Level
1: Valuations based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities. Currently, we classify our cash and cash equivalents as Level 1 financial instruments.
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Level 2: Valuations
based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date quoted
prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the
full term of the asset or liability. We do not currently have any accounts under Level 2.
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Level 3: Valuations
based on inputs that require inputs that are both significant to the fair value measurement and unobservable and involve management
judgment (i.e., supported by little or no market activity). Currently, we classify our warrants accounted for as derivative
liabilities as level 3 financial instruments.
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If
the inputs used to measure fair value fall in different levels of the fair value hierarchy, a financial security’s hierarchy
level is based upon the lowest level of input that is significant to the fair value measurement.
Derivative
Financial Instruments
The
Company issues derivative financial instruments in conjunction with its debt and equity offerings and to provide additional incentive
to investors and placement agents. The Company’s uses derivative financial instruments in order to obtain the lowest cash
cost-source of funds. Derivative liabilities are recognized in the consolidated balance sheets at fair value based on the criteria
specified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) topic
815-40 “
Derivatives and Hedging – Contracts in Entity’s own Equity
.” The estimated fair value
of the derivative liabilities is calculated using either the Black-Scholes-Merton or Monte Carlo simulation model method.
The
Company issued common stock warrants and convertible secured notes payable with conversion features in April 2014. These embedded
derivatives were evaluated under ASC topic 815-40, were bifurcated from the debt host and are classified as liabilities on the
consolidated balance sheet. The Company records the warrants and embedded derivative liabilities at fair value and adjusts the
carrying value of the common stock warrants and embedded derivatives to their estimated fair value at each reporting date with
the increases or decreases in the fair value of such warrants and derivatives at each reporting date, recorded as a gain or (loss)
in the consolidated statements of operations (See Notes 8, 9, and 11).
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
The
Company issued common stock warrants for services in September 2014. These derivative securities were evaluated under ASC topic
815-40 and determined that they did not need to be recorded as liabilities on the consolidated balance sheet. The warrants were
valued on the date of issuance at fair value.
Revenue
Recognition
We
generate revenue from the sale of our clean power energy systems and from consulting services. Revenue is recognized when there
is persuasive evidence of an arrangement, product delivery and acceptance have occurred, the sales price is fixed or determinable
and collectability of the resulting receivable is reasonable assured. Amounts billed to clients for shipping and handling are
classified as sales of product with related costs incurred included in cost of sales.
Provisions
for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period
the related revenue is recorded. We defer any revenue for which the services have not been performed or are subject to refund
until such time that we and our customer jointly determine that the services have been performed or no refund will be required.
Revenues
under long-term construction contracts are generally recognized using the completed-contract method of accounting. Long-term construction-type
contracts for which reasonably dependable estimates cannot be made or for which inherent hazards make estimates difficult are
accounted for under the completed-contract method. Revenues under the completed-contract method are recognized upon substantial
completion – that is acceptance by the customer, compliance with performance specifications demonstrated in a factory acceptance
test or similar event. Accordingly, during the period of contract performance, billings and costs are accumulated on the balance
sheet, but no profit or income is recorded before completion or substantial completion of the work. Anticipated losses on contracts
are recognized in full in the period in which losses become probable and estimable. Changes in estimate of profit or loss on contracts
are included in earnings on a cumulative basis in the period the estimate is changed. We had deferred all amounts received on
our contract with EECT until the contract is substantially completed, which occurred in June 2014, at which time the entire contract,
including change orders, was recorded as revenue. As of December 31, 2014 and 2013, we had a provision for contract loss of $0
and $100,000, respectively, related to our contract with EECT for the Attero EC250 sale in the Netherlands.
Research
and Development Costs
Research
and development costs are expensed as incurred. Research and development was $3.2 million and $2.3 million, for the
years ended December 31, 2014 and 2013, respectively.
Share-Based
Compensation
We
maintain a stock option plan and record expenses attributable to the stock option plan. We amortize share-based compensation from
the date of grant on a weighted average basis over the requisite service (vesting) period for the entire award.
We
account for equity instruments issued to consultants and vendors in exchange for goods and services at fair value. The measurement
date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for
performance by the consultant or vendor is reached or (ii) the date at which the consultant’s or vendor’s performance
is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over
the term of the consulting agreement.
In
accordance with the accounting standards, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity
instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity
instrument is granted for accounting purposes. Accordingly, we record the fair value of the fully vested, non-forfeitable common
stock issued for future consulting services as prepaid expense in our consolidated balance sheets.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Income
Taxes
We
account for income taxes under the provisions of the accounting standards. Under the accounting standards, deferred
tax assets and liabilities are recognized for the expected future tax benefits or consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred
tax assets when it is more likely than not that such asset will not be realized through future operations. Our deferred tax assets
and liabilities are primarily related to our Net Operating Losses and timing differences between book and tax accounting for depreciation
and our net deferred tax assets were fully reserved as of December 31, 2014 and December 31, 2013.
The
accounting guidance for uncertainty in income taxes provides that a tax benefit from an uncertain tax position may be recognized
when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals
or litigation processes, based on the technical merits. We recognize any uncertain income tax positions on income tax
returns at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An
uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. As of
December 31, 2014 and 2013 and there were no unrecognized tax benefits included in the consolidated balance sheets that would,
if recognized, affect the effective tax rate. Our practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. We had no accrual for interest or penalties on our consolidated balance sheets at
December 31, 2014 and 2013 and have not recognized interest and/or penalties in the consolidated statements of operations
for the years ended December 31, 2014 or 2013.
We
are subject to taxation in the U.S. and various state and foreign jurisdictions.
We
do not foresee material changes to our gross uncertain income tax position liability within the next twelve months.
Earnings
(Loss) per Share
Basic
loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares
assumed to be outstanding during the period of computation. Diluted loss per share is computed similar to basic loss
per share except that the denominator is increased to include the number of additional common shares that would have been outstanding
if the potential shares had been issued and if the additional common shares were dilutive. Options and warrants to
purchase approximately 23.1 million and 9.5 million were outstanding at December 31, 2014 and 2013, respectively, but were excluded
from the computation of diluted loss per share due to the anti-dilutive effect on net loss per share.
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Year
ended
December 31,
2014
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Year
ended
December 31,
2013
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Net loss
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$
|
(10,534,000
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)
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$
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(7,130,000
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)
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Weighted average number of common shares outstanding:
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Basic and diluted
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85,381,000
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67,803,000
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Net loss attributable to common stockholders
per share:
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Basic and diluted
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$
|
(0.12
|
)
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$
|
(0.11
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)
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Comprehensive
Income (Loss)
We
have no items of other comprehensive income (loss) in any period presented. Therefore, net loss as presented in our Consolidated
Statements of Operations equals comprehensive loss.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Recently
Issued Accounting Pronouncements
Effective
January 1, 2014, we adopted FASB Accounting Standards Update (“ASU”) 2013-07, Presentation of Financial Statements
(Topic 205): Liquidation Basis of Accounting (“ASU 2013-07”). The amendments in ASU 2013-07 clarify when an entity
should apply the liquidation basis of accounting and provide principles for the recognition and measurement of associated assets
and liabilities. In accordance with the amendments, the liquidation basis is used when liquidation is imminent. Liquidation
is considered imminent when the likelihood is remote that the organization will return from liquidation and either: (a) a plan
for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote
that the execution of the plan will be blocked by other parties; or (b) a plan for liquidation is being imposed by other forces.
The adoption of ASU 2013-07 did not have a material impact on our consolidated financial statements.
Effective
January 1, 2014, we adopted FASB ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). The amendments
in ASU 2013-11 clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented
in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In
situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting
date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does
not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements
as a liability and should not be combined with deferred tax assets. The adoption of ASU 2013-11 did not have a material impact
on our consolidated financial statements.
In
May, 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic
606) ("ASU 2014-09"). ASU 2014-09 provides a framework for addressing revenue recognition issues and, upon its effective
date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally
accepted accounting principles. ASU 2014-09 is effective beginning with the calendar year ended December 31, 2017. The Company
has not yet assessed the impact ASU 2014-09 will have upon adoption on its financial position, results of operations or cash flows.
In
August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires that an entity's management evaluate
whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to
continue as a going concern within one year after the date that the financial statements are issued. Substantial doubt about an
entity's ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate
that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that
the financial statements are issued. Certain disclosures are necessary in the footnotes to the financial statements in the event
that conditions or events raise substantial doubt about an entity's ability to continue as a going concern. ASU 2014-15 is effective
for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter and early application
is permitted. The Company has not yet assessed the impact ASU 2014-15 will have upon adoption.
In
November 2014, the FASB issued ASU 2014-16 – Derivatives and Hedging: Determining Whether the Host Contract in a Hybrid
Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity. ASU 2014-16 clarifies how current GAAP should
be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is
issued in the form of a share. ASU 2014-16 is effected for the interim and annual periods beginning after December 15, 2015. The
Company has not yet assessed the impact ASU 2014-16 will have upon adoption.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Note
3 - Inventory
Inventory
consists of Power Oxidizer parts used interchangeably as raw materials and as spare parts for the EC 250 units installed to date.
Inventory totaled $53,000 and $29,000 as of December 31, 2014 and 2013 respectively. The Company had no inventory reserve during
2014 or 2013.
Note
4 - Prepaid expenses and other current assets
Prepaid
expenses and other current assets consisted of the following:
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December
31, 2014
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December 31,
2013
|
|
|
Prepaid rent
|
|
$
|
27,000
|
|
|
$
|
26,000
|
|
|
Prepaid insurance
|
|
|
31,000
|
|
|
|
11,000
|
|
|
Prepaid licenses
|
|
|
—
|
|
|
|
6,000
|
|
|
Prepaid fees
|
|
|
5,000
|
|
|
|
3,000
|
|
|
Prepaid deposit
|
|
|
8,000
|
|
|
|
—
|
|
|
Prepaid professional
fees
|
|
|
20,000
|
|
|
|
—
|
|
|
Total
|
|
$
|
91,000
|
|
|
$
|
46,000
|
|
Note
5 - Property and Equipment, Net
Property
and equipment, net consisted of the following:
|
|
|
December 31,
2014
|
|
|
December 31,
2013
|
|
|
Machinery
and equipment
|
|
$
|
1,013,000
|
|
|
$
|
849,000
|
|
|
Office
furniture and fixtures
|
|
|
198,000
|
|
|
|
198,000
|
|
|
Computer
equipment and software
|
|
|
149,000
|
|
|
|
97,000
|
|
|
Total
cost
|
|
|
1,360,000
|
|
|
|
1,144,000
|
|
|
Less
accumulated depreciation
|
|
|
(605,000
|
)
|
|
|
(380,000
|
)
|
|
Net
|
|
$
|
755,000
|
|
|
$
|
764,000
|
|
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Assets
recorded under capital leases and included in property and equipment in our balance sheets consist of the following:
|
|
|
December
31, 2014
|
|
|
December 31,
2013
|
|
|
Machinery and equipment
|
|
$
|
27,000
|
|
|
$
|
27,000
|
|
|
Computer equipment
and software
|
|
|
46,000
|
|
|
|
17,000
|
|
|
Total assets under capital lease
|
|
|
73,000
|
|
|
|
44,000
|
|
|
Less accumulated
amortization
|
|
|
(21,000
|
)
|
|
|
(1,000
|
)
|
|
Net assets under
capital lease
|
|
$
|
52,000
|
|
|
$
|
43,000
|
|
Depreciation
expense for the year ended December 31:
|
|
|
2014
|
|
|
2013
|
|
|
Research and development
|
|
$
|
120,000
|
|
|
$
|
76,000
|
|
|
General and administrative
|
|
|
113,000
|
|
|
|
130,000
|
|
|
|
|
$
|
233,000
|
|
|
$
|
206,000
|
|
Amortization
of assets under capital lease was $20,000 and $1,000 for the years ended December 31, 2014 and 2013, respectively.
Note
6 - Intangibles, Net
Intangibles,
net consisted of the following:
|
|
|
December 31,
2014
|
|
|
December 31,
2013
|
|
|
Patents
|
|
$
|
80,000
|
|
|
$
|
80,000
|
|
|
Less
accumulated amortization
|
|
|
(46,000
|
)
|
|
|
(39,000
|
)
|
|
Net
|
|
$
|
34,000
|
|
|
$
|
41,000
|
|
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Our
patents are amortized over their remaining life. Amortization expense related to these intangible assets was $7,000
for the years ended December 31, 2014 and 2013.
Amortization
expense on intangible assets is $7,000 per year for the years ending December 31, 2015 through December 31, 2018, and $6,000 for
the year ending December 31, 2019.
We
continue to invest in our intellectually property portfolio and are actively filing for patent protection for our technology in
both the United States and abroad. The costs, including legal, associated with compiling and filing patent applications
are expensed in selling, general and administrative expenses as incurred.
Note
7 - Accrued Expenses
Accrued
expenses consisted of the following:
|
|
|
December 31,
2014
|
|
|
December 31,
2013
|
|
|
|
|
|
|
|
|
|
|
Accrued professional fees
|
|
$
|
267,000
|
|
|
$
|
81,000
|
|
|
Accrued payroll
|
|
|
-
|
|
|
|
26,000
|
|
|
Accrued vacation
|
|
|
92,000
|
|
|
|
76,000
|
|
|
Accrued expense reports
|
|
|
-
|
|
|
|
29,000
|
|
|
Accrued board fees
|
|
|
13,000
|
|
|
|
-
|
|
|
Accrued taxes
|
|
|
-
|
|
|
|
7,000
|
|
|
Accrued other
|
|
|
49,000
|
|
|
|
12,000
|
|
|
Accrued liabilities
owed by Parent - reimbursable under Contribution Agreement
|
|
|
35,000
|
|
|
|
35,000
|
|
|
Total accrued expenses
|
|
$
|
456,000
|
|
|
$
|
266,000
|
|
Note
8 – Convertible Secured Notes Payable
Secured
Notes
Secured
Notes payable activity is summarized in the table below:
|
|
|
Secured
Notes
|
|
|
Debt
Discount
|
|
|
Net
Total
|
|
|
Original Value - April 16, 2014
|
|
$
|
4,575,000
|
|
|
$
|
(3,236,000
|
)
|
|
$
|
1,339,000
|
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
540,000
|
|
|
|
540,000
|
|
|
Capitalization of Interest Payable
|
|
|
2,000
|
|
|
|
-
|
|
|
|
2,000
|
|
|
Conversion and redemption of secured Notes Payable
|
|
|
(4,577,000
|
)
|
|
|
2,696,000
|
|
|
|
(1,881,000
|
)
|
|
Ending balance – December 31, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
On
April 16, 2014, the Company issued $4.6 million of convertible secured promissory notes (“Secured Notes”) in
a private placement to five institutional investors. The Secured Notes and related detachable warrants are governed by a Securities
Purchase Agreement (the “SPA”) dated as of April 15, 2014.
The
Secured Notes carried interest at a rate of 0.28% per year, subject to certain adjustments, and were originally set
to mature in October 2015. The Secured Notes were convertible, at the holders’ option, into shares of the Company's common
stock at an initial conversion price of $0.67 per share, subject to adjustments in the event the Company issued equity securities
at a price per share below the conversion price. Interest on the Secured Notes was payable quarterly and the principal amount
of the Secured Notes amortized monthly with payments originally set to begin on July 16, 2014 and extended in July 2014 to begin
August 15, 2014 (see below). On each of the monthly principal installment dates, the Company’s scheduled principal amortization
payment was to have been $286,000. Installment payments could be settled, at the Company’s option, in cash or shares
of common stock, subject to certain conditions including: (i) the daily dollar trading volume of the Company's common stock during
the thirty (30) trading days prior to the applicable date of determination shall be at least $50,000 commencing August
9, 2014; and (ii) the daily weighted average price of the Company's common stock for each trading day during the thirty (30)
trading days ending on the trading day immediately prior to the applicable date of determination was initially set to be at least $0.50.
Also subject to certain conditions, at any time, the holder may accelerate a limited amount of scheduled amortization payments.
The
Secured Notes were issued with detachable warrants to purchase up to 4.1 million shares of its common stock, exercisable
for five years with an initial exercise price of $0.78 per share subject to potential future anti-dilution adjustments for the
exercise price in the event the Company issues equity securities at a price per share lower than the warrant exercise price. On
September 22, 2014, the warrants issued had the exercise price reduced to $0.50 per share with a further exercise price reduction
to be 80% of the 10 day average volume weighted exercise price for the the ten trading days prior to March 24, 2015. On March
24, 2015 the warrant exercise price was reduced to $0.11 per share.
The
SPA provides for the investors to continue to have participation rights for two years from the date of the agreement. Each investor,
on a pro-rata basis, shall have the right but not the obligation to participate in up to 50% of any future financing.
The
Company received gross proceeds of $4.0 million, and incurred cash transaction expenses of approximately $0.2 million. Of the
$3.8 million net proceeds, $2.3 million was placed in a control account pursuant the Control Agreement and $1.5 million was available
for the company to be used for overhead and general working capital purposes. The release of additional cash from the Control
Agreement was at the discretion of the investors.
In
connection with the issuance of the Secured Notes, the Company agreed to pay the placement agent 6.5% of the total principal amount
of the Secured Notes, of which $0.2 million were to be paid as the funds are released from the control account. The placement
agent was granted warrants to purchase up to 0.7 million shares of common stock. The warrants are exercisable at $0.78 per
share (subject to future anti-dilution adjustments) and expire on April 15, 2019.
The
Secured Notes were initially recorded net of a discount of $3.2 million, reflecting the original issue discount of $0.6 million,
the fair value of the warrants and embedded derivatives within the Secured Notes on the issuance date of $2.1 million and $0.5
million in costs related to the issuance of the Secured Notes. See below for further detail on the fair value of the warrants
and derivatives. The $3.2 million debt discount was amortized through interest expense on the consolidated statements
of operations over the term of the Secured Notes.
Amendment
to Secured Notes
On
July 11, 2014, the Company entered into a letter agreement with the investors who are parties to the SPA. The letter agreement
amended certain terms of the SPA and the Secured Notes issued thereunder.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
The letter
agreement amended the SPA as follows:
|
|
●
|
The period of time during
which the Company may sell and issue up to $2.0 million of its equity securities without the consent of the investors was
increased from 45 days commencing April 16, 2014, to 120 days.
|
The letter
agreement amended the Secured Notes as follows:
|
|
●
|
The date of the Company’s
first monthly installment payment was changed from July 16, 2014, to August 15, 2014;
|
|
|
●
|
The date of the Company’s
final monthly installment, as well as the maturity date of the Secured Notes, was changed from October 16, 2015, to November
16, 2015;
|
|
|
●
|
The required closing price
of the Company’s common stock in order to satisfy certain equity conditions was changed from $0.50 to $0.35; and
|
|
|
●
|
The percentage used to
determine the Market Price (as defined in the Secured Notes) of the Company’s common stock, was changed from 85% to
82%.
|
Except
for the foregoing amendments, the remaining terms of the SPA and the Secured Notes remained unchanged. The investors who were
signatories to the letter agreement collectively constitute the Required Holders (as defined in the SPA and the Secured Notes)
necessary to effectuate the foregoing amendments.
Conversion
and Redemption of Secured Notes Payable
On
August 14, 2014, we entered into a Conversion and Redemption Agreement (each, an "Agreement" and together the "Agreements")
with each holder of the Secured Notes. Pursuant to the Agreements:
|
|
●
|
The
conversion price of the Secured Notes was adjusted to $0.20 per share. As a result of this change, we adjusted the fair value
of the conversion feature to $103,000 immediately prior to the conversion;
|
|
|
|
|
|
|
●
|
The holders
of the Secured Notes converted a portion of the Secured Notes held by them, in an aggregate amount of $2,711,000, into 13,555,000
shares of our common stock in the aggregate based on the adjusted conversion price;
|
|
|
|
|
|
|
●
|
The holders
of the Secured Notes redeemed a portion of the Secured Notes held by them for cash, in the aggregate amount of $1,833,000,
from the funds held in the control account;
|
|
|
|
|
|
|
●
|
The Secured
Notes were cancelled immediately following the foregoing conversion and redemption. The fair value of the conversion feature
was accelerated to income and we recorded a loss on conversion of $2,414,000; and
|
|
|
|
|
|
|
●
|
$405,000,
net of $17,000 of legal fees, of the funds held in the control account was transferred to us immediately after the closing
of the Agreements.
|
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
The
closing of the Agreements occurred on August 15, 2014, and we received funds from the control account on August 18, 2014. The
following reflect changes to our financial statements resulted upon the conversion and redemption of the secured notes payable:
|
|
|
Increase
(decrease)
|
|
|
Operating Cash
|
|
$
|
405,000
|
|
|
Restricted Cash
|
|
$
|
(2,288,000
|
)
|
|
Convertible Note
|
|
$
|
(4,575,000
|
)
|
|
Discount on convertible note
|
|
$
|
(2,515,000
|
)
|
|
Derivative liabilities
|
|
$
|
(104,000
|
)
|
|
Common stock
|
|
$
|
1,000
|
|
|
Paid in capital
|
|
$
|
2,710,000
|
|
|
|
|
|
|
|
|
Outstanding shares
|
|
|
13,555,000
|
|
Derivative
Liabilities
We
evaluate any freestanding financial instruments or embedded features that have the characteristics of a derivative, and to any
freestanding financial instruments that are potentially settled in an entity’s own common stock to determine if they are
indexed to an entity’s own stock.
The
common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any
asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such,
all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants
are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate
the fair value of these warrants and embedded conversion features using the Binomial pricing model using the following assumptions:
|
|
|
|
2014
|
|
|
Annual
dividend yield
|
|
|
-
|
|
|
Expected
life (years)
|
|
|
1.25-5.0
|
|
|
Risk-free
interest rate
|
|
|
0.04%-0.96
|
%
|
|
Expected
volatility
|
|
|
47%-151
|
%
|
Expected
volatility is based primarily on historical volatility of us and our peer group. Historical volatility was computed using weekly
pricing observations for us and daily pricing observations for our peer group for recent periods that correspond to the expected
term. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected
term of these warrants.
We
currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially
from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based
on one-year to five-year U.S. Treasury securities consistent with the remaining term of the warrants.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
The fair
values of the April 2014 warrants and embedded derivatives, which require bifurcation from the debt host, were initially recorded
within long-term liabilities on the consolidated balance sheets. The embedded derivatives relate to the conversion option, redemption
in the case of an event of default and redemption in the case of a change in control features of the convertible secured note.
On August 14, 2014, the convertible secured note related derivatives were marked to market with the change recorded as an adjustment
to the carrying value of these liabilities and a gain on derivatives liabilities recorded in the consolidated statements of operations
and the remaining carrying value was eliminated when the underlying debt was redeemed and converted as described above. The April
2014 warrants will continue to be marked to market quarterly, with any change recorded as an adjustment to the carrying value
of these liabilities and the gain or (loss) on warrant derivative liabilities recorded in the consolidated statements of operations.
The fair value of the warrants and embedded derivatives from the issuance date to the December 31, 2014 declined $1.7 million.
The following table provides a reconciliation of the derivative liability activity:
|
|
|
Warrants
Liability
|
|
|
Embedded
Note
Conversion
Feature
|
|
|
Total
|
|
|
Original
Value - April 16, 2014
|
|
$
|
1,250,000
|
|
|
$
|
828,000
|
|
|
$
|
2,078,000
|
|
|
Adjustment
to fair value, Conversion Feature, August 14, 2014
|
|
|
-
|
|
|
|
(724,000
|
)
|
|
|
(724,000
|
)
|
|
Conversion
of convertible secured notes
|
|
|
-
|
|
|
|
(104,000
|
)
|
|
|
(104,000
|
)
|
|
Adjustment
to fair value, Warrants
|
|
|
(848,000
|
)
|
|
|
-
|
|
|
|
(848,000
|
)
|
|
Ending
balance – December 31, 2014
|
|
$
|
402,000
|
|
|
$
|
-
|
|
|
$
|
402,000
|
|
Note
9 – Fair Value Measurements and Disclosures
Fair
value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly
transaction between market participants at the measurement date and in the principal or most advantageous market for that asset
or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset
or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration
of non-performance risk, including the Company's own credit risk.
Inputs
used in measuring fair value are prioritized into a three-level hierarchy based on whether the inputs to those measurements are
observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs
reflect the Company's market assumptions. The fair-value hierarchy requires the use of observable market data when available and
consists of the following levels:
|
|
●
|
Level 1 – Quoted
prices for identical instruments in active markets;
|
|
|
●
|
Level 2 – Quoted
prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not
active; and model-derived valuations in which all significant inputs are observable in active markets; and
|
|
|
●
|
Level 3 – Valuations
derived from valuation techniques in which one or more significant inputs are unobservable.
|
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
The
following tables present information on the Company’s financial instruments as of December 31, 2014:
|
|
|
Fair
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, including restricted cash
|
|
$
|
2,226,000
|
|
|
$
|
2,226,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Warrant
derivative liability
|
|
$
|
402,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
402,000
|
|
Note
10 - Notes and Capital Leases Payable
Notes
Payable
On
October 24, 2013, we entered into a Loan, Security and Guarantee agreement with the Export-Import Bank of the United States (“Ex-Im
Bank”). Under this agreement, pursuant to the Global Credit Express Program, we can borrow up to a maximum amount
of $400,000 from November 4, 2013 until November 4, 2014. The agreement was not renewed in 2014. All
outstanding principal and accrued and unpaid interest under each disbursement is due and payable in full on November 4, 2014 or
per the conditions precedent noted below. Interest accrues at a rate of 4.24% per year. There were no outstanding principal
amounts as of December 31, 2014 and 2013.
Capital
Leases Payable
Capital
leases payable consisted of the following:
|
|
|
December
31, 2014
|
|
|
December 31,
2013
|
|
|
Capital
lease payable to De Lange Landon secured by forklift, 10.0% interest, due on October 1, 2018, monthly payment of $452
|
|
$
|
17,000
|
|
|
$
|
20,000
|
|
|
Capital
lease payable to Dell Computers secured by computer equipment, 15.09% interest, due on November 16, 2016, monthly payment
of $592.
|
|
|
12,000
|
|
|
|
17,000
|
|
|
Capital
lease payable to Dell Computers secured by computer equipment, 15.09% interest, due on December 15, 2016, monthly payment
of $590.
|
|
|
8,000
|
|
|
|
-
|
|
|
Capital
lease payable to Dell Computers secured by computer equipment, 15.09% interest, due on January 3, 2017, monthly payment of
$405.
|
|
|
12,000
|
|
|
|
-
|
|
|
Total capital leases
|
|
|
49,000
|
|
|
|
37,000
|
|
|
Less: current portion
|
|
|
(19,000
|
)
|
|
|
(8,000
|
)
|
|
Long-term portion of capital leases
|
|
$
|
30,000
|
|
|
$
|
29,000
|
|
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
The
future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of
December 31, 2014, are as follows:
|
|
|
Year
Ending
December 31
|
|
|
Amount
|
|
|
|
|
2015
|
|
$
|
24,000
|
|
|
|
|
2016
|
|
|
24,000
|
|
|
|
|
2017
|
|
|
6,000
|
|
|
|
|
2018
|
|
|
5,000
|
|
|
Net minimum
lease payments
|
|
|
|
|
59,000
|
|
|
Less: Amount
representing interest
|
|
|
|
|
(9,000
|
)
|
|
Less:
Taxes
|
|
|
|
|
(1,000
|
)
|
|
Present value
of net minimum lease payments
|
|
|
|
|
49,000
|
|
|
Less:
Current maturities of capital lease obligations
|
|
|
|
|
(19,000
|
)
|
|
Long-term
capital lease obligations
|
|
|
|
$
|
30,000
|
|
Note
11 - Equity
Common
Stock Issuances
In
April 2013, we sold and issued 1,867,000 shares of our common stock to our major stockholder at $0.75 per share in consideration
of approximately $728,000 in cash proceeds and for the conversion of approximately $671,000 of our debt and working capital obligations
that we had incurred between the spin-off transaction in November 2012 and March 2013. Certain cash proceeds were
received, and all repayments occurred, in April 2013, and additional cash proceeds were received in June 2013.
In
July 2013, we sold and issued 4,614,000 shares of our common stock at $0.75 per share in connection with the Merger-related private
placement for which we received proceeds of approximately $3,077,000 million, net of approximately $383,000 in broker-dealer commissions. As
discussed in Note 13, we also issued 133,000 shares as conversion of a $100,000 related party note payable. In connection with
this financing, we issued warrants for the purchase of up to 475,000 shares of our common stock to placement agents in July 2013. The
warrants have an exercise price of $0.75 per share and expire five years from issuance.
In
August 2013, we sold and issued 413,000 shares of our common stock at $0.75 per share, for which we received proceeds of approximately
$285,000, net of approximately $25,000 in broker-dealer commissions. In connection with this financing, we issued warrants for
the purchase of up to 36,000 shares of our common stock to placement agents. The warrants have an exercise price of $0.75 per
share and expire five years from issuance.
In
November 2013, we sold and issued 1,500,000 shares of our common stock at $1.00 per share, for which we received proceeds of approximately
$1,375,000 net of offering costs of approximately $125,000. In connection with this financing, we issued warrants for
the purchase of up to 120,000 shares of our common stock to placement agents. The warrants have an exercise price of $1.00 per
share and expire five years from issuance. In 2014, the investors in this offering threatened legal action surrounding claims
of misrepresentations made by the Company. The dispute was settled in December 2014 as described below.
On
August 15, 2014, we issued 13,555,000 shares of our common stock to the holders of the Secured Notes for the conversion of $2,711,000
of Secured Notes held by them based on the adjusted conversion price described in Note 9 above.
On
September 22, 2014, we sold and issued 26,666,658 shares of our common stock to 36 accredited investors at $0.15 per share (the
“September 2014 PIPE”). We received net cash proceeds of $3,844,000 consisting of $4,000,000 in gross proceeds reduced
by $156,000 in cash offering costs consisting of cash placement fees of $73,000 and legal fees of $32,000. In addition to the
cash offering costs, we also issued: (1) 1,000,000 restricted shares of the Company’s common stock valued at $150,000; and
(2) warrants to purchase up to 1,325,000 shares of the Company’s common stock at an exercise price of $0.50 per share. The
warrants issued for placement agent fees are exercisable for a period of four years after their issuance dates. The warrants issued
to the placement agents were recorded to offering costs at fair value of $296,000 using the Black-Scholes option pricing model
using a market price of $0.27 per share on the date of issuance, a risk free rate of 1.8%, a dividend rate of 0%, and volatility
of 151%.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
In
connection with the September 2014 PIPE transaction, the Company entered into a Registration Rights Agreement with the Investors
(the “Registration Rights Agreement”), pursuant to which the Company was required to file a registration statement
related to the September 2014 PIPE transaction with the SEC covering the resale of the Shares that were issued to the Investors.
The Company filed the initial registration statement on October 22, 2014 and the registration statement was declared effective
on November 13, 2014.
In
December 2014 the Company settled a legal claim made by the two investors who invested $1,500,000 in November 2013 as described
above. The investors claimed that the Company was required to raise a total of $5,000,000 as a condition of their investment participation,
did not properly register all shares issued, and did not satisfy the financing condition despite the issuance of the convertible
debt offering dated April 15, 2014. The Company disputed this claim but to avoid costly legal expenses, in December 2014 the Company
issued 423,077 shares of its common stock and a total of 1,923,077 warrants to settle the claim in full.
The
Company’s Convertible Note holders provided a waiver of any price reset rights in July 2014 before the conversion of the
notes in August 2014. This waiver also applied to the price reset rights of the convertible note warrants remaining as of December
31, 2014. See further discussion of the warrants issued in Note 12 below.
Note
12 - Stock Options and Warrants
On
July 1, 2013, our Board of Directors adopted and approved the 2013 Equity Incentive Award Plan. The
plan authorizes us to grant non-qualified stock options and restricted stock purchase rights to purchase up to 14,000,000
shares of our common stock with vesting to employees (including officers) and other service providers. To date, all issuances
under the 2013 Equity Incentive Award Plan have been stock options. No restricted shares have been issued under the 2013
Equity Incentive Award Plan. At December 31, 2014, 0.8 million shares were available for future grants and total
unrecognized deferred stock compensation expected to be recognized over the remaining vesting period of 3.89 years for
outstanding grants was $4.0 million.
On
March 25, 2015, the Company’s Board of Directors approved an increase in the authorized shares available for grants
under the Company’s 2013 Equity Incentive Award Plan from 14,000,000 shares of common stock to
21,000,000 shares of common stock.
In
April 2014, all outstanding employee stock options granted under the 2013 Equity Incentive Award Plan were cancelled and
reissued by our Board of Directors with an exercise price of $0.35 per share. Each reissued stock option grant had 15% of the
stock option vesting immediately and the remainder in 1/36th in monthly increments over the next three years. As a result of
the cancellation and reissuance of the options, we recognized a non-cash charge of $840,000 for the incremental change in
fair value of the cancelled and reissued options over the vesting period of the reissued options. This cancellation and
reissuance affected 21 employees who held 8.6 million stock options as of the date of the cancellation and
reissuance.
The
fair value of option awards and warrants issued is estimated on the grant date using the Black-Scholes option valuation model
for all warrants except for the warrants issued in April 2014 in conjunction with the April 2014 Convertible Debt offering which
are estimated on the grant date and on subsequent measuring dates using the binomial method as described in Note 8.
Estimates
of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity
awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by us. The
following table presents the range of grant date assumptions used to estimate the fair value of options and warrants granted for
the year ended December 31, 2014.
|
|
|
December 31,
2014
|
|
|
Expected volatility
|
|
|
71- 185
|
%
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
Risk-free interest rate
|
|
|
1.55-1.70
|
%
|
|
Expected life (in years)
|
|
|
4.5- 8.2
|
|
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Expected
volatility represents the estimated volatility of the shares over the expected life of the options. We have estimated
the expected volatility based on the weighted-average historical volatilities of a pool of public companies that are comparable
to Ener-Core.
