Exhibit 10.1
 
NINTH EXTENSION OF FORBEARANCE UNDER
LOAN AND SECURITY AGREEMENT

This Ninth Extension of Forbearance under Loan and Security Agreement (this
“Ninth Forbearance Extension”) is entered into as of the 1st day of July, 2013
(the “Ninth Extension Effective Date”), by and between ISC8, Inc. (formerly
Irvine Sensors Corporation), a Delaware corporation with its principal place of
business at 3001 Red Hill Ave., Bldg. 4/108, Costa Mesa, Orange County, CA 92926
(“Borrower”) and Partners for Growth III, L.P. (“PFG”).  Except as otherwise
specified herein, capitalized terms used herein without definition shall have
the same meanings given them in the Loan Agreement (as defined below).

WHEREAS, Borrower and PFG entered into that certain Loan and Security Agreement
dated as of December 14, 2011, as amended by the Forbearance (as defined below)
(the “Loan Agreement”);

WHEREAS, PFG provided the credit contemplated under the Loan Agreement as, when
and how specified in the Loan Agreement;

WHEREAS, PFG and Borrower entered into that certain Forbearance, Limited Waiver
and Consent under Loan and Security Agreement on August 21, 2012, to, inter
alia, address financial covenant defaults by Borrower specified therein (the
“Specified Defaults” and such Forbearance, Limited Waiver and Consent under Loan
and Security Agreement on August 21, 2012, the “Forbearance”);

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement on September 28, 2012 (the “First Forbearance
Extension”) extending PFG’s forbearance until October 31, 2012;

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement on October 31, 2012 (the “Second Forbearance
Extension”) extending PFG’s forbearance until December 15, 2012;

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement on December 15, 2012 (the “Third Forbearance
Extension”) extending PFG’s forbearance until January 31, 2013;

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement as of February 1, 2013 (the “Fourth
Forbearance Extension”) extending PFG’s forbearance until February 28, 2013;

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement as of March 1, 2013 (the “Fifth Forbearance
Extension”) extending PFG’s forbearance until March 31, 2013;
WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement as of April 1, 2013 (the “Sixth Forbearance
Extension”) extending PFG’s forbearance until April 30, 2013;

WHEREAS, PFG and Borrower entered into that certain Extension of Forbearance
under Loan and Security Agreement as of May 1, 2013 (the “Seventh Forbearance
Extension”) extending PFG’s forbearance until May 31, 2013;

WHEREAS, Borrower in March, 2013, resolved, and ceased to be engaged in its
Government-focused business, terminating all of its employees and exiting the
facilities associated with that business (the “Shutdown Transaction”), and
Borrower treated the Shutdown Transaction as a disposition of obsolete or
unneeded Equipment in the ordinary course of Borrower’s business not requiring
PFG’s consent under the Loan Documents. Certain terminated employees of Borrower
formed a new corporation named “Irvine Sensors Corporation” (“New ISC”) in an
attempt to continue Borrower’s former government business. No ownership or
security interest exists between Borrower and New ISC.;
 
 
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       WHEREAS, PFG and Borrower entered into that certain Extension of
Forbearance under Loan and Security Agreement as of June 1, 2013 (the “Eighth
Forbearance Extension”) extending PFG’s forbearance until June 30, 2013;

WHEREAS, Borrower remains in default due to the Specified Default and PFG’s
agreement to Forbear (as defined below) expires on the date hereof;

WHEREAS, (i) Borrower, acknowledging that the Specified Defaults have occurred
and are continuing, has requested that PFG extend the term of the Forbearance
and, subject to the terms and conditions of this Ninth Forbearance Extension,
PFG is willing to defer exercising remedies under the Loan Agreement (to
“Forbear”) due to the Specified Defaults, extend the term of the Forbearance and
modify the terms of the Loan Agreement as set forth herein;

NOW THEREFORE, the parties hereby agree as follows:

1.           Extension of Forbearance. Section 2(a)(i) of the Forbearance which
(after giving effect to the Eighth Forbearance Extension) read as follows (with
quotes and italicized text added for convenience of reading only):
 
“(i)           Forbearance by PFG.  In consideration of, among other things,
Borrower’s compliance with each and every term of this Forbearance, PFG hereby
agrees to forbear from exercising its rights and remedies as a result of the
Specified Defaults until the earliest to occur of (i) a Default or an Event of
Default under the Loan Agreement (with the sole exception of the Specified
Defaults), (ii) the failure of Borrower to promptly, punctually, or faithfully
perform or comply with any term or condition of this Forbearance as and when
required, it being expressly acknowledged and agreed that TIME IS OF THE
ESSENCE, and (iii) 5:00 p.m. (San Francisco, California time) on June 30, 2013
(the period commencing as of the date of the effectiveness of this Forbearance
and ending on the earliest of (i), (ii) and (iii) above shall be referred to as
the “Forbearance Period”).”
 
shall be amended as from the Ninth Extension Effective Date to read in its
entirety (Section 2(a))(i) only) as follows:
 
“(i)           Forbearance by PFG.  In consideration of, among other things,
Borrower’s compliance with each and every term of this Forbearance, PFG hereby
agrees to forbear from exercising its rights and remedies as a result of the
Specified Defaults until the earliest to occur of (i) a Default or an Event of
Default under the Loan Agreement (with the sole exception of the Specified
Defaults), (ii) the failure of Borrower to promptly, punctually, or faithfully
perform or comply with any term or condition of this Ninth Forbearance Extension
as and when required, it being expressly acknowledged and agreed that TIME IS OF
THE ESSENCE, (iii) the occurrence of any other event or failure of a condition
set forth in this Ninth Forbearance Extension (whether by the act of Borrower or
a third party), (iv) the failure of Borrower to receive proceeds of at least
$3,000,000 from the sale of convertible debt and/or equity by August 2, 2013,
and (v) 5:00 p.m. (San Francisco, California time) on September 20, 2013,
provided, however, such date shall be accelerated or extended in increments of
one calendar week for each $250,000 increment by which the Financing cash
proceeds fall short of (or exceed) $3,500,000 (the period commencing as of the
date of the effectiveness of this Forbearance and ending on the earliest of (i),
(ii), (iii), (iv) and (v) above shall be referred to as the “Forbearance
Period”). For example only in respect of clause (v), above, if Borrower raises
cash Financing proceeds of $4,125,000 before the end of the Forbearance Period,
then the date specified in clause (v) would be extended by two weeks. If prior
to the end of such extended period Borrower raised an additional $130,000, then
the date specified in clause (v) would be extended by an additional one week.”
 
2.           Payment of Fees and Expenses.  Borrower shall pay to PFG its
reasonable out-of-pocket fees and expenses in connection with this Ninth
Forbearance Extension.
 
 
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    3.           Additional Terms.

(a)  Conditional Partial Deferral of Interest. During the Forbearance Period, so
long as no Default or Event of Default has occurred other than the Specified
Defaults and no Default or Event of Default has occurred under the terms of this
Ninth Forbearance, Borrower shall be obligated to pay in cash as and when due on
a monthly basis only one-half of the interest due on monetary Obligations, with
the balance of such interest, together with interest thereon at the specified
Interest Rate, at the end of the Forbearance Period, however occurring.

