FORBEARANCE AND AMENDMENT AGREEMENT
THIS FORBEARANCE AND AMENDMENT AGREEMENT (this "Agreement"), dated as of
September 7, 2006 among Electronic Sensor Technology, Inc., a Nevada corporation
(the "Company"), Midsummer Investment, Ltd. ("Midsummer") and Islandia L.P.
("Islandia") (each of Midsummer and Islandia, including its successors and
assigns, also referred to as a "Holder" and collectively the "Holders"). The
Holders are the holders of the Company's 8% Convertible Debentures due December
7, 2009 (the "Debentures") issued pursuant to that certain Securities Purchase
Agreement, dated December 7, 2005, by and among the Company and the Holders (the
"Purchase Agreement"), and those certain common stock purchase warrants issued
pursuant to the Purchase Agreement (the "Warrants"). Capitalized terms used
herein and not otherwise defined herein that are defined in the Securities
Purchase Agreement shall have the same meaning herein as therein defined.
Preliminary Statement:
A. Events of Default have occurred under Sections 8(a) of the Debentures,
including but not limited to, Events of Default occurring as a result of the
Company's failure to cause the Registration Statement to be declared effective
within 180 days of the Closing Date and failure to pay accrued and unpaid
liquidated damages on a timely basis (collectively, the "Existing Defaults").
B. Subject to the terms and conditions set forth herein, Holders have
agreed (i) to forbear from exercising the available rights and remedies arising
as a result of the Existing Defaults until February 28, 2007 (the "Available
Remedies"), and (ii) other than the adjustments provided for hereunder, to
forbear from exercising their right to an adjustment to the exercise price of
the Warrants pursuant to Section 3(h) of the Warrants until February 28, 2007.
C. In negotiating this Agreement with the Holders, the Company believes
it has acted in good faith and in the best interest of all of the shareholders
of the Company and the Holders.
NOW, THEREFORE, the parties to this Agreement, for adequate and sufficient
consideration, the receipt of which is hereby acknowledged, do hereby agree as
follows:
1. Forbearance by Holders.
(a) The Company hereby acknowledges the current and continuing
existence of the Existing Defaults. Subject to the terms and provisions of
this Agreement, until the earlier of (i) February 28, 2007 and (ii) the
date, if any, upon which the Company breaches any other obligation to the
Holders under the Transaction Documents or this Agreement not otherwise
subject to this Agreement (the "Forbearance Termination Date"), the
Holders, severally and not jointly, agree to forbear from exercising the
Available Remedies and any rights and remedies that will be available to
the Holders solely as a result of the Company's failure to cause the
Registration Statement to be declared effective within 180 days of the
Closing Date and failure to pay accrued and unpaid liquidated damages prior
to the date hereof.
(b) Forbearance of Warrant Adjustments. The Company hereby
acknowledges the reduction, and continued reduction, of the Exercise Price
pursuant to Section 3(h) of the Warrants on account of the Company's
failure to secure the effectiveness of the Registration Statement. Subject
to the terms and provisions of this Agreement, until the Forbearance
Termination Date, the Holders, severally and not jointly, agree to a
standstill of the automatic $0.03 per 30-day reduction of the Exercise
Price of the Warrants set forth in Section 3(h) of the Warrants; provided,
however, that after the Forbearance Termination Date any such adjustment
that would have otherwise occurred if not for the standstill shall be
immediately and retroactively applied to the Exercise Price of the Warrant.