We
use an expected dividend yield of zero since no dividends are expected to be paid. The risk-free interest rate for
periods within the expected life of the option is derived from the U.S. treasury interest rates in effect at the date of grant. The
expected option life represents the period of time the option is expected to be outstanding. The simplified method
is used to estimate the term since we do not have sufficient exercise history to calculate the expected life of the options.
Stock-based
compensation expense is recorded only for those awards expected to vest. Currently, the forfeiture rate is zero. The
rate is adjusted if actual forfeitures differ from the estimates in order to recognize compensation cost only for those awards
that actually vest. If factors change and different assumptions are employed in future periods, the share-based compensation
expense may differ from that recognized in previous periods.
Stock-based
award activity was as follows:
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
|
Balance,
December 31, 2013
|
|
|
8,910,000
|
|
|
$
|
1.289
|
|
|
|
6.30
|
|
|
|
|
|
|
Forfeited
during 2014
|
|
|
(1,532,400
|
)
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
|
Cancelled
during 2014
|
|
|
(8,610,000
|
)
|
|
|
1.29
|
|
|
|
|
|
|
|
|
|
|
Reissued
during 2014
|
|
|
8,610,000
|
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
Granted
during 2014
|
|
|
5,985,266
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2014
|
|
|
13,362,866
|
|
|
$
|
0.30
|
|
|
|
6.51
|
|
|
$
|
47,000
|
|
|
Exercisable
on December 31, 2014
|
|
|
3,644,471
|
|
|
$
|
0.37
|
|
|
|
5.53
|
|
|
$
|
2,000
|
|
The
options granted have a contract term ranging between five and seven years. Options granted during 2014 had vesting
schedules between zero and four years. Options cancelled and reissued had portions vested immediately and the remainder over a
three year period, with 15% - 100% of the options vesting immediately upon grant and the remainder ratably over the vesting term.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
The
following table summarizes information about stock options outstanding and exercisable at December 31, 2014:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Exercise
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Prices
|
|
Shares
|
|
|
Life
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
|
|
|
$0.15 - $0.25
|
|
|
4,675,000
|
|
|
|
8.50
|
|
|
$
|
0.19
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$0.26 - $0.50
|
|
|
8,687,866
|
|
|
|
5.44
|
|
|
$
|
0.37
|
|
|
|
3,644,471
|
|
|
$
|
0.37
|
|
|
Total
|
|
|
13,362,866
|
|
|
|
6.51
|
|
|
$
|
0.30
|
|
|
|
3,644,471
|
|
|
$
|
0.37
|
|
Stock
based compensation expense consisted of the following:
|
|
|
Year
ended
December 31
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Research
and development
|
|
$
|
1,435,000
|
|
|
$
|
737,000
|
|
|
General
and administrative
|
|
|
2,025,000
|
|
|
|
992,000
|
|
|
Total
|
|
$
|
3,460,000
|
|
|
$
|
1,729,000
|
|
Restricted
Stock
Restricted
stock grants consist of common shares of the Company owned by employees, consultants, and directors which are subject to vesting
conditions, typically for services provided to the company. Restricted Stock was originally issued in the first quarter of 2013
when all outstanding stock options in existence at that time were exercised prior to vesting. All unvested restricted shares are
subject to repurchase rights and therefore recorded as restricted stock.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Restricted
stock activities in 2014 were as follows:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
Balance,
December 31, 2013
|
|
|
1,677,000
|
|
|
$
|
0.001
|
|
|
Repurchase of
unvested restricted shares
|
|
|
(92,000
|
)
|
|
$
|
|
|
|
Vested,
year ended December 31, 2014
|
|
|
(799,000
|
)
|
|
$
|
|
|
|
Unvested
balance, December 31, 2014
|
|
|
786,000
|
|
|
$
|
0.001
|
|
The remaining
unvested restricted shares vest over the next twelve months.
Under
the terms of the stock option plan, we repurchased 92,000 shares from an employee for $92 during the year ended December 31, 2014.
Warrants
From
time to time, we issue warrants to purchase shares of our common stock to investors, note holders and to non-employees for services
rendered or to be rendered in the future. Each warrant gives the holder the right to purchase one share of the Company’s
common stock at a fixed exercise price or “strike” price. For certain warrant series, the fixed exercise price may
be adjusted lower upon certain conditions.
The
following table provides a reconciliation of the warrant activity for the year ended December 31, 2014:
|
|
|
Warrants
Outstanding
|
|
|
|
|
Number
of
Warrants
|
|
|
Weighted-
Average
Exercise
Price
per Share
|
|
|
Balance
outstanding at January 1, 2014
|
|
|
631,087
|
|
|
$
|
0.80
|
|
|
Warrants
issued
|
|
|
9,152,929
|
|
|
|
0.52
|
|
|
Warrants
exercised
|
|
|
-
|
|
|
|
-
|
|
|
Balance
outstanding at December 31, 2014
|
|
|
9,784,016
|
|
|
$
|
0.54
|
|
|
Warrants
exercisable at December 31, 2014
|
|
|
9,784,016
|
|
|
$
|
0.54
|
|
As
of December 31, 2014, warrants outstanding had a weighted average remaining life of 4.01 years and no intrinsic value.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Warrants
outstanding as of December 31, 2014 consist of :
|
|
|
Issue
Date
|
|
Expiry
Date
|
|
Number
of
Warrants
|
|
|
Exercise Price
per Share
|
|
|
2013 Services Warrants – July
|
|
Jul-13
|
|
Jul-18
|
|
|
474,687
|
|
|
$
|
0.75
|
|
|
2013 Services Warrants – August
|
|
Aug-13
|
|
Aug-18
|
|
|
36,400
|
|
|
|
0.75
|
|
|
2013 Services Warrants – November
|
|
Nov-13
|
|
Nov-18
|
|
|
120,000
|
|
|
|
1.00
|
|
|
2014 Services Warrants – April (1)
|
|
Apr-14
|
|
Apr-19
|
|
|
682,836
|
|
|
|
0.78
|
|
|
2014 Convertible Notes Warrants (2)
|
|
Apr-14
|
|
Apr-19
|
|
|
4,097,016
|
|
|
|
0.50
|
|
|
2014 Services Warrants – September (3)
|
|
Aug
-14
|
|
Aug-19
|
|
|
800,000
|
|
|
|
0.50
|
|
|
2014 PIPE Warrants – September (4)
|
|
Sept-14
|
|
Sept-18
|
|
|
1,325,000
|
|
|
|
0.50
|
|
|
2014 Services Warrants – November (5)
|
|
Nov-14
|
|
Nov-18
|
|
|
325,000
|
|
|
|
0.50
|
|
|
2014 Settlement Warrants –
December (6)
|
|
Dec-14
|
|
Dec-19
|
|
|
1,923,077
|
|
|
|
0.50
|
|
|
Balance outstanding at December
31, 2014
|
|
|
|
|
|
|
9,784,016
|
|
|
$
|
0.54
|
|
|
Warrants exercisable at December
31, 2014
|
|
|
|
|
|
|
9,784,016
|
|
|
$
|
0.54
|
|
|
|
(1)
|
The
2014 Services Warrants – April were issued for fees incurred in conjunction with
the 2014 Convertible Notes. The warrants were valued on the issuance date at $0.23 per
warrant in conjunction with the valuation approach used for the 2014 Convertible Notes
Warrants initial valuation.
|
|
|
(2)
|
The
2014 Convertible Notes Warrants (“Convertible Notes Warrants”) were issued
in conjunction with the April 2014 Convertible Notes described in Note 8 above. The Convertible
Notes Warrants were originally issued with an exercise price of $0.78 per share and have
anti-dilution price protection whereby if the Company issues any common stock, or securities
convertible or exercisable into common stock at a price per share less than the exercise
price of the Convertible Notes Warrants, the Company is obligated to reduce the exercise
price of the Convertible Notes Warrants to an exercise price at, or below the new issuance
price. On September 22, 2014, the Company issued approximately 26.7 million common shares
at a price per share of $0.15 as described in Note 11 above. In conjunction with this
issuance, the Company received a waiver from the warrant holders which waived the reset
of their exercise price which would have been to $0.15 per share. The terms of the waiver
required the Company to reduce the warrant exercise price to $0.50 per share, from $0.78
per share and also required the Company to make a further adjustment to the exercise
price on March 22, 2015. On that date, the Company is obligated to reset the warrant
exercise price to the lower of the current exercise price of $0.50 per warrant, or to
an exercise price equivalent to 70% of the weighted average price of the Company’s
common stock for the preceding 10 trading days prior to March 24, 2015. The Company currently
accounts for the Convertible Notes Warrants as derivative liabilities. On March 24, 2015
the Company adjusted the exercise price of the Convertible Notes Warrants to $0.11 per
share. Issuances of future securities below $0.11 per share would require an additional
reduction in the Convertible Notes Warrants exercise price.
|
|
|
(3)
|
The
2014 Services Warrants – September were issued to a consultant in exchange for
advisory services with no readily available fair value. The warrants were originally
issued at $0.78 per warrant and had a one-time price reset provision to the exercise
price of the Convertible Notes Warrants if the exercise price of the Convertible Notes
Warrants changed prior the September 30, 2014. On September 22, 2014, the exercise price
was changed to $0.50 per warrant. There are no further exercise price changes for this
warrant series. The warrants were valued using the Black-Scholes option pricing model
at $131,000 on the issuance date with an additional $6,000 recorded to expense on September
22, 2014 to reflect the change in fair value resulting from the exercise price change.
|
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
|
|
(4)
|
On
September 22, 2014 the Company issued 1,325,000 warrants with a strike price of $0.50
per warrant in conjunction with placement agent services for the Company’s September
2014 private equity placement. The warrants were valued using the Black-Scholes option
pricing model at $296,000 on the issuance date.
|
|
|
(5)
|
On
November 26, 2014, the Company issued 325,000 warrants with a strike price of $0.50 per
warrant for compensation for investor relations services provided. The warrants were
valued using the Black-Scholes option pricing model at $43,000 on the issuance date.
|
|
|
(6)
|
On
December 1, 2014, the Company issued 961,539 warrants with a strike price of $0.78 per
warrant and on December 15, 2014 issued 961,538 warrants with a strike price of $0.50
per warrant to settle legal disputes resulting from claims made by the investors in the
November 2013 private equity placement. The warrants issued on December 1, 2014 were
issued concurrent with 423,077 shares of the Company’s common stock in partial
settlement of the claim from two investors. The Company settled all remaining claims
with all remaining investors in the November 2013 private placement on December 15, 2014
by issuing the second tranche of warrants and setting the price of each warrant series
issued at $0.50 with no further reset provisions. The combined issuance of the warrants
and expense resulting from any price changes were valued using the Black-Scholes option
pricing model at $246,000 and expensed to general and administrative expense.
|
Note 13 - Income Taxes
Income
tax provision for the year ended December 31, 2014 and the year ended December 31, 2013 consists of the following:
|
|
|
Year
Ended December 31, 2014
|
|
|
Year
Ended December 31, 2013
|
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
|
|
1,000
|
|
|
|
1,000
|
|
|
Total
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
Deferred income tax expense:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Provision for income taxes
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Due
to net losses, effective tax rate for the periods presented was 0%.
Deferred
income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and
liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the
periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized. The valuation allowance increased by $ 4.2 million from
December 31, 2013 to December 31, 2014.
|
|
|
December 31,
2014
|
|
|
December 31,
2013
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carry-forward
|
|
$
|
8,276,000
|
|
|
|
4,033,000
|
|
|
Valuation
allowance
|
|
|
(8,276,000
|
)
|
|
|
(4,033,000
|
)
|
|
Net deferred tax
assets
|
|
$
|
—
|
|
|
$
|
—
|
|
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
A
significant component of our deferred tax assets consisted of net operating loss carry-forwards. We have evaluated
the available evidence supporting the realization of our deferred tax assets, including the amount and timing of future taxable
income, and have determined it is more likely than not that the assets will not be fully realized and a full valuation allowance
is necessary as of December 31, 2014 and 2013. As of December 31, 2014, we have federal and state net operating loss
carry-forwards of approximately $16.1 million and $16.2 million, respectively, which expire through 2032. The utilization
of net operating loss carry-forwards may be subject to limitations under provision of the Internal Revenue Code Section 382 and
similar state provisions.
We
follow ASC 740 related to accounting for uncertain tax positions, which prescribes a recognition threshold and measurement process
for recording in the financial statements, uncertain tax positions taken or expected to be taken in a tax return. Under
this provision, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount
that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. Tax benefits of an uncertain tax position
will not be recognized if it has less than a 50% likelihood of being sustained based on technical merits. We did not
have any uncertain income tax position as of December 31, 2014 and 2013.
Note
14 - Related Party Transactions
There
were no related party transactions for the year ended December 31, 2014.
Notes
Payable and Advances
In
January 2013, we borrowed $250,000 from a stockholder under a secured convertible note payable that was due at the earliest of
February 28, 2013, or upon completion of a $1,000,000 financing event. The note accrued interest at the rate of 12%
and was convertible at the lender’s option into common stock at 85% of the price of a future financing or $3.6056 per share. The
note and accrued interest were repaid using proceeds from a $260,000 convertible note payable in March 2013. The note
was secured by our intangible assets.
In
March 2013, we borrowed $260,000 from a stockholder under a note payable that was due March 28, 2014, or earlier, upon completion
of the Merger. The note accrued interest at the rate of 12% and was convertible at the lender’s option into common
stock at $0.75 per share. The note was subsequently converted in April 2013. As the note was outstanding
less than one month, no interest was due to the lender.
In
March 2013, a stockholder advanced us a total of $411,000 for operating capital. The advance did not bear interest
and was due on demand. In April 2013, the advance was converted into our common stock at $0.75 per share at the stockholder’s
election (see Note 11).
In
June 2013, we borrowed $100,000 from each of three individual stockholders under notes payable that were due December 31, 2013,
or earlier, upon completion of the Merger. The notes accrued interest at the rate of 8% and were convertible at the holders’
option into our common stock at $0.75 per share. On July 1, 2013, $100,000 was converted into shares of common stock in the Merger-related
private placement, and $200,025, including $25 of accrued interest, was repaid at the closing of the Merger.
Related
party interest expense was $10,000 for the year ended December 31, 2013. There was no related party interest expense for the year
ended December 31, 2014.
Note
15 - Commitments and Contingencies
We
may become a party to litigation in the normal course of business. We accrue for open claims based on our historical
experience and available insurance coverage. In the opinion of management, there are no legal matters involving us that
would have a material adverse effect upon our financial condition, results of operations or cash flows.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
EECT
Agreement
On
December 31, 2012, we entered into a Master Purchase and Resale Agreement (“MPRSA”) with EECT. As part of this agreement,
EECT is committed to buy a certain number of the FP250 and related optional equipment in order to maintain exclusivity in the
region. The pricing for the first unit was $760,000, and subsequent units will be sold at a higher price than the first
unit. In accordance with the MPRSA, EECT placed a Purchase Order (“PO”) with us on December 31, 2012, for the
purchase of the first unit at $760,000. The order was conditional on the issuance of an irrevocable letter of credit
to us, according to the terms of the PO. Such irrevocable letter of credit was issued on March 1, 2013, in the amount
of 533,000 Euros, and we acknowledged the acceptance of the PO on the same date. On November 14, 2013, we shipped the
FP250 and on December 24, 2013, we received the proceeds from the letter of credit. We had deferred all amounts
received on our contract with EECT until the contract was substantially completed, which occurred in June 2014, at which time
the entire contract, including change orders, was recorded as revenue. As of December 31, 2014 and December 31, 2013,
we had a provision for contract loss of approximately $0 and $100,000, respectively, related to our contract with EECT.
Warranties
Our
warranty policy generally provides coverage for components of the Gradual Oxidizer that we produce. Typically, the coverage period
is one calendar year from the date of commissioning. Provisions for estimated expenses related to product warranties
are made at the time products are commissioned. These estimates are established using available information on the nature, frequency,
and average cost of claims. Revision to the reserves for estimated product warranties is made when necessary, based on changes
in these factors. Management actively studies trends of claims and takes action to improve product quality and minimize claims.
The
following table presents the changes in the product warranty accrual included in accrued expenses in the accompanying consolidated
balance sheets as of December 31, 2014:
|
|
|
2014
|
|
|
Beginning balance, January 1, 2014
|
|
$
|
-
|
|
|
Charged to cost of revenues
|
|
|
311,000
|
|
|
Usage
|
|
|
(69,000
|
)
|
|
|
|
|
|
|
|
Ending balance, December 31, 2014
|
|
$
|
242,000
|
|
Product
Liability
With
respect to product liability claims involving our products, we believe that any judgment against us for actual damages will be
adequately covered by our recorded accruals and, where applicable, excess liability insurance coverage.
Lease
We
lease our office facility, research and development facility and certain equipment under operating leases, which for the most
part, are renewable. Certain leases also provide that we pay insurance and taxes.
Ener-Core,
Inc.
Notes
to Consolidated Financial Statements (continued)
Future
minimum rental payments under operating leases that have initial noncancellable lease terms in excess of one year as of December
31, 2014 are as follows:
|
2015
|
|
$
|
327,000
|
|
|
2016
|
|
|
329,000
|
|
|
2017
|
|
|
3,000
|
|
|
2018
|
|
|
2,000
|
|
|
|
|
$
|
661,000
|
|
Minimum
rent payments under operating leases are recognized on a straight-line basis over the term of each lease. Rent expense,
net of sublease income, was $365,000 and $211,000 for the years ended December 31, 2014 and 2013, respectively.
Our
current headquarters is located at 9400 Toledo Way, Irvine, California 92618. The property consists of a mixed use
commercial office, production, and warehouse facility of 32,649 square feet. Effective August 1, 2013, we assumed this
lease (the “Lease”) from FEES. The Lease has a remaining term of 24 months and expires December 31, 2016. The
current monthly rent payment is $26,044 and increases on an annual basis.
We
also lease space from the Regents of the University of California, Irvine, for the installation and demonstration of the FP250
equipment. The lease has a monthly payment of $7,780 and expires on January 1, 2015 and is month-to-month thereafter.
Note
16 - Subsequent Events
On
March 24, 2015, the Company reduced the exercise price of the 2014 Convertible Notes Warrants from $0.50 per warrant to $0.11
per warrant.
On March 25, 2015, the Company’s
Board of Directors approved an increase in the authorized shares available for grants under the Company’s 2013 Equity Incentive
Award Plan from 14,000,000 shares of common stock to 21,000,000 shares of common stock
.
F-34
EXHIBIT 4.9
NEITHER THE ISSUANCE AND SALE OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL SELECTED BY THE HOLDER, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION
IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING,
THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
ENER-CORE,
INC.
Warrant
To Purchase Common Stock
Warrant No.:
1201-S1
Number of Shares of Common Stock: 641,026
Date of Issuance: December 1, 2014 ("
Issuance Date
")
Ener-Core, Inc., a
Nevada corporation (the "
Company
"), hereby certifies that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged
,
Rufus Dufus, LLC, the registered holder
hereof or its permitted assigns (the "
Holder
"), is entitled, subject to the terms set forth below, to purchase
from the Company, at the Exercise Price (as defined below) then in effect, at any time or times on or after the Issuance Date,
but not after 11:59 p.m., New York time, on the Expiration Date, (as defined below), Six Hundred Forty-One Thousand and Twenty-Six
fully paid nonassessable shares of Common Stock, subject to adjustment as provided herein
(the "
Warrant Shares
").
Except as otherwise defined herein, capitalized terms in this Warrant to Purchase Common Stock (including any Warrants to Purchase
Common Stock issued in exchange, transfer or replacement hereof, this "
Warrant
"), shall have the meanings set
forth in Section 17. This Warrant is one of the Warrants to purchase Common Stock (the "
Supplemental Warrants
")
approved by the Company’s Board of Directors on November 28, 2014 (the "
Warrant Issuance Date
"), by and
among the Company and the Investor (the "
Investor
") referred to therein. Capitalized terms used herein and not
otherwise defined shall have the definitions ascribed to such terms in the Services Agreement.
1.
EXERCISE OF WARRANT.
(a)
Mechanics
of Exercise
. Subject to the terms and conditions hereof (including, without limitation, the limitations set forth in Section
1(f)), this Warrant may be exercised by the Holder at any time or times on or after the Issuance Date, in whole or in part, by
(i) delivery of a written notice, in the form attached hereto as
Exhibit A
(the "
Exercise Notice
"),
of the Holder's election to exercise this Warrant and (ii) (A) payment to the Company of an amount equal to the applicable
Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (the "
Aggregate
Exercise Price
") in cash by wire transfer of immediately available funds or (B) if the provisions of Section 1(d) are
applicable, by notifying the Company that this Warrant is being exercised pursuant to a Cashless Exercise (as defined in Section
1(c)). The Holder shall not be required to deliver the original Warrant in order to effect an exercise hereunder. Execution and
delivery of the Exercise Notice with respect to less than all of the Warrant Shares shall have the same effect as cancellation
of the original Warrant and issuance of a new Warrant evidencing the right to purchase the remaining number of Warrant Shares.
On or before the first (1
st
) Trading Day following the date on which the Company has received the Exercise Notice,
the Company shall transmit by facsimile an acknowledgment of confirmation of receipt of the Exercise Notice to the Holder and
the Company's transfer agent (the "
Transfer Agent
"). On or before the fifth (5th) Trading Day following the date
on which the Company has received the Exercise Notice, so long as the Holder delivers the Aggregate Exercise Price (or notice
of a Cashless Exercise) on or prior to the second (2nd) Trading Day following the date on which the Company has received the Exercise
Notice (the "
Share Delivery Date
") (provided that if the Aggregate Exercise Price has not been delivered by such
date, the Share Delivery Date shall be three (3) Trading Days after the Aggregate Exercise Price (or notice of a Cashless Exercise)
is delivered), the Company shall issue and dispatch by overnight courier to the address as specified in the Exercise Notice, a
certificate, registered in the Company's share register in the name of the Holder or its designee, for the number of Warrant Shares
to which the Holder is entitled pursuant to such exercise. The Company shall be responsible for all fees and expenses of the Transfer
Agent. Upon delivery of the Exercise Notice, the Holder shall be deemed for all corporate purposes to have become the holder of
record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the
certificates evidencing such Warrant Shares, as the case may be. If this Warrant is submitted in connection with any exercise
pursuant to this Section 1(a) and the number of Warrant Shares represented by this Warrant submitted for exercise is greater than
the number of Warrant Shares being acquired upon an exercise, then the Company shall as soon as practicable and in no event later
than five (5) Trading Days after any exercise and at its own expense, issue a new Warrant (in accordance with Section 7(d)) representing
the right to purchase the number of Warrant Shares issuable immediately prior to such exercise under this Warrant, less the number
of Warrant Shares with respect to which this Warrant is exercised. No fractional Warrant Shares are to be issued upon the exercise
of this Warrant, but rather the number of Warrant Shares to be issued shall be rounded up to the nearest whole number. The Company
shall pay any and all taxes which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of
this Warrant. The Company's obligations to issue and deliver Warrant Shares in accordance with the terms and subject to the conditions
hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or
consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same,
or any setoff, counterclaim, recoupment, limitation or termination.
Notwithstanding
any provision of this Warrant to the contrary, no more than the Maximum Eligibility Number of Warrant Shares shall be exercisable
hereunder.
(b)
Exercise
Price
. For purposes of this Warrant, "
Exercise Price
" means $0.78, subject to adjustment as provided herein.
(c)
Disputes
. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant
Shares, the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed and resolve such dispute
in accordance with Section 12.
2.
ADJUSTMENT
OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES
. The Exercise Price and the number of Warrant Shares shall be adjusted from
time to time. as follows:
(a)
Voluntary Adjustment By Company
. The Company may at any time during the term of this Warrant, with the prior written consent
of the Required Holders, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.
(b)
Adjustment Upon Subdivision or Combination of Shares of Common Stock
. If the Company at any time on or after the Subscription
Date subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares
of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision will be proportionately
reduced and the number of Warrant Shares will be proportionately increased. If the Company at any time on or after the Subscription
Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price in effect immediately prior to such combination will be proportionately increased
and the number of Warrant Shares will be proportionately decreased. Any adjustment under this Section 2(c) shall become effective
at the close of business on the date the subdivision or combination becomes effective.
(c)
Other
Events
. If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by
such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company's Board of Directors will make an appropriate adjustment in the Exercise Price and the
number of Warrant Shares, as mutually determined by the Company’s Board of Directors and the Required Holders, so as to
protect the rights of the Holder;
provided
that no such adjustment pursuant to this Section 2(d) will increase the Exercise
Price or decrease the number of Warrant Shares as otherwise determined pursuant to this Section 2.
3.
REGISTRATION
RIGHTS
. This Warrant shall have piggyback registration rights. The Company hereby agrees to make its best commercial efforts
to include the shares underlying the Warrants in the next available registration statement filed by the Company and is committed
to including the underlying warrant shares in the next available registration statement unless the inclusion of the Warrants in
such a registration statement would cause undue harm to the Company or is prohibited by the securities laws, rules or regulations.
4.
NONCIRCUMVENTION
.
The Company hereby covenants and agrees that the Company will not, by amendment of its Articles of Incorporation or Bylaws, or
through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities,
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and will
at all times in good faith carry out all of the provisions of this Warrant and take all action as may be required to protect the
rights of the Holder. Without limiting the generality of the foregoing, the Company (i) shall not increase the par value
of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, (ii) shall
take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant, and (iii) shall, so long as any of the SPA Warrants are
outstanding, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock,
solely for the purpose of effecting the exercise of the SPA Warrants, 135% of the number of shares of Common Stock as shall from
time to time be necessary to effect the exercise of the SPA Warrants then outstanding (without regard to any limitations on exercise).
5.
WARRANT
HOLDER NOT DEEMED A SHAREHOLDER
. Except as otherwise specifically provided herein, the Holder, solely in such Person's capacity
as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the
Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in such Person's
capacity as the Holder of this Warrant, any of the rights of a shareholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger,
conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance
to the Holder of the Warrant Shares which such Person is then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon
exercise of this Warrant or otherwise) or as a shareholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 6, the Company shall provide the Holder with copies of the same notices
and other information given to the shareholders of the Company generally, contemporaneously with the giving thereof to the shareholders.
6.
REISSUANCE
OF WARRANTS
.
(a)
Transfer of Warrant
. If this Warrant is to be transferred, the Holder shall surrender this Warrant to the Company, whereupon
the Company will forthwith issue and deliver upon the order of the Holder a new Warrant (in accordance with Section 7(d)), registered
as the Holder may request, representing the right to purchase the number of Warrant Shares being transferred by the Holder and,
if less than the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant (in accordance
with Section 7(d)) to the Holder representing the right to purchase the number of Warrant Shares not being transferred.
(b)
Lost, Stolen or Mutilated Warrant
. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft or destruction, of any indemnification
undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this
Warrant, the Company shall execute and deliver to the Holder a new Warrant (in accordance with Section 7(d)) representing the right
to purchase the Warrant Shares then underlying this Warrant.
(c)
Exchangeable
for Multiple Warrants
. This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the
Company, for a new Warrant or Warrants (in accordance with Section 7(d)) representing in the aggregate the right to purchase the
number of Warrant Shares then underlying this Warrant, and each such new Warrant will represent the right to purchase such portion
of such Warrant Shares as is designated by the Holder at the time of such surrender;
provided
,
however
, that no
SPA Warrants for fractional Warrant Shares shall be given.
(d)
Issuance
of New Warrants
. Whenever the Company is required to issue a new Warrant pursuant to the terms of this Warrant, such new Warrant
(i) shall be of like tenor with this Warrant, (ii) shall represent, as indicated on the face of such new Warrant, the right to
purchase the Warrant Shares then underlying this Warrant (or in the case of a new Warrant being issued pursuant to Section 7(a)
or Section 7(c), the Warrant Shares designated by the Holder which, when added to the number of shares of Common Stock underlying
the other new Warrants issued in connection with such issuance, does not exceed the number of Warrant Shares then underlying this
Warrant), (iii) shall have an issuance date, as indicated on the face of such new Warrant which is the same as the Issuance Date,
and (iv) shall have the same rights and conditions as this Warrant.
7.
NOTICES
. Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall
be given in accordance with Section 9(f) of the Securities Purchase Agreement. The Company shall provide the Holder with prompt
written notice of all actions taken pursuant to this Warrant, including in reasonable detail a description of such action and the
reason therefor. Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Exercise Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment
and (ii) at least fifteen (15) days prior to the date on which the Company closes its books or takes a record (A) with respect
to any dividend or distribution upon the shares of Common Stock, (B) with respect to any grants, issuances or sales of any Options,
Convertible Securities or rights to purchase stock, warrants, securities or other property to holders of shares of Common Stock
or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation;
provided
in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided
to the Holder. It is expressly understood and agreed that the time of exercise specified by the Holder in each Exercise Notice
shall be definitive and may not be disputed or challenged by the Company.
8.
AMENDMENT
AND WAIVER
. Except as otherwise provided herein, the provisions of this Warrant may be amended or waived and the Company may
take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained
the written consent of the Holder.
9.
GOVERNING LAW; JURISDICTION; JURY TRIAL
. This Warrant shall be governed by and construed and enforced in accordance
with, and all questions concerning the construction, validity, interpretation and performance of this Warrant shall be governed
by, the internal laws of the State of California, without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of California or any other jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of California. The Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in Orange County, California, for the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action
or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding
is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. The Company hereby irrevocably
waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy
thereof to the Company at the address set forth herein and agrees that such service shall constitute good and sufficient service
of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner
permitted by law. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other
legal action against the Company in any other jurisdiction to collect on the Company's obligations to the Holder, to realize on
any collateral or any other security for such obligations, or to enforce a judgment or other court ruling in favor of the Holder.
10.
CONSTRUCTION;
HEADINGS
. This Warrant shall be deemed to be jointly drafted by the Company and all the Buyers and shall not be construed
against any Person as the drafter hereof. The headings of this Warrant are for convenience of reference and shall not form part
of, or affect the interpretation of, this Warrant.
11.
DISPUTE
RESOLUTION
. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant
Shares, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within two (2) Business
Days of receipt of the Exercise Notice giving rise to such dispute, as the case may be, to the Holder. If the Holder and the Company
are unable to agree upon such determination or calculation of the Exercise Price or the Warrant Shares within three (3) Business
Days of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within two
(2) Business Days submit via facsimile (a) the disputed determination of the Exercise Price to an independent, reputable investment
bank selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of the Warrant Shares to the
Company's independent, outside accountant. The Company shall cause at its expense the investment bank or the accountant, as the
case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than
ten (10) Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.
12.
REMEDIES,
OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF
. The remedies provided in this Warrant shall be cumulative and in addition
to all other remedies available under this Warrant and the other Transaction Documents, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue actual
damages for any failure by the Company to comply with the terms of this Warrant. The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate.
The Company therefore agrees that, in the event of any such breach or threatened breach, the holder of this Warrant shall be entitled,
in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.
13.
SEVERABILITY
. If
any provision of this Warrant is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent
jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the
broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect
the validity of the remaining provisions of this Warrant so long as this Warrant as so modified continues to express, without
material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity
or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations
of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will
endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s),
the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).
14.
CERTAIN
DEFINITIONS
. For purposes of this Warrant, the following terms shall have the following meanings:
(a) "
1933 Act
" means the Securities Act of 1933, as amended.
(b) "
Affiliate
" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled
by, or is under common control with, such Person, it being understood for purposes of this definition that "control"
of a Person means the power directly or indirectly either to vote 10% or more of the stock having ordinary voting power for the
election of directors of such Person or direct or cause the direction of the management and policies of such Person whether by
contract or otherwise.
(c) "
Approved Stock Plan
" means any employee benefit plan which has been approved by the Board of Directors of the
Company, pursuant to which the Company's securities may be issued to any employee, officer or director for services provided to
the Company. "
Bloomberg
" means Bloomberg Financial Markets.
(d) "
Business Day
" means any day other than Saturday, Sunday or other day on which commercial banks in The City of
New York are authorized or required by law to remain closed.
(e) "
Closing Bid Price
" and "
Closing Sale Price
" means, for any security as of any date, the last
closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg,
or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing
trade price, as the case may be, then the last bid price or the last trade price, respectively, of such security prior to 4:00:00
p.m., New York time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities
exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply,
the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported
for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security
as reported in the OTC Link or "pink sheets" by OTC Markets Group Inc. (formerly Pink OTC Markets Inc.). If the Closing
Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the
Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value
of such security, then such dispute shall be resolved pursuant to Section 12. All such determinations to be appropriately adjusted
for any stock dividend, stock split, stock combination, reclassification or other similar transaction during the applicable calculation
period.
(f) "
Common Stock
" means (i) the Company's shares of Common Stock, par value $0.0001 per share, and (ii) any
share capital into which such Common Stock shall have been changed or any share capital resulting from a reclassification of such
Common Stock.
(g) "
Convertible Securities
" means any stock or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for shares of Common Stock.
(h) "
Eligible Market
" means the Principal Market, the NYSE MKT LLC, The NASDAQ Global Market, The NASDAQ Global Select
Market, The NASDAQ Capital Market or The New York Stock Exchange, Inc.
(i) "
Expiration Date
" means the date sixty (60) months after the Issuance Date or, if such date falls on a day other
than a Business Day or on which trading does not take place on the Principal Market (a "
Holiday
"), the next day
that is not a Holiday.
(j) "
Group
"
means a "group" as that term is used in Section 13(d) of the 1934 Act and as defined in Rule 13d-5 thereunder.
(k) "
Options
" means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible
Securities.
(l) "
Person
"
means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization,
any other entity and a government or any department or agency thereof.
(m) "
Principal Market
" means the OTC QB.