(b)  Deferred Forbearance Fee. The parties acknowledge that Borrower
contemplates closing a bridge financing of Borrower generally upon the terms set
forth in that certain term sheet appended hereto for reference (only) as Exhibit
A (the “Financing”). In consideration of PFG not accelerating the Obligations on
the Ninth Amendment Effective Date, PFG’s deferral of a part of the interest due
on outstanding monetary Obligations, and for other good and valuable
consideration acknowledged by Borrower, Borrower shall pay PFG a Forbearance
Fee, deemed fully earned on the Ninth Forbearance Extension Date but payable as
set forth below, equal to: (i) in cash, the product of 12.5% of the gross
proceeds of the Financing times 0.077% (determined as at the earlier of final
closing of the Financing and December 31, 2013), payable at the end of this
Ninth Forbearance Extension Forbearance Period (as grossed up on a monthly basis
for additional cash Financing proceeds raised, and (B) in Borrower equity
derivatives, warrants to purchase that number of shares of Borrower Common Stock
at an exercise price of $0.01 as would result from the product of 12.5% of the
gross proceeds of the Financing (determined as at the earlier of final closing
of the Financing and December 31, 2013) times 3.97 (the “Warrants”). The
Warrants shall be issuable by Borrower upon the earlier of the final closing of
the Financing and PFG demand (with the number of shares of Common Stock issuable
under the Warrants calculated as of the date of such demand, but with a gross-up
provision to reflect any additional warrant coverage based on the final proceeds
of the Financing. For the avoidance of doubt, Exhibit A is appended solely for
reference and shall have no express or implied effect upon PFG’s rights or
obligations under the Loan Documents.

4.           Ratification of Loan Documents.  Borrower hereby ratifies, confirms
and reaffirms, all and singular, the terms and conditions of each of the Loan
Documents to which it is a party. The authority and incumbency documents and
certificates previously delivered to PFG in connection with the Loan Documents
from time to time remain in full force and effect, unmodified, and are hereby
ratified. The terms and conditions of the Loan Agreement remain in full force
and effect, unmodified, notwithstanding PFG’s forbearance.

5.           Representations and Warranties.  Borrower represents and warrants
that:
 
(a)           immediately upon execution of this Ninth Forbearance Extension and
assuming Borrower’s satisfaction of the conditions set forth in Section 6 hereof
(i) the representations and warranties contained in the Existing Loan Documents
are true, accurate and complete in all material respects as of the date hereof
(except to the extent such representations and warranties relate to an earlier
date, in which case they are true and correct as of such date), and (ii) no
Default or Event of Default (other than the Specified Defaults) has occurred and
is continuing or would result from the performance of the Loan Documents;
 
(b)           Borrower has the corporate power and authority to deliver this
Ninth Forbearance Extension and to perform its Obligations under the Loan
Documents and the person(s) executing this Ninth Forbearance Extension on behalf
of Borrower are duly empowered to do so;
 
(c)           the certificate of incorporation and other formation and
organizational documents of Borrower provided to PFG on the date of the Loan
Agreement remain true, accurate and complete and have not been amended,
supplemented or restated and are and continue to be in full force and effect or,
if any such documents have been amended, supplemented or restated or are no
longer true, accurate and complete, Borrower shall provide true, complete,
correct and current versions of such documents as additional conditions to this
Ninth Forbearance Extension under Section 6;

 
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(d)           the execution and delivery by Borrower of this Ninth Forbearance
Extension and the performance by Borrower of its Obligations under the Loan
Agreement have been duly authorized by all necessary corporate action on the
part of Borrower;
 
(e)           this Ninth Forbearance Extension, when executed and delivered by
Borrower (i) constitutes the binding obligation of Borrower, enforceable against
Borrower in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or
other similar laws of general application and equitable principles relating to
or affecting creditors’ rights; and (ii) does not conflict with any law or
regulation or judgment or the organizational documents of Borrower, or any
agreement or document to which Borrower is a party or which is binding upon it
or any of this assets; and (iii) does not require any authorization, approval,
consent, licence or registration in any jurisdiction for its execution,
performance, validity or enforceability that has not already been obtained by
Borrower;
 
(f)           Borrower acknowledges that PFG has acted in good faith and has
conducted in a commercially reasonable manner its relationship with Borrower in
connection with this Ninth Forbearance Extension and in connection with the Loan
Documents and that, as of the date hereof, it has no defenses against its
obligation to pay any and all Obligations; and
 
(g)           the information set forth in the Representations, as updated by
Borrower (as required) and delivered to PFG on or prior to the date hereof,
continues to be true, correct, accurate and complete as of the Seventh Extension
Effective Date.
 