(c) Forbearance Only. This Agreement constitutes a forbearance only
and does not and shall not constitute a waiver by Holders of any Event of
Default, a cumulative and accrued adjustment to the Exercise Price of the
Warrants pursuant to Section 3(h) of the Warrants or, except as
specifically provided herein, an amendment or modification of the Purchase
Agreements or any other Transaction Documents. Except to the extent of the
forbearance contained in Sections 1(a) and 1(b) of this Agreement, each
Holder reserves all of its rights, remedies, powers and privileges under
the Purchase Agreement, the Debentures and Transaction Documents and
otherwise with respect to any existing or future Events of Default (other
than an Existing Default prior to the Forbearance Termination Date) and
after the Forbearance Termination Date, the Existing Defaults and the
cumulative and accrued reduction in the Exercise Price of the Warrants that
would have occurred if not for this Agreement. Except as expressly set
forth in this Agreement, no waiver, consent, agreement, amendment, renewal,
extension, modification, standstill, release or understanding of any kind
or nature whatsoever shall be binding on Holders unless and until one or
more counterparts of a document in writing specifically affirming the same
has been executed by Holders. No failure or delay by Holders with respect
to exercising any right, remedy, power or privilege under the Purchase
Agreement, the Transaction Documents or otherwise shall operate as a waiver
thereof or any acquiescence therein.
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2. Reduction in Conversion Price. Effective immediately and forevermore,
the Conversion Price of the Debentures is hereby reduced to equal $0.40, subject
to further adjustment therein. Such adjustment is automatic upon the execution
of this Agreement by the Company and promptly upon request by a Holder and
surrender of the Debenture certificate to the Company, the Company shall deliver
to the Holder a replacement Debenture certificate evidencing such reduced
Conversion Price.
3. Reduction in Exercise Price. Effective immediately and forevermore,
the Exercise Price of the Warrants is hereby reduced to equal $0.43, subject to
further adjustment therein, subject to Section 1(b) above. Such adjustment is
automatic upon the execution of this Agreement by the Company and promptly upon
request by a Holder and surrender of its Warrant certificate to the Company, the
Company shall deliver to the Holder a replacement Warrant certificate evidencing
such reduced Exercise Price.
4. Appointment of Directors; Creation of Committee.
(a) Within 14 days of the date hereof, the Company shall have
appointed (or caused its board of directors to appoint) one Person selected
by Midsummer (together with any successor appointed below, the "Midsummer
Designee"), at Midsummer's sole discretion, as a member of the Company's
board of directors. In addition, within 14 days of the date hereof,
Midsummer will nominate an additional Person to serve as an independent
director subject to the approval of a majority of the directors of the
Board; provided that the board may only reject a nominee in good faith and
with cause pursuant to a written explanation to Midsummer (unless the
Midsummer Designee participated in such decision) and provided further that
Midsummer shall have the right to nominate a new nominee at every meeting
of the board of directors for approval hereunder until such a nominee is
approved (the "Midsummer Nominee"). Until such time as Midsummer (i)
determines that it no longer wishes to control such appointment and/or
nomination or (ii) ceases to beneficially own (ignoring for such purposes
any conversion or exercise caps or limitations) at least 5 million shares
(subject to adjustment for reverse and forward stock splits and the like)
of the Company's common stock on a fully diluted and fully converted or
exercised basis, the Company shall use reasonable best efforts to nominate,
solicit proxies and recommend that shareholders vote in favor of the
Midsummer Designee and/or the Midsummer Nominee, each as a director, or
their respective replacement directors, as selected by Midsummer, in
Midsummer's sole discretion, for re-election as directors of the Company at
each annual meeting or special meeting of the shareholders of the Company
at which the election of directors is a matter to be acted upon. The
Company shall take all further actions reasonably necessary to satisfy the
covenants herein. The Company shall not increase the number of directors to
more than 9 members, including the two directors appointed/nominated by
Midsummer, without the consent of Midsummer.
(b) The parties agree that planning for the succession of sound
management is important to all shareholders of the Company and the Holders.