(n) "
Trading Day
" means any day on which the Common Stock is traded on the Principal Market, or, if the Principal
Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market
on which the Common Stock is then traded;
provided
that "Trading Day" shall not include any day on which the Common
Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from
trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time).
[Signature Page
Follows]
IN WITNESS WHEREOF,
the Company has caused this Warrant to Purchase Common Stock to be duly executed as of the Issuance Date set out above.
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ENER-CORE, INC.
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By:
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Name:
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Alain J.
Castro
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Title:
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Chief Executive
Officer
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EXHIBIT A
EXERCISE NOTICE
TO BE EXECUTED BY THE REGISTERED
HOLDER TO EXERCISE THIS
WARRANT TO PURCHASE COMMON STOCK
ENER-CORE,
inc.
The undersigned
holder hereby exercises the right to purchase _________________ of the shares of Common Stock ("
Warrant Shares
")
of Ener-Core, Inc., a Nevada corporation (the "
Company
"), evidenced by the attached Warrant to Purchase Common
Stock (the "
Warrant
"). Capitalized terms used herein and not otherwise defined shall have the respective meanings
set forth in the Warrant.
1. Form of Exercise
Price. The Holder intends that payment of the Exercise Price shall be made as:
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____________ a
"
Cash Exercise"
with respect to _________________ Warrant Shares;
and/or
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____________ a
"Cashless Exercise"
with respect to _______________ Warrant Shares.
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2. Payment of Exercise
Price. In the event that the holder has elected a Cash Exercise with respect to some or all of the Warrant Shares to be issued
pursuant hereto, the holder shall pay the Aggregate Exercise Price in the sum of $___________________ to the Company in accordance
with the terms of the Warrant.
3. Delivery of Warrant
Shares. The Company shall deliver to the holder __________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________ __, ______
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Name of Registered Holder
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By:
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Name:
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Title:
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ACKNOWLEDGMENT
The Company hereby
acknowledges this Exercise Notice and hereby directs VStock Transfer, LLC. to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated April [__], 2014 from the Company and acknowledged and agreed to
by VStock Transfer, LLC.
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ENER-CORE, INC.
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By:
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Name:
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Title:
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EXHIBIT 4.10
NEITHER THE ISSUANCE AND SALE OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL SELECTED BY THE HOLDER, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION
IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING,
THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
ENER-CORE,
INC.
Warrant
To Purchase Common Stock
Warrant No.:
1201-S1
Number of Shares of Common Stock:
320,513
Date of Issuance: December 1,
2014 ("
Issuance Date
")
Ener-Core, Inc.,
a Nevada corporation (the "
Company
"), hereby certifies that, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged
,
Rufus Dufus, LLC, the registered
holder hereof or its permitted assigns (the "
Holder
"), is entitled, subject to the terms set forth below, to
purchase from the Company, at the Exercise Price (as defined below) then in effect, at any time or times on or after the Issuance
Date, but not after 11:59 p.m., New York time, on the Expiration Date, (as defined below), Three Hundred Twenty Thousand, Five
Hundred and Thirteen (320,513) fully paid nonassessable shares of Common Stock, subject to adjustment as provided herein
(the
"
Warrant Shares
"). Except as otherwise defined herein, capitalized terms in this Warrant to Purchase Common Stock
(including any Warrants to Purchase Common Stock issued in exchange, transfer or replacement hereof, this "
Warrant
"),
shall have the meanings set forth in Section 17. This Warrant is one of the Warrants to purchase Common Stock (the "
Supplemental
Warrants
") approved by the Company’s Board of Directors on November 28, 2014 (the "
Warrant Issuance Date
"),
by and among the Company and the Investor (the "
Investor
") referred to therein. Capitalized terms used herein
and not otherwise defined shall have the definitions ascribed to such terms in the Services Agreement.
1.
EXERCISE OF WARRANT.
(a)
Mechanics
of Exercise
. Subject to the terms and conditions hereof (including, without limitation, the limitations set forth in Section
1(f)), this Warrant may be exercised by the Holder at any time or times on or after the Issuance Date, in whole or in part, by
(i) delivery of a written notice, in the form attached hereto as
Exhibit A
(the "
Exercise Notice
"),
of the Holder's election to exercise this Warrant and (ii) (A) payment to the Company of an amount equal to the applicable
Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (the "
Aggregate
Exercise Price
") in cash by wire transfer of immediately available funds or (B) if the provisions of Section 1(d) are
applicable, by notifying the Company that this Warrant is being exercised pursuant to a Cashless Exercise (as defined in Section
1(c)). The Holder shall not be required to deliver the original Warrant in order to effect an exercise hereunder. Execution and
delivery of the Exercise Notice with respect to less than all of the Warrant Shares shall have the same effect as cancellation
of the original Warrant and issuance of a new Warrant evidencing the right to purchase the remaining number of Warrant Shares.
On or before the first (1
st
) Trading Day following the date on which the Company has received the Exercise Notice,
the Company shall transmit by facsimile an acknowledgment of confirmation of receipt of the Exercise Notice to the Holder and
the Company's transfer agent (the "
Transfer Agent
"). On or before the fifth (5th) Trading Day following the date
on which the Company has received the Exercise Notice, so long as the Holder delivers the Aggregate Exercise Price (or notice
of a Cashless Exercise) on or prior to the second (2nd) Trading Day following the date on which the Company has received the Exercise
Notice (the "
Share Delivery Date
") (provided that if the Aggregate Exercise Price has not been delivered by such
date, the Share Delivery Date shall be three (3) Trading Days after the Aggregate Exercise Price (or notice of a Cashless Exercise)
is delivered), the Company shall issue and dispatch by overnight courier to the address as specified in the Exercise Notice, a
certificate, registered in the Company's share register in the name of the Holder or its designee, for the number of Warrant Shares
to which the Holder is entitled pursuant to such exercise. The Company shall be responsible for all fees and expenses of the Transfer
Agent. Upon delivery of the Exercise Notice, the Holder shall be deemed for all corporate purposes to have become the holder of
record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the
certificates evidencing such Warrant Shares, as the case may be. If this Warrant is submitted in connection with any exercise
pursuant to this Section 1(a) and the number of Warrant Shares represented by this Warrant submitted for exercise is greater than
the number of Warrant Shares being acquired upon an exercise, then the Company shall as soon as practicable and in no event later
than five (5) Trading Days after any exercise and at its own expense, issue a new Warrant (in accordance with Section 7(d)) representing
the right to purchase the number of Warrant Shares issuable immediately prior to such exercise under this Warrant, less the number
of Warrant Shares with respect to which this Warrant is exercised. No fractional Warrant Shares are to be issued upon the exercise
of this Warrant, but rather the number of Warrant Shares to be issued shall be rounded up to the nearest whole number. The Company
shall pay any and all taxes which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of
this Warrant. The Company's obligations to issue and deliver Warrant Shares in accordance with the terms and subject to the conditions
hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or
consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same,
or any setoff, counterclaim, recoupment, limitation or termination.
Notwithstanding
any provision of this Warrant to the contrary, no more than the Maximum Eligibility Number of Warrant Shares shall be exercisable
hereunder.
(b)
Exercise
Price
. For purposes of this Warrant, "
Exercise Price
" means $0.78, subject to adjustment as provided herein.
(c)
Disputes
. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant
Shares, the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed and resolve such dispute
in accordance with Section 12.
2.
ADJUSTMENT
OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES
. The Exercise Price and the number of Warrant Shares shall be adjusted from
time to time. as follows:
(a)
Voluntary Adjustment By Company
. The Company may at any time during the term of this Warrant, with the prior written consent
of the Required Holders, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.
(b)
Adjustment Upon Subdivision or Combination of Shares of Common Stock
. If the Company at any time on or after the Subscription
Date subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares
of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision will be proportionately
reduced and the number of Warrant Shares will be proportionately increased. If the Company at any time on or after the Subscription
Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price in effect immediately prior to such combination will be proportionately increased
and the number of Warrant Shares will be proportionately decreased. Any adjustment under this Section 2(c) shall become effective
at the close of business on the date the subdivision or combination becomes effective.
(c)
Other
Events
. If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by
such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company's Board of Directors will make an appropriate adjustment in the Exercise Price and the
number of Warrant Shares, as mutually determined by the Company’s Board of Directors and the Required Holders, so as to
protect the rights of the Holder;
provided
that no such adjustment pursuant to this Section 2(d) will increase the Exercise
Price or decrease the number of Warrant Shares as otherwise determined pursuant to this Section 2.
3.
REGISTRATION
RIGHTS
. This Warrant shall have piggyback registration rights. The Company hereby agrees to make its best commercial efforts
to include the shares underlying the Warrants in the next available registration statement filed by the Company and is committed
to including the underlying warrant shares in the next available registration statement unless the inclusion of the Warrants in
such a registration statement would cause undue harm to the Company or is prohibited by the securities laws, rules or regulations.
4.
NONCIRCUMVENTION
.
The Company hereby covenants and agrees that the Company will not, by amendment of its Articles of Incorporation or Bylaws, or
through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities,
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and will
at all times in good faith carry out all of the provisions of this Warrant and take all action as may be required to protect the
rights of the Holder. Without limiting the generality of the foregoing, the Company (i) shall not increase the par value
of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, (ii) shall
take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant, and (iii) shall, so long as any of the SPA Warrants are
outstanding, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock,
solely for the purpose of effecting the exercise of the SPA Warrants, 135% of the number of shares of Common Stock as shall from
time to time be necessary to effect the exercise of the SPA Warrants then outstanding (without regard to any limitations on exercise).
5.
WARRANT
HOLDER NOT DEEMED A SHAREHOLDER
. Except as otherwise specifically provided herein, the Holder, solely in such Person's capacity
as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the
Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in such Person's
capacity as the Holder of this Warrant, any of the rights of a shareholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger,
conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance
to the Holder of the Warrant Shares which such Person is then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon
exercise of this Warrant or otherwise) or as a shareholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 6, the Company shall provide the Holder with copies of the same notices
and other information given to the shareholders of the Company generally, contemporaneously with the giving thereof to the shareholders.
6.
REISSUANCE
OF WARRANTS
.
(a)
Transfer of Warrant
. If this Warrant is to be transferred, the Holder shall surrender this Warrant to the Company, whereupon
the Company will forthwith issue and deliver upon the order of the Holder a new Warrant (in accordance with Section 7(d)), registered
as the Holder may request, representing the right to purchase the number of Warrant Shares being transferred by the Holder and,
if less than the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant (in accordance
with Section 7(d)) to the Holder representing the right to purchase the number of Warrant Shares not being transferred.
(b)
Lost, Stolen or Mutilated Warrant
. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft or destruction, of any indemnification
undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this
Warrant, the Company shall execute and deliver to the Holder a new Warrant (in accordance with Section 7(d)) representing the right
to purchase the Warrant Shares then underlying this Warrant.
(c)
Exchangeable
for Multiple Warrants
. This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the
Company, for a new Warrant or Warrants (in accordance with Section 7(d)) representing in the aggregate the right to purchase the
number of Warrant Shares then underlying this Warrant, and each such new Warrant will represent the right to purchase such portion
of such Warrant Shares as is designated by the Holder at the time of such surrender;
provided
,
however
, that no
SPA Warrants for fractional Warrant Shares shall be given.
(d)
Issuance
of New Warrants
. Whenever the Company is required to issue a new Warrant pursuant to the terms of this Warrant, such new Warrant
(i) shall be of like tenor with this Warrant, (ii) shall represent, as indicated on the face of such new Warrant, the right to
purchase the Warrant Shares then underlying this Warrant (or in the case of a new Warrant being issued pursuant to Section 7(a)
or Section 7(c), the Warrant Shares designated by the Holder which, when added to the number of shares of Common Stock underlying
the other new Warrants issued in connection with such issuance, does not exceed the number of Warrant Shares then underlying this
Warrant), (iii) shall have an issuance date, as indicated on the face of such new Warrant which is the same as the Issuance Date,
and (iv) shall have the same rights and conditions as this Warrant.
7.
NOTICES
. Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall
be given in accordance with Section 9(f) of the Securities Purchase Agreement. The Company shall provide the Holder with prompt
written notice of all actions taken pursuant to this Warrant, including in reasonable detail a description of such action and the
reason therefor. Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Exercise Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment
and (ii) at least fifteen (15) days prior to the date on which the Company closes its books or takes a record (A) with respect
to any dividend or distribution upon the shares of Common Stock, (B) with respect to any grants, issuances or sales of any Options,
Convertible Securities or rights to purchase stock, warrants, securities or other property to holders of shares of Common Stock
or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation;
provided
in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided
to the Holder. It is expressly understood and agreed that the time of exercise specified by the Holder in each Exercise Notice
shall be definitive and may not be disputed or challenged by the Company.
8.
AMENDMENT
AND WAIVER
. Except as otherwise provided herein, the provisions of this Warrant may be amended or waived and the Company may
take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained
the written consent of the Holder.
9.
GOVERNING LAW; JURISDICTION; JURY TRIAL
. This Warrant shall be governed by and construed and enforced in accordance
with, and all questions concerning the construction, validity, interpretation and performance of this Warrant shall be governed
by, the internal laws of the State of California, without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of California or any other jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of California. The Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in Orange County, California, for the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action
or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding
is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. The Company hereby irrevocably
waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy
thereof to the Company at the address set forth herein and agrees that such service shall constitute good and sufficient service
of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner
permitted by law. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other
legal action against the Company in any other jurisdiction to collect on the Company's obligations to the Holder, to realize on
any collateral or any other security for such obligations, or to enforce a judgment or other court ruling in favor of the Holder.
10.
CONSTRUCTION;
HEADINGS
. This Warrant shall be deemed to be jointly drafted by the Company and all the Buyers and shall not be construed
against any Person as the drafter hereof. The headings of this Warrant are for convenience of reference and shall not form part
of, or affect the interpretation of, this Warrant.
11.
DISPUTE
RESOLUTION
. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant
Shares, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within two (2) Business
Days of receipt of the Exercise Notice giving rise to such dispute, as the case may be, to the Holder. If the Holder and the Company
are unable to agree upon such determination or calculation of the Exercise Price or the Warrant Shares within three (3) Business
Days of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within two
(2) Business Days submit via facsimile (a) the disputed determination of the Exercise Price to an independent, reputable investment
bank selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of the Warrant Shares to the
Company's independent, outside accountant. The Company shall cause at its expense the investment bank or the accountant, as the
case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than
ten (10) Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.
12.
REMEDIES,
OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF
. The remedies provided in this Warrant shall be cumulative and in addition
to all other remedies available under this Warrant and the other Transaction Documents, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue actual
damages for any failure by the Company to comply with the terms of this Warrant. The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate.
The Company therefore agrees that, in the event of any such breach or threatened breach, the holder of this Warrant shall be entitled,
in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.
13.
SEVERABILITY
. If
any provision of this Warrant is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent
jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the
broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect
the validity of the remaining provisions of this Warrant so long as this Warrant as so modified continues to express, without
material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity
or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations
of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will
endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s),
the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).
14.
CERTAIN
DEFINITIONS
. For purposes of this Warrant, the following terms shall have the following meanings:
(a) "
1933 Act
" means the Securities Act of 1933, as amended.
(b) "
Affiliate
" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled
by, or is under common control with, such Person, it being understood for purposes of this definition that "control"
of a Person means the power directly or indirectly either to vote 10% or more of the stock having ordinary voting power for the
election of directors of such Person or direct or cause the direction of the management and policies of such Person whether by
contract or otherwise.
(c) "
Approved Stock Plan
" means any employee benefit plan which has been approved by the Board of Directors of the
Company, pursuant to which the Company's securities may be issued to any employee, officer or director for services provided to
the Company. "
Bloomberg
" means Bloomberg Financial Markets.
(d) "
Business Day
" means any day other than Saturday, Sunday or other day on which commercial banks in The City of
New York are authorized or required by law to remain closed.
(e) "
Closing Bid Price
" and "
Closing Sale Price
" means, for any security as of any date, the last
closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg,
or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing
trade price, as the case may be, then the last bid price or the last trade price, respectively, of such security prior to 4:00:00
p.m., New York time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities
exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply,
the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported
for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security
as reported in the OTC Link or "pink sheets" by OTC Markets Group Inc. (formerly Pink OTC Markets Inc.). If the Closing
Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the
Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value
of such security, then such dispute shall be resolved pursuant to Section 12. All such determinations to be appropriately adjusted
for any stock dividend, stock split, stock combination, reclassification or other similar transaction during the applicable calculation
period.
(f) "
Common Stock
" means (i) the Company's shares of Common Stock, par value $0.0001 per share, and (ii) any
share capital into which such Common Stock shall have been changed or any share capital resulting from a reclassification of such
Common Stock.
(g) "
Convertible Securities
" means any stock or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for shares of Common Stock.
(h) "
Eligible Market
" means the Principal Market, the NYSE MKT LLC, The NASDAQ Global Market, The NASDAQ Global Select
Market, The NASDAQ Capital Market or The New York Stock Exchange, Inc.
(i) "
Expiration Date
" means the date sixty (60) months after the Issuance Date or, if such date falls on a day other
than a Business Day or on which trading does not take place on the Principal Market (a "
Holiday
"), the next day
that is not a Holiday.
(j) "
Group
"
means a "group" as that term is used in Section 13(d) of the 1934 Act and as defined in Rule 13d-5 thereunder.
(k) "
Options
" means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible
Securities.
(l) "
Person
"
means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization,
any other entity and a government or any department or agency thereof.
(m) "
Principal Market
" means the OTC QB.
(n) "
Trading Day
" means any day on which the Common Stock is traded on the Principal Market, or, if the Principal
Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market
on which the Common Stock is then traded;
provided
that "Trading Day" shall not include any day on which the Common
Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from
trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time).
[Signature Page
Follows]
IN WITNESS WHEREOF,
the Company has caused this Warrant to Purchase Common Stock to be duly executed as of the Issuance Date set out above.
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ENER-CORE, INC.
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By:
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Alain J. Castro
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Title:
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Chief Executive Officer
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EXHIBIT A
EXERCISE NOTICE
TO BE EXECUTED BY THE REGISTERED
HOLDER TO EXERCISE THIS
WARRANT TO PURCHASE COMMON STOCK
ENER-CORE,
inc.
The undersigned
holder hereby exercises the right to purchase _________________ of the shares of Common Stock ("
Warrant Shares
")
of Ener-Core, Inc., a Nevada corporation (the "
Company
"), evidenced by the attached Warrant to Purchase Common
Stock (the "
Warrant
"). Capitalized terms used herein and not otherwise defined shall have the respective meanings
set forth in the Warrant.
1. Form of Exercise
Price. The Holder intends that payment of the Exercise Price shall be made as:
____________ a
"
Cash Exercise"
with respect to _________________ Warrant Shares;
and/or
____________ a
"Cashless Exercise"
with respect to _______________ Warrant Shares.
2. Payment of Exercise
Price. In the event that the holder has elected a Cash Exercise with respect to some or all of the Warrant Shares to be issued
pursuant hereto, the holder shall pay the Aggregate Exercise Price in the sum of $___________________ to the Company in accordance
with the terms of the Warrant.
3. Delivery of Warrant
Shares. The Company shall deliver to the holder __________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________ __, ______
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ACKNOWLEDGMENT
The Company hereby
acknowledges this Exercise Notice and hereby directs VStock Transfer, LLC. to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated April [__], 2014 from the Company and acknowledged and agreed to
by VStock Transfer, LLC.
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ENER-CORE, INC.
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EXHIBIT 4.11
NEITHER THE ISSUANCE AND SALE OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL SELECTED BY THE HOLDER, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION
IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING,
THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
ENER-CORE,
INC.
Warrant
To Purchase Common Stock
Warrant No.:
2014-12-16 Pickle
Number of Shares of Common Stock: 320,513
Date of Issuance: December 1, 2014 ("
Issuance Date
")
Ener-Core, Inc., a
Nevada corporation (the "
Company
"), hereby certifies that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged
,
Island Pickle, LLC, the registered
holder hereof or its permitted assigns (the "
Holder
"), is entitled, subject to the terms set forth below, to purchase
from the Company, at the Exercise Price (as defined below) then in effect, at any time or times on or after the Issuance Date,
but not after 11:59 p.m., New York time, on the Expiration Date, (as defined below), Three Hundred Twenty Thousand, Five Hundred
and Thirteen (320,513) fully paid nonassessable shares of Common Stock, subject to adjustment as provided herein
(the "
Warrant
Shares
"). Except as otherwise defined herein, capitalized terms in this Warrant to Purchase Common Stock (including any
Warrants to Purchase Common Stock issued in exchange, transfer or replacement hereof, this "
Warrant
"), shall have
the meanings set forth in Section 17. This Warrant is one of the Warrants to purchase Common Stock (the "
Supplemental Warrants
")
approved by the Company’s Board of Directors on November 28, 2014 (the "
Warrant Issuance Date
"), by and
among the Company and the Investor (the "
Investor
") referred to therein. Capitalized terms used herein and not
otherwise defined shall have the definitions ascribed to such terms in the Services Agreement.
1.
EXERCISE OF WARRANT.
(a)
Mechanics
of Exercise
. Subject to the terms and conditions hereof (including, without limitation, the limitations set forth in Section
1(f)), this Warrant may be exercised by the Holder at any time or times on or after the Issuance Date, in whole or in part, by
(i) delivery of a written notice, in the form attached hereto as
Exhibit A
(the "
Exercise Notice
"),
of the Holder's election to exercise this Warrant and (ii) (A) payment to the Company of an amount equal to the applicable
Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (the "
Aggregate
Exercise Price
") in cash by wire transfer of immediately available funds or (B) if the provisions of Section 1(d) are
applicable, by notifying the Company that this Warrant is being exercised pursuant to a Cashless Exercise (as defined in Section
1(c)). The Holder shall not be required to deliver the original Warrant in order to effect an exercise hereunder. Execution and
delivery of the Exercise Notice with respect to less than all of the Warrant Shares shall have the same effect as cancellation
of the original Warrant and issuance of a new Warrant evidencing the right to purchase the remaining number of Warrant Shares.
On or before the first (1
st
) Trading Day following the date on which the Company has received the Exercise Notice,
the Company shall transmit by facsimile an acknowledgment of confirmation of receipt of the Exercise Notice to the Holder and
the Company's transfer agent (the "
Transfer Agent
"). On or before the fifth (5th) Trading Day following the date
on which the Company has received the Exercise Notice, so long as the Holder delivers the Aggregate Exercise Price (or notice
of a Cashless Exercise) on or prior to the second (2nd) Trading Day following the date on which the Company has received the Exercise
Notice (the "
Share Delivery Date
") (provided that if the Aggregate Exercise Price has not been delivered by such
date, the Share Delivery Date shall be three (3) Trading Days after the Aggregate Exercise Price (or notice of a Cashless Exercise)
is delivered), the Company shall issue and dispatch by overnight courier to the address as specified in the Exercise Notice, a
certificate, registered in the Company's share register in the name of the Holder or its designee, for the number of Warrant Shares
to which the Holder is entitled pursuant to such exercise. The Company shall be responsible for all fees and expenses of the Transfer
Agent. Upon delivery of the Exercise Notice, the Holder shall be deemed for all corporate purposes to have become the holder of
record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the
certificates evidencing such Warrant Shares, as the case may be. If this Warrant is submitted in connection with any exercise
pursuant to this Section 1(a) and the number of Warrant Shares represented by this Warrant submitted for exercise is greater than
the number of Warrant Shares being acquired upon an exercise, then the Company shall as soon as practicable and in no event later
than five (5) Trading Days after any exercise and at its own expense, issue a new Warrant (in accordance with Section 7(d)) representing
the right to purchase the number of Warrant Shares issuable immediately prior to such exercise under this Warrant, less the number
of Warrant Shares with respect to which this Warrant is exercised. No fractional Warrant Shares are to be issued upon the exercise
of this Warrant, but rather the number of Warrant Shares to be issued shall be rounded up to the nearest whole number. The Company
shall pay any and all taxes which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of
this Warrant. The Company's obligations to issue and deliver Warrant Shares in accordance with the terms and subject to the conditions
hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or
consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same,
or any setoff, counterclaim, recoupment, limitation or termination.
Notwithstanding
any provision of this Warrant to the contrary, no more than the Maximum Eligibility Number of Warrant Shares shall be exercisable
hereunder.
(b)
Exercise
Price
. For purposes of this Warrant, "
Exercise Price
" means $0.78, subject to adjustment as provided herein.
(c)
Disputes
. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant
Shares, the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed and resolve such dispute
in accordance with Section 12.
2.
ADJUSTMENT
OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES
. The Exercise Price and the number of Warrant Shares shall be adjusted from
time to time. as follows:
(a)
Voluntary Adjustment By Company
. The Company may at any time during the term of this Warrant, with the prior written consent
of the Required Holders, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.
(b)
Adjustment Upon Subdivision or Combination of Shares of Common Stock
. If the Company at any time on or after the Subscription
Date subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares
of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision will be proportionately
reduced and the number of Warrant Shares will be proportionately increased. If the Company at any time on or after the Subscription
Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price in effect immediately prior to such combination will be proportionately increased
and the number of Warrant Shares will be proportionately decreased. Any adjustment under this Section 2(c) shall become effective
at the close of business on the date the subdivision or combination becomes effective.
(c)
Other
Events
. If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by
such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company's Board of Directors will make an appropriate adjustment in the Exercise Price and the
number of Warrant Shares, as mutually determined by the Company’s Board of Directors and the Required Holders, so as to
protect the rights of the Holder;
provided
that no such adjustment pursuant to this Section 2(d) will increase the Exercise
Price or decrease the number of Warrant Shares as otherwise determined pursuant to this Section 2.
3.
REGISTRATION
RIGHTS
. This Warrant shall have piggyback registration rights. The Company hereby agrees to make its best commercial efforts
to include the shares underlying the Warrants in the next available registration statement filed by the Company and is committed
to including the underlying warrant shares in the next available registration statement unless the inclusion of the Warrants in
such a registration statement would cause undue harm to the Company or is prohibited by the securities laws, rules or regulations.
4.
NONCIRCUMVENTION
.
The Company hereby covenants and agrees that the Company will not, by amendment of its Articles of Incorporation or Bylaws, or
through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities,
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and will
at all times in good faith carry out all of the provisions of this Warrant and take all action as may be required to protect the
rights of the Holder. Without limiting the generality of the foregoing, the Company (i) shall not increase the par value
of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, (ii) shall
take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant, and (iii) shall, so long as any of the SPA Warrants are
outstanding, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock,
solely for the purpose of effecting the exercise of the SPA Warrants, 135% of the number of shares of Common Stock as shall from
time to time be necessary to effect the exercise of the SPA Warrants then outstanding (without regard to any limitations on exercise).
5.
WARRANT
HOLDER NOT DEEMED A SHAREHOLDER
. Except as otherwise specifically provided herein, the Holder, solely in such Person's capacity
as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the
Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in such Person's
capacity as the Holder of this Warrant, any of the rights of a shareholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger,
conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance
to the Holder of the Warrant Shares which such Person is then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon
exercise of this Warrant or otherwise) or as a shareholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 6, the Company shall provide the Holder with copies of the same notices
and other information given to the shareholders of the Company generally, contemporaneously with the giving thereof to the shareholders.
6.
REISSUANCE
OF WARRANTS
.
(a)
Transfer of Warrant
. If this Warrant is to be transferred, the Holder shall surrender this Warrant to the Company, whereupon
the Company will forthwith issue and deliver upon the order of the Holder a new Warrant (in accordance with Section 7(d)), registered
as the Holder may request, representing the right to purchase the number of Warrant Shares being transferred by the Holder and,
if less than the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant (in accordance
with Section 7(d)) to the Holder representing the right to purchase the number of Warrant Shares not being transferred.
(b)
Lost, Stolen or Mutilated Warrant
. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft or destruction, of any indemnification
undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this
Warrant, the Company shall execute and deliver to the Holder a new Warrant (in accordance with Section 7(d)) representing the right
to purchase the Warrant Shares then underlying this Warrant.
(c)
Exchangeable
for Multiple Warrants
. This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the
Company, for a new Warrant or Warrants (in accordance with Section 7(d)) representing in the aggregate the right to purchase the
number of Warrant Shares then underlying this Warrant, and each such new Warrant will represent the right to purchase such portion
of such Warrant Shares as is designated by the Holder at the time of such surrender;
provided
,
however
, that no
SPA Warrants for fractional Warrant Shares shall be given.
(d)
Issuance
of New Warrants
. Whenever the Company is required to issue a new Warrant pursuant to the terms of this Warrant, such new Warrant
(i) shall be of like tenor with this Warrant, (ii) shall represent, as indicated on the face of such new Warrant, the right to
purchase the Warrant Shares then underlying this Warrant (or in the case of a new Warrant being issued pursuant to Section 7(a)
or Section 7(c), the Warrant Shares designated by the Holder which, when added to the number of shares of Common Stock underlying
the other new Warrants issued in connection with such issuance, does not exceed the number of Warrant Shares then underlying this
Warrant), (iii) shall have an issuance date, as indicated on the face of such new Warrant which is the same as the Issuance Date,
and (iv) shall have the same rights and conditions as this Warrant.
7.
NOTICES
. Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall
be given in accordance with Section 9(f) of the Securities Purchase Agreement. The Company shall provide the Holder with prompt
written notice of all actions taken pursuant to this Warrant, including in reasonable detail a description of such action and the
reason therefor. Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Exercise Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment
and (ii) at least fifteen (15) days prior to the date on which the Company closes its books or takes a record (A) with respect
to any dividend or distribution upon the shares of Common Stock, (B) with respect to any grants, issuances or sales of any Options,
Convertible Securities or rights to purchase stock, warrants, securities or other property to holders of shares of Common Stock
or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation;
provided
in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided
to the Holder. It is expressly understood and agreed that the time of exercise specified by the Holder in each Exercise Notice
shall be definitive and may not be disputed or challenged by the Company.
8.
AMENDMENT
AND WAIVER
. Except as otherwise provided herein, the provisions of this Warrant may be amended or waived and the Company may
take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained
the written consent of the Holder.
9.
GOVERNING LAW; JURISDICTION; JURY TRIAL
. This Warrant shall be governed by and construed and enforced in accordance
with, and all questions concerning the construction, validity, interpretation and performance of this Warrant shall be governed
by, the internal laws of the State of California, without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of California or any other jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of California. The Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in Orange County, California, for the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action
or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding
is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. The Company hereby irrevocably
waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy
thereof to the Company at the address set forth herein and agrees that such service shall constitute good and sufficient service
of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner
permitted by law. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other
legal action against the Company in any other jurisdiction to collect on the Company's obligations to the Holder, to realize on
any collateral or any other security for such obligations, or to enforce a judgment or other court ruling in favor of the Holder.
10.
CONSTRUCTION;
HEADINGS
. This Warrant shall be deemed to be jointly drafted by the Company and all the Buyers and shall not be construed
against any Person as the drafter hereof. The headings of this Warrant are for convenience of reference and shall not form part
of, or affect the interpretation of, this Warrant.
11.
DISPUTE
RESOLUTION
. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant
Shares, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within two (2) Business
Days of receipt of the Exercise Notice giving rise to such dispute, as the case may be, to the Holder. If the Holder and the Company
are unable to agree upon such determination or calculation of the Exercise Price or the Warrant Shares within three (3) Business
Days of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within two
(2) Business Days submit via facsimile (a) the disputed determination of the Exercise Price to an independent, reputable investment
bank selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of the Warrant Shares to the
Company's independent, outside accountant. The Company shall cause at its expense the investment bank or the accountant, as the
case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than
ten (10) Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.
12.
REMEDIES,
OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF
. The remedies provided in this Warrant shall be cumulative and in addition
to all other remedies available under this Warrant and the other Transaction Documents, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue actual
damages for any failure by the Company to comply with the terms of this Warrant. The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate.
The Company therefore agrees that, in the event of any such breach or threatened breach, the holder of this Warrant shall be entitled,
in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.
13.
SEVERABILITY
. If
any provision of this Warrant is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent
jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the
broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect
the validity of the remaining provisions of this Warrant so long as this Warrant as so modified continues to express, without
material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity
or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations
of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will
endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s),
the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).
14.
CERTAIN
DEFINITIONS
. For purposes of this Warrant, the following terms shall have the following meanings:
(a) "
1933 Act
" means the Securities Act of 1933, as amended.
(b) "
Affiliate
" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled
by, or is under common control with, such Person, it being understood for purposes of this definition that "control"
of a Person means the power directly or indirectly either to vote 10% or more of the stock having ordinary voting power for the
election of directors of such Person or direct or cause the direction of the management and policies of such Person whether by
contract or otherwise.
(c) "
Approved Stock Plan
" means any employee benefit plan which has been approved by the Board of Directors of the
Company, pursuant to which the Company's securities may be issued to any employee, officer or director for services provided to
the Company. "
Bloomberg
" means Bloomberg Financial Markets.
(d) "
Business Day
" means any day other than Saturday, Sunday or other day on which commercial banks in The City of
New York are authorized or required by law to remain closed.
(e) "
Closing Bid Price
" and "
Closing Sale Price
" means, for any security as of any date, the last
closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg,
or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing
trade price, as the case may be, then the last bid price or the last trade price, respectively, of such security prior to 4:00:00
p.m., New York time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities
exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply,
the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported
for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security
as reported in the OTC Link or "pink sheets" by OTC Markets Group Inc. (formerly Pink OTC Markets Inc.). If the Closing
Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the
Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value
of such security, then such dispute shall be resolved pursuant to Section 12. All such determinations to be appropriately adjusted
for any stock dividend, stock split, stock combination, reclassification or other similar transaction during the applicable calculation
period.