Borrower understands and acknowledges that PFG is entering into this Ninth
Forbearance Extension in reliance upon, and in partial consideration for, the
above representations and warranties, and agrees that such reliance is
reasonable and appropriate.

6.           Conditions.  Subject to the satisfaction of the conditions set
forth below, this Ninth Forbearance Extension shall become effective on the date
it is executed by the parties hereto, but shall continue to be subject to the
satisfaction of all the following conditions:

6.1           Execution and Delivery.  As a condition precedent, Borrower shall
have duly executed and delivered an original counterpart of this Ninth
Forbearance Extension to PFG via electronic mail by 5:00 p.m. US Pacific Time on
July 30, 2013 with the original of such counterpart not later than one Business
Day thereafter via overnight courier.
 
6.2           Payment of PFG Expenses.  Borrower shall have paid upon demand all
PFG Expenses (including all reasonable attorneys’ fees and expenses) incurred in
connection with this Ninth Forbearance Extension.
 
6.3           Updates to Borrower Information. If required to render the
Representations identified in Section 5(g) hereof true, correct, accurate and
complete as of the date hereof in all material respects, Borrower shall update
the Representations.
 
6.4           Guaranty. No demand shall have been made under that certain
Unconditional Continuing Guaranty dated as of December 14, 2011 for the return
of monies paid over to PFG upon PFG demand and being held by PFG.
 
 
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6.5           Restatement of Outstanding Warrants. Upon the occurrence of a Next
Equity Financing, at PFG’s option, either each of the Warrants issued to PFG and
its designees in connection with the Forbearance and each Forbearance Extension
shall be amended to specify the Number of Shares of Next Equity Financing Stock
(or Common Stock, as the case may be) and relevant Exchange Price of Warrant
Stock, or the Company shall provide PFG and its designees an officer’s
certificate showing the Number of Shares of Next Equity Financing Stock (or
Common Stock, as the case may be) and relevant Exchange Price for each Warrant
held. Schedule A hereto sets forth the Warrants outstanding to PFG and its
designees as of the Ninth Extension Effective Date. Borrower acknowledges that
(i) all possible reductions in the Number of Shares under the Warrants (under
the respective Section 1.7’s thereof), have expired and are no longer of any
force and effect, and (ii) all Warrants (including the Warrants issued on the
date of the Loan Agreement) shall reflect an Exchange Price of the lower of
$0.11 and the Effective Price of the securities issued in a Next Equity
Financing, the “Effective Price” being a value that excludes any value
associated with any other consideration given in the Next Equity Financing, such
as warrants or other rights, consistent with the manner in which the term
“Effective Price” is used in the Warrants issued in connection with the
Forbearance and each Forbearance Extension.

For the avoidance of doubt, the failure of any of the conditions set forth in
this Section 6 at any time, unless waived by PFG in its sole discretion, shall
constitute an Event of Default.
 
7.           Terms Related to Shutdown Transaction.  PFG expressly reserves all
rights under the Loan Documents with respect to the Shutdown Transaction, a
transaction PFG believes (and advised Borrower) required its prior consent.
PFG’s execution of this forbearance shall not be deemed a waiver of any rights
PFG may have in relation to the Shutdown Transaction. Borrower shall promptly
pay over to PFG, to be held by PFG as a non-segregated deposit against
Borrower’s monetary Obligations: (i) any consideration received or to be
received by Borrower from the New ISC in connection with the Shutdown
Transaction and (ii) any payments received or to be received by Borrower as
license fees, royalty payments or otherwise from or in connection with New
ISC.  Borrower shall promptly provide such details and information regarding the
commercial relationship between Borrower and New ISC as PFG may reasonably
request at any and all times.