As soon as practicable following the appointment of the Midsummer Designee
as a director but in no event later than 30 days from the date hereof, the
board of directors of the Company shall create a special committee of 3
board members comprised of one director chosen by Midsummer,
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one independent director and one appointee of the founding shareholders for
the purpose of searching for and hiring a chief operating officer ("COO")
of the Company (the "Search Committee"). In identifying a candidate, the
Search Committee shall search for a candidate with the potential to become
the chief executive officer of the Company ("CEO"), as well as serving
immediately as COO. Upon the selection by the Search Committee, such
candidate shall be presented to the full board of directors for its
consideration. If the board approves of such candidate, the Company shall
promptly hire such candidate for the position of COO of the Company on an
interim and trial basis for up to 3 months. At the end of such interim
period, the board of directors shall meet to decide whether the board
believes that such candidate should be promoted to CEO or released. If the
board of directors determines that such candidate should not be promoted to
CEO, the Search Committee shall immediately commence another search for a
Person with potential to become the CEO of the Company. The Company shall
use its reasonable best efforts to assist the Search Committee in the
discharge of the duties of the Search Committee.
5. Conditions Precedent. Notwithstanding any contrary provisions,
Section 1 above shall not be effective unless and until:
(a) the representations and warranties in this Agreement are true and
correct as of the date hereof; and
(b) no Event of Default (other than the Existing Defaults) shall have
occurred and be continuing and no event or condition shall have occurred,
that with the giving of notice or lapse of time or both would be an Event
of Default (except for the Existing Defaults).
6. Representations and Warranties of the Company. The Company hereby
makes to each Holder the following representations and warranties:
i. Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by this Agreement and otherwise to carry out its
obligations hereunder. The execution and delivery of this Agreement by the
Company and the consummation by it of the transactions contemplated hereby
have been duly authorized by all necessary action on the part of the
Company and no further action is required by the Company, its board of
directors or its stockholders in connection therewith other than in
connection with the Required Approvals. This Agreement has been duly
executed by the Company and, when delivered in accordance with the terms
hereof will constitute the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms except (i) as
limited by general equitable principles and applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally, (ii) as
limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable
law.
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ii. No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby do not and will not: (i) conflict with or
violate any provision of the Company's or any Subsidiary's certificate or
articles of incorporation, bylaws or other organizational or charter
documents, or (ii) conflict with, or constitute a default (or an event that
with notice or lapse of time or both would become a default) under, result
in the creation of any Lien (except as contemplated by the Security
Documents) upon any of the properties or assets of the Company or any
Subsidiary, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or
both) of, any material agreement, credit facility, debt or other material
instrument (evidencing a Company or Subsidiary debt or otherwise) or other
material understanding to which the Company or any Subsidiary is a party or
by which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) subject to the Required Approvals, conflict with or
result in a violation of any law, rule, regulation, order, judgment,
injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including
federal and state securities laws and regulations), or by which any
property or asset of the Company or a Subsidiary is bound or affected;
except in the case of each of clauses (ii) and (iii), such as could not
have or reasonably be expected to result in a Material Adverse Effect.
iii. Affirmation of Prior Representations and Warranties. Except as
set forth under the corresponding section of the disclosure schedules
attached to the Purchase Agreements and except as set forth on Schedule 5
attached hereto, all representations and warranties of the Company
contained in the Purchase Agreement were true and correct when made and
remain true and correct as of the date hereof, as though made at and as of
the date hereof. Except as set forth herein or on Schedule 5(iii) attached
hereto, the Company has performed all of the covenants of the Company
contained in the applicable Transaction Documents to be performed by the
Company through the date hereof.
iv. Other Events of Defaults. As of the date of this Agreement, to
the knowledge of the Company, no Event of Default (other than the Existing
Default) exists.
7. Representations and Warranties of the Holders. Each Holder hereby, for
itself and for no other Holder, represents and warrants as of the date hereof
to the Company as follows:
i. Authority. The execution, delivery and performance by such Holder
of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate or similar action on the part of such
Holder. This Agreement has been duly executed by such Holder, and when
delivered by such Holder in accordance with the terms hereof, will
constitute the valid and legally binding obligation of such Holder,
enforceable against it in accordance with its terms, except (i) as limited
by general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or
other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.