(f) "
Common Stock
" means (i) the Company's shares of Common Stock, par value $0.0001 per share, and (ii) any
share capital into which such Common Stock shall have been changed or any share capital resulting from a reclassification of such
Common Stock.
(g) "
Convertible Securities
" means any stock or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for shares of Common Stock.
(h) "
Eligible Market
" means the Principal Market, the NYSE MKT LLC, The NASDAQ Global Market, The NASDAQ Global Select
Market, The NASDAQ Capital Market or The New York Stock Exchange, Inc.
(i) "
Expiration Date
" means the date sixty (60) months after the Issuance Date or, if such date falls on a day other
than a Business Day or on which trading does not take place on the Principal Market (a "
Holiday
"), the next day
that is not a Holiday.
(j) "
Group
"
means a "group" as that term is used in Section 13(d) of the 1934 Act and as defined in Rule 13d-5 thereunder.
(k) "
Options
" means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible
Securities.
(l) "
Person
"
means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization,
any other entity and a government or any department or agency thereof.
(m) "
Principal Market
" means the OTC QB.
(n) "
Trading Day
" means any day on which the Common Stock is traded on the Principal Market, or, if the Principal
Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market
on which the Common Stock is then traded;
provided
that "Trading Day" shall not include any day on which the Common
Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from
trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time).
[Signature Page
Follows]
IN WITNESS WHEREOF,
the Company has caused this Warrant to Purchase Common Stock to be duly executed as of the Issuance Date set out above.
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ENER-CORE, INC.
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By:
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Name:
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Alain J. Castro
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Title:
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Chief Executive Officer
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EXHIBIT A
EXERCISE NOTICE
TO BE EXECUTED BY THE REGISTERED
HOLDER TO EXERCISE THIS
WARRANT TO PURCHASE COMMON STOCK
ENER-CORE,
inc.
The undersigned
holder hereby exercises the right to purchase _________________ of the shares of Common Stock ("
Warrant Shares
")
of Ener-Core, Inc., a Nevada corporation (the "
Company
"), evidenced by the attached Warrant to Purchase Common
Stock (the "
Warrant
"). Capitalized terms used herein and not otherwise defined shall have the respective meanings
set forth in the Warrant.
1. Form of Exercise
Price. The Holder intends that payment of the Exercise Price shall be made as:
____________ a
"
Cash Exercise"
with respect to _________________ Warrant Shares;
and/or
____________ a
"Cashless Exercise"
with respect to _______________ Warrant Shares.
2. Payment of Exercise
Price. In the event that the holder has elected a Cash Exercise with respect to some or all of the Warrant Shares to be issued
pursuant hereto, the holder shall pay the Aggregate Exercise Price in the sum of $___________________ to the Company in accordance
with the terms of the Warrant.
3. Delivery of Warrant
Shares. The Company shall deliver to the holder __________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________ __, ______
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ACKNOWLEDGMENT
The Company hereby
acknowledges this Exercise Notice and hereby directs VStock Transfer, LLC. to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated April [__], 2014 from the Company and acknowledged and agreed to
by VStock Transfer, LLC.
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ENER-CORE, INC.
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EXHIBIT 4.12
NEITHER THE ISSUANCE AND SALE OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL SELECTED BY THE HOLDER, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION
IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING,
THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
ENER-CORE,
INC.
Warrant
To Purchase Common Stock
Warrant No.:
2014-12-16 Pilly
Number of Shares of Common Stock: 641,026
Date of Issuance: December 1, 2014 ("
Issuance Date
")
Ener-Core, Inc., a
Nevada corporation (the "
Company
"), hereby certifies that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged
,
Pilly Boy, LLC, the registered holder
hereof or its permitted assigns (the "
Holder
"), is entitled, subject to the terms set forth below, to purchase
from the Company, at the Exercise Price (as defined below) then in effect, at any time or times on or after the Issuance Date,
but not after 11:59 p.m., New York time, on the Expiration Date, (as defined below), Six Hundred Forty-One Thousand and Twenty-Six
fully paid nonassessable shares of Common Stock, subject to adjustment as provided herein
(the "
Warrant Shares
").
Except as otherwise defined herein, capitalized terms in this Warrant to Purchase Common Stock (including any Warrants to Purchase
Common Stock issued in exchange, transfer or replacement hereof, this "
Warrant
"), shall have the meanings set
forth in Section 17. This Warrant is one of the Warrants to purchase Common Stock (the "
Supplemental Warrants
")
approved by the Company’s Board of Directors on November 28, 2014 (the "
Warrant Issuance Date
"), by and
among the Company and the Investor (the "
Investor
") referred to therein. Capitalized terms used herein and not
otherwise defined shall have the definitions ascribed to such terms in the Services Agreement.
1.
EXERCISE OF WARRANT.
(a)
Mechanics
of Exercise
. Subject to the terms and conditions hereof (including, without limitation, the limitations set forth in Section
1(f)), this Warrant may be exercised by the Holder at any time or times on or after the Issuance Date, in whole or in part, by
(i) delivery of a written notice, in the form attached hereto as
Exhibit A
(the "
Exercise Notice
"),
of the Holder's election to exercise this Warrant and (ii) (A) payment to the Company of an amount equal to the applicable
Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (the "
Aggregate
Exercise Price
") in cash by wire transfer of immediately available funds or (B) if the provisions of Section 1(d) are
applicable, by notifying the Company that this Warrant is being exercised pursuant to a Cashless Exercise (as defined in Section
1(c)). The Holder shall not be required to deliver the original Warrant in order to effect an exercise hereunder. Execution and
delivery of the Exercise Notice with respect to less than all of the Warrant Shares shall have the same effect as cancellation
of the original Warrant and issuance of a new Warrant evidencing the right to purchase the remaining number of Warrant Shares.
On or before the first (1
st
) Trading Day following the date on which the Company has received the Exercise Notice,
the Company shall transmit by facsimile an acknowledgment of confirmation of receipt of the Exercise Notice to the Holder and
the Company's transfer agent (the "
Transfer Agent
"). On or before the fifth (5th) Trading Day following the date
on which the Company has received the Exercise Notice, so long as the Holder delivers the Aggregate Exercise Price (or notice
of a Cashless Exercise) on or prior to the second (2nd) Trading Day following the date on which the Company has received the Exercise
Notice (the "
Share Delivery Date
") (provided that if the Aggregate Exercise Price has not been delivered by such
date, the Share Delivery Date shall be three (3) Trading Days after the Aggregate Exercise Price (or notice of a Cashless Exercise)
is delivered), the Company shall issue and dispatch by overnight courier to the address as specified in the Exercise Notice, a
certificate, registered in the Company's share register in the name of the Holder or its designee, for the number of Warrant Shares
to which the Holder is entitled pursuant to such exercise. The Company shall be responsible for all fees and expenses of the Transfer
Agent. Upon delivery of the Exercise Notice, the Holder shall be deemed for all corporate purposes to have become the holder of
record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the
certificates evidencing such Warrant Shares, as the case may be. If this Warrant is submitted in connection with any exercise
pursuant to this Section 1(a) and the number of Warrant Shares represented by this Warrant submitted for exercise is greater than
the number of Warrant Shares being acquired upon an exercise, then the Company shall as soon as practicable and in no event later
than five (5) Trading Days after any exercise and at its own expense, issue a new Warrant (in accordance with Section 7(d)) representing
the right to purchase the number of Warrant Shares issuable immediately prior to such exercise under this Warrant, less the number
of Warrant Shares with respect to which this Warrant is exercised. No fractional Warrant Shares are to be issued upon the exercise
of this Warrant, but rather the number of Warrant Shares to be issued shall be rounded up to the nearest whole number. The Company
shall pay any and all taxes which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of
this Warrant. The Company's obligations to issue and deliver Warrant Shares in accordance with the terms and subject to the conditions
hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or
consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same,
or any setoff, counterclaim, recoupment, limitation or termination.
Notwithstanding
any provision of this Warrant to the contrary, no more than the Maximum Eligibility Number of Warrant Shares shall be exercisable
hereunder.
(b)
Exercise
Price
. For purposes of this Warrant, "
Exercise Price
" means $0.78, subject to adjustment as provided herein.
(c)
Disputes
. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant
Shares, the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed and resolve such dispute
in accordance with Section 12.
2.
ADJUSTMENT
OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES
. The Exercise Price and the number of Warrant Shares shall be adjusted from
time to time. as follows:
(a)
Voluntary Adjustment By Company
. The Company may at any time during the term of this Warrant, with the prior written consent
of the Required Holders, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.
(b)
Adjustment Upon Subdivision or Combination of Shares of Common Stock
. If the Company at any time on or after the Subscription
Date subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares
of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision will be proportionately
reduced and the number of Warrant Shares will be proportionately increased. If the Company at any time on or after the Subscription
Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price in effect immediately prior to such combination will be proportionately increased
and the number of Warrant Shares will be proportionately decreased. Any adjustment under this Section 2(c) shall become effective
at the close of business on the date the subdivision or combination becomes effective.
(c)
Other
Events
. If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by
such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company's Board of Directors will make an appropriate adjustment in the Exercise Price and the
number of Warrant Shares, as mutually determined by the Company’s Board of Directors and the Required Holders, so as to
protect the rights of the Holder;
provided
that no such adjustment pursuant to this Section 2(d) will increase the Exercise
Price or decrease the number of Warrant Shares as otherwise determined pursuant to this Section 2.
3.
REGISTRATION
RIGHTS
. This Warrant shall have piggyback registration rights. The Company hereby agrees to make its best commercial efforts
to include the shares underlying the Warrants in the next available registration statement filed by the Company and is committed
to including the underlying warrant shares in the next available registration statement unless the inclusion of the Warrants in
such a registration statement would cause undue harm to the Company or is prohibited by the securities laws, rules or regulations.
4.
NONCIRCUMVENTION
.
The Company hereby covenants and agrees that the Company will not, by amendment of its Articles of Incorporation or Bylaws, or
through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities,
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and will
at all times in good faith carry out all of the provisions of this Warrant and take all action as may be required to protect the
rights of the Holder. Without limiting the generality of the foregoing, the Company (i) shall not increase the par value
of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, (ii) shall
take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant, and (iii) shall, so long as any of the SPA Warrants are
outstanding, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock,
solely for the purpose of effecting the exercise of the SPA Warrants, 135% of the number of shares of Common Stock as shall from
time to time be necessary to effect the exercise of the SPA Warrants then outstanding (without regard to any limitations on exercise).
5.
WARRANT
HOLDER NOT DEEMED A SHAREHOLDER
. Except as otherwise specifically provided herein, the Holder, solely in such Person's capacity
as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the
Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in such Person's
capacity as the Holder of this Warrant, any of the rights of a shareholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger,
conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance
to the Holder of the Warrant Shares which such Person is then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon
exercise of this Warrant or otherwise) or as a shareholder of the Company, whether such liabilities are asserted by the Company
or by creditors of the Company. Notwithstanding this Section 6, the Company shall provide the Holder with copies of the same notices
and other information given to the shareholders of the Company generally, contemporaneously with the giving thereof to the shareholders.
6.
REISSUANCE
OF WARRANTS
.
(a)
Transfer of Warrant
. If this Warrant is to be transferred, the Holder shall surrender this Warrant to the Company, whereupon
the Company will forthwith issue and deliver upon the order of the Holder a new Warrant (in accordance with Section 7(d)), registered
as the Holder may request, representing the right to purchase the number of Warrant Shares being transferred by the Holder and,
if less than the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant (in accordance
with Section 7(d)) to the Holder representing the right to purchase the number of Warrant Shares not being transferred.
(b)
Lost, Stolen or Mutilated Warrant
. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft or destruction, of any indemnification
undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this
Warrant, the Company shall execute and deliver to the Holder a new Warrant (in accordance with Section 7(d)) representing the right
to purchase the Warrant Shares then underlying this Warrant.
(c)
Exchangeable
for Multiple Warrants
. This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the
Company, for a new Warrant or Warrants (in accordance with Section 7(d)) representing in the aggregate the right to purchase the
number of Warrant Shares then underlying this Warrant, and each such new Warrant will represent the right to purchase such portion
of such Warrant Shares as is designated by the Holder at the time of such surrender;
provided
,
however
, that no
SPA Warrants for fractional Warrant Shares shall be given.
(d)
Issuance
of New Warrants
. Whenever the Company is required to issue a new Warrant pursuant to the terms of this Warrant, such new Warrant
(i) shall be of like tenor with this Warrant, (ii) shall represent, as indicated on the face of such new Warrant, the right to
purchase the Warrant Shares then underlying this Warrant (or in the case of a new Warrant being issued pursuant to Section 7(a)
or Section 7(c), the Warrant Shares designated by the Holder which, when added to the number of shares of Common Stock underlying
the other new Warrants issued in connection with such issuance, does not exceed the number of Warrant Shares then underlying this
Warrant), (iii) shall have an issuance date, as indicated on the face of such new Warrant which is the same as the Issuance Date,
and (iv) shall have the same rights and conditions as this Warrant.
7.
NOTICES
. Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall
be given in accordance with Section 9(f) of the Securities Purchase Agreement. The Company shall provide the Holder with prompt
written notice of all actions taken pursuant to this Warrant, including in reasonable detail a description of such action and the
reason therefor. Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately
upon any adjustment of the Exercise Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment
and (ii) at least fifteen (15) days prior to the date on which the Company closes its books or takes a record (A) with respect
to any dividend or distribution upon the shares of Common Stock, (B) with respect to any grants, issuances or sales of any Options,
Convertible Securities or rights to purchase stock, warrants, securities or other property to holders of shares of Common Stock
or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation;
provided
in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided
to the Holder. It is expressly understood and agreed that the time of exercise specified by the Holder in each Exercise Notice
shall be definitive and may not be disputed or challenged by the Company.
8.
AMENDMENT
AND WAIVER
. Except as otherwise provided herein, the provisions of this Warrant may be amended or waived and the Company may
take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained
the written consent of the Holder.
9.
GOVERNING LAW; JURISDICTION; JURY TRIAL
. This Warrant shall be governed by and construed and enforced in accordance
with, and all questions concerning the construction, validity, interpretation and performance of this Warrant shall be governed
by, the internal laws of the State of California, without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of California or any other jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of California. The Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in Orange County, California, for the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action
or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding
is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. The Company hereby irrevocably
waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy
thereof to the Company at the address set forth herein and agrees that such service shall constitute good and sufficient service
of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner
permitted by law. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other
legal action against the Company in any other jurisdiction to collect on the Company's obligations to the Holder, to realize on
any collateral or any other security for such obligations, or to enforce a judgment or other court ruling in favor of the Holder.
10.
CONSTRUCTION;
HEADINGS
. This Warrant shall be deemed to be jointly drafted by the Company and all the Buyers and shall not be construed
against any Person as the drafter hereof. The headings of this Warrant are for convenience of reference and shall not form part
of, or affect the interpretation of, this Warrant.
11.
DISPUTE
RESOLUTION
. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant
Shares, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within two (2) Business
Days of receipt of the Exercise Notice giving rise to such dispute, as the case may be, to the Holder. If the Holder and the Company
are unable to agree upon such determination or calculation of the Exercise Price or the Warrant Shares within three (3) Business
Days of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within two
(2) Business Days submit via facsimile (a) the disputed determination of the Exercise Price to an independent, reputable investment
bank selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of the Warrant Shares to the
Company's independent, outside accountant. The Company shall cause at its expense the investment bank or the accountant, as the
case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than
ten (10) Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.
12.
REMEDIES,
OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF
. The remedies provided in this Warrant shall be cumulative and in addition
to all other remedies available under this Warrant and the other Transaction Documents, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue actual
damages for any failure by the Company to comply with the terms of this Warrant. The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate.
The Company therefore agrees that, in the event of any such breach or threatened breach, the holder of this Warrant shall be entitled,
in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.
13.
SEVERABILITY
. If
any provision of this Warrant is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent
jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the
broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect
the validity of the remaining provisions of this Warrant so long as this Warrant as so modified continues to express, without
material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity
or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations
of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will
endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s),
the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).
14.
CERTAIN
DEFINITIONS
. For purposes of this Warrant, the following terms shall have the following meanings:
(a) "
1933 Act
" means the Securities Act of 1933, as amended.
(b) "
Affiliate
" means, with respect to any Person, any other Person that directly or indirectly controls, is controlled
by, or is under common control with, such Person, it being understood for purposes of this definition that "control"
of a Person means the power directly or indirectly either to vote 10% or more of the stock having ordinary voting power for the
election of directors of such Person or direct or cause the direction of the management and policies of such Person whether by
contract or otherwise.
(c) "
Approved Stock Plan
" means any employee benefit plan which has been approved by the Board of Directors of the
Company, pursuant to which the Company's securities may be issued to any employee, officer or director for services provided to
the Company. "
Bloomberg
" means Bloomberg Financial Markets.
(d) "
Business Day
" means any day other than Saturday, Sunday or other day on which commercial banks in The City of
New York are authorized or required by law to remain closed.
(e) "
Closing Bid Price
" and "
Closing Sale Price
" means, for any security as of any date, the last
closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg,
or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing
trade price, as the case may be, then the last bid price or the last trade price, respectively, of such security prior to 4:00:00
p.m., New York time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities
exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply,
the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported
for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security
as reported in the OTC Link or "pink sheets" by OTC Markets Group Inc. (formerly Pink OTC Markets Inc.). If the Closing
Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the
Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value
of such security, then such dispute shall be resolved pursuant to Section 12. All such determinations to be appropriately adjusted
for any stock dividend, stock split, stock combination, reclassification or other similar transaction during the applicable calculation
period.
(f) "
Common Stock
" means (i) the Company's shares of Common Stock, par value $0.0001 per share, and (ii) any
share capital into which such Common Stock shall have been changed or any share capital resulting from a reclassification of such
Common Stock.
(g) "
Convertible Securities
" means any stock or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for shares of Common Stock.
(h) "
Eligible Market
" means the Principal Market, the NYSE MKT LLC, The NASDAQ Global Market, The NASDAQ Global Select
Market, The NASDAQ Capital Market or The New York Stock Exchange, Inc.
(i) "
Expiration Date
" means the date sixty (60) months after the Issuance Date or, if such date falls on a day other
than a Business Day or on which trading does not take place on the Principal Market (a "
Holiday
"), the next day
that is not a Holiday.
(j) "
Group
"
means a "group" as that term is used in Section 13(d) of the 1934 Act and as defined in Rule 13d-5 thereunder.
(k) "
Options
" means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible
Securities.
(l) "
Person
"
means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization,
any other entity and a government or any department or agency thereof.
(m) "
Principal Market
" means the OTC QB.
(n) "
Trading Day
" means any day on which the Common Stock is traded on the Principal Market, or, if the Principal
Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market
on which the Common Stock is then traded;
provided
that "Trading Day" shall not include any day on which the Common
Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from
trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time).
[Signature Page
Follows]
IN WITNESS WHEREOF,
the Company has caused this Warrant to Purchase Common Stock to be duly executed as of the Issuance Date set out above.
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ENER-CORE, INC.
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By:
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Name:
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Alain J. Castro
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Title:
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Chief Executive Officer
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EXHIBIT A
EXERCISE NOTICE
TO BE EXECUTED BY THE REGISTERED
HOLDER TO EXERCISE THIS
WARRANT TO PURCHASE COMMON STOCK
ENER-CORE,
inc.
The undersigned
holder hereby exercises the right to purchase _________________ of the shares of Common Stock ("
Warrant Shares
")
of Ener-Core, Inc., a Nevada corporation (the "
Company
"), evidenced by the attached Warrant to Purchase Common
Stock (the "
Warrant
"). Capitalized terms used herein and not otherwise defined shall have the respective meanings
set forth in the Warrant.
1. Form of Exercise
Price. The Holder intends that payment of the Exercise Price shall be made as:
____________ a
"
Cash Exercise"
with respect to _________________ Warrant Shares;
and/or
____________ a
"Cashless Exercise"
with respect to _______________ Warrant Shares.
2. Payment of Exercise
Price. In the event that the holder has elected a Cash Exercise with respect to some or all of the Warrant Shares to be issued
pursuant hereto, the holder shall pay the Aggregate Exercise Price in the sum of $___________________ to the Company in accordance
with the terms of the Warrant.
3. Delivery of Warrant
Shares. The Company shall deliver to the holder __________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________ __, ______
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Name of Registered Holder
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By:
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Name:
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Title:
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ACKNOWLEDGMENT
The Company hereby
acknowledges this Exercise Notice and hereby directs VStock Transfer, LLC. to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated April [__], 2014 from the Company and acknowledged and agreed to
by VStock Transfer, LLC.
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ENER-CORE, INC.
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Name:
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Title:
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EXHIBIT
10.22
CONFIDENTIAL
TREATMENT REQUESTED
COMMERCIAL
LICENSE AGREEMENT
This
COMMERCIAL LICENSE AGREEMENT
(“
Agreement
”) is made as of the 14th day of November, 2014, (“
Effective
Date
”) by and between Dresser-Rand Company, a New York general partnership (“
D-R
”), and
Ener-Core Power, Inc., a Delaware corporation (“
E-C
”) (each a “
Party
” and,
together, the “
Parties
”).
WHEREAS
,
D-R is in the business of building gas turbines, including the D-R KG2-3GEF gas turbine;
WHEREAS
,
E-C is in the business of building gradual oxidizers, which would be complementary to the D-R KG2-3GEF gas turbine;
WHEREAS
,
E-C desires to develop a gradual oxidizer for D-R’s KG2-3GEF gas turbines;
WHEREAS
,
D-R desires to design its controls to be specific to a product configured as a single integrated unit consisting of a combination
of the gradual oxidizer with the D-R KG2-3GEF gas turbine;
WHEREAS
,
the Parties desire to market an integrated KG2-3GEF/GO unit;
WHEREAS
,
subject to the conditions set forth herein, D-R and E-C will commit to this project the resources described in
Sections 2.2,
2.3, and 5.1
;
WHEREAS
,
the Parties are willing to grant each other rights to their background intellectual property during the Initial System Project
to permit them to conduct their development and commercialization activities under this Agreement in accordance with the terms
and conditions set forth herein; and
WHEREAS
,
the Parties desire to allocate ownership and license rights to the technology developed by, or acquired by either of them for,
the Initial System Project and to allow them to jointly commercialize the KG2-3GEF/GO on the terms and conditions set forth herein.
NOW,
THEREFORE
, in consideration of the premises and the mutual covenants, terms and conditions set forth herein, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
1.
DEFINITIONS
.
Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings set forth in this Section.
|
1.1
|
“
Affiliate
”
shall mean, with respect to any Person, any other person or entity that, directly or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such Person. For the purpose of this Agreement the term “control”
(including the terms “controlled by” and “under common control with”) means the possession, directly
or indirectly, of the power to direct or cause the direction of the management and policies of such person or entity, whether
through ownership of voting securities, by contract or otherwise. A person or entity shall be deemed an Affiliate of another
person or entity only during such time as such control exists.
|
|
1.2
|
“
Customer
”
means the Person who purchases, or contracts for the purchase of, a KG2-3GEF/GO from D-R.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
1.3
|
“
Deliverables
”
shall mean all tangible objects, quantifiable characteristics or functions, and services required to complete Initial System
Project Plan that each Party has agreed to provide or deliver to the other to satisfy timelines or Milestones specified in
the Initial System Project Plan pursuant to the terms of this Agreement.
|
|
1.4
|
“
D-R
Background Intellectual Property
” shall mean (a) all Inventions, Intellectual Property, and all other proprietary
rights owned or controlled (with the right to (sub)license as contemplated herein) by D-R as of the Effective Date, and (b)
all Improvements of the Inventions and Intellectual Property described in (a), above, and associated intellectual property
rights owned or controlled (with the right to (sub)license as contemplated herein) by D-R after the Effective Date and during
the Term.
|
|
1.5
|
“
D-R
Hardware
” shall mean the D-R Target Gas Turbine products, components and spare parts, integrated controls, and
packaging, all designed for the KG2-3GEF/GO.
|
|
1.6
|
“
D-R
Products
” shall mean D-R Hardware and on-site commissioning and technical support that D-R has agreed to provide
or deliver to a Customer or End-User pursuant to the terms of this Agreement, but excluding any E-C Products.
|
|
1.7
|
“
D-R
Target Gas Turbine
” means the D-R KG2-3GEF gas turbine.
|
|
1.8
|
“
E-C
Background Intellectual Property
” shall mean (a) all Inventions, Intellectual Property, and all other proprietary
rights owned or controlled (with the right to (sub)license as contemplated herein) by E-C as of the Effective Date and (b)
all Improvements of the Inventions, Intellectual Property described in (a), above, and associated intellectual property rights
owned or controlled (with the right to (sub)license as contemplated herein) by E-C after the Effective Date and during the
Term.
|
|
1.9
|
“
E-C
Hardware
” shall mean E-C’s Gradual Oxidizer products, components, spare parts, and controls, all designed
for the KG2-3GEF/GO.
|
|
1.10
|
“
E-C
Products
” shall mean E-C Hardware and on-site commissioning and technical support, and training of D-R field
support personnel that E-C has agreed to provide or deliver to D-R pursuant to the terms of this Agreement.
|
|
1.11
|
“
End-User
”
means the Person for whose benefit the KG2-3GEF/GO was purchased or installed, if that Person is not the Customer.
|
|
1.12
|
“
Fundamental
Process
” means a process (including sensors, instrumentation, controls and heat exchangers) designed for the
primary purpose of achieving heat release from any fuel whereby such fuel is gradually oxidized in a high-temperature vessel
maintained at such high temperature.
|
|
1.13
|
“
Fundamental
Process Technology Developments
” shall mean any Inventions relating to the Fundamental Process conceived, invented,
discovered, developed or created during the Term of this Agreement (i) solely by one or more employees, contractors or agents
of D-R or an Affiliate of D-R, or (ii) jointly by employees, contractors or agents of D-R or an Affiliate on the one hand
and by one or more employees, contractors or agents of E-C or an Affiliate of E-C on the other hand, in each case based upon
or resulting from the use of E-C Background Intellectual Property.
|
|
1.14
|
“
Gas
Turbine Technology Developments
” shall mean any Inventions relating to gas turbines conceived, invented, discovered,
developed or created during the Term of this Agreement (i) solely by employees or agents of E-C or an Affiliate of E-C, or
(ii) jointly by one or more employees, contractors or agents of E-C or an Affiliate of E-C on the one hand and one or more
employees, contractors or agents of D-R or an Affiliate of D-R on the other hand, in each case based upon or resulting from
the use of D-R Background Intellectual Property.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
1.15
|
“
Governmental
Body
” means any government or governmental or regulatory body thereof, or political subdivision thereof, whether
federal, state, local or foreign, or any agency, instrumentality or authority thereof, or any court or arbitrator (public
or private).
|
|
1.16
|
“
Gradual
Oxidizer
” means the E-C gradual oxidizer, which is a ceramic filled pressure vessel, including fuel distribution
manifold, implementing the Fundamental Process.
|
|
1.17
|
“
Improvements
”
means any and all improvements, derivative works, additions, modifications, enhancements, changes, translations, abridgements,
revisions, adaptations, corrections and updates, findings, discoveries, Inventions, developments, formulations, ideas, processes,
techniques, industrial and other designs, specifications, schematics, computer programs, source code (in both machine and
human readable formats) and object code, whether or not patentable.
|
|
1.18
|
“
Initial
System
” means the first commercial order and installation of a KG2-3GEF/GO.
|
|
1.19
|
“
Initial
System Project
” shall mean a joint project to develop and put into commercial operation the Initial System,
as more particularly described in the Initial System Product Plan.
|
|
1.20
|
“
Initial
System Project Plan
” shall mean the timelines, Deliverables, and Milestones, of the Initial System Project attached
hereto as
Annex A
. The Parties agree that all of the timelines set forth in Annex A shall not start to run until the
Core Binding Date.
|
|
1.21
|
“
Intellectual
Property
” shall mean all right, title and interest of a Party or the Parties in intellectual property, whether protected,
created or arising under the laws of the United States or any other jurisdiction, including: (i) Patents; (ii) trademarks,
service marks, trade names, service names, brand names, trade dress rights, corporate names, trade styles, logos and other
source or business identifiers and general intangibles of a like nature, together with the goodwill associated with any of
the foregoing, along with all applications, registrations, renewals and extensions thereof; (iii) Internet domain names; (iv)
copyrights and mask work, database and design rights, whether or not registered or published, all registrations and recordations
thereof and all applications in connection therewith, along with all reversions, extensions and renewals thereof; (iv) trade
secrets and other proprietary Confidential Information; (v) Inventions, and (vi) contracts granting any right relating to
or under the foregoing.
|
|
1.22
|
“
Invention
”
shall mean all tangible or intangible ideas, know-how, knowledge, concepts, analyses, evaluations, developments, designs,
Improvements, formulae, software, processes, inventions, discoveries, methods, compositions, techniques, designs or manufacturing
specifications, and procedures, whether or not patentable.
|
|
1.23
|
“
Joint
Inventions
” shall mean all Inventions conceived, reduced to practice, invented, discovered, developed, created
or authored during the Term of this Agreement, jointly by some combination of an employee, contractor or agent of E-C or an
Affiliate of E-C on the one hand, and an employee, contractor or agent of D-R or an Affiliate of D-R on the other hand, and
all rights in any of the foregoing;
provided
,
however
, that Joint Inventions shall not include Fundamental Process
Technology Developments or Gas Turbine Technology Developments.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
1.24
|
“
KG2-3GEF/GO
”
shall mean a packaged solution where the Gradual Oxidizer and D-R Target Gas Turbine are combined into a single fully integrated
system (i) to be offered to Customers or End Users or (ii) that D-R has agreed to provide or deliver to Customers or End-Users
pursuant to the terms of this Agreement and consisting of E-C Products and D-R Products.
|
|
1.25
|
“
Milestone
”
shall mean a point in time, during the Initial System Project, signifying (i) a critical-path event that receives special
attention, (ii) the completion of one or more Deliverables, or (iii) an important decision or derivation of a critical piece
of information which affects the future of the Initial System Project; each as set forth in the Initial System Project Plan.
|
|
1.26
|
“
Patent
”
shall mean any United States or foreign patent application, provisional patent application, and any patent issuing there from
anywhere in the world (including by way of example and not limitation, patents of importation, patents of confirmation, patents
of improvement, patents and certificates of addition and utility model patents, together with any extension, registration,
confirmation, reissue, continuation, division, continuations-in-part, reexamination or other post-issuance certificate, certificate
of invention and application for certificate of invention, revalidation, renewal, substitution, supplementary protection certificate,
or any addition or term restoration thereof, utility models, and industrial designs. The term “
Patent
”
does not include copyrights or trademarks.
|
|
1.27
|
“
Perpetuity
Threshold
” shall mean * KG2-3GEF/GO units.
|
|
1.28
|
“
Perpetuity
Window
” shall mean any three consecutive calendar years after the four-year anniversary of the end of the Initial
Exclusive License Term.
|
|
1.29
|
“
Person
”
means any individual, corporation, limited liability company, partnership, firm, joint venture, association, joint-stock company,
trust, unincorporated organization, Governmental Body or other entity.
|
|
1.30
|
“
Sales
Price
” means the price paid by D-R for E-C’s scope of supply for each KG2-3GEF/GO ordered, except the
Initial System, as evidenced by a valid Customer Purchase Order during an Exclusive License Term.
|
|
1.31
|
“
Specifications
”
means, as the context requires, the performance specifications for the Gradual Oxidizer set forth on
Annex B
or
the performance guarantees set forth for the KG2-3GEF/GO in any Customer purchase order.
|
|
1.32
|
“
Technical
Acceptance Criteria
” means, the criteria for acceptance of the Gradual Oxidizer for the KG2-3GEF/GO set forth
on
Annex F
.
|
|
1.33
|
“
Threshold
”
means either a Perpetuity Threshold or an Extension Threshold, as the context requires.
|
|
1.34
|
“
Underperforming
Perpetuity Window
” shall mean a Perpetuity Window, prior to the date of any Election Notice pursuant to
Section
6.10.2
, during which the Actual Units Credited (calculated based on Actual Units and Applied Carried Forwards for the
full three-year Perpetuity Window in lieu of the last twelve months of the Exclusive License Term) is less than the Perpetuity
Threshold.
|
|
1.35
|
“
Variable
Overhead
” means any item tied to production levels, such as indirect labor, utilities, maintenance, etc.
|
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
|
1.36
|
“
Warranty
Funding Date
” shall mean the date that E-C has provided evidence to D-R reasonably satisfactory to D-R that
E-C has sufficient funding to meet its warranty obligations in full for the Initial System until such warranty obligations
expire by their terms.
|
|
1.37
|
“
Work
Product
” shall mean any drawing, designs, specifications, results or output of investigations, including, without
limitation, any designs, models, drawings, prints, samples, transparencies, specifications, reports, documents, spreadsheets,
manuscripts, working notes, documentation, manuals, photographs, negatives, tapes, discs, software or any other similar items,
or any modifications thereto, which are prepared by a Party under this Agreement.