8.           Counterparts.  This Forbearance may be signed in any number of
counterparts, and by different parties hereto in separate counterparts, with the
same effect as if the signatures to each such counterpart were upon a single
instrument.  All counterparts shall be deemed an original of this Forbearance.

9.           Integration; Construction.  This Ninth Forbearance Extension, the
Eighth Forbearance Extension, the Seventh Forbearance Extension, the Sixth
Forbearance Extension, the Fifth Forbearance Extension, the Fourth Forbearance
Extension, Third Forbearance Extension, the Second Forbearance Extension, the
First Forbearance Extension, the Forbearance (including without limitation the
release set forth in Section 4 thereof, which shall be deemed incorporated by
reference herein and given as of the Ninth Extension Effective Date), the Loan
Agreement, the other Loan Documents and any documents executed in connection
herewith or therewith or pursuant hereto or thereto contain the entire agreement
between the parties with respect to the subject matter hereof and supersede all
prior agreements, understandings, offers and negotiations, oral or written, with
respect thereto and no extrinsic evidence whatsoever may be introduced in any
judicial or arbitration proceeding, if any, involving this Ninth Forbearance
Extension; except that any financing statements or other agreements or
instruments filed by PFG with respect to Borrower shall remain in full force and
effect. The title of this Agreement and section headings are for the readers’
convenience only and shall be ignored for purposes of integration into the Loan
Agreement. The quotation marks around modified clauses set forth herein and any
differing font styles, if any, in which such clauses are presented herein are
for ease of reading only and shall be ignored for purposes of construing and
interpreting this Ninth Forbearance Extension. The Recitals to this Ninth
Forbearance Extension are expressly incorporated by reference herein. The
General Provisions set forth in Section 9 of the Loan Agreement are incorporated
herein by reference.
 
10.           Governing Law; Venue.  THIS NINTH FORBEARANCE EXTENSION SHALL BE
GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF CALIFORNIA.  Borrower and PFG each submit to the exclusive
jurisdiction of the State and Federal courts in San Francisco County,
California.
 
[Signature Page Follows]

 
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IN WITNESS WHEREOF, the parties hereto have caused this Ninth Forbearance
Extension to be executed as of the Ninth Extension Effective Date.
 

Borrower:                                                                      
 
ISC8, Inc.
a Delaware corporation
 
By: /s/ John Vong
Name: John Vong
Title: Sr. Vice President and Chief Financial Officer

PFG:                                                           
 
Partners for Growth III, L.P.

By:  /s/ Lorraine Nield
Name: Lorraine Nield
Title:   Manager, Partners for Growth III, LLC,
its General Partner

 
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Schedule A to Ninth Forbearance Extension

Original Loan
Warrant Stock
Exchange Price
PFG
6,750,000 CS
Lower of $0.11 and NEFEP1
PFGEI
990,000 CS
Lower of $0.11 and NEFEP1
SVB
7,260,000 CS
Lower of $0.11 and NEFEP1
8/21/12 Forb.
(@ Holder option)
 
PFG
($101,250/NEFEP) NEFS or 920,455 CS
NEFEP (NEFS) or $0.11 (CS)
PFGEI
($14,850/NEFEP) NEFS or 135,000 CS
NEFEP (NEFS) or $0.11 (CS)
SVB
($108,900/NEFEP) NEFS or 990,000 CS
NEFEP (NEFS) or $0.11 (CS)
9/28/12 Extension
(@ Holder option)
 
PFG
($101,250/NEFEP) NEFS or 920,455 CS
NEFEP (NEFS) or $0.11 (CS)
PFGEI
($14,850/NEFEP) NEFS or 135,000 CS
NEFEP (NEFS) or $0.11 (CS)
SVB
($108,900/NEFEP) NEFS or 990,000 CS
NEFEP (NEFS) or $0.11 (CS)
10/31/12 Extension
(@ Holder option)
 