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ii. Affirmation of Prior Representations and Warranties. Such Holder
hereby represents and warrants to the Company that its representations and
warranties listed in Section 3.2 of the applicable Purchase Agreement are
true and correct as of the date hereof.
8. Delivery of Opinion. Concurrently herewith, the Company shall deliver
to the Holders an opinion of outside counsel in form and substance substantially
similar to the opinion delivered to the Holders pursuant the Purchase Agreement
and which opinion shall be reasonably acceptable to the Holders.
9. Effect on Transaction Documents. Except as expressly set forth above,
all of the terms and conditions of the Transaction Documents shall continue in
full force and effect after the execution of this Agreement and shall not be in
any way changed, modified or superseded by the terms set forth herein, including
but not limited to, any other obligations the Company may have to the Holders
under the Transaction Documents.
10. Release of all Claims. THE COMPANY HEREBY UNCONDITIONALLY RELEASES AND
FOREVER DISCHARGES EACH HOLDER AND ITS RESPECTIVE SUCCESSORS, ASSIGNS, AGENTS,
DIRECTORS, OFFICERS, EMPLOYEES, AFFILIATES, ACCOUNTANTS, CONSULTANTS, ADVISORS
AND ATTORNEYS (COLLECTIVELY, THE "BENEFITED PARTIES") FROM ALL CLAIMS (AS
DEFINED BELOW) AND AGREES TO INDEMNIFY THE BENEFITED PARTIES, AND HOLD THEM
HARMLESS FROM ANY AND ALL CLAIMS, LOSSES, CAUSES OF ACTION, COSTS AND EXPENSES
OF EVERY KIND OR CHARACTER IN CONNECTION WITH THE CLAIMS. AS USED IN THIS
AGREEMENT, THE TERM "CLAIMS" MEANS ANY AND ALL POSSIBLE CLAIMS, DEMANDS,
ACTIONS, CAUSES OF ACTIONS, COSTS, EXPENSES AND LIABILITIES WHATSOEVER, KNOWN OR
UNKNOWN, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART IN CONNECTION WITH
SUCH HOLDERS OBLIGATIONS UNDER THE PURCHASE AGREEMENT, WHICH THE COMPANY, OR ANY
OF ITS AGENTS, EMPLOYEES OR AFFILIATES MAY NOW OR HEREAFTER HAVE OR CLAIM
AGAINST ANY OF THE BENEFITED PARTIES AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS
ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR OTHERWISE IN CONNECTION WITH
ANY OF THE TRANSACTION AGREEMENTS, INCLUDING ANY CONTRACTING FOR, CHARGING,
TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE MAXIMUM
RATE ON INTEREST CHARGEABLE UNDER APPLICABLE LAW AND ANY LOSS, COST OR DAMAGE,
OF ANY KIND OR CHARACTER, ARISING OUT OF OR IN ANY WAY CONNECTED WITH OR IN ANY
WAY RESULTING FROM THE ACTIONS OR OMISSIONS OF THE BENEFITED PARTIES, INCLUDING
ANY BREACH OF FIDUCIARY DUTY, BREACH OF ANY DUTY OF GOOD FAITH OR FAIR DEALING,
UNDUE INFLUENCE, DURESS, ECONOMIC COERCION, CONFLICT OF INTEREST, NEGLIGENCE,
BAD FAITH, MALPRACTICE, VIOLATIONS . THE COMPANY AGREES THAT NONE OF THE
BENEFITED PARTIES HAS FIDUCIARY OR SIMILAR OBLIGATIONS TO THE COMPANY OR ANY
AGENTS, EMPLOYEES OR AFFILIATES OF THE COMPANY AND THAT THEIR RELATIONSHIPS ARE
STRICTLY THAT OF CREDITOR AND DEBTOR. THIS RELEASE IS ACCEPTED BY HOLDERS
PURSUANT TO
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THIS AGREEMENT AND SHALL NOT BE CONSTRUED AS AN ADMISSION OF LIABILITY BY
HOLDERS OR ANY OTHER BENEFITED PARTY.