|
|
1.38
|
Other
Definitions
. Other defined terms in this Agreement are set forth in the following sections of this Agreement:
|
|
Term
|
|
Section
|
|
|
Term
|
|
Section
|
|
|
AAA Rules
|
|
|
18.15.2
|
|
|
Exclusive
License
|
|
|
6.1
|
|
|
Acceptance Date
|
|
|
4.4
|
|
|
Exclusive License
Term
|
|
|
6.1.3
|
|
|
Action
|
|
|
7.4.1
|
|
|
Extended Exclusive
License Term
|
|
|
6.1.2
|
|
|
Actual Units
|
|
|
6.1.2
|
|
|
Extension Fee
|
|
|
6.1.3
|
|
|
Actual Units Commissioned
|
|
|
6.1.4
|
|
|
Extension Threshold
|
|
|
6.1.2
|
|
|
Actual Units Credited
|
|
|
6.1.3
|
|
|
FPTD License
|
|
|
6.3
|
|
|
Agreement
|
|
|
Introductory
Paragraph
|
|
|
FSAT
|
|
|
4.1.2
|
|
|
Applied Carry Forwards
|
|
|
6.1.2
|
|
|
Fundamental Process
Security
|
|
|
3.2.2
|
|
|
Application Engineering
Resources
|
|
|
2.2.3
|
|
|
Indemnifiable Claim
|
|
|
12.1
|
|
|
Arbitration
|
|
|
18.15.2
|
|
|
Indemnified Party
|
|
|
12.1
|
|
|
Average SVM
|
|
|
6.1.4
|
|
|
Indemnifying Party
|
|
|
12.1
|
|
|
Carry Forwards
|
|
|
6.1.2
|
|
|
Initial Exclusive
License Term
|
|
|
6.1.1
|
|
|
Claim Notice
|
|
|
12.1
|
|
|
Installment Payment
|
|
|
5.1.3.2
|
|
|
Code
|
|
|
18.13
|
|
|
Leased KG2-3GEF
|
|
|
5.1.1.3
|
|
|
Completed Test
|
|
|
4.4
|
|
|
License
|
|
|
6.1
|
|
|
Confidential Information
|
|
|
15.1
|
|
|
Non-Exclusive License
|
|
|
6.1.3
|
|
|
Core Binding Conditions
|
|
|
3.3.1
|
|
|
Paid Units
|
|
|
6.1.3
|
|
|
Core Binding Date
|
|
|
3.3.2
|
|
|
Participating Party
|
|
|
7.4.2
|
|
|
Costs
|
|
|
3.1.1
|
|
|
Party
|
|
|
Introductory
Paragraph
|
|
|
Cure Period
|
|
|
3.2.1
|
|
|
Per Unit Amount
|
|
|
6.1.3
|
|
|
Customer Acceptance
|
|
|
6.1.1
|
|
|
Paid-In-Full Quarter
|
|
|
5.1.3.2
|
|
|
Damages
|
|
|
11.1
|
|
|
Performance Security
|
|
|
3.1.2
|
|
|
Deliverable Customer
|
|
|
4.2
|
|
|
Perpetuity Buyout
Option
|
|
|
6.10.1.2
|
|
|
Deliverable Owner
|
|
|
4.2
|
|
|
Perpetuity Buyout
Price
|
|
|
6.10.1.2
|
|
|
Development Resources
|
|
|
2.2.2
|
|
|
Plan B
|
|
|
3.1.1
|
|
|
Development Supplies
|
|
|
2.2.4
|
|
|
Prepaid License Fee
|
|
|
5.1.1.1
|
|
|
Development Supplies
Commitment
|
|
|
5.1.2.1.1
|
|
|
Purchase Price
|
|
|
6.10.1
|
|
|
Development Supplies
Overage
|
|
|
5.1.2.3.2
|
|
|
Quote
|
|
|
9.1
|
|
|
Development Supplies
Savings
|
|
|
5.1.2.2
|
|
|
Receiving Party
|
|
|
15.1
|
|
|
Disclosing Party
|
|
|
15.1
|
|
|
Recovery
|
|
|
7.4.1
|
|
|
Down Payment
|
|
|
5.1.3.1
|
|
|
Requisition Engineering
Commitment
|
|
|
5.1.2.1.3
|
|
|
D-R
|
|
|
Introductory
Paragraph
|
|
|
Requisition Engineering
Advance Payment
|
|
|
5.1.3.4
|
|
|
D-R Backstop Security
|
|
|
3.1.2
|
|
|
Requisition Engineering
Payment
|
|
|
5.1.3.5
|
|
|
D-R Indemnitees
|
|
|
3.1.1
|
|
|
Residual Binding
Condition
|
|
|
3.3.3
|
|
|
D-R Perpetual Manufacturing
License
|
|
|
9.5
|
|
|
Residual Binding
Date
|
|
|
3.3.4
|
|
|
D-R Purchase Order
|
|
|
9.1
|
|
|
Residual Binding
Notice
|
|
|
3.3.4
|
|
CONFIDENTIAL
TREATMENT REQUESTED
|
Term
|
|
Section
|
|
|
Term
|
|
Section
|
|
|
E-C
|
|
|
Introductory
Paragraph
|
|
|
Residual Binding Quarter
|
|
|
3.3.4
|
|
|
E-C Company Budget
|
|
|
3.3.1.3
|
|
|
Review Period
|
|
|
4.2
|
|
|
E-C Indemnitees
|
|
|
11.1
|
|
|
Savings Reimbursement Payment
|
|
|
5.1.3.6
|
|
|
E-C OCTS
|
|
|
2.2.10
|
|
|
Shipment Delay
|
|
|
6.1.1
|
|
|
E-C Perpetual Manufacturing License
|
|
|
9.6
|
|
|
Shotgun Purchase Offer
|
|
|
6.10.1
|
|
|
E-C Resource Commitment
|
|
|
5.1.2.1.2
|
|
|
Shotgun Purchase Offer Response
|
|
|
6.10.2
|
|
|
E-C Resource Overage
|
|
|
5.1.2.3.1
|
|
|
Shotgun Purchase Option
|
|
|
6.10.1
|
|
|
Effective Date
|
|
|
Introductory
Paragraph
|
|
|
SSAT
|
|
|
4.1.1
|
|
|
Election Notice
|
|
|
6.10.2
|
|
|
Tax
|
|
|
5.2.1
|
|
|
Enjoined Technology
|
|
|
11.3
|
|
|
Total Units Credited
|
|
|
6.1.3
|
|
|
Expanded License
|
|
|
6.2
|
|
|
Transfer
|
|
|
18.16
|
|
|
|
|
|
|
|
|
Unused Carry Forwards
|
|
|
6.1.2
|
|
|
2.
|
PARTIES’
OBLIGATIONS
.
Subject to the conditions set forth in
Section 3.4
and
Section 5.1
, each of the Parties
agrees as follows:
|
|
2.1
|
Initial
System Project Activities
. The Parties have entered into this Agreement to jointly and collaboratively develop and commercialize
the KG2-3GEF/GO as set forth in this Agreement.
|
|
|
2.1.1
|
The Parties shall
work together to develop the Initial System in accordance with the Initial System Project Plan.
|
|
|
2.1.2
|
Each
Party shall use commercially reasonable efforts to:
|
|
|
|
2.1.2.1
|
perform
its responsibilities in accordance with this Agreement and the Initial System Project Plan and perform all Initial System
Project Plan requirements, including by meeting all Initial System Project Plan timelines, Deliverables and Milestones;
|
|
|
|
2.1.2.2
|
cooperate
with and provide reasonable support to the other Party in connection with the other Party’s performance of its obligations
under this Agreement including the Initial System Project Plan.
|
|
|
|
2.1.2.3
|
develop
marketing collateral and support material (including a compelling economic value proposition) for the KG2-3GEF/GO;
|
|
|
|
2.1.2.4
|
establish a Joint
Oversight Team as listed in
Annex D;
and
|
|
|
|
2.1.2.5
|
through
the Joint Oversight Team, cooperate in development of the KG2-3GEF/GO product according to the Specifications and the definition
of roles and responsibilities and development schedule set forth in the Initial System Project Plan. Either or both of the
Specification and the Initial System Project Plan may be amended, by mutual agreement of the Parties, to account for and accommodate
alterations to the design of the KG2-3GEF/GO, and the Parties agree to cooperate in the implementation of such mutually acceptable
changes to the Initial System Project.
|
|
2.2
|
E-C Specific
Obligations
. E-C hereby agrees to do the following:
|
|
|
2.2.1
|
Develop
a Gradual Oxidizer for KG2-3GEF/GO.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
|
2.2.2
|
Provide
up to 15,000 labor hours of non-billable engineering, project management, and technical support (such support, collectively,
“
Development Resources
”) for the Initial System Project.
|
|
|
2.2.3
|
Contract
D-R for up to 3,000 hours of non-recurring, application engineering and project management resources to design D-R controls
to be specific to the KG2-3GEF/GO unit (“
Application Engineering Resources
”), at a fixed-fee cost
to E-C of $500,000.
|
|
|
2.2.4
|
Spend
up to $2,200,000 on parts, components, and materials required to prepare and conduct the SSAT and FSAT for the Initial System Project
(“
Development Supplies
”), *.
|
|
|
2.2.5
|
Maintain
during the Initial System Project, and provide to D-R by the 30th day of each quarter commencing with the calendar quarter
beginning January 1, 2015, until and through the Paid-In-Full Quarter, pursuant to
Section 5.1.3
, detailed (i) project
cost accounting, through the end of the prior quarter, of all Development Supplies purchased and Development Resources hours*worked,
if any, and (ii) updated outlook, by quarter, of the remaining estimated Development Supplies costs and Development Resources
hours required to achieve a Completed Test, pursuant to
Section 4.4
and the Initial System Project Plan.
|
|
|
2.2.6
|
Maintain
during the period commencing with the calendar quarter beginning January 1, 2015 through the later of (a) the twenty-fourth
month following the Core Binding Date and (b) the Warranty Funding Date, and provide to D-R by the 30th day of each quarter
therein, a reconciliation of E-C’s actual and forecasted (i) quarterly cash inflows and expenditures and (ii) balance
sheet account balances, pursuant to
Section 3.4.2
, with explanations as necessary to explain variances in actual or
forecasted values. In addition to the foregoing reports, on February 10, 2015, March 10, 2015 and April 10, 2015, provide
to D-R a reconciliation of E-C’s actual and forecasted (i) quarterly cash inflows and expenditures and (ii) balance
sheet account balances, with explanations as necessary to explain variances in actual or forecasted values, updated to reflect
results through the end of January 2015, February 2015 and March 2015, respectively. Participate in quarterly reviews of E-C
Company Budget, pursuant to
Section 3.3.1.3
, with D-R, as well as monthly reviews of the E-C Company Budget for the
first three months of 2015.
|
|
|
2.2.7
|
Work
with D-R to design the Initial System embodying the Gradual Oxidizer and the D-R Target Gas Turbine.
|
|
|
2.2.8
|
Develop,
with D-R support, the integrated controls for the KG2-3GEF/GO.
|
|
|
2.2.9
|
Develop
the spare parts list pertaining to the E-C scope of supply to allow D-R to offer service agreements for the KG2-3GEF/GO.
|
|
|
2.2.10
|
Provide
on-site commissioning and technical support for the startup of KG2-3GEF/GOs (“
E-C OCTS
”). For the
first seven KG2-3GEF/GOs, D-R will endeavor to structure commercial contracts with Customers such that Customers pay for E-C
OCTS; *.
|
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
|
|
2.2.11
|
Train
D-R field support personnel on startup and commissioning of the Gradual Oxidizer.
|
|
|
|
|
|
|
2.2.12
|
Work with D-R to develop and prioritize
sales opportunities for the KG2-3GEF/GO.
|
|
|
2.2.13
|
Supply
a Gradual Oxidizer designed for the KG2-3GEF/GO that complies with the Specifications.
|
|
|
2.2.14
|
Provide
prompt engineering and field warranty support for the E-C Products included in each KG2-3GEF/GO on the terms stipulated in
D-R’s contract with the Customer purchasing the KG2-3GEF/GO and in D-R’s corresponding purchase contract with
E-C.
|
|
|
2.2.15
|
Assume
all warranty responsibilities and liabilities associated with E-C Products per contract between D-R and the Customer and in
D-R’s corresponding purchase contract with E-C. Warranties shall be as set forth in D-R 100 Terms and Conditions and
D-R 195 Terms of Purchase, unless otherwise agreed by D-R and E-C on individual commercial transactions.
|
|
|
2.2.16
|
Develop
a standard price list and delivery time listings for the E-C Products for D-R to use in Customer proposals. This will be subject
to a quarterly or semi-annual review by the Parties and subject to mutual agreement.
|
|
2.3
|
D-R
Specific Obligations
. D-R agrees to market and sell the KG2-3GEF/GO in accordance with
Section 9
. In addition,
D-R agrees to do the following:
|
|
|
2.3.1
|
Provide
technical data, applications guidelines, and general arrangement drawings to E-C for the D-R Target Gas Turbine to support
E-C’s design of the Initial System.
|
|
|
2.3.2
|
Sell
to E-C at a fixed-fee of $500,000 up to 3,000 hours of Application Engineering Resources in the package and system design
of the Initial System.
|
|
|
2.3.3
|
Provide
E-C up to $1,600,000 in cash for the Prepaid License Fee, pursuant to
Section 5.1.1
, consisting of:
|
|
|
2.3.3.1
|
The Down Payment
of $400,000, pursuant to
Section 5.1.3.1
, and
|
|
|
2.3.3.2
|
*
additional Installment Payments totaling $1,200,000, pursuant to
Section 5.1.3.2
.
|
|
|
2.3.4
|
Develop
the controls strategy for the D-R developed D-R Target Gas Turbine control system.
|
|
|
2.3.5
|
With support from
E-C as expressly provided herein, commercialize the KG2-3GEF/GO.
|
|
|
2.3.6
|
With
support from E-C as expressly provided herein, develop and prioritize sales opportunities for the KG2-3GEF/GO.
|
|
|
2.3.7
|
Define
standard lead times for the D-R Target Gas Turbine to support high-priority commercial opportunities; provided, however, that
D-R shall not be obligated to purchase any E-C Products from E-C with respect to any particular KG2-3GEF/GO until D-R has
received a valid Customer purchase order for that KG2-3GEF/GO and has issued an official order acknowledgement with respect
thereto and the other conditions precedent contained in
Sections 3 and 9.1
have been met.
|
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
|
|
2.3.8
|
Assume
the sales lead role with respect to each Customer. D-R may, at its sole discretion, allow qualified E-C distributors to support
D-R’s commercial lead throughout the sales cycles for particular Customers. All such E-C distributors will be obligated
to maintain strict adherence to D-R business policies, including D-R’s Code of Business Conduct attached hereto as
Annex
E
.
|
|
|
2.3.9
|
Take
commercial lead in developing sales to Customers. Unless otherwise mutually agreed in writing by D-R and E-C, which agreement
shall not be unreasonably withheld, delayed or conditioned, all sales of KG2-3GEF/GOs shall be made by D-R to the Customer
pursuant to the D-R100 Terms and Conditions in the form attached hereto as
Annex C
.
|
|
3.
|
PERFORMANCE
GUARANTEES
|
|
3.1
|
Performance
Guarantees for Gradual Oxidizers to be included in KG2-3GEF/GOs
. With respect to the initial * KG2-3GEF/GOs:
|
|
|
3.1.1
|
E-C
agrees to, at its own expense, protect, defend, hold harmless and indemnify D-R, its successors and assigns and their respective
directors, officers, employees, agents, contractors, customers and Affiliates (collectively, the “
D-R Indemnitees
”)
from and against any and all claims, proceedings and lawsuits brought by third parties for any and all losses, damages, liabilities,
penalties, fines, forfeitures, attorneys’ fees, costs, and expenses of any kind and nature whatsoever, including (a)
any performance or delivery liquidated damages or other damages which are incurred by the Customer or the End User, (b) any
incremental costs incurred by D-R to develop and implement an alternative combustion system with appropriate emissions control
technology (“
Plan B
”) to replace the E-C Products, and (c) any power shortfall claims for the period
until either (i) the E-C Products can be corrected to comply with the Specifications or (ii) Plan B can be implemented to
replace the E-C Products (collectively, “
Costs
”) arising out of (x) E-C’s failure to timely
supply E-C Products or (y) E-C Products’ failure to meet the Specifications, which in either (x) or (y) results in a
material breach by D-R of its obligations to the Customer under the sales contract, except to the extent that any such costs
result from (p) the gross negligence or intentional misconduct of a D-R Indemnitee or Customer, or (q) a material breach by
D-R of its obligations hereunder or material breach by a Customer of its obligations thereunder. E-C’s aggregate indemnification
obligation under this
Section 3.1
shall not exceed, for each KG2-3GEF/GO, the greater of D-R’s aggregate limit
on its indemnification obligations specified in its contractual commitment with the Customer and any actual Costs directly
imposed on D-R by a Government Body. E-C’s time to cure defaults in E-C Products and E-C’s maximum liability pursuant
to this performance guarantee will be as set forth in the sales agreement between the Customer and D-R (which shall be subject
to E-C’s prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed).
|
|
|
3.1.2
|
*
The Parties agree not to unreasonably withhold, delay or condition their consent to the proposed terms of such a customer
commitment. The foregoing D-R Backstop Security requirement for:
|
CONFIDENTIAL
TREATMENT REQUESTED
|
|
3.1.2.1
|
Any
order associated with the initial * KG2-3GEF/GOs (i) shall cover the period from order acknowledgement through the end of
the warranty period and (ii) may be waived in whole or in part by D-R in its sole discretion.
|
|
|
3.1.2.2
|
The
Initial System Project shall be in an amount equal to the total order value of the D-R Purchase Order for E-C Products applicable
thereto.
|
|
3.2
|
Performance Guarantees
for Fundamental Process in the Initial System.
|
|
|
3.2.1
|
If
the Initial System fails to meet the Specifications in the timelines set forth in
Annex A
, D-R shall give E-C
up to the lesser of (i) an additional 60 days and (ii) the additional number of days, if any, allowed by D-R’s contractual
commitment to the Customer, to cure such non-performance (the “
Cure Period
”). If the Cure Period
has expired and the Initial System performance has not been conformed to Specifications, D-R shall be entitled to terminate
this Agreement and E-C shall promptly pay to D-R an amount in cash equal to D-R’s financial contribution to this Agreement
to date.
|
|
|
3.2.2
|
*
The Fundamental Process Security shall be for a period of 24 months and shall be promptly terminated upon Completed Test pursuant
to
Section 4.4
below.
|
|
|
3.3.1
|
All
of D-R’s actions, performance, covenants and obligations contained in this Agreement, including, without limitation,
those obligations set forth in
Section 2.3
and
Section 5.1
, will be conditioned on and subject to (the “
Core
Binding Conditions
”):
|
|
|
|
3.3.1.1
|
E-C obtaining the
Fundamental Process Security pursuant to
Section 3.2.2
;
|
|
|
|
3.3.1.2
|
E-C
providing D-R with evidence reasonably satisfactory to D-R that all (a) previously existing liens on the E-C Intellectual
Property have been released and (b) all Patents applicable to the Fundamental Process, Gradual Oxidizer, Target Gas Turbine
and/or KG2-3GEF/GO purported to be owned by E-C are in fact owned by E-C and recorded at the appropriate Patent Office(s);
|
|
|
|
3.3.1.3
|
E-C
providing D-R with (i) evidence reasonably satisfactory to D-R that it has sufficient funding as of the Effective Date to
fund its planned operations for a period of * and (ii) a budget consistent with discussions between the Parties and reasonably
satisfactory to D-R, for the period starting with the month of the Core Binding Date, pursuant to
Section 3.3.2
, through
the * outlining E-C’s planned (x) quarterly balance sheet account balances and (y) monthly inflows of cash and expenditures
of cash (such budget the “
E-C Company Budget
”); and
|
|
|
|
3.3.1.4
|
D-R
provides a written acknowledgement of an initial binding Customer purchase order for a KG2-3GEF/GO. For the avoidance of doubt,
D-R shall notbe obligated to enter into a contract with a Customer or End User for the Initial System unless E-C has previously
satisfied the conditions pursuant to
Sections 3.3.1.1, 3.3.1.2, and 3.3.1.3
.
|
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
|
|
3.3.2
|
Core
Binding Notice. Within two business days of all of the Core Binding Conditions set forth above having been implemented to
D-R’s reasonable satisfaction, D-R shall provide E-C with written confirmation that such conditions have been satisfied
and that D-R’s obligations of this Agreement, except for those contained in
Sections 2.3.3.2
and
Section 5.1.3.2
,
have become binding (the date of delivery of such notice the “
Core Binding Date
”).
|
|
|
3.3.3
|
Residual
Binding Condition for Prepaid License Fee
. Notwithstanding the foregoing, D-R’s actions, performance, covenants
and obligations in
Section 2.3.3.2
and
Section 5.1.3.2
of this Agreement will be further conditioned on and
subject to E-C obtaining the D-R Backstop Security within 45 days of the Core Binding Date, but no earlier than January 1,
2015 (the “
Residual Binding Condition
”).
|
|
|
3.3.4
|
Residual
Binding Notice
. Within two business days of the Residual Binding Condition having been implemented to D-R’s reasonable
satisfaction, D-R shall provide E-C with written confirmation that such condition has been satisfied and that all of D-R’s
obligations in
Section 2.3.3.2
and
Section 5.1.3.2
have become binding (such notice the “
Residual
Binding Notice
”, the date of delivery of such notice the “
Residual Binding Date
”,
and the calendar quarter of such date the “
Residual Binding Quarter
”).
|
|
3.4
|
E-C
Company Financial Viability through Initial System Project
. For avoidance of doubt, D-R has no intention of providing
funding in any form or at any time to E-C, whether it be for equity, debt, or any other type of advance, beyond the Prepaid
License Fee, pursuant to
Section 5.1
, and D-R Purchase Orders, pursuant to
Sections 9.1 through 9.4
.
|
|
|
3.4.1
|
Company
Funding
. Notwithstanding anything else in this Agreement, if * E-C fails to raise additional capital in such amounts as
are necessary, when included with cash on-hand on the Core Binding Date, to fund its planned operations for a period ending
on the later of (a) the twenty-fourth month following the Core Binding Date and (b) the Warranty Funding Date, in accordance
with the E-C Company Budget provided pursuant to Section 3.3.1.3 herein, and such failure is not cured within 45-days of occurrence,
D-R shall be entitled, by delivering written notice to E-C, to terminate this Agreement.
|
|
|
3.4.2
|
Company
Budget Discipline
. For the period starting with the month of the Core Binding Date through the later of (a) the twenty-fourth
month following the Core Binding Date and (b) the Warranty Funding Date, E-C shall adhere to the E-C Company Budget. E-C shall
provide to D-R, on a quarterly basis, a reconciliation of E-C’s actual (x) balance sheet account balances and (y) receipts
and expenditures, pursuant to
Section 3.3.1.3
, to those contained in the E-C Company Budget. Any material increase
in expenditures above and beyond those set forth in the E-C Company Budget shall be a violation of this Agreement, and D-R
shall be entitled, by delivering written notice to E-C, to terminate this Agreement, unless such expenditures have been consented
to in writing by D-R, or E-C has obtained additional funding sufficient to fund such additional expenditures.
|
|
3.5
|
Delays in Initial
System Project
.
|
|
|
3.5.1
|
The
Parties shall monitor the Initial System Project Plan and any changes thereto, and each Party agrees to notify the other Party
by written correspondence to the designated project leaders of each Party within five business days of that Party’s
knowledge of any factor, occurrence, or event coming to its attention that may affect its ability to meet the requirements
of the Initial System Project Plan or that is likely to cause any material delay in achieving any of the Milestones.
|
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
|
|
3.5.2
|
In
the event such delay results in the achievement of any of the Milestones to be delayed by more than 15 days, the delayed Party
agrees to immediately schedule a Project Plan review meeting during which the Parties shall address the problem(s) that have
caused such delays and the procedures to be followed by the delayed Party to resolve such problems.
|
|
|
3.5.3
|
In
the event that delays by either Party, or their respective Affiliates or contractors, (i) cause one or more Milestones to
be delayed by more than 30 days and (ii) constitute a material and incurable breach of D-R’s Customer contractual commitment,
such delay shall constitute a material breach of this Agreement.
|
|
3.6
|
Third-Party
Contractors
. In the event that either Party employs the services of third-party contractors for performance of any task(s)
assigned to that Party, that Party shall, before such third party or third-party personnel are provided any information regarding
the KG2-3GEF/GO or any components or portions thereof: (i) notify the other Party of the third party’s involvement;
and (ii) require that such third party and all third-party personnel involved in performance of the task(s) execute non-disclosure
agreements containing confidentiality obligations at least as restrictive as those contained herein and invention disclosure
and assignment agreements consistent with the obligations of the Parties hereunder.
|
|
4.
|
PROCEDURES
FOR ACCEPTANCE TESTING OF THE INITIAL SYSTEM
|
|
4.1
|
Acceptance
Testing. Immediately upon delivery of each Deliverable, or any upgrades or updates thereto:
|
|
|
4.1.1
|
E-C
shall perform sub-scale testing (the Sub-Scale Acceptance Test, or “
SSAT
”) and, if D-R accepts all
SSAT Deliverables pursuant to Sections 4.2 and 4.3, then
|
|
|
4.1.2
|
The
Parties shall commence joint full-scale testing (the Full-Scale Acceptance Test, or “
FSAT
”). After
such FSAT, the Parties shall make a joint protocol describing details of testing and determining whether the Initial System
has met Technical Acceptance Criteria set forth in Annex F and Specifications set forth in Annex B.
|
|
4.2
|
Test
Reviews
. Each Party shall have (i) 30 days following delivery of the SSAT Deliverables and (ii) 30 days following delivery
of the FSAT Deliverables to conduct reviews (each such 30-day period a “
Review Period
”) to determine
whether the Technical Acceptance Criteria and Specifications for the Initial System have been met. If the Party designated
as the customer of any Deliverable (the “
Deliverable-Customer
” as set forth in the table in Annex
A) does not, within 10 business days following the termination of the Review Period, provide written notice to the Party responsible
for developing or preparing the Deliverable (the “
Deliverable-Owner
”) of its rejection of such Deliverable
specifying the reason why the Deliverable was not accepted, such Deliverable shall be deemed to have been accepted by the
Deliverable-Customer for purposes of this Agreement.
|
|
4.3
|
Rejections
and Remedies
. If a Deliverable-Customer rejects an SSAT or FSAT Deliverable, the Deliverable-Owner shall have 10 business
days from the date of receipt of written notice of rejection, unless otherwise provided for in a Customer contractual commitment,
to commence a cure of all material non-conformances described in the written notice of rejection and to deliver to the Deliverable-Customer
a plan for the prompt delivery of a revised Deliverable. If rejection of, or failure to deliver, an SSAT or FSAT Deliverable
results in a breach of a Customer contractual commitment, the Deliverable-Customer may declare such Deliverable rejected and
terminate this Agreement. Upon receipt by the Deliverable-Customer of a revised Deliverable delivered in accordance with this
Section 4.3
, the provisions of
Section 4.2
and this
Section 4.3
shall again apply, the new Review Period
running from the date of delivery of the revised version of the Deliverable. If the revised Deliverable is again rejected
by the Deliverable-Customer or fails to meet Customer contractual commitments, such Party may declare the Deliverable rejected
and terminate this Agreement. For avoidance of doubt, for the Initial System Project, D-R shall have the right in its sole
discretion to make the decision to replace the E-C Products with Plan B.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
4.4
|
Completion
.
Once both Parties have accepted all FSAT Deliverables, the Initial System testing will be deemed completed (such outcome a
“
Completed Test
”, and the date of a Completed Test the “
Acceptance Date
”),
and E-C may elect to terminate the Fundamental Process Performance Security.
|
|
4.5
|
Acceptance
Testing Costs
. E-C shall cover and be responsible for all costs associated with SSATs and FSATs conducted pursuant to
Sections 4.1
,
4.2
and
4.3
, including any additional instrumentation required to verify that the Gradual
Oxidizer meets Technical Acceptance Criteria and Specifications, and costs related to the Leased KG2-3GEF pursuant to
Section
5.1
.
|
|
5.
|
LICENSE
AND INITIAL SYSTEM PROJECT COSTS; TAXES
|
|
5.1
|
License
and Initial System Project Costs
. The total financial contribution required for E-C to develop and achieve a Completed
Test of the Initial System is estimated to be $4.2 million. Of this amount, it is estimated that $ * will
be required to purchase Development Supplies and the remainder will be in the form of Development Resources to be provided
by E-C and Application Engineering Resources to be purchased from D-R by E-C. Amounts described in Sections
2.2
and
2.3
are a subpart of the obligations in this
Section 5
and not additive to the financial obligations described
below.
|
|
|
5.1.1
|
Contributions
by D-R
.
|
|
|
|
5.1.1.1
|
Prepaid
License Fee
. In accordance with the requirements of
Sections 5.1.3.1
and
5.1.3.2
, D-R shall pay up to $1.6
million in cash to E-C which, upon achievement of a Completed Test, will constitute a pre-payment for the Initial Exclusive
License Term (the “
Prepaid License Fee
”) under
Section 6.1.1
.
|
|
|
|
5.1.1.2
|
Application
Engineering Resources
. D-R shall provide up to 3,000 hours of Application Engineering Resources at a flat fee to E-C of
$500,000.
|
|
|
|
5.1.1.3
|
Product
Use Contribution by D-R
. D-R shall offer to lease to E-C one (1) D-R Target Gas Turbine (“
Leased KG2-3GEF
”),
on a preferential commercial basis, for which E-C will be responsible for all costs of use, including but not limited to:
modification and preparation; shipping to a site specified by E-C; packaging modification required to support E-C testing;
shipping to and installing at test site(s); conduct of testing; demobilization of packaging modifications; shipping back to
D-R Kongsberg; repair and refurbishment to its original condition; and any other out-of-pocket and labor-related expenses
the Parties might incur in support of executing the associated lease agreement. The Leased KG2-3GEF shall be utilized by E-C
in accordance with the Initial System Project Plan. The Parties shall negotiate a separate agreement for such Leased KG2-3GEF.
|
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
|
|
5.1.2
|
Contributions
by E-C
.
|
|
|
|
5.1.2.1
|
Financial
Contributions by E-C
. Subject to
Sections 3.3
and
5.1.2.3
, E-C’s total financial commitment for Development
Supplies, Development Resources and Application Engineering Resources applicable to the Initial System will amount to $4.2
million, comprised of:
|
|
|
|
|
5.1.2.1.1
|
$ * in
spend on Development Supplies (such amount the “
Development Supplies Commitment
”), paid for with
up to $ * ;
|
|
|
|
|
5.1.2.1.2
|
$ * in
the form of Development Resources, consisting of 15,000 hours at an average cost of $ * (such
15,000 hours the “
E-C Resource Commitment
”); and
|
|
|
|
|
5.1.2.1.3
|
$500,000
flat fee, in cash, to be paid to D-R for Application Engineering Resource hours (such amount the “
Requisition
Engineering Commitment
”) provided pursuant to
Section 5.1.1.2
.
|
|
|
|
5.1.2.2
|
Cost
Savings in the Initial System Project
. In the event the actual total cost of Development Supplies utilized to achieve
a Completed Test is less than the Development Supplies Commitment (such difference “
Development Supplies Savings
”),
then as appropriate either (i) the Prepaid License Fee shall be reduced by an amount equal to one-half of the Development
Supplies Savings or (ii) if D-R has previously paid the Prepaid License Fee in full, E-C shall pay to D-R a cash amount equal
to one-half of the Development Supplies Savings.
|
|
|
|
5.1.2.3
|
Cost
Overruns in the Initial System Project
.
|
|
|
|
|
5.1.2.3.1
|
E-C
shall be solely responsible for and shall pay for any (i) Development Supplies costs over and above the Development Supplies
Commitment (such cost overrun the “
Development Supplies Overage
”) and (ii) Development Resources
hours over and above E-C Resource Commitment (such hours overrun the “
E-C Resource Overage
”);
|
|
|
|
|
5.1.2.3.2
|
Notwithstanding
Section 5.1.2.3.1
, E-C shall not be responsible for any E-C Resource Overage or Development Supplies Overage that are
(i) solely attributable to D-R Products failing to perform according to Specifications or (ii) the result of delays in the
scheduled delivery of D-R Deliverables.
|
|
|
5.1.3
|
License
and Initial System Project Costs Funding Schedule
.
|
|
|
|
5.1.3.1
|
Within
five business days following the Core Binding Date, D-R shall pay to E-C $400,000, in cash, towards the Prepaid License Fee
(the “
Down Payment
”).
|
|
|
|
5.1.3.2
|
During
each of the * immediately following the Residual Binding Quarter, * shall pay to E-C $*, in cash, towards the Prepaid
License Payment (each such payment an “
Installment Payment
”, and the quarter of the final Installment
Payment the “
Paid-In-Full Quarter
”).
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|
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|
5.1.3.3
|
Notwithstanding
the foregoing, if D-R delays the Down Payment or any scheduled Installment Payment for more than ten business days past the
date it is payable under
Sections 5.1.3.1
or
5.1.3.2
respectively, E-C shall be entitled to terminate this Agreement
following notification to D-R and then a cure period of five additional business days following D-R’s receipt of such
notification, and D-R shall promptly pay to E-C an amount in cash equal to E-C’s financial contribution (both in cash
and labor) to this Agreement to the date of such default.
|
* Portions of
this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
|
|
|
5.1.3.4
|
Within
five business days following the Core Binding Date, E-C shall pay to DR $125,000, in cash, towards the Requisition Engineering
Commitment (the “
Requisition Engineering Advance Payment
”).
|
|
|
|
5.1.3.5
|
Within
the first five business days of the each of the three quarters immediately following the Residual Binding Quarter, E-C shall
pay to D-R $125,000, in cash, towards the Requisition Engineering Commitment (each such payment an “
Requisition
Engineering Payment
”).