PFG
($101,250/NEFEP) NEFS or 920,455 CS
NEFEP (NEFS) or $0.11 (CS)
PFGEI
($14,850/NEFEP) NEFS or 135,000 CS
NEFEP (NEFS) or $0.11 (CS)
SVB
($108,900/NEFEP) NEFS or 990,000 CS
NEFEP (NEFS) or $0.11 (CS)
12/15/12 Extension
(@ Holder option)
 
PFG
($101,250/NEFEP) NEFS or 920,455 CS
NEFEP (NEFS) or $0.11 (CS)
PFGEI
($14,850/NEFEP) NEFS or 135,000 CS
NEFEP (NEFS) or $0.11 (CS)
SVB
($108,900/NEFEP) NEFS or 990,000 CS
NEFEP (NEFS) or $0.11 (CS)
2/1/13 Extension
(@ Holder option)
 
PFG
($101,250/NEFEP) NEFS or 920,455 CS
NEFEP (NEFS) or $0.11 (CS)
PFGEI
($14,850/NEFEP) NEFS or 135,000 CS
NEFEP (NEFS) or $0.11 (CS)
SVB
($108,900/NEFEP) NEFS or 990,000 CS
NEFEP (NEFS) or $0.11 (CS)
3/1/13 Extension
(@ Holder option)
 
PFG
($101,250/NEFEP) NEFS or 920,455 CS
NEFEP (NEFS) or $0.11 (CS)
PFGEI
($14,850/NEFEP) NEFS or 135,000 CS
NEFEP (NEFS) or $0.11 (CS)
SVB
($108,900/NEFEP) NEFS or 990,000 CS
NEFEP (NEFS) or $0.11 (CS)
4/1/13 Extension
(@ Holder option)
 
PFG
($101,250/NEFEP) NEFS or 920,455 CS
NEFEP (NEFS) or $0.11 (CS)
PFGEI
($14,850/NEFEP) NEFS or 135,000 CS
NEFEP (NEFS) or $0.11 (CS)
SVB
($108,900/NEFEP) NEFS or 990,000 CS
NEFEP (NEFS) or $0.11 (CS)
5/1/13 Extension
(@ Holder option)
 
PFG
($101,250/NEFEP) NEFS or 920,455 CS
NEFEP (NEFS) or $0.11 (CS)
PFGEI
($14,850/NEFEP) NEFS or 135,000 CS
NEFEP (NEFS) or $0.11 (CS)
SVB
($108,900/NEFEP) NEFS or 990,000 CS
NEFEP (NEFS) or $0.11 (CS)
6/1/13 Extension
(@ Holder option)
 
PFG
($101,250/NEFEP) NEFS or 920,455 CS
NEFEP (NEFS) or $0.11 (CS)
PFGEI
($14,850/NEFEP) NEFS or 135,000 CS
NEFEP (NEFS) or $0.11 (CS)
SVB
($108,900/NEFEP) NEFS or 990,000 CS
NEFEP (NEFS) or $0.11 (CS)

Note 1. The 8/21/12 Forbearance adjusted the Exchange Price of the original
Warrants.

Terms below are as defined in the Warrants

NEFS = “Next Equity Financing Stock”
NEFEP = “Next Equity Financing Effective Price”
CS = Common Stock

Example: Based on proposed terms of Next Equity Financing, PFG 8/21/12 Warrant
would be restated for (or an officer’s certificate in favor of PFG would
reflect) ($101,250 divided by $[NEFEP]) exchangeable at $[NEFEP] shares of NEFS
or 920,455 shares of CS exchangeable at $0.11 per share. Based on
currently-advised terms of Next Equity Financing, Holders would always elect
NEFS at the assumed NEFEP and the restated warrant or officer’s certificate
would reflect the same.
 
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