THE COMPANY ACKNOWLEDGES THAT THE FOREGOING PROVISIONS ARE INTENDED TO RELEASE
HOLDERS FROM LIABILITY AND/OR INDEMNIFY AND HOLD HARMLESS HOLDERS FOR, AMONG
OTHER THINGS, THE ORDINARY NEGLIGENCE OF HOLDERS. THE COMPANY AGREES THAT THE
RELEASE AND/OR INDEMNITY PROVISIONS CONTAINED IN THIS AGREEMENT ARE CAPTIONED TO
CLEARLY IDENTIFY THE RELEASE AND/OR INDEMNITY PROVISIONS AND, THEREFORE, ARE SO
CONSPICUOUS THAT THE COMPANY HAS FAIR NOTICE OF THE EXISTENCE AND CONTENTS OF
SUCH PROVISIONS.
11. Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, unless the same shall be in writing and signed by the Company and each
Holder.
12. Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be delivered as set
forth in the Purchase Agreement.
13. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and permitted assigns of each of the parties
and shall inure to the benefit of each Holder. The Company may not assign
(except by merger) its rights or obligations hereunder without the prior written
consent of all of the Holders of the then-outstanding Securities. Each Holder
may assign their respective rights hereunder in the manner and to the Persons as
permitted under the applicable Purchase Agreement.
14. Execution and Counterparts. This Agreement may be executed in two or
more counterparts, all of which when taken together shall be considered one and
the same agreement and shall become effective when counterparts have been signed
by each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission or by e-mail delivery of a ".pdf" format
data file, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile or ".pdf" signature page were an original
thereof.
15. Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be determined in
accordance with the provisions of the Purchase Agreements.
16. Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their commercially reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that
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they would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.
17. Headings. The headings in this Agreement are for convenience only, do
not constitute a part of the Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
18. Independent Nature of Holders' Obligations and Rights. The obligations
of each Holder hereunder are several and not joint with the obligations of any
other Holders hereunder, and no Holder shall be responsible in any way for the
performance of the obligations of any other Holder hereunder. Nothing contained
herein or in any other agreement or document delivered at any closing, and no
action taken by any Holder pursuant hereto, shall be deemed to constitute the
Holders as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Holders are in any way acting in
concert with respect to such obligations or the transactions contemplated by
this Agreement. Each Holder shall be entitled to protect and enforce its rights,
including without limitation the rights arising out of this Agreement, and it
shall not be necessary for any other Holder to be joined as an additional party
in any proceeding for such purpose.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Forbearance and
Amendment Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
ELECTRONIC SENSOR TECHNOLOGY, INC. Address for Notice:
0000 Xxxxxxxx Xxxxxx Xxxxxx
Xxxxxxx Xxxx, Xxxxxxxxxx 00000
By: /s/ Xxxxx X. Xxx
--------------------------
Name: Xxxxx X. Xxx
Title: President and Chief
Executive Officer
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR HOLDER FOLLOWS]
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[HOLDER SIGNATURE PAGES TO ESNR FORBEARANCE AND AMENDMENT AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Forbearance and
Amendment Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
Name of Holder: Midsummer Investment, Ltd.
Signature of Authorized Signatory of Holder: /s/ Xxxxxx X. Xxxxxxx
Name of Authorized Signatory: Xxxxxx X. Xxxxxxx
Title of Authorized Signatory: Director
Wire Instructions of Holder:
[SIGNATURE PAGES CONTINUE]
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[HOLDER SIGNATURE PAGES TO ESNR FORBEARANCE AND AMENDMENT AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Forbearance and
Amendment Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
Name of Holder: Islandia, L.P.
Signature of Authorized Signatory of Holder: /s/ Xxxxx X. Xxxxxx
Name of Authorized Signatory: Xxxxx X. Xxxxxx
Title of Authorized Signatory: VP of Xxxx Xxxx, Inc., General Partner
Wire Instructions of Holder:
[SIGNATURE PAGES CONTINUE]
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