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|
|
|
5.1.3.6
|
Within
30 days following the later of (i) an Acceptance Date, if any, and (ii) end of the Paid-In-Full Quarter, E-C shall pay to
D-R an amount in cash equal to one-half of the Development Supplies Savings, if any (such payment the “
Savings
Reimbursement Payment
”).
|
|
|
|
5.1.3.7
|
Notwithstanding
the foregoing, if E-C delays any scheduled Requisition Engineering Advance Payment, Requisition Engineering Payment, or Savings
Reimbursement Payment for more than ten business days past the date it is payable under
Sections 5.1.3.4
,
5.1.3.5
or
5.1.3.6
respectively, D-R shall be entitled to net such outstanding amounts against future (x) Installment Payments,
pursuant to
Section 5.1.3.2
, and (y) funding for any D-R Purchase Order, pursuant to
Section 9.2
, following
a cure period of five additional business days.
|
|
|
5.2.1
|
“
Tax
”
or “
Taxes
” shall mean all taxes, charges, duties, fees, levies or other assessments, including income,
excise, property, sales, consumption, use, value added, profits, license, withholding (with respect to compensation or otherwise),
payroll, employment, net worth, capital gains, transfer, stamp, social security, environmental, occupation and franchise taxes,
imposed by any Governmental Body, and including any interest, penalties and additions attributable thereto, and all amounts
payable pursuant to an agreement or arrangement with respect to taxes.
|
|
|
5.2.2
|
As
between the Parties, D-R shall be responsible for the collection, remittance and payment of any or all Taxes of any kind imposed
by any governmental authority in respect of the purchase, importation, sale, lease or other distribution of the KG2-3GEF/GO.
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|
|
5.2.3
|
As
between the Parties, D-R shall be responsible for obtaining any necessary import licenses or permits necessary for the entry
of the KG2-3GEF/GO into each country, or its delivery to D-R, and D-R shall be responsible for any and all customs duties,
clearance charges, taxes, brokers’ fees and other amounts payable in connection with the exportation, importation and
delivery of KG2-3GEF/GO to or by D-R.
|
|
|
5.2.4
|
The
Parties agree to cooperate and produce on a timely basis any Tax forms or reports reasonably requested by the other Party
in connection with any payment made under this Agreement. Each Party further agrees to provide reasonable cooperation to the
other Party, at the other Party’s expense, in connection with any official or unofficial Tax audit or contest relating
to payments made by the other Party under this Agreement.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
|
5.2.5
|
Any
payments made by a Party pursuant to this Agreement shall not be reduced on account of any Taxes unless required by applicable
law. E-C shall be responsible for paying any and all Taxes (other than withholding taxes required to be paid by D-R under
applicable law) levied on account of, or measured in whole or in part by reference to, any payments it receives hereunder.
D-R shall deduct or withhold from any such payments to E-C any Taxes that D-R is required to deduct or withhold under applicable
law. Notwithstanding the foregoing, if E-C is entitled under any applicable Tax treaty to a reduction in the rate of, or the
elimination of, applicable withholding Tax, it may deliver to D-R or the appropriate governmental authority (with the assistance
of D-R to the extent that such assistance is reasonably required and is requested in writing) the prescribed forms necessary
to reduce the applicable rate of withholding or to relieve D-R of its obligation to withhold Tax, and D-R shall apply the
reduced rate of withholding, or dispense with withholding, as the case may be, provided that D-R has received evidence, in
a form reasonably satisfactory to D-R, of E-C’s delivery of all applicable forms (and, if necessary, its receipt of
appropriate governmental authorization) at least 10 days prior to the time that the payments are due. If, in accordance with
the foregoing, D-R withholds any amount, it shall (i) timely remit to E-C the balance of such payment; (ii) timely remit the
full amount withheld to the proper governmental authority; and (iii) send to E-C written proof of remittance of the full amount
withheld within 30 days following remittance.
|
|
6.1
|
Grant
to D-R of License. Subject to the terms and conditions of this Agreement, including timely payment in full of the Prepaid
License Fee, E-C hereby grants D-R a worldwide right to market and commercialize the E-C Products to commercialize the Fundamental
Process and Fundamental Process Technology Developments for gas turbine generators in the range of 1 to 4 MW per unit (the
“
License
”). The License shall initially be an exclusive license (the “
Exclusive License
”)
and, for the avoidance of doubt, such exclusive license is exclusive of all others, including E-C, except in connection with
E-C’s performance of its obligations contemplated by this Agreement. The term and payment obligations applicable to
the Exclusive License are set forth below:
|
|
|
6.1.1
|
In
exchange for the payment of the Prepaid License Fee, the Exclusive License shall remain in effect for an initial term commencing
upon the Core Binding Date and ending on the date that is (i) four years after the Core Binding Date, with such date to be
extended by (ii) an additional number of days equal to the sum of (x) the number of days of delay, if any, in achieving the
Ship to Customer Site Milestone designated for Week 62 in the Initial System Project Plan set forth in Annex A (such number
of days the “
Shipment Delay
”), plus (y) the number of days of delay, if any, in achieving the Final
Completion milestone specified in D-R’s contractual commitment to the Customer for the Initial System at the time of
the Core Binding Date (such milestone “
Customer Acceptance
”) that exceeds the Shipment Delay, plus
(z) the number of days of delay, if any, during the period from Customer Acceptance to the expiration of the warranty period
specified in D-R’s contract with the Customer for the Initial System, that the Initial System is out of operation because
of a failure of the Gradual Oxidizer to perform according the specifications in D-R’s contract with the Customer (the
“
Initial Exclusive License Term
”).
|
CONFIDENTIAL
TREATMENT REQUESTED
|
|
6.1.2
|
After
the Initial Exclusive License Term, the Exclusive License shall automatically remain in effect for an additional 12-month
period (an “
Extended Exclusive License Term
”) if, during the Initial Exclusive License Term, D-R
has formally acknowledged the receipt of binding purchase orders for at * KG2-3GEF/GOs (with * KG2-3GEF/GOs being the “
Extension
Threshold
”). KG2-3GEF/GOs for which D-R has formally acknowledged to Customers the receipt of such purchase
orders are referred to herein as “
Actual Units
”. At the end of each Extended Exclusive License Term,
the Exclusive License shall automatically remain in effect for an additional 12-month period if, during the last 12 months
immediately prior to the end of the Extended Exclusive License Term just ended, Actual Units equaled or exceeded the Extension
Threshold. If during the Initial Exclusive License Term or during any Extended Exclusive License Term, D-R has exceeded the
applicable Threshold, then each additional unit above the applicable Threshold (the “
Carry Forwards
”)
will be treated as having being formally acknowledged during the next Exclusive License Term for purposes of calculating whether
the Threshold has been met for that subsequent Exclusive License Term or Perpetuity Window. These Carry Forwards shall continue
for each Extended Exclusive License Term and Perpetuity Window such that if Carry Forwards cause the Threshold to be exceeded
during any subsequent Exclusive License Term or Perpetuity Window (the “
Unused Carry Forwards
”),
such Unused Carry Forwards shall continue to be carried forward to subsequent Exclusive License Terms and Perpetuity Windows
until all Carry Forwards and Unused Carry Forwards have been utilized (collectively, “
Applied Carry Forwards
”).
|
|
|
6.1.3
|
If
the Initial Exclusive License Term or any Extended Exclusive License Term (each, an “
Exclusive License Term
”)
does not automatically extend because the Threshold has not been achieved, D-R will have the right, exercisable by delivery
of written notice to E-C prior to the date on which such Exclusive License Term would otherwise expire, to an additional Extended
Exclusive License Term if D-R pays E-C an amount equal to the Extension Fee. The “
Extension Fee
”
shall be equal to (i) the Extension Threshold less (ii) the sum of Actual Units for the last twelve months of the Exclusive
License Term then ending and Applied Carry Forwards (such sum “
Actual Units Credited
”), multiplied
by the Per Unit Amount (with (i) less (ii) being the number of “
Paid Units
”, and the sum of Paid
Units and Actual Units Credited being the “
Total Units Credited
”). The “
Per Unit Amount
”
shall be equal to *. The Extension Fee shall be payable within 30 days after the prior Extended Exclusive License Term has
ended. If D-R fails to provide such notice to E-C within the time specified the License shall, at the end of the Exclusive
License Term then ended, become a nonexclusive license (the
“
Non-Exclusive License
”)
. Notwithstanding
anything in this
Section 6.1.3
to the contrary, if prior to the fourth anniversary of the end of the Initial Exclusive
License Term, D-R accumulates an aggregate of * Total Units Credited, then the Exclusive License shall thereafter remain in
effect in perpetuity regardless of the number of KG2-3GEF/GOs sold thereafter and without any further payments by D-R under
this
Section 6.1.3
, with the exception of payments due by virtue of the exercise of the Shotgun Purchase Option set
forth in
Section 6.10
.
|
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
|
|
6.1.4
|
During
the term of this Agreement, E-C shall keep accurate records of the costs incurred, including standard overhead charges applied,
in delivering E-C Products for each KG2-3GEF/GO produced and sold under this Agreement, in such amounts as are reflected on
its financial statements. If it appears to either Party during any Exclusive License Term that the Extension Threshold will
not be met, such Party shall immediately notify the other Party. In such event the Parties shall, no later than 45 days prior
to the end of that Exclusive License Term, meet to exchange information regarding E-C Product costs incurred with respect
to each Actual Unit fully commissioned by D-R and accepted by the Customer (“
Actual Units Commissioned
”)
during the Exclusive License Term. The “
Average SVM
” for an Exclusive License Term or any Perpetuity
Window shall be equal to (x) the difference of the (i) sum of all Sales Prices less (ii) sums of E-C’s direct material
costs, direct labor costs, engineering/drafting costs, Variable Overhead expenses, warranty expenses, commission expenses
and freight/duties expenses corresponding to respective Actual Units Commissioned, divided by (y) the number of Actual Units
Commissioned, for all Actual Units Commissioned. If no Actual Units Commissioned occurred from which the Parties may derive
an Average SVM during the Exclusive License Term or Perpetuity Window, the default value for determining the Per Unit Amount
will be equal to *. If no Actual Units Commissioned occurred in the Exclusive License Term or Perpetuity Window immediately
preceding the current Extended Exclusive License Term or Perpetuity Window, but Actual Units Commissioned have occurred in
prior Exclusive License Terms or Perpetuity Windows, the Parties shall use Average SVM based upon most recent prior Exclusive
License Term or Perpetuity Window in which Actual Units Commissioned occurred, adjusted for changes in the Consumer Price
Index for all Urban Consumers, as publicized by the United States Department of Labor Bureau of Labor Statistics, between
the dates of such base line bookings and the most recent month for which the Consumer Price Index is available. Notwithstanding
the foregoing, the first D-R Purchase Order for non-recuperated oxidizers, not to exceed * in total, as well as the first
D-R Purchase Order for recuperated oxidizers, not to exceed * in total, shall be excluded from all calculations of Average
SVM.
|
|
6.2
|
Expanded
License Grant to D-R
. Subject to the terms and conditions of this Agreement, as long as the License remains Exclusive
under the terms of
Section 6.1
hereof, E-C hereby grants D-R a non-exclusive, worldwide right to commercialize the
Fundamental Process for projects larger than 4 MW that are comprised of the KG2-3GEF/GO in multiple power blocks with E-C
supplying the Gradual Oxidizer (the “
Expanded License
”) for which D-R shall not be obligated to
pay any additional license fees. Notwithstanding the foregoing, E-C shall immediately notify D-R in the event that E-C grants
to a third party an exclusive license to commercialize the Fundamental Process for gas turbine generators larger than 4 MW
per unit, which notice shall specify the effective date of such third party license. The Expanded License shall terminate
immediately upon the effective date of such third party license.
|
|
6.3
|
Fundamental
Process Technology Developments
. Subject to the terms and conditions of this Agreement, D-R hereby irrevocably assigns
to E-C all rights in and to any Fundamental Process Technology Developments developed during the Term of this Agreement and
E-C hereby grants to D-R a non-terminable, perpetual, exclusive, irrevocable and royalty-free license of such Fundamental
Process Technology Developments to make, have made, use and impart products, processes and/or services in connection with
or related to 1-4MW gas turbines (“
FPTD License
”). Notwithstanding the foregoing, should the Exclusive
License become a Non-Exclusive License pursuant to
Section 6.1.3
, the FPTD License would become non-exclusive. For
avoidance of doubt, the FPTD License pertains to gas turbines in the 1-4MW range only.
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|
6.4
|
Gas
Turbine Technology Developments
. Subject to the terms and conditions of this Agreement, E-C hereby irrevocably assigns
to D-R all rights in and to any Gas Turbine Technology Developments developed during the Term of this Agreement and D-R hereby
grants to E-C a non-terminable, perpetual, non-exclusive, irrevocable and royalty-free license of such Gas Turbine Technology
Developments to make, have made, use, and impart products, processes and/or services in connection with or related to 1-4MW
gas turbines.
|
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
|
6.5
|
Joint
Inventions
. The Parties agree that D-R and E-C shall jointly own any Joint Inventions developed during the Term of this
Agreement. Each Party shall have unrestricted rights to use such Joint Inventions during the Term of this Agreement and perpetually
thereafter, without accounting to the other Party.
|
|
6.6
|
Sublicense
Rights
. Other than as expressly provided herein, the licenses granted under
Sections 6.1
through
6.5
include
the right to grant sublicenses.
|
|
6.7
|
Background
Intellectual Property
. E-C shall have the right to use D-R Background Intellectual Property and D-R shall have the right
to use E-C Background Intellectual Property, in each case, only as is necessary to perform such Party’s obligations
and exercise such Party’s rights under this Agreement.
|
|
6.8
|
Negative
Pledge
. E-C shall not, during the Initial Exclusive License Term, without the prior written consent of D-R, which consent
shall not be unreasonably withheld, delayed or conditioned, allow the creation of any encumbrance, lien or pledge of the E-C
Intellectual Property.
|
|
6.9
|
Cooperation
.
Each Party shall take all reasonable actions necessary to evidence, protect, or convey the ownership rights set forth in this
Section 6, including but not limited to the acquisition of assignments of any and all Intellectual Property rights from any
contractors, subcontractors, employees or any other entity providing services to one or both Parties that results in the development
of Intellectual Property rights to be conveyed hereunder. All conveyances shall be free and clear of any claims, liens, security
interests or other encumbrances or interests by the transferring Party and any third parties claiming through such Party.
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|
6.10
|
E-C
Exclusivity License Shotgun Purchase Option
.
|
|
|
6.10.1
|
Shotgun
Purchase Option
. Following an Underperforming Perpetuity Window, E-C shall have the right, but not the obligation, to
offer to purchase the exclusivity provision of the License from D-R upon the terms and subject to the conditions set forth
in this Section 6.10 (such right, E-C’s “
Shotgun Purchase Option
”, and such offer, the “
Shotgun
Purchase Offer
”) at a purchase price of E-C’s choosing, provided that it is payable at closing in cash
(the “
Purchase Price
”). In such case, D-R shall have the option to:
|
|
|
|
6.10.1.1
|
Accept
the Shotgun Purchase Offer, in which case the License shall become a Non-Exclusive License, or
|
|
|
|
6.10.1.2
|
Reject
it and instead pay E-C an amount equal to (i) the Perpetuity Threshold less the sum of (x) Actual Units during the Underperforming
Perpetuity Window then ending and (y) Applied Carried Forwards carried forward into the Underperforming Perpetuity Window,
multiplied by (ii) the lower of (x) * and (y) the * (such amount the “
Perpetuity Buyout Price
”),
to eliminate E-C’s right to exercise E-C’s Shotgun Purchase Option at any time in the future (“
Perpetuity
Buyout Option
”).
|
|
|
6.10.2
|
Exercise
of Shotgun Purchase Option; Closing
. In order to exercise the Shotgun Purchase Option, E-C must give written notice (E-C’s
“
Election Notice
”) to D-R of such election, including the Purchase Price, within 90 days following
the Underperforming Perpetuity Window. In the event of the exercise of the Shotgun Purchase Option, D-R shall have 90 days
following receipt of the Election Notice by D-R to notify E-C of its decision of whether to accept or reject the Shotgun Purchase
Offer pursuant to
Section 6.10.1
(D-R’s “
Shotgun Purchase Offer Response
”). Failure
by D-R to notify E-C of its election during such 90 day period shall be conclusively deemed to constitute acceptance of the
Shotgun Purchase Option. The closing of the Shotgun Purchase Option or the Perpetuity Buyout Option, as appropriate, shall
occur within 60 days following receipt by E-C of D-R’s Shotgun Purchase Option Response. At such closing, if D-R accepts
the Shotgun Purchase Offer, E-C shall pay to D-R, in cash or immediately available funds, an amount equal to the Purchase
Price, and if D-R rejects the Shotgun Purchase Offer, D-R shall pay to E-C, in cash or immediately available funds, an amount
equal to the Perpetuity Buyout Price. The Parties shall enter into an amendment to this Agreement or such other agreement
as reasonably agreed to by the Parties to reflect D-R’s Shotgun Purchase Option Response, including (i) conversion of
the License into a Non-Exclusive License or (ii) elimination of E-C’s Shotgun Purchase Option right.
|
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
|
7.
|
OWNERSHIP
AND PROTECTION OF INTELLECTUAL PROPERTY
|
|
7.1
|
Ownership
.
For the avoidance of doubt, all Intellectual Property rights that are owned by a Party as of the Effective Date shall remain
the sole property of that Party, subject to the licenses expressly set forth in this Agreement, and no other rights are granted
hereunder by implication, by estoppel, or otherwise.
|
|
7.2
|
Protection
of Joint Inventions
. The Parties will adopt and include in the Initial System Project Plan measures and procedures to
safeguard the value of the Joint Inventions. The Parties may issue instructions to guide the handling of the Joint Inventions
constituting trade secrets. In any event, each Party will be obligated to treat the Joint Inventions in accordance with the
same degree of care such Party uses to protect its own trade secrets, but in no event less than a reasonable degree of care.
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|
7.3
|
Prosecution
and Maintenance
. Each Party shall have the sole right to file, prosecute, maintain, register, or otherwise secure protection
for all Intellectual Property solely owned by such Party, in its discretion and at its sole cost and expense using agents,
attorneys and others selected by such Party.
|
|
|
7.4.1
|
Except
as otherwise provided herein, each Party shall have the sole right to enforce or otherwise prevent violations of all Intellectual
Property solely owned by such Party, in its discretion and at its sole cost and expense using agents, attorneys and others
selected by such Party. If either Party believes that any E-C Patent included in the Fundamental Process is being infringed
or is being misused by a third party, such Party will promptly notify the other Party of such infringement or misuse. If,
within sixty (60) days from the date such notice is received, the Parties agree that action is warranted, the Parties will
cooperate in the filing and maintenance of a claim, demand, investigation, suit or other proceeding (an “
Action
”),
as appropriate, regarding such infringement or misuse. Each of the Parties will bear its own internal costs and expenses in
connection with the filing and prosecution of such Action, and out-of-pocket fees and expenses will be borne equally by the
Parties. With respect to any monetary damages, profits, awards and royalties (“
Recovery
”) obtained
by the Parties in connection with such Action, such Recovery will be allocated to the Parties as follows: firstly, out-of-pocket
fees and expenses will be reimbursed to each Party, and then secondly, E-C will receive the remainder of the Recovery.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
|
7.4.2
|
If
either Party declines to participate in, or the Parties are unable to agree on, the filing of an Action within the sixty (60)
day period set forth in
Section 7.4.1
, then the other Party (the “
Participating Party
”) may
proceed in its sole discretion and at its sole expense to file and prosecute such Action for infringement or misuse in its
own name or, if required by law, jointly with the other Party and in such event the Participating Party is hereby authorized
to take action in the name of the other Party as well; provided however, that if the Participating Party takes action in the
name of the other Party, the Participating Party will indemnify and hold the other Party harmless from and against any and
all monetary damages, fines, fees, penalties, obligations, deficiencies, losses and out-of-pocket expenses that the other
Party incurs or is subject to directly as a result of such Action. The Participating Party will receive for its sole benefit
any damages, profits, awards and royalties recoverable for such infringement or misuse as the result of such Action.
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|
|
7.4.3
|
If
both Parties initially agree to jointly bring any Action, either Party may elect at any time to settle or withdraw for any
reason from the proceedings related to such Action; provided, however, the settling Party will not as part of any settlement
grant a license in the E-C Patent that renders the Action moot without the consent of the other Party. Going forward, the
continuing Party will bear all of the fees and expenses incurred for such Action and may proceed in its sole discretion to
prosecute, settle (including, but not limited to, licenses granted in connection therewith) or discontinue prosecution of
such Action. Any damages, profits, awards and royalties recovered or to be recovered for such Action will be apportioned between
the Parties in direct proportion to the ratio of each Party’s out-of-pocket fees and expenses compared to the total
out-of-pocket fees and expenses of both Parties and taking into account any benefits recovered by the non-continuing Party
as the result of any settlement.
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|
8.1
|
Marketing
Program
. Except as otherwise expressly provided herein, D-R shall be solely responsible for marketing, commercialization,
launch, sales, installation and aftermarket parts for KG2-3GEF/GOs, and D-R will use commercially reasonable efforts to do
so throughout the Term. E-C may, in its discretion, also actively market and generate sales leads for the KG2-3GEF/GOs. Each
Party shall be solely responsible for compensating its own sales representatives and distributors for their sales efforts
in accordance with their own internal policies and out of their own funds. To the extent that D-R publicly discloses any information
about any KG2-3GEF/GO provided to any Customer of D-R, such as through a press release, Internet web site, technical briefing/paper,
marketing literature or brochures, or other channel, E-C may publicly disclose its participation in connection with such KG2-3GEF/GOs,
including the fact that the KG2-3GEF/GO includes a Gradual Oxidizer manufactured by E-C.
|
|
8.2
|
Customer
Referrals
. Each Party shall bring to the other Party any sales leads it becomes aware of for the KG2-3GEF/GO. In the event
that a Party encounters an opportunity to refer a potential customer to the other Party (regardless of whether such opportunity
involves a KG2-3GEF/GO), such recommendation shall be given. Neither Party will be obligated to actively pursue and develop
business for the other Party.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
8.3
|
Publicity
.
Neither Party will release any promotional materials concerning this Agreement or the collaboration between the Parties unless
and until the other Party has provided written approval of such materials. E-C may affix its logo to any KG2-3GEF/GO, or D-R’s
name or logo on any communication related to D-R, subject to prior approval of D-R, which shall not be unreasonably withheld,
conditioned or delayed. It is understood that both D-R and E-C retain all rights in their individual trademarks or logos.
The use of any joint letterhead or other material with joint logos affixed to any Work Product will not affect the Intellectual
Property ownership as described in this Agreement. This Agreement does not create any license in either Party to use the trademarks,
service marks, or trade names of the other Party. In the event either Party desires to use such marks in connection with this
Agreement, the Parties shall negotiate a separate agreement.
|
|
9.
|
PROVISION
OF GRADUAL OXIDIZERS
|
|
9.1
|
Supply
Arrangement
. In the event D-R accepts SSAT Deliverables pursuant to
Sections 4.2 and 4.3
of this Agreement, then
D-R will purchase from E-C, and E-C will sell to D-R, E-C Products for inclusion in KG2-3GEF/GO. Unless otherwise agreed in
writing between D-R and E-C, D-R 195 Terms of Purchase shall be used as the guide for preferred terms and conditions on all
purchase orders between D-R and E-C for the supply of E-C Products. D-R shall issue a request for quote (“
Quote
”)
to E-C for each KG2-3GEF/GO opportunity that D-R intends to quote to the customer. Based on the Quote received, D-R may issue
purchase orders (“
D-R Purchase Orders
”) detailing the quantity and delivery specifications for E-C
Products with a lead-time to be negotiated between the Parties or set forth in a contractual commitment with a Customer, but
otherwise complying the D-R Purchase Order for which E-C has issued an official order acknowledgement. Unless otherwise provided
herein, within five (5) business days of receipt of a D-R Purchase Order, E-C will issue a written acknowledgment (electronically
or by facsimile) to D-R; provided, however, that if E-C has good-faith questions concerning the details of the D-R Purchase
Order, the acknowledgment will be sent within three (3) business days after such questions have been resolved. If E-C does
not notify D-R with questions regarding the D-R Purchase Order or does not acknowledge the D-R Purchase Order, E-C will be
considered to have accepted the D-R Purchase Order.
|
|
9.2
|
Funding
Schedule for Initial Order of E-C Products
. The E-C Products to be included in the Initial System shall be funded according
to the schedule that will be contained in the D-R Purchase Order issued to and accepted by E-C. If D-R delays any scheduled
payment under the Funding Schedule for Initial Order of E-C Products for more than ten business days, E-C shall be entitled
to terminate this Agreement following a cure period of five additional business days, and D-R shall promptly pay to E-C an
amount in cash equal to E-C’s financial contribution to date (both in cash and labor) to this Agreement.
|
|
9.3
|
Adjustments
to Supplier Arrangement
. It is the intent of the Parties to negotiate in good faith a worldwide right for D-R to manufacture
E-C Hardware for KG2-3GEF/GO. The Parties intend to negotiate in good faith in order to enter into a Manufacturing License
Agreement within 6 months of the Effective Date that (a) would permit D-R to manufacture E-C Hardware for KG2-3GEF/GOs and
(b) provide D-R with copies of and use of all E-C Background Intellectual Property, Fundamental Process Technology Developments
and Joint Inventions to the extent necessary to perform such manufacturing. The Parties acknowledge that any E-C Hardware
manufactured and sold pursuant to the Manufacturing License Agreement would be treated as if it were purchased by D-R from
E-C hereunder for purposes of determining whether any Threshold has been met.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
9.4
|
D-R
Proposals
. All D-R proposals to purchase E-C Products shall be subject to change at any time prior to D-R’s acceptance
of a Customer purchase order that includes such E-C Products and shall expire at the end of the validity period stipulated
in such proposal. If no such period is stipulated in a proposal, then the proposal shall expire sixty (60) days from the date
of issuance.
|
|
9.5
|
Discontinuation
of Gradual Oxidizer
. Until the Parties can execute a Manufacturing License Agreement, in the event that E-C, directly
or through one or more contract manufacturers, licensees or successors in interest, ceases to develop, manufacture or supply
the Gradual Oxidizer technology, D-R shall have the right to acquire, subject to the Parties reaching mutually agreeable terms,
a perpetual non-exclusive license (the “
D-R Perpetual Manufacturing License
”) to (a) manufacture
E-C Hardware and (b) to acquire copies of and use all E-C Background Intellectual Property, Process Technology Developments
and Joint Inventions to the extent necessary to perform such manufacturing. If the Exclusive License has previously become
a perpetual license pursuant to
Section 6.1.3
, D-R shall not be required to make any additional payments for the D-R
Perpetual Manufacturing License. If the Exclusive License has not previously become perpetual, D-R may acquire the D-R Perpetual
Manufacturing License by making a payment to E-C in cash equal to (a) the difference between the number of Total Units Credited
and *, multiplied by (b) the Per Unit Amount.
|
|
9.6
|
Discontinuation
of D-R Target Gas Turbine
. In the event that D-R, directly or through one or more contract manufacturers, licensees or
successors in interest ceases to develop, manufacture or supply D-R Target Gas Turbines, at D-R’s option (1) E-C shall
have the right to acquire, subject to the Parties reaching mutually agreeable terms, a non-exclusive perpetual license (the
“
E-C Perpetual Manufacturing License
”) to (a) manufacture D-R Hardware and (b) to acquire copies
of and use all D-R Background Intellectual Property, Gas Turbine Technology Developments and Joint Inventions to the extent
necessary to perform such manufacturing or (2) D-R will manufacture a similarly suited gas turbine or turbines for the 1-4MW
range that, subject to the Parties reaching mutually agreeable terms (including terms addressing appropriate cost sharing),
will be integrated with E-C’s gradual oxidizer in substitution for the D-R Target Gas Turbine. EC shall not be required
to make any additional payments for the E-C Perpetual Manufacturing License.
|
|
10.1
|
Term
.
This Agreement shall commence on the Effective Date and shall continue until the end of the Initial Exclusive License Term,
the last Extended Exclusive License Term or perpetually if the Exclusive License has become a perpetual license, unless this
Agreement is earlier terminated in accordance with the provisions hereof.
|
|
10.2
|
Termination
for Default
. Except in circumstances specifically described in
Sections 10.3
and
10.4
, which shall control
in those events, if either Party defaults in the performance of any of its material obligations under this Agreement and does
not substantially cure such default, or commence a cure, within 30 days after being given written notice specifying the default,
the non-defaulting Party may, by giving written notice to the defaulting Party, terminate this Agreement as of a date specified
in such notice of termination, such date to be no earlier than the date of written notice of the default.
|
|
10.3
|
Termination
by D-R
. D-R will have the right to immediately terminate this Agreement upon delivery of written termination notice to
E-C in the event that:
|
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
|
|
10.3.1
|
If
the Cure Period has expired and the Gradual Oxidizer failure has not been remediated in accordance with the provisions of
Section 3.2
;
|
|
|
10.3.2
|
In
accordance with the provisions in
Section 3.4
;
|
|
|
|
|
|
|
10.3.3
|
In accordance
with the provisions of
Section 4.3
;
|
|
|
|
|
|
|
10.3.4
|
In accordance
with the provisions of
Section 18.1
;
|
|
|
|
|
|
|
10.3.5
|
In accordance
with the provisions of
Section 18.17
; or
|
|
|
10.3.6
|
E-C,
directly or through one or more contract manufacturers, licensees or successors in interest ceases development and manufacturing
of Gradual Oxidizers for use in the KG2-3GEF/GOs.
|
|
10.4
|
Termination
by E-C
. E-C will have the right to immediately terminate this Agreement upon delivery of written termination notice to
D-R in the event that
|
|
|
10.4.1
|
In
accordance with the provisions of
Section 4.3
;
|
|
|
|
|
|
|
10.4.2
|
In accordance
with provisions of
Section 5.1.3
;
|
|
|
|
|
|
|
10.4.3
|
In accordance
with provisions of
Section 9.2
;
|
|
|
|
|
|
|
10.4.4
|
In accordance
with the provisions of
Section 18.1
;
|
|
|
|
|
|
|
10.4.5
|
In accordance
with the provisions of
Section 18.17
; or
|
|
|
|
|
|
|
10.4.6
|
D-R, directly
or through one or more contract manufacturers, licensees or successors in interest, ceases development and manufacturing of
D-R Target Gas Turbines for use in the KG2-3GEF/GOs.
|
|
10.5
|
Effect
of Termination; Survival
. Following termination of this Agreement, E-C will fulfill and DR will make payments in accordance
with all D-R Purchase Orders that were accepted prior to the non-terminating Party’s receipt of written notice of termination.
If this Agreement is terminated by D-R prior to the Completed Test, D-R shall be entitled to promptly redeem the D-R Backstop
Security in full plus (i) the sum of Installment Payments previously paid plus (ii) any out-of-pocket expenses incurred by
D-R in support of the development of KG2-3GEF/GO through the termination date. If E-C does not promptly pay the amounts set
forth in (i) and (ii) above, D-R shall be entitled to promptly redeem the Fundamental Process Security in order to recoup
such amounts. If this Agreement is terminated by D-R after the Completed Test, D-R shall be entitled to promptly redeem the
D-R Backstop Security in full but shall have no claim against the Fundamental Process Security. Notwithstanding the termination
of this Agreement, those provisions that, by their nature, are intended to survive termination shall so survive termination,
including without limitation,
Sections 1, 3.6, 6, 7, 11, 12, 13, 14, 15 and 18
.
|
|
10.6
|
The
various licenses granted by the Parties under this Agreement shall terminate upon termination of this Agreement or survive
such a termination in accordance with the parameters set forth on
Annex G
.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
11.1
|
Indemnification
by D-R
. D-R agrees to, at its own expense, protect, defend, hold harmless and indemnify E-C, its successors and assigns
and their respective directors, officers, employees, agents, contractors, customers and Affiliates (collectively, the “
E-C
Indemnitees
”) from and against any and all claims, proceedings and lawsuits brought by third parties for any
and all losses, damages, liabilities, penalties, fines, forfeitures, attorneys’ fees, costs, and expenses of any kind
and nature whatsoever (“
Damages
”), alleging that any of D-R’s Intellectual Property incorporated
into D-R Products infringes upon or misappropriates any Intellectual Property of others; provided that (i) E-C promptly notifies
D-R in writing of any such claim and (ii) D-R is given the opportunity to settle or defend such claim or make changes to the
accused D-R Products for the purpose of avoiding infringement.
|
|
11.2
|
Indemnification
by E-C
. E-C agrees to, at its own expense, protect, defend, hold harmless and indemnify D-R Indemnitees from and against
any and all claims, proceedings and lawsuits brought by third parties for Damages alleging that any of E-C’s Intellectual
Property incorporated into E-C Products infringes upon or misappropriates any Intellectual Property of others; provided that
(i) D-R promptly notifies E-C in writing of any such claim and (ii) E-C is given the opportunity to settle or defend such
claim or make changes to the accused E-C Products for the purpose of avoiding infringement. Notwithstanding the foregoing,
E-C shall have no obligation with respect to allegations arising out of any modification of any E-C Products by D-R that is
not authorized by E-C or this Agreement.
|
|
11.3
|
Remedies
.
If an injunction, decree or judgment is entered providing that either Party may not use any of the E-C Products or D-R Products
or any component or portion of a completed version of the KG2-3GEF/GO (collectively, “
Enjoined Technology
”)
in the manner contemplated by this Agreement without violating the Intellectual Property rights of a third party, the Party
responsible for the development of the Enjoined Technology shall, at its sole option and expense, either (i) procure for the
other Party the right to use the Enjoined Technology as furnished hereunder, or (ii) replace or modify the Enjoined Technology
to make the same non-infringing. If the Party elects to replace or modify the Enjoined Technology, such replacement shall
undergo timely Acceptance Testing and review as set forth in
Section 4
of this Agreement.
|
|
11.4
|
Indemnification
Exclusive
. The foregoing indemnification provisions are the sole and exclusive remedy for any third-party claim of Intellectual
Property infringement, misappropriation or violation.
|
|
11.5
|
Indemnification
for Acts or Omissions
. Each Party agrees to, at its own expense, protect, defend, hold harmless and indemnify the other
Party, its successors and assigns, and its respective directors, officers, employees, agents, contractors, customers and Affiliates,
from and against any and all claims, proceedings and lawsuits brought by third parties for Damages against the Party for injury
to persons (including libel, slander or death) or loss or damage to tangible or intangible property to the extent it results
from any grossly negligent, willful or fraudulent act or omission of the Party under this Agreement.
|
|
11.6
|
Conduct
of Personnel
. Each Party covenants that it has used and will use reasonable efforts to obligate those employees, agents
or contractors of such Party involved in activities pursuant to this Agreement, to assign Inventions to the respective Party,
consistent with the obligations of such Party hereunder with respect to Inventions. Personnel of a Party visiting the premises
of the other Party shall observe and act in accordance with any and all work, security, health and safety standards as may
be formulated by the host Party in accordance with and subject to statutory or other governmental administrative requirements.
