Exhibit
10.4


 


February 13, 2009


 


VIA FACSIMILE


American Defense Systems, Inc. 

230 Duffy Avenue,


Hicksville, NY 11801


Attention: Chief Financial Officer 

Facsimile: (516) 390-5308


 


Re: Forbearance


 


Gentlemen:


 


Reference is made to (a) the Certificate of Designations,
Preferences and Rights (the “Certificate of Designation”) of Series A
Convertible Preferred Stock of American Defense Systems, Inc., a Delaware
corporation (the “Company”) pursuant to which the Company designated and
issued its Series A Convertible Preferred Stock, par value $0.001 per
share (the “Series A Preferred Stock”) and (b) the Consent and
Agreement of Series A Convertible Preferred Stockholders, dated as of May 23,
2008, by and between the Company and the holders of the Series A Preferred
Stock (the “Consent”). All capitalized terms used in this letter and not
otherwise defined herein shall have their respective meanings set forth in the
Certificate of Designations and the Consent.


 


The Company has informed the undersigned, Centaur
Value Fund, LP and United Centaur Master Fund (together, the “Investor”),
that it will not be in compliance with the Financial Covenants for the Fiscal
Year ended December 31, 2008, the requirement to publicly disclose and
disseminate the Company’s Operating Results by the Operating Results
Announcement Deadline, or the requirement to certify the same, all as required
by Section 6 of the Consent (collectively, the “Financial Covenant
Triggering Event”). The Consent provides that such breaches shall be deemed Triggering
Events under Section 3(a)(vii) of the Certificate of Designation.


 


The Investor, as Holders of Series A Preferred
Stock, hereby agree, subject to the satisfaction of the Forbearance Conditions
(as defined below), to forbear (the “Forbearance”) from taking any
action or exercising any of their remedies under the Certificate of
Designation, the Consent or otherwise with respect to the Financial Covenant
Triggering Event, including, without limitation, the exercise of its right to
cause the Company to redeem the Series A Preferred Stock and to increase
the Dividend Rate to the rates during a Triggering Period, until the earlier of
(a) the date on which any Triggering Event (other than the Financial
Covenant Triggering Event) shall occur or exist and (b) February 27,
2009 (such period being hereinafter called, the “Forbearance Period”).


 


The effectiveness of the Forbearance is subject to
the continued satisfaction of the following terms and conditions (the “Forbearance
Conditions”):


 

















 


(1)               The Company shall have obtained from all of
the Holders an executed forbearance letter in substance substantially identical
to this letter.


 


(2)               The Company shall use its best efforts during
the Forbearance Period to negotiate and consummate in good faith the transaction
(the “Exchange Transaction”) described in the term sheet attached hereto
as Exhibit A.


 


(3)     The Company shall pay all of the documented reasonable legal
fees and expenses of the undersigned incurred during the Forbearance Period in
connection with the preparation and execution of this letter and the Exchange
Transaction.


 


The Investor has not waived, is not by this letter
waiving, and has no present intention of waiving, the Financial Covenant
Triggering Event or any other Triggering Event which may be continuing on the
date hereof or any Triggering Event which may occur after the date hereof
(whether the same or similar to the Financial Covenant Triggering Event), and
nothing contained herein shall be deemed to constitute any such waiver. Except
as provided in this letter agreement, the Investor reserves the right, in their
sole discretion, to exercise any or all rights or remedies under the
Certificate of Designation, the Consent, applicable law and otherwise as a
result of the Financial Covenant Triggering Event or any other Triggering Event
that may be continuing on the date hereof or any Triggering Event that may
occur after the date hereof, and the Investor has not waived any of such rights
or remedies and nothing in this letter, and no delay on the Investor’s part in
exercising such rights or remedies, should be construed as a waiver of any such
rights or remedies. Upon the termination of the Forbearance Period, the
agreement of the Investor to forbear shall automatically and without further
action terminate and be of no force and effect, it being understood and agreed
that the effect of such termination will be to permit the Investor to seek to
exercise any and all of their respective rights and remedies at any time and
from time to time thereafter, including, without limitation, the right to
require redemption of all or any portion of Series A Preferred Stock and
exercise any other rights and remedies set forth in the Certificate of
Designation, the Consent, applicable law or otherwise, in each case, without
any notice, passage of time or forbearance of any kind.


 


[Signature page follows]


 


2

















 


This letter may be executed in any number of
counterparts, each of which counterparts when executed and delivered shall be
an original, but all of which shall together constitute one and the same
instrument. Delivery of an executed counterpart of this letter by facsimile or
other electronic transmission shall be equally effective as delivery of a
manually executed counterpart.


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  CENTAUR VALUE FUND, LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  UNITED CENTAUR MASTER FUND

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  ACKNOWLEDGED AND AGREED TO 

  

  BY: AMERICAN DEFENSE SYSTEMS, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  cc: 

  	
  Greenberg Traurig, LLP

  	
   

  
	
   

  	
  1750 Tysons Blvd., Suite 1200

  	
   

  
	
   

  	
  McLean, Virginia 22102

  	
   

  
	
   

  	
  Attention: Jeffrey R. Houle

  	
   

  
	
   

  	
  Facsimile: (703) 749-1301

  	
   

  
					



 


[Signature page to
Forbearance letter]


 


3

















 


EXHIBIT A


 


Term Sheet