Each Party shall be responsible for its employees and contractors when they are visiting the premises of the other Party.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
12.1
|
Notice
of Third Party Claims. If a Party (“
Indemnified Party
”) receives notice of the assertion by any
third party of any claim or of the commencement by any such third party of any action under
Sections 3.1, 7.4.2, 11 or
18.17.1
, any such action being referred to herein as an (“
Indemnifiable Claim
”), then such Party
shall promptly notify the indemnifying party (“
Indemnifying Party
”) in writing (the “
Claim
Notice
”) of the Indemnifiable Claim; provided, that the Indemnifying Party is not obligated to indemnify and
defend the Indemnified Party with respect to an Indemnifiable Claim (or portions of an Indemnifiable Claim) if the Indemnified
Party fails to promptly send the Claim Notice to the Indemnifying Party and fails to provide reasonable cooperation and information
to defend or settle the Indemnifiable Claim, if, and only to the extent that, the failure to provide such Claim Notice materially
prejudices the Indemnifying Party’s ability to satisfactorily defend or settle the Indemnifiable Claim.
|
|
12.2
|
Right
to Defend
. The Indemnifying Party will retain the right, at its option, to defend or settle, at its own expense and with
its own counsel, the Indemnifiable Claim. The Indemnified Party will have the right, at its option, to participate in the
defense or settlement of the Indemnifiable Claim, with its own counsel and at its own expense, but the Indemnifying Party
will have the right to control the defense or settlement. The Indemnifying Party will not enter into any settlement that imposes
any liability or obligation on the Indemnified Party without the Indemnified Party’s prior written consent. The Parties
will cooperate in the defense or settlement of the Indemnifiable Claim and give each other full access to all necessary information.
|
|
12.3
|
Other
Rights of Indemnified Party
. If the Indemnifying Party (i) fails to notify the Indemnified Party of the Indemnifying Party’s
intent to take any action within thirty (30) days after receipt of the Claim Notice from the Indemnified Party or (ii) fails
to proceed in good faith with the prompt resolution of the Indemnifiable Claim, the Indemnified Party, with prior written
notice to the Indemnifying Party and without waiving any rights to indemnification, may defend or settle the Indemnifiable
Claim without the prior written consent of the Indemnifying Party. The Indemnifying Party will reimburse the Indemnified Party
on demand for all Damages incurred by the Indemnified Party in defending or settling the Indemnifiable Claim.
|
|
13.
|
LIMITATION
OF LIABILITY
|
|
|
EXCEPT
AS EXPRESSLY SET FORTH HEREIN, NEITHER PARTY NOR ITS AFFILIATES SHALL BE LIABLE TO THE OTHER PARTY FOR ANY CONSEQUENTIAL,
INDIRECT, EXEMPLARY, SPECIAL, PUNITIVE OR INCIDENTAL DAMAGES OR LOST PROFITS, WHETHER FORESEEABLE OR UNFORESEEABLE, EVEN IF
SUCH PARTY HAS PREVIOUSLY BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING OUT OF BREACH OR FAILURE OF EXPRESS OR
IMPLIED WARRANTY, BREACH OF CONTRACT, MISREPRESENTATION, NEGLIGENCE, STRICT LIABILITY IN TORT OR OTHERWISE FROM DAMAGES ARISING
UNDER THIS AGREEMENT.
|
|
|
|
|
|
THE
REMEDIES OF EACH PARTY SET FORTH HEREIN ARE EXCLUSIVE AS STATED AND, IN ANY EVENT, EXCEPT AS SET FORTH IN
SECTIONS 3.1,
3.2, 3.4 AND 11
, THE TOTAL AGGREGATE LIABILITY OF EITHER PARTY WITH RESPECT TO ANY CLAIMS UNDER THIS AGREEMENT OR REGARDING
THE EQUIPMENT, SERVICES, WORK, SPARE OR REPLACEMENT PARTS AND SERVICES INCIDENTAL THERETO AS FURNISHED HEREUNDER, WHETHER
BASED IN CONTRACT, INDEMNITY, TORT, STRICT LIABILITY, OR OTHERWISE, SHALL NOT EXCEED THE TOTAL CONTRACT PRICE PAID FOR THE
EQUIPMENT, SERVICES, WORK, SPARE OR REPLACEMENT PARTS AND SERVICES UPON WHICH ANY SUCH CLAIM IS BASED. THE OBLIGATIONS OF
THE PARTIES UNDER
SECTIONS 3.1, 3.2, 3.4 AND 11
SHALL NOT BE LIMITED BY THE IMMEDIATELY FOREGOING SENTENCE OR BY SPECIFIC
EXCEPTIONS TO THE CONTRARY INCLUDED IN BINDING AGREEMENTS WITH CUSTOMERS.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
14.
|
WARRANTIES
ON PRODUCTS SOLD; TERMS OF CONTRACTS
|
|
14.1
|
E-C
Warranties
. D-R shall be prime on Customer contracts as far as the overall warranty and other commercial conditions to
the Customer are concerned and be the sole project and service provider and interface with the Customer. E-C shall be responsible
for warranty, service, and after-sales technical assistance for all portions of the KG2-3GEF/GOs that comprise E-C Products.
E-C shall have the right to provide its formal pricing and commercial conditions on a project by project basis, and these
prices and conditions, if acceptable to both D-R and the Customer, will form part of D-R’s overall proposal and contract
with D-R’s Customers.
|
|
14.2
|
D-R
Warranties
. D-R shall be responsible for warranty, service, and after-sales technical assistance for all portions of KG2-3GEF/GOs
that comprise D-R Products.
|
|
14.3
|
Terms
.
The work performed by D-R and E-C under this Agreement shall be governed by D-R100 Terms and Conditions for Sale with regard
to D-R sales made to Customers and D-R195 Terms and Conditions for Purchase with regard to D-R’s purchases from E-C,
both of which forms are attached hereto as
Annex C
.
|
|
15.
|
CONFIDENTIAL
INFORMATION
|
|
15.1
|
Confidential
Information
. Neither D-R nor E-C has any intention pursuant to this Agreement of developing Intellectual Property that
falls within each other’s proprietary space, and each agrees to limit disclosures of Confidential Information strictly
to that which is necessary to achieve the purpose of this Agreement. Subject to
Section 15.2
, “
Confidential
Information
” means confidential business information, including research and development, formulae, compositions,
processes, techniques, methodologies, technical information, designs, industrial models, manufacturing, engineering and technical
drawings, specifications, research records, records of inventions, test information, customer and supplier lists, customer
data, pricing and cost information, and business and marketing plans and proposals, all proprietary, non-public information
that has commercial value or other utility in a Party’s business, or the unauthorized disclosure of which could be detrimental
to the Party’s interests, including the terms and conditions of this Agreement (but not its mere existence) and any
other information exchanged between the Parties pursuant hereto, if any, provided by one Party (a “
Disclosing
Party
”) to the other Party (a “
Receiving Party
”) in any form, and all copies thereof
made, in whole or in part, by the Receiving Party in any form. Each Party shall be deemed a Receiving Party to the terms and
conditions of this Agreement. Notwithstanding the foregoing, (a) to the extent to which any Fundamental Process Technology
Developments are first disclosed by a representative of D-R or its Affiliate to a representative of E-C or its Affiliate,
such things are the Confidential Information of E-C and (b) to the extent to which any Gas Turbine Technology Developments
are first disclosed by a representative of E-C or its Affiliate to a representative of D-R or its Affiliate, such things are
the Confidential Information of D-R and clauses (i) and (ii) of
Section 15.2
shall not apply to Fundamental Process
Technology Developments and Gas Turbine Technology Developments.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
15.2
|
Not
Confidential Information
. Confidential Information shall not include, and the duties and obligations of this
Section
15
shall not apply to, information for which the receiving Party can demonstrate through documentary evidence: (i) was
known to the Receiving Party at the time of disclosure in its fully consolidated form as disclosed under this Agreement and
without any obligation of confidentiality; (ii) can be shown by corroborated records to have been independently developed
by the Receiving Party without breach of this Agreement or reference to or use of the Confidential Information disclosed by
the Disclosing Party; (iii) is or becomes part of the public domain through no wrongful act of the Receiving Party, its Affiliates
or their respective representatives; (iv) is rightfully received from a third party without restriction on disclosure; or
(v) is approved for release upon prior written consent of the Disclosing Party.
|
|
15.3
|
Restrictions
on Use and Disclosure
. The Receiving Party shall not use the Confidential Information of the Disclosing Party for any
purpose other than to exercise the rights conveyed to it and to perform its obligations under this Agreement. The Receiving
Party also shall not disclose the Confidential Information of the Disclosing Party to any third party, except to its Affiliates
and their and the Receiving Party’s respective employees, contractors and consultants. The Receiving Party and such
third parties to whom disclosure is permitted shall only disclose such Confidential Information to their employees, contractors,
and consultants who have a need to know such information to exercise the rights conveyed or to perform the obligations under
this Agreement and who have first agreed to restrictions regarding use and disclosure at least as protective of the Disclosing
Party as those set forth in this Agreement. The Receiving Party shall, and shall cause all others to whom it discloses the
Confidential Information of the Disclosing Party, to take reasonable security measures and use reasonable care to preserve
and protect the secrecy of the Disclosing Party’s Confidential Information. E-C may not use the existence of this Agreement
or the content of this Agreement in efforts to solicit, negotiate or reach an agreement with an original equipment manufacturer
that could be deemed a competitor of D-R.
|
|
15.4
|
Certain
Permitted Disclosures
. Notwithstanding
Section 15.3
, a Receiving Party may disclose the Confidential Information
of the other Party to the limited extent that such disclosure (i) is inherent in products sold or otherwise disposed of by
the Party or its Affiliates in accordance with this Agreement and subject to reasonable commercial terms regarding preservation
of confidentiality of that material, (ii) to parties assisting such Party in evaluating the potential market for products
to be developed under this Agreement, subject to reasonable commercial terms regarding preservation of confidentiality of
that material or (iii) is otherwise strictly necessary in connection with the exercise of any of the rights licensed to it
under this Agreement.
|
|
15.5
|
Further
Permitted Disclosures
. Notwithstanding
Section 15.3
, either Party may disclose the Confidential Information of
the other Party to: (i) Governmental Bodies in order to respond to inquiries, requests or investigations relating to this
Agreement, provided, however, that such Party shall provide the Disclosing Party notice of its intent to disclose that information
so that the Disclosing Party may seek protective orders and the like; (ii) in connection with prosecuting or defending litigation
as permitted by this Agreement, provided, however, that such Party shall use reasonable efforts to limit the dissemination
of such information, including by use of protective orders and the like, as such Party would use for its own similar types
of confidential information; (iii) in connection with the resolution of disputes under this Agreement, provided, however,
that such Party shall use reasonable efforts to limit the dissemination of such information, including by use of protective
orders and the like, as such Party would use for its own similar types of confidential information; (iv) in connection with
filings required by security and tax regulations and the rules and regulations of any securities exchanges upon which a Party’s
or its Affiliate’s securities are traded, provided, however, that such Party shall use reasonable efforts to limit the
dissemination of such information, including by use of protective orders and the like, as such Party would use for its own
similar types of confidential information; (v) to a Party’s actual and potential lenders, private investors, bankers,
accountants, and lawyers who are subject to an obligation of confidentiality prohibiting further disclosure of the information;
and (vi) to a Party’s actual and bona fide potential assignees or transferees permitted in accordance with
Section
18.12
subject to an obligation of confidentiality prohibiting further disclosure of the information.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
15.6
|
Survival
.
The obligations of this
Section 15
will survive any termination or expiration of this Agreement for, with respect to
all Confidential Information, at least five (5) years, and for trade secrets within the Confidential Information, as long
as such trade secrets remain a trade secret under applicable law.
|
|
15.7
|
Return/Destruction
of Information
. Upon request after termination of this Agreement by a Party for return of the Confidential Information
of such Party, the other Party shall, within sixty (60) business days of the request, use commercially reasonable efforts
to either return or destroy all written or tangible material containing or reflecting Confidential Information of the requesting
Party (whether prepared by the requesting Party or otherwise), without retaining any copies, summaries, analyses, or abstracts
thereof, except that each Party’s independent outside counsel may retain one copy for attorney’s eyes only. An
authorized individual of the Receiving Party shall confirm in writing Receiving Party’s compliance with this Section
within sixty (60) business days after the other Party’s request for the return or destruction of Confidential Information.
|
|
16.
|
REPRESENTATIONS
AND WARRANTIES
|
|
16.1
|
Authority
.
Each Party represents and warrants that the individuals signing this Agreement have full authority to execute this Agreement
for, and on behalf of, and to bind the Parties, and that, when signed, this Agreement will be binding and enforceable according
to its terms.
|
|
16.2
|
No
Conflicts
. Each Party represents and warrants that neither it, nor any of its Affiliates, will enter into any other agreement
or understanding in conflict with the provisions contained in this Agreement.
|
|
16.3
|
Financial
Status
. E-C represents and warrants that it has sufficient financial resources to fully and timely perform its obligations
to develop and manufacture Gradual Oxidizers for the KG2-3GEF/GO under the terms of this Agreement.
|
|
|
16.4.1
|
E-C
represents and warrants to D-R that: (i) E-C has the right to grant the license in the E-C Intellectual Property upon the
terms and conditions set forth in this Agreement; (ii) E-C has not granted and will not grant any licenses or rights under
the E-C Intellectual Property that would conflict with the licenses and rights granted to D-R hereunder; (iii) except as set
forth on
Annex I
, there are no liens, pledges, deed of trusts, security interests, claims, leases, charges,
options, rights of first refusal, easements, servitudes, proxies, voting trusts or agreements, transfer restrictions under
any equity holder, conveyances, mortgages, assignments, encumbrances, or other obligations affecting the E-C Intellectual
Property; and (iv) E-C’s disclosure or transfer of possession of any Confidential Information to D-R will not infringe
any copyright or misappropriate any trade secrets of any third party.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
|
16.4.2
|
D-R
represents and warrants to E-C that: (i) D-R has the right to grant the license in the Intellectual Property of D-R and its
Affiliates upon the terms and conditions set forth in this Agreement; (ii) D-R has not granted and will not grant any licenses
or rights under the Intellectual Property of D-R and its Affiliates that would conflict with the licenses and rights granted
to E-C hereunder; (iii) there are no liens, pledges, deed of trusts, security interests, claims, leases, charges, options,
rights of first refusal, easements, servitudes, proxies, voting trusts or agreements, transfer restrictions under any equity
holder, conveyances, mortgages, assignments, encumbrances, or other obligations that would prevent or impair the full and
complete exercise of the terms of this Agreement; and (iv) D-R’s disclosure or transfer of possession of any copies
of any Confidential Information to E-C will not infringe any copyright or misappropriate any trade secrets of any third party.
|
|
16.5
|
Noninfringement
.
E-C represents and warrants that, as of the Effective Date, it has not received any notice that any of the E-C Intellectual
Property or the use thereof, misappropriates, infringes, constitutes an unauthorized use of, or dilutes any Intellectual Property
rights (including any copyrights, patents, trade secrets or trademarks) of any third party.
|
|
16.6
|
DISCLAIMER
.
EXCEPT AS OTHERWISE EXPRESSLY STATED IN
SECTION 3
AND
SECTIONS 16.1
THROUGH
16.5
, NEITHER PARTY MAKES
ANY REPRESENTATION OR WARRANTY OF ANY KIND WITH RESPECT TO ANY INTELLECTUAL PROPERTY OR ANY OTHER SUBJECT MATTER UNDER THIS
AGREEMENT. EXCEPT AS OTHERWISE EXPRESSLY STATED IN
SECTION 3
AND
SECTIONS 16.1
THROUGH
16.5
, EACH PARTY
DISCLAIMS ALL SUCH OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE OR AGAINST INFRINGEMENT.
|
|
17.
|
INDEPENDENT
CONTRACTOR
|
|
17.1
|
Status
.
The Parties are and shall remain independent contractors with respect to all performances rendered pursuant to this Agreement.
Further, neither Party nor any employee or agent of either Party shall be considered an employee, agent or representative
of the other Party for any purpose. Neither Party, nor its employees, shall have any authority to act for, bind or otherwise
create or assume any obligation on behalf of the other Party for any purpose, nor shall it or they hold itself or themselves
out as having such authority. Each Party shall be responsible for its actions and the actions of its personnel in rendering
performance pursuant to this Agreement, and shall be solely responsible for supervising, providing daily direction and control,
paying the salaries (including withholding of income taxes and social security), worker’s compensation, disability benefits
and the like of its personnel.
|
|
17.2
|
No
Joint Venture
. Nothing contained in this Agreement shall be deemed or construed as creating a joint venture or partnership
between D-R and E-C. The Parties agree that they will not by their conduct form such a joint venture or partnership and that
they will not be deemed to be partners or joint venturers unless they agree in writing that they are such. Neither Party is
by virtue of this Agreement authorized as an agent, employee or legal representative of the other. Neither Party shall have
power to control the activities and operations of the other and their status is, and at all times shall continue to be, that
of independent contractors. Neither Party shall have any power or authority to bind or commit the other.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
18.1
|
Force
Majeure
. Either Party shall be excused from delays in performing or from its failure to perform hereunder to the extent
that such delays or failures result from causes beyond the reasonable control of such Party; provided that, in order to be
excused from delay or failure to perform, such Party must act diligently to remedy the cause of such delay or failure. Notwithstanding
the foregoing, if either Party’s performance is delayed by more than ninety (90) calendar days for any reason, the other
Party shall have the right to terminate this Agreement without any further liability to the non-performing Party, except for
fulfillment of obligations previously incurred under this Agreement (e.g., outstanding purchase orders, shipments and payment
of invoices).
|
|
18.2
|
Construction
.
Unless the context requires otherwise: (a) the gender (or lack of gender) of all words used in this Agreement includes the
masculine, feminine, and neuter; (b) the term “include” or “includes” means “includes, without
limitation,” and “including” means “including, without limitation”; (c) references to laws refer
to such laws as they may be amended from time to time, and references to particular provisions of a law include any corresponding
provisions of any succeeding law; and (d) references to money or $ refer to legal currency of the United States of America.
|
|
18.3
|
Specific
Performance
. Each Party acknowledges and agrees that a breach of
Section 7.2 and Section 15
of this Agreement would
cause irreparable damage to the other Party and that the non-breaching Party will not have an adequate remedy at law. Therefore,
the obligations of E-C and D-R under this Agreement in
Sections 7.2
and
Section 15
shall be enforceable by a
decree of specific performance issued by any court of competent jurisdiction, and appropriate injunctive relief may be applied
for and granted in connection therewith. Such remedies shall, however, be cumulative and not exclusive and shall be in addition
to any other remedies which any Party may have under this Agreement or otherwise.
|
|
18.4
|
Multiple
Counterparts
. This Agreement may be executed in two counterparts, both of which taken together shall constitute one single
Agreement between the Parties.
|
|
18.5
|
Section
and Schedule Headings
. The section and subsection headings used herein are for reference and convenience only, and shall
not enter into the interpretation hereof. The schedules referred to herein and attached hereto, or to be attached hereto,
are incorporated herein to the same extent as if set forth in full herein.
|
|
18.6
|
Required
Approvals
. Where agreement, approval, acceptance, or consent by either Party is required by any provision of this Agreement,
such action shall not be unreasonably delayed, conditioned or withheld.
|
|
18.7
|
No
Waiver
. No delay or omission by either Party hereto to exercise any right or power arising upon any noncompliance or default
by the other Party with respect to any of the terms of this Agreement shall impair any such right or power or be construed
to be a waiver thereof. A waiver by either of the Parties hereto of any of the covenants, conditions, or agreements to be
performed by the other shall not be construed to be a waiver of any succeeding breach thereof or of any other covenant, condition,
or agreement herein contained. Unless stated otherwise, all remedies provided for in this Agreement shall be cumulative and
in addition to and not in lieu of any other remedies available to either Party at law, in equity, or otherwise.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
18.8
|
Governing
Law
. This Agreement and the License shall be construed as to both validity and performance and enforced in accordance
with the laws of the State of New York, without giving reference to its principles of conflicts of law.
|
|
18.9
|
Entire
Agreement; Amendment
. Other than the currently existing Original Equipment Packaging Agreement between D-R and E-C (FKA
Flex Power Generation, Inc.), which shall remain in full force and effect, this Agreement and the Schedules annexed hereto
constitute the entire agreement between the Parties and specifically supersede all previous agreements, oral or written, regarding
the subject matter hereof. No amendment, waiver, or discharge hereof shall be valid unless it is executed by the Party against
whom such amendment, waiver, or discharge is sought to be enforced.
|
|
18.10
|
Severability
.
If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced by any law or public
policy, all other terms or provisions of this Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any
Party. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the Parties
hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely
as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated
to the greatest extent possible.
|
|
18.11
|
Notices
.
Any notices to be given hereunder by either Party to the other shall be in writing on paper and be delivered either by personal
delivery (including delivery by Federal Express or similar reputable overnight courier) or by mail, registered or certified,
postage prepaid with return receipt requested. Mailed notices shall be addressed to the Parties at the addresses appearing
in this Section of this Agreement, but each Party may change such address by written notice in accordance with this paragraph.
Notices delivered personally, including via overnight courier, shall be deemed communicated as of actual receipt. Notices
forwarded via the United States mail shall be deemed communicated as of five (5) days after mailing.
|
If
to E-C, to:
ENER-CORE
POWER, INC.
9400
Toledo Way
Irvine,
CA 92618
Attn:
Alain Castro, Chief Executive Officer
Boris
Maslov, President and Chief Technology Officer
with
a copy, which shall not constitute notice, to:
McDermott
Will & Emery LLP
4
Park Plaza, Suite 1700
Irvine,
CA 92614
Attention:
CONFIDENTIAL
TREATMENT REQUESTED
If
to D-R, to:
DRESSER-RAND
COMPANY
Paul
Clark Drive
Olean,
New York 14760
Attention:
David J. Grenell, Assistant General Counsel
with
a copy, which shall not constitute notice, to:
Haynes
and Boone, LLP
1221
McKinney Street, Suite 2100
Houston,
Texas 77010
Attention:
Bill Nelson
|
18.12
|
Binding
Effect; Assignment
. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective
successors and permitted assigns. Except as provided herein, neither Party shall assign or delegate this Agreement in whole
or in part, or any of the licenses, rights, covenants, or duties under this Agreement, by agreement, merger, reorganization,
sale of assets, operation of law or otherwise, including in connection with the insolvency or bankruptcy of the Party, without
the prior written consent of the other Party. Notwithstanding the foregoing, either Party may (i) assign or otherwise transfer
this Agreement in its entirety to (a) an acquirer of all or substantially all of the assets of a Party’s business to
which this Agreement relates or (b) the surviving entity in any merger, consolidation, equity exchange, reorganization or
other change of control transaction involving such Party.
|
|
18.13
|
Bankruptcy
.
The Parties acknowledge and agree that the E-C Intellectual Property is “intellectual property” as defined in
Section 101(35A) of the United States Bankruptcy Code (the “
Code
”), as the same may be amended from
time to time, that has been licensed hereunder in a contemporaneous exchange for value. E-C acknowledges that if E-C, as a
debtor in possession or a trustee in bankruptcy in a case under the Code, rejects this Agreement, D-R may elect to retain
its rights under this Agreement as provided in Section 365(n) of the Code. Upon written request from D-R to E-C or the bankruptcy
trustee of E-C’s election to proceed under section 365(n), E-C or the bankruptcy trustee shall comply in all respects
with 365(n), including, without limitation, by not interfering with the rights of D-R as provided by this Agreement.
|
|
18.14
|
Costs
and Expenses
. The Parties shall each be responsible for all of their own expenses (including legal, accounting, investment
banking and financial advisory fees and expenses) incident to the negotiation, documentation and consummation of this Agreement.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
18.15
|
Dispute Resolution
.
|
|
|
18.15.1
|
In
the event of any continuing dispute between the Parties relating to this Agreement which has not been resolved after reasonable
attempts by either Party to do so, including without limitation any continuing dispute relating to the interpretation of any
provision of this Agreement, the performance or non-performance by either Party hereunder, or the amount of any disputed consideration
arising hereunder, then, upon the written request of either Party, each of the Parties will appoint a designated executive
management representative, whose task it will be to meet for the purpose of endeavoring to resolve such dispute. The designated
representatives shall meet as often as the Parties reasonably deem necessary in order to gather and furnish to the other all
information with respect to the matter in issue which the Parties believe to be appropriate and germane in connection with
its resolution. Such representatives shall discuss the problem and negotiate in good faith in an effort to resolve the dispute
without the necessity of any formal proceeding relating thereto. During the course of such negotiation, all reasonable requests
made by one Party to the other for information will be honored in order that each of the Parties may be fully advised in the
premises of the dispute. The specific format for such discussions will be left to the discretion of the designated representatives
but may include the preparation of agreed upon statements of fact or written statements of position furnished to the other
Party. Formal proceedings for the resolution of such dispute pursuant to
Section 18.15.2
hereof may not be commenced
until the earlier to occur of (i) the designated representatives concluding in good faith that amicable resolution through
continued negotiation of the matter in issue does not appear likely, or (ii) thirty (30) days after the initial request to
negotiate such dispute. The Parties hereby waive the expiration of any applicable statute of limitations during such thirty
(30) day period and for the thirty (30) days next following. Except where clearly prevented by the area in dispute, both Parties
agree to continue performing their respective obligations under this Agreement while the dispute is being resolved unless
and until this Agreement expires or is terminated. The provisions of this
Section 18.15.1
shall not apply to any actions
of the Parties for equitable relief.
|
|
|
18.15.2
|
Arbitration
of Disputes
. Any claim or controversy arising out of or relating to this Agreement, or the breach thereof, including any
anticipated breach or disagreement as to interpretation of this Agreement, which is not resolved pursuant to
Section 18.15.1
hereof, shall be settled by arbitration as follows:
|
|
|
|
(a)
|
No
arbitration governed by this
Section 18.15.2
may be commenced until thirty (30)
days after the Party wishing to commence an arbitration proceeding shall have given the
other Party written notice describing the dispute to be arbitrated. During that thirty
(30) days the Parties shall attempt to resolve the dispute amicably by negotiation. A
written request by either Party to resolve a dispute pursuant to
Section 18.15.1
hereof shall constitute notice of a dispute for purposes of this
Section 18.15.2 (a)
.
|
|
|
|
|
|
|
|
|
(b)
|
Except
as provided below and to the extent the Parties may otherwise agree in writing, any arbitration
under this
Section 18.15.2
(the
“
Arbitration
”)
shall
be conducted in accordance with the rules of the American Arbitration Association (the
“
AAA Rules
”)
by three arbitrators, none of whom shall be a
current or former officer, Manager, or employee of any Party hereto or its Affiliates,
selected as provided in the AAA Rules.
|
|
|
|
|
|
|
|
|
(c)
|
The
Arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. § 1
et seq., and judgment upon the award rendered by the arbitrators may be entered by any
court of competent jurisdiction.
|
|
|
|
|
|
|
|
|
(d)
|
The
Arbitration shall take place in New York, New York. The arbitrators may hold individual
hearings at any location they deem appropriate.
|
|
|
|
|
|
|
|
|
(e)
|
The
arbitrators shall hold a pre-hearing conference as promptly as possible after the selection
of the arbitrators and shall hold the first hearing within thirty (30) days after the
selection of the arbitrators. If additional hearings are needed, they shall be held as
promptly as possible thereafter, so that all hearings that may be required are concluded
within ninety (90) days after the selection of the arbitrators. The arbitrators shall
render their award within thirty (30) days after the last hearing.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
|
|
(f)
|
The
Parties may by written notice to each other and the arbitrators freely specify further
controversies or claims to be arbitrated up until the date of the pre-hearing conference.
Thereafter, additional controversies or claims may be added only with the consent of
the arbitrators.
|
|
|
|
|
|
|
|
|
(g)
|
The
arbitrators may make interim awards and may award equitable and declaratory relief.
|
|
|
|
|
|
|
|
|
(h)
|
The
costs and expenses of the Arbitration (including reasonable attorneys’ fees) shall
be borne equally between the Parties.
|
|
|
|
|
|
|
|
|
(j)
|
The
arbitrators shall not consider, nor shall any award include amounts for, punitive, exemplary,
or consequential damages.
|
|
|
|
|
|
|
|
|
(j)
|
It
shall not be inconsistent with this
Section 18.15.2
for either Party to seek from
any court of competent jurisdiction interim relief in aid of arbitration or to protect
the rights of either Party pending the establishment of the arbitral tribunal.
|
|
18.16
|
Export
Control.
If either Party determines that any information, technology or data that is to be transferred, shared or contributed
(collectively a “
Transfer
”) pursuant to this Agreement is subject to export control restrictions
under the U.S. Export Administration Regulations, the International Traffic in Arms Regulations or any other U.S. law or regulation,
such Party may withhold such information, technology or data from Transfer without being in violation of this Agreement. In
the event of such restrictions, transferring-Party will take reasonable steps to obtain an export license to permit the Transfer,
so long as such Transfer would not violate any transferring-Party policy.
|
|
18.17.1
|
Each
Party warrants that it and its Affiliates have not made, offered, or authorized and will not make, offer, or authorize with
respect to the matters which are the subject of this Agreement, any payment, gift, promise or other advantage, whether directly
or through any other person or entity, to or for the use or benefit of any public official (i.e., any person holding a legislative,
administrative or judicial office, including any person employed by or acting on behalf of a public agency, a public enterprise
or a public international organization) or any political party or political party official or candidate for office, where
such payment, gift, promise or advantage would violate the applicable laws of the United States of America or of any other
country in which the Parties are together in business. Each Party shall defend, indemnify and hold the other Party harmless
from and against any and all claims, damages, losses, penalties, costs and expenses arising from or related to, any breach
by such first Party of such warranty. Such indemnity obligation shall survive termination or expiration of this Agreement.
Each Party shall in good time (i) respond in reasonable detail to any notice from any other Party reasonably connected with
the above-stated warranty; and (ii) furnish applicable documentary support for such response upon request from such other
Party.
|
CONFIDENTIAL
TREATMENT REQUESTED
|
18.17.2
|
Each
Party agrees to (i) maintain adequate internal controls; (ii) properly record and report all transactions; and (iii) comply
with the laws referred to in
Section 18.17.1
above. Each Party must rely on the other Party’s system of internal
controls and on the adequacy of full disclosure of the facts, and of financial and other data provided under this Agreement.
No Party is in any way authorized to take any action on behalf of the other Party that would result in an inadequate or inaccurate
recording and reporting of assets, liabilities or any other transaction, or which would put such Party in violation of its
obligations under the laws applicable to this Agreement. Each Party, at its own expense and upon providing reasonable notice
to the other Party, shall have the right to audit the books and records of the other Party to the extent necessary to verify
compliance with the provisions of this Section.
|
|
18.17.3
|
In
the event of a breach of this Section of the Agreement, the non-breaching Party may terminate this Agreement immediately without
any further liability or obligation.
|
|
18.18
|
Non-Solicitation
.
During the term of this Agreement, and upon termination of this Agreement for any reason (including the expiration of the
term hereof or any extension thereof) then for the period of twelve (12) months after such termination, neither Party shall
directly or indirectly, solicit or attempt to employ, any employees of the other Party, except as mutually agreed by the Parties
.
|
|
18.19
|
Time
is of the Essence
. Time shall be of the essence with respect to all time periods and notice periods set forth in this
Agreement.
|
CONFIDENTIAL
TREATMENT REQUESTED
IN
WITNESS THEREOF, E-C and D-R have caused this Agreement to be signed and delivered by their duly authorized officers, all as of
the date first hereinabove written.
ENER-CORE
POWER, INC.
DRESSER-RAND
COMPANY
CONFIDENTIAL
TREATMENT REQUESTED
ANNEX
A: Initial System Project Plan
[Attached]
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
ANNEX
B: Performance Specifications for Gradual Oxidizer
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
ANNEX
C: D-R Terms of Sale (DR100) and Terms of Purchase (DR195)
[Attached]
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY (D-R)
TERMS
AND CONDITIONS OF SALE FOR EQUIPMENT, PARTS, FIELD SERVICES AND REPAIRS
“D-R100 Terms and Conditions” - Effective February 1, 2013
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY (D-R)
TERMS
AND CONDITIONS OF SALE FOR EQUIPMENT, PARTS, FIELD SERVICES AND REPAIRS
“D-R100 Terms and Conditions” - Effective February 1, 2013
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY (D-R)
TERMS
AND CONDITIONS OF SALE FOR EQUIPMENT, PARTS, FIELD SERVICES AND REPAIRS
“D-R100 Terms and Conditions” - Effective February 1, 2013
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY (D-R)
TERMS
AND CONDITIONS OF SALE FOR EQUIPMENT, PARTS, FIELD SERVICES AND REPAIRS
“D-R100 Terms and Conditions” - Effective February 1, 2013
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY (D-R)
TERMS
AND CONDITIONS OF SALE FOR EQUIPMENT, PARTS, FIELD SERVICES AND REPAIRS
“D-R100 Terms and Conditions” - Effective February 1, 2013
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY (D-R)
TERMS
AND CONDITIONS OF SALE FOR EQUIPMENT, PARTS, FIELD SERVICES AND REPAIRS
“D-R100 Terms and Conditions” - Effective February 1, 2013
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY (D-R)
TERMS
AND CONDITIONS OF SALE FOR EQUIPMENT, PARTS, FIELD SERVICES AND REPAIRS
“D-R100 Terms and Conditions” - Effective February 1, 2013
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY
TERMS
AND CONDITIONS OF PURCHASE
D-R195
Terms and Conditions –USA - Effective October 18, 2014
*
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY
TERMS
AND CONDITIONS OF PURCHASE
D-R195
Terms and Conditions –USA - Effective October 18, 2014
*
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL TREATMENT
REQUESTED
DRESSER-RAND
COMPANY
TERMS
AND CONDITIONS OF PURCHASE
D-R195
Terms and Conditions –USA - Effective October 18, 2014
*
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY
TERMS
AND CONDITIONS OF PURCHASE
D-R195
Terms and Conditions –USA - Effective October 18, 2014
*
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY
TERMS
AND CONDITIONS OF PURCHASE
D-R195
Terms and Conditions –USA - Effective October 18, 2014
*
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY
TERMS
AND CONDITIONS OF PURCHASE
D-R195
Terms and Conditions –USA - Effective October 18, 2014
*
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY
TERMS
AND CONDITIONS OF PURCHASE
D-R195
Terms and Conditions –USA - Effective October 18, 2014
*
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY
TERMS
AND CONDITIONS OF PURCHASE
D-R195
Terms and Conditions –USA - Effective October 18, 2014
*
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
DRESSER-RAND
COMPANY
TERMS
AND CONDITIONS OF PURCHASE
D-R195
Terms and Conditions –USA - Effective October 18, 2014
*
*
Portions of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
ANNEX
D: Joint Oversight Team
From
E-C:
1. *
2.
*
3. *
From
D-R:
1. *
2.
*
3. *
4. *
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
Annex
E: Code of Business Conduct
[Attached]
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
CONFIDENTIAL
TREATMENT REQUESTED
ANNEX
F: Technical Acceptance Criteria
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
ANNEX G:
Termination or Survival of Licenses
|
|
Termination
Trigger—Agreement Section Number
|
|
10.3.2
|
10.2
|
10.3.1
or
10.4.2
|
10.4.3
|
10.3.3
or
10.4.1
|
10.3.4
or 10.4.4
|
10.3.5
or 10.4.5
|
10.3.6
or
10.4.6
|
|
Termination
by
(Party):
|
D-R
|
Either
|
D-R
|
E-C
|
E-C
|
Either
|
Either
|
Either
|
D-R
|
E-C
|
|
Timing:
|
NA
|
<CT
|
>CT
|
Anytime
|
Anytime
|
Anytime
|
<CT
|
>CT
|
<CT
|
>CT
|
Anytime
|
(A)
Exclusive License
under
6.1 before it
becomes perpetual
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
P
|
T
|
|
(B)
Exclusive License under 6.1 after it becomes perpetual
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
P
|
T
|
|
(C)
Non-Exclusive License under 6.1
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
P
|
T
|
|
(D)
Expanded License under 6.2
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
P
|
T
|
|
(E)
Fundamental Process Tech. Dev. license under 6.3
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
T
|
|
(F)
Gas Turbine Tech. Dev. license under
6.4
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
T
|
|
(G)
Rights to use Joint Inventions under
6.5
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
P
|
T
|
|
(H)
Rights to use Background IP in order to perform under 6.7
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
|
(I)
Actions to... protect or convey ownership
rights under 6.
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
T
|
Legend:
T
= Terminates immediately; P = Perpetual <CT = before Completed Test >CT = after Completed Test
CONFIDENTIAL
TREATMENT REQUESTED
ANNEX
H: Performance Security—Letter of Credit Form
*
* Portions
of this page have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities
and Exchange Commission.
CONFIDENTIAL
TREATMENT REQUESTED
Annex
I
Existing
Liens on E-C Intellectual Property
None
EXHIBIT 10.29
AMENDMENT
AND WAIVER AGREEMENT
THIS
AMENDMENT AND WAIVER AGREEMENT (this “
Amendment
”) is made and entered into this as of December 1, 2014, by
and among Ener-Core, Inc., a Nevada corporation (the “
Company
”), and the undersigned Investors. Capitalized
terms used but not defined herein shall have the meanings set forth in the Transaction Agreements (defined in the Recitals below).
RECITALS:
WHEREAS,
reference is made to that certain Subscription Agreement by and among the Company and the Investors, and dated as of November
18, 2013 (the “
Subscription Agreement
”), and the Registration Rights Agreement by the same parties and dated
as of November 18, 2013 (the “
Registration Rights Agreement
,” and together with the Subscription Agreement,
the “
Transaction Agreements
”); and
WHEREAS,
the Investors have proposed that the Subscription Agreement be amended on the terms set forth below, in consideration of which
the Investors shall waive certain of their rights under the Registration Rights Agreement, which Proposal is acceptable to the
Company;
NOW,
THEREFORE, in consideration of the foregoing recitals and the mutual agreements herein contained and for other good and valuable
consideration, the parties hereto agree as follows:
(A)
AMENDMENT AND WAIVER.
(1)
Amendments
to the Subscription Agreement
. The Subscription Agreement (including the Instruction Sheet for Investor and the exhibits attached
thereto) is hereby amended as follows:
(a) Section
1 of the Subscription Agreement is deleted in its entirety and the following are inserted in substitution therefor:
“1.
Subscription
.
The undersigned (the “
Investor
”) hereby subscribes for and agrees to purchase the number of shares of common
stock (the “
Common Stock
” or the “
Shares
”) of Ener-Core, Inc., a Nevada corporation (the
“
Company
”), and warrants to purchase 50% of such number of shares of Common Stock (the “
Warrants
”),
as set forth on the signature page hereto at a purchase price of
$0.78
per share.
(b) All other references throughout the Subscription Agreement to the purchase price per share of Common Stock being
$1.00
shall be stricken and replaced by
$0.78
.
(c) The
term “Shares” appearing anywhere else throughout the Subscription Agreement shall be stricken and replaced by “Shares
and Warrants.”
(2)
Waiver
of Registration Rights
. Each Investor signatory to this Amendment hereby agrees that the Registration Rights Agreement shall
not apply to, and such Investor hereby waives all of such Investor’s rights under the Registration Rights Agreement, if
any, with respect to the shares of Common Stock issuable by the Company to such Investor resulting from the amendment to the Subscription
Agreement set forth in
Section (A)(1)
above, including the shares of Common Stock underlying the Warrants, and will make
no claims for damages or for default thereunder;
provided
,
however
, that all other ongoing obligations of the Company
under the Registration Rights Agreement shall remain in full force and effect.
(3)
No
Other Amendments
. Except as expressly set forth herein, this Amendment shall not be deemed to be a waiver, amendment
or modification of any provisions of the Transaction Agreements, or of any right, power or remedy of the Investors,
or constitute a waiver, amendment or modification of any provision of the Transaction Agreements (except to the extent herein
set forth), or any other document, instrument and/or agreement executed or delivered in connection therewith, in each case whether
arising before or after the date hereof or as a result of performance hereunder or thereunder, all of which (except as specified
herein) remain in full force and effect. Except as set forth herein, the Investors reserve all rights, remedies, powers,
or privileges.
(B)
CONFLICTS
.
Except as expressly set forth in this Amendment, the terms and provisions of each of the Transaction Agreements shall continue
unmodified and in full force and effect. In the event of any conflict between this Amendment and any one of the Transaction Agreements,
this Amendment shall control.
(C)
GOVERNING
LAW
. This Amendment shall be governed and construed under the laws of the State of California, and shall be binding on and
shall inure to the benefit of the parties and their respective successors and permitted assigns.
(D)
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 other electronic transmission of this signed Amendment shall be legal and binding on
all parties hereto.
[Remainder
of page left blank intentionally.]
IN
WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above.
COMPANY
:
ENER-CORE,
INC.
|
By:
|
|
|
|
Name:
|
Alain
J. Castro
|
|
|
Title:
|
Chief
Executive Officer
|
|
IN
WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above.
INVESTORS:
RUFUS
DUFUS, LLC
IN
WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above.
BUYERS:
DYLANA
DREAMS, LLC
-5-
EXHIBIT
10.30
SETTLEMENT
AGREEMENT AND MUTUAL RELEASE
This
Settlement Agreement and Mutual Release (this “
Agreement
”) is entered into as of December 16, 2014 (“
Effective
Date
”), by and between Ener-Core, Inc. (the “
Company
”), and each of the parties named under Column
I of the table in
Exhibit A
attached hereto (collectively the “
Investors
”) (Company and Investors
are hereinafter collectively referred to, at times, as the “
Parties
,” and each individually, as a “
Party
”).
RECITALS
WHEREAS,
on November 18, 2013, the Company entered into that certain Subscription Agreement (the “
Subscription Agreement
”)
with the Investors, pursuant to which the Company issued and sold to Investors, in a private placement (the “
Offering
”),
an aggregate 1,500,000 shares of the Company’s common stock, par value $0.0001 per share, at a per share purchase price
of $1.00 per share;
WHEREAS,
on November 18, 2013, the Company also entered into that certain Registration Rights Agreement (the “
Registration Rights
Agreement
”) with the Investors whereby the Company agreed to file a registration statement with the Securities and Exchange
Commission to register the shares acquired by the Investors in the Offering;
WHEREAS,
on December 1, 2014 entered into that certain Amendment and Waiver Agreement (the “
Amendment
”) with the Investors
to amend certain terms of the Subscription Agreement and also to memorialize the agreed upon waiver of certain rights of the Investors
under the Registration Rights Agreement, specifically: (a) the purchase price per share for the shares of Common Stock acquired
by the Investors under the Subscription Agreement was reduced from $1.00 per share to $0.78 per share, resulting in the issuance
of an aggregate 423,077 additional shares to the Investors; (b) the Company agreed to issue a warrant to each Investor (the “
Warrant
”)
with an exercise price per share of $0.78 per share, which Warrant is immediately exercisable and expires 60 months after the
its date of issuance, for the purchase of up to an additional 50% of the total number of shares acquired by such Investor under
the amended terms of the Subscription Agreement, resulting in the issuance of Warrants to the Investors for the purchase of up
to an aggregate of 961,538 shares; and (c) the Investors agreed to waive their rights under the Registration Rights Agreement
with respect to any and all additional shares of Common Stock issuable to the Investors as a result of the Amendment, including
the Common Stock shares underlying the Warrants;
WHEREAS,
a potential dispute (the “
Potential Dispute
”) has arisen between the Company and Investors in connection with
the Offering; and
WHEREAS,
the Parties, each without admission of any liabilities under the Potential Dispute, now desire to enter into this Agreement to
resolve the Potential Dispute and any and all Claims (as defined herein) between them as of the Effective Date.
NOW,
THEREFORE, for and in consideration of the mutual releases, promises, covenants, representations, and warranties contained herein
and for other good and valuable consideration, the receipt of sufficiency of which are hereby acknowledged, and intending to be
legally bound, the Parties hereto agree as follows:
1.
Incorporation
of Recitals
. The above Recitals are hereby incorporated into and made a part of this Agreement.
2.
Consideration
.
Subject to the terms and conditions set forth in this Agreement, and as consideration for the releases, promises, agreements and
covenants set forth herein:
2.1 The
Parties hereby agree to amend the Warrants issued pursuant to the Amendment whereby the “Exercise Price” (as defined
in the Warrants) per share, as set forth in Section 1(b) of the Warrants, shall be reduced from $0.78 per share to $0.50 per share.
2.2 Contemporaneous
with the execution and delivery of this Agreement, the Company hereby agrees to issue to each Investor a warrant (each a “
New
Warrant
” and all such warrants collectively, the “
New Warrants
”) to purchase up to the number of
shares of the Company’s common stock set forth under Column II titled “Number of New Warrant Shares” in the
New Warrants Table set forth in
Exhibit A
attached hereto, which New Warrant shall be substantially in the form
attached as
Exhibit B
to this Agreement. Each New Warrant shall have a per share exercise price of $0.50 per share,
shall be immediately exercisable upon issuance, and shall expire 60 months after the date of its issuance. The Warrants shall
be issued to the entities listed in the New Warrants Table set forth in
Exhibit A
attached hereto at the sole direction
of the Investors.
2.3 Each
Investor signatory to this Agreement hereby agrees that the Registration Rights Agreement shall not apply to, and such Investor
hereby waives all of such Investor’s rights under the Registration Rights Agreement, if any, with respect to the New Warrants
and any and all shares of Company’s common stock issuable pursuant to this Agreement, including the shares of the Company’s
common stock underlying the New Warrants, and will make no claims for damages or for default thereunder;
provided
,
however
,
that all other ongoing obligations of the Company under the Registration Rights Agreement shall remain in full force and effect.
3.
Mutual
Releases and Covenant Not To Sue
.
3.1 Except
for such obligations, rights or claims as may be created by, contingent upon or arise from the terms and conditions of this Agreement,
each and every Investor, on behalf of itself and each of its agents, brokers, legatees, devisees, executors, trustees, beneficiaries,
affiliates, administrators, successors in interest, predecessors in interest, assigns, corporations, partners, entities, attorneys,
directors, officers, employees, insurers, and representatives (collectively, the “
Investor Releasors
”), hereby
releases and forever discharges the Company, and each of its agents, brokers, affiliates, successors in interest, predecessors
in interest, assigns, attorneys, directors, officers, employees, insurers, and representatives (collectively, the “
Company
Releasees
”), and each of them, separately and collectively, from any and all claims, losses, liens, demands, causes
of action, obligations, damages and liabilities of any kind or nature (collectively, the “
Claims
”), that relate
to any time up to and including the Effective Date, whether known or unknown, that the Investor Releasors have, had in the past,
or may have in the future, against the Company Releasees, or any of them, of any type whatsoever, including but not limited to
Claims arising out of, in connection with, or relating to, the Subscription Agreement, the Offering or the Potential Dispute.
3.2 Except
for such obligations, rights or claims as may be created by, contingent upon or arise from the terms and conditions of this Agreement,
the Company, on behalf of itself and each of its agents, brokers, legatees, devisees, executors, trustees, beneficiaries, affiliates,
administrators, successors in interest, predecessors in interest, assigns, corporations, partners, entities, attorneys, directors,
officers, employees, insurers, and representatives, (collectively, the “
Company Releasors
”), hereby releases
and forever discharges the Investors, and each of their respective agents, brokers, affiliates, successors in interest, predecessors
in interest, assigns, attorneys, directors, officers, employees, insurers, and representatives, (collectively, the “
Investor
Releasees
”), and each of them, separately and collectively, from any and all Claims that relate to any time up to and
including the Effective Date, whether known or unknown, that the Company Releasors have, had in the past, or may have in the future,
against the Investor Releasees, or any of them, of any type whatsoever, including but not limited to Claims arising out of, in
connection with, or relating to, the Subscription Agreement, the Offering or the Potential Dispute.
3.3 Except
for the enforcement of this Agreement, each of the Parties, for itself, and for its respective Releasors (hereinbefore defined)
hereby covenants not to sue any of the other Parties or their respective Releasees (hereinbefore defined) based on any Claim covered
by the foregoing releases set forth in
Sections 3.1
and
3.2
.
4.
California
Civil Code Section 1542
. Except for such obligations, rights or claims as may be created by, contingent upon or arise from
the terms and conditions of this Agreement, each of the Parties hereby agree that this Agreement is a full and final accord and
satisfaction and release as to all Claims for any injuries and damages each Party may ever assert against the other Party in connection
with any time up to and including the Effective Date, relating to the Subscription Agreement, the Offering or the Potential Dispute,
and/or any other Claims relating thereto, whether now known or unknown, contingent or accrued, and whether now existing or resulting
in the future. In furtherance of this intention, and as further consideration for the Agreement, each Party hereby represents
and warrants that it has been informed of, has read, is familiar with, and does hereby expressly waive and relinquish all rights
that it has or may have under Section 1542 of the California Civil Code (“
Section 1542
”) and all other similar
rights in other states or territories of the United States of America, or any other jurisdiction. Section 1542 provides:
“A
GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME
OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR
.”
Accordingly,
the releases given herein shall remain in effect notwithstanding the discovery or existence of any additional facts or Claims
in existence at the time this Agreement was executed.
5.
Investor
Representations
. Each Investor, severally and not jointly, represents and warrants to the Company, as of the Execution Date,
as follows:
5.1 Each
Investor has all requisite legal and other power and authority to execute and deliver this Agreement and to carry out and perform
its obligations under the terms of this Agreement. This Agreement constitutes a valid and legally binding obligation of each Investor
enforceable in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization and other laws
of general applicability relating to or affecting creditors’ rights and to general equity principles.
5.2 Each
Investor owns all right, title and interest in and to its respective Claims, if any, and has not sold, assigned or otherwise transferred
to any third party any interest it may have in any of such Claims, respectively.
5.3 The
New Warrants and the shares of the Company’s common stock issuable upon exercise of the New Warrants (collectively with
the New Warrants, the “
Securities
”) are being acquired for investment for each Investor’s own account,
not as a nominee or agent and not with a view to the resale or distribution of any part thereof.
5.4 Each
Investor
has had an opportunity to ask questions and receive answers and other information from the Company regarding
the terms and conditions of the Securities and the business, properties, prospects, financial condition, and results of operations
of the Company, and each Investor has received sufficient information on which to make an investment decision.
5.5 Each
Investor is an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated by the Securities
and Exchange Commission (the “
SEC
”) under the Securities Act of 1933, as amended (the “
Securities
Act
”).
5.6 Each
Investor understands that the purchase of the Securities involves substantial risk. Each Investor is a sophisticated and accredited
investor and acknowledges that it can bear the economic risk of its investment and has such knowledge and experience in financial
or business matters that it is capable of evaluating the merits and risks of its investment in the Securities. Each Investor has
not been organized for the purpose of acquiring the Securities.
5.7 Each
Investor understands that:
(i) the
Securities are characterized as “restricted securities” under the U.S. federal securities laws inasmuch as they are
being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act only in certain limited circumstances;
(ii) the
Securities have not been registered under the Securities Act or any state securities laws and are being offered in reliance upon
specific exemptions from the registration requirements of the Securities Act and state securities laws, and the Company is relying
upon the truth and accuracy of, and Investor’s compliance with, the representations, warranties, covenants, agreements,
acknowledgments and understandings of each Investor contained in this Agreement in order to determine the availability of such
exemptions and the eligibility of each Investor to acquire the Securities;
(iii) the
Securities must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or is exempt
from such registration;
(iv) the
Securities will bear a legend substantially in the form set forth in Section 5(k) herein; and
(v) the
Company will make a notation on its transfer books to such effect.
5.8 Each
Investor understands that (i) the sale or resale of the Securities has not been and is not being registered under the Securities
Act or any state securities laws, and the Securities may not be transferred unless: (A) such Investor shall have delivered to
the Company an opinion of Company counsel (which opinion shall be in form, substance and scope customary for opinions of counsel
in comparable transactions) to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to
an exemption from such registration; or (B) sold under and in compliance with Rule 144, as promulgated under the Securities Act
(or a successor rule).
5.9 Investor
understands that the certificates evidencing the Securities will bear a legend substantially similar to the following, as well
as any other legends required by applicable law:
NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT
BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL SELECTED BY THE HOLDER, IN A GENERALLY ACCEPTABLE FORM,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING
THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT
SECURED BY THE SECURITIES.
5.10 Each
Investor further understands that there are no registration rights associated with the Securities being acquired pursuant to this
Agreement.
5.11 The
representations and warranties and statements of fact made by each Investor in this Agreement are, as applicable, accurate, correct
and complete and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order
to make the statements and information contained herein not false or misleading.
6.
Representations
and Warranties of the Company
. The Company hereby represents and warrants to each of the Investors as follows:
6.1 The
Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada. The Company
has the corporate power and authority to execute, deliver and perform the Agreement, the New Warrant and any other agreements
contemplated hereunder (collectively, the “
Transaction Documents
”) to which it is a party and to issue, sell
and deliver the Securities.
6.2 The
execution and delivery by the Company of the Transaction Documents, the performance by the Company of its obligations thereunder,
and the issuance, sale and delivery of the Securities have been duly authorized by all requisite corporate action. The New Warrants,
when issued pursuant to the Agreement, have been duly authorized and validly issued and are fully paid and nonassessable and free
of preemptive or similar rights, and have been issued in compliance with applicable securities laws, rules and regulations.
6.3 The
Company has full power and authority and has taken all requisite action on the part of the Company, its officers, directors and
stockholders necessary for (i) the authorization, execution and delivery of the Transaction Documents, (ii) the authorization
of the performance of all obligations of the Company hereunder or thereunder, and (iii) the authorization, issuance (or reservation
for issuance) and delivery of the Securities. When delivered in accordance with the terms hereof, the Transaction Documents will
constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability,
relating to or affecting creditors’ rights generally and to general equitable principles.
6.4 The
execution, delivery and performance by the Company of the Transaction Documents and the offer, issuance and sale of the Securities
require no consent of, action by or in respect of, or filing with, any Person, governmental body, agency, or official other than
filings that have been made pursuant to applicable state securities laws and post-sale filings pursuant to applicable state and
federal securities laws which the Company undertakes to file within the applicable time periods. “
Person
” means
an individual, corporation, partnership, limited liability company, trust, business trust, association, joint stock company, joint
venture, sole proprietorship, unincorporated organization, governmental authority or any other form of entity not specifically
listed herein.
6.5 The
execution, delivery and performance of the Transaction Documents by the Company and the issuance and sale of the Securities will
not conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under (i)
the Company’s Articles of Incorporation, as amended, or the Company’s Bylaws, both as in effect on the date hereof
(true and complete copies of which have been filed on EDGAR), or (ii)(a) any statute, rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over the Company, any subsidiary of the Company or any of
their respective assets or properties, or (b) any agreement or instrument to which the Company or any subsidiary of is a party
or by which the Company or a subsidiary is bound or to which any of their respective assets or properties is subject.
6.6 Neither
the Company nor any Person acting on its behalf has conducted any general solicitation or general advertising, as those terms
are used in the provisions of Regulation D in connection with the offer or sale of any of the Securities.
6.7 Neither
the Company nor any of its affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers
or sales of any Company security or solicited any offers to buy any security, under circumstances that would adversely affect
reliance by the Company on Section 4(2) for the exemption from registration for the transactions contemplated hereby or would
require registration of the Securities under the Act.
6.8 The
offer and sale of the Securities to the Investors as contemplated hereby is exempt from the registration requirements of the Securities
Act.
6.9 The
representations and warranties and statements of fact made by the Company in this Agreement are, as applicable, accurate, correct
and complete and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order
to make the statements and information contained herein not false or misleading.
7.
Miscellaneous
.
7.1
No
Admissions; No Prior Assignment
. Neither the negotiation or execution of this Agreement nor the releases and dismissals provided
for herein, nor any other act or agreement in furtherance of this Agreement, shall be construed in any way as an admission of
any kind on the part of any Party hereto for any liability whatsoever, to the other Party, except as may be otherwise expressly
provided for in this Agreement, nor shall any past or present liability or wrongdoing on the part of any Party be implied thereby.
Each Party further agrees that it will not, and will cause its respective officers, directors, employees, agents, representatives,
and subsidiaries not to, directly or indirectly, whether orally or in writing, make any statements or representations to any third
party (i) that the other Party was liable or admitted any liability in connection with the matters covered by this Agreement,
and (ii) regarding the subject matter of this Agreement, including, but not limited to, any and all discussions preceding the
negotiation and execution of this Agreement, except that either Party may disclose the existence of this Agreement and may also
disclose the specific terms set forth herein as may be required pursuant to applicable law, including, but not limited to, the
applicable rules and regulations of the SEC. Each of the Parties hereto hereby further warrants that it has not previously
assigned, transferred or granted, or purported to assign, transfer or grant, any Claim, matter, or cause of action which is being
released herein.
7.2
Successors
and Assigns; Assignment
. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the
respective heirs, legal representatives, successors and assigns of the parties. Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. No Party
may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval
of the other Party hereto.
7.3
Survival
of Representations and Warranties
. Notwithstanding any provisions in this Agreement to the contrary, the representations and
warranties given or made by the Parties under this Agreement: (i) shall in no way be affected by any investigation or knowledge
of the subject matter thereof made by or on behalf of each Party, and (ii) shall survive the execution and delivery of the Transaction
Documents. Nothing in this
Section 7.3
shall impair or alter any covenant or agreement of the Parties which by its terms
contemplates performance after the Execution Date.
7.4
Governing
Law/Venue
. This Agreement shall be governed by and construed under the laws of the State of California, without regard to
conflicts of laws principles. Each Party hereby waives any right it may have to assert the doctrine of forum non conveniens or
similar doctrine or to object to venue with respect to any Proceeding brought in accordance with this paragraph, and stipulates
that the State and Federal courts located in the City and County of Los Angeles, State of California shall have in personam jurisdiction
and venue over each of them for the purposes of litigating any dispute, controversy or Proceeding in connection with, arising
out of or related to this Agreement. Each Party hereby authorizes and accepts service of process sufficient for personal
jurisdiction in any action against it as contemplated by this
Section 7.4
in the manner set forth in
Section 7.6
of this Agreement for the giving of notice. Any final judgment rendered against a Party in any Proceeding shall be conclusive
as to the subject of such final judgment and may be enforced in other jurisdictions in any manner provided by law. If any Proceeding
arises or is commenced to interpret, enforce or recover damages for the breach of any term of this Agreement, the prevailing party
shall be entitled to recover from the non-prevailing party its reasonable attorneys’ fees actually incurred, together with
other costs relating to any such Proceeding. “
Proceeding
” shall mean any action, claim, demand, suit, litigation,
arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding and any informal
proceeding), prosecution, contest, hearing, inquiry, inquest, audit, examination or investigation commenced, brought, conducted
or heard by or before, or that otherwise has involved or may involve, any applicable judicial, governmental, administrative or
regulatory authority or any arbitrator or arbitration panel.
7.5
Titles
and Subtitles; Construction
. The titles and subtitles used in this Agreement are used for convenience only and are not to
be considered in construing or interpreting this Agreement. The Parties have participated jointly in the negotiation and drafting
of this Agreement. If an ambiguity or question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue
of the authorship of any of the provisions of this Agreement. Unless otherwise expressly provided, the word "including"
and its syntactical variants do not limit the preceding words or terms and mean "including, but not limited to."
7.6
Notices
. Any
notice, demand, consent, request, instruction or other communication required or permitted hereunder shall be in writing, delivered
via first class certified mail or registered mail (return receipt requested, postage prepaid), via internationally recognized
overnight courier or via hand-delivery to addresses that are set forth on the signature pages hereof, and shall be deemed sufficiently
given, received and effective on the earliest of: (i) if mailed via certified or registered mail return (return receipt requested,
postage prepaid) to the applicable address set forth in the signature pages hereto, five (5) Business days after being mailed;
(ii) the second Business Day following the date of mailing, if sent to the applicable address set forth in the signature pages
hereto by internationally recognized overnight courier service, or (iii) the date of actual receipt by the party to whom such
notice or communication is required or permitted to be given, if such notice or communication is hand-delivered to such party.
If any notice, demand, consent, request, instruction or other communication cannot be delivered because of a changed address of
which no notice was given (in accordance with this
Section 7.6
), or the refusal to accept same, the notice, demand, consent,
request, instruction or other communication shall be deemed received on the second Business Day the notice is sent (as evidenced
by a sworn affidavit of the sender). “
Business Day
” means any day except any Saturday, any Sunday, any day
which is a federal legal holiday in the United States or any day on which banking institutions in the State of California are
authorized or required by law or other governmental action to close.
7.7
Separate
Counsel; Expenses
. Each Party hereby expressly acknowledges that it has been advised to seek its own separate legal counsel
for advice with respect to this Agreement. Each of the parties shall bear its own costs and expenses incurred with respect to
the review, negotiation, execution, delivery, and performance of this Agreement.
7.8
Amendments
and Waivers
. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively), only by an instrument in writing executed by
the Parties. No waiver by any Party of any default or breach by another Party of any representation, warranty, covenant or condition
contained in this Agreement shall be deemed to be a waiver of any subsequent default or breach by such Party of the same or any
other representation, warranty, covenant or condition. No act, delay, omission or course of dealing on the part of any Party in
exercising any right, power or remedy under this Agreement or at law or in equity shall operate as a waiver thereof or otherwise
prejudice any of such Party’s rights, powers and remedies. All remedies, whether at law or in equity, shall be cumulative
and the election of any one or more shall not constitute a waiver of the right to pursue other available remedies.
7.9
Severability
.
If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated and the Parties hereby agree to negotiate in good faith
to modify this Agreement to preserve each Party’s anticipated benefits under this Agreement.
7.10
Entire
Agreement; Further Assurances
. This Agreement represents and constitutes the entire agreement and understanding between the
parties with regard to the subject matter contained herein. All prior agreements, understandings and representations are hereby
merged into this Agreement. Each Party shall execute and/or cause to be delivered to each other Party such instruments and other
documents, and shall take such other actions, as such other Party may reasonably request (prior to, at or after the Execution
Date) for the purpose of carrying out or evidencing any of the transactions contemplated hereunder.
7.11
Specific
Performance
. The Parties agree that irreparable damage would occur in the event that any provision of this Agreement were
not performed in accordance with its specific terms or were otherwise breached, and that money damages or other remedies at law
would not be an adequate remedy for any such damages. Accordingly and in addition to any other remedy that may be available at
law or in equity, the Parties acknowledge and hereby agree that in the event of any breach or threatened breach by any Party of
any of its covenants or obligations set forth in this Agreement, the non-breaching Party shall be entitled to apply to a court
of competent jurisdiction for specific performance, or injunctive relief, or such other relief as such court may deem just and
proper, in order to enforce this Settlement Agreement or prevent any violation of the terms hereof, and to the extent permitted
by applicable law, each Party waives the posting of a bond and any objection to the imposition of such relief.
7.12
Counterparts
.
This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute one and the same Agreement. This Agreement, to the
extent delivered by means of a facsimile machine or electronic mail (any such delivery, an “
Electronic Delivery
”),
shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding
legal effect as if it were the original signed version thereof delivered in person. No party hereto shall raise the use of Electronic
Delivery to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through
the use of Electronic Delivery as a defense to the formation of a contract, and each such party forever waives any such defense,
except to the extent such defense related to lack of authenticity.
[Signature
pages follow]
[COMPANY
SIGNATURE PAGE]
IN
WITNESS WHEREOF, the Parties have each approved and executed this Agreement on the date first set forth above.
COMPANY:
Ener-Core,
Inc.
|
By:
|
|
|
|
Name:
|
Alain
Castro
|
|
|
Title:
|
Chief
Executive Officer
|
|
Address
for Notices:
Ener-Core,
Inc.
Attn:
Mr. Alain Castro, CEO
9400
Toledo Way
Irvine,
CA 92618
Tel:
(949) 616-3300
[INVESTOR
SIGNATURE PAGE]
IN
WITNESS WHEREOF, the Parties have each approved and executed this Agreement on the date set forth above.
INVESTOR:
Rufus
Dufus, LLC
Address
for Notices:
[INVESTOR
SIGNATURE PAGE]
IN
WITNESS WHEREOF, the Parties have each approved and executed this Agreement on the date set forth above.
INVESTOR:
Dylana
Dreams, LLC
Address
for Notices:
EXHIBIT
A
NEW
WARRANTS TABLE
(Column I)
Investor Name:
|
|
(Column II)
Number of New Warrant Shares:
|
|
|
Pilly Boy, LLC
|
|
|
641,026
|
|
|
Island Pickle, LLC
|
|
|
320,513
|
|
EXHIBIT
B
NEW
WARRANT
[Attached]
E-2
Exhibit 10.31
Confidential Treatment Requested
* Portions of this page have been omitted pursuant to a request for confidential treatment and have
been filed separately with the Securities and Exchange Commission.
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
OF 2002
I, Alain J. Castro, certify that:
|
1.
|
I have reviewed this annual report on Form 10-K of Ener-Core, Inc.;
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
|
|
4.
|
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
|
|
|
(a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
|
|
|
(b)
|
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
|
(c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
|
|
|
(d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
|
|
5.
|
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent function):
|
|
|
(a)
|
All significant deficiencies and material weakness in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
|
|
|
(b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
|
|
Date: March 31, 2015
|
|
|
|
|
|
|
|
|
Alain J. Castro
Chief Executive Officer
|
|
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
OF 2002
I, Domonic Carney, certify that:
|
1.
|
I have reviewed this annual report on Form 10-K of Ener-Core, Inc.;
|
|
|
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
|
|
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
|
|
|
|
4.
|
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
|
|
|
(a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
|
|
|
(b)
|
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
|
(c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
|
|
|
(d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
|
|
5.
|
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
|
|
|
(a)
|
All significant deficiencies and material weakness in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
|
|
|
(b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
|
|
Date: March 31, 2015
|
|
|
|
|
|
|
|
|
Domonic Carney
|
|
|
Chief Financial Officer
|
|
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In connection with the annual report
of Ener-Core, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2014 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Alain J. Castro, Chief Executive Officer of the Company,
hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that
to the best of my knowledge:
(1) The Report fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the
Report fairly presents, in all material respects, the financial condition and result of operations of the Company at the dates
and for the periods indicated.
|
|
|
|
Alain J. Castro
|
|
|
Chief Executive Officer
|
|
|
|
|
|
March 31, 2015
|
|
A signed original of this written statement
required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In connection with the annual report
of Ener-Core, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2014 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Domonic Carney, Chief Financial Officer of the Company,
hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that
to the best of my knowledge:
(1) The Report fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the
Report fairly presents, in all material respects, the financial condition and result of operations of the Company at the dates
and for the periods indicated.
|
|
|
|
Domonic Carney
|
|
|
Chief Financial Officer
|
|
|
|
|
|
March 31, 2015
|
|
A signed original of this written statement
required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.