Exhibit 10.2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of December ___, 2005, among Electronic Sensor Technology, Inc.,
a Nevada corporation (the "Company"), and the purchasers signatory hereto (each
such purchaser is a "Purchaser" and collectively, the "Purchasers").
This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof among the Company and the Purchasers (the "Purchase
Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"Advice" shall have the meaning set forth in Section 6(d).
"Effectiveness Date" means, with respect to the initial
Registration Statement required to be filed hereunder, the 90th calendar
day following the date hereof (the 150th calendar day in the case of a
"full review" by the Commission of the initial Registration Statement)
and, with respect to any additional Registration Statements which may be
required pursuant to Section 3(c) (including an additional Registration
Statement filed pursuant to the second clause of the first sentence of
Section 2(a)), the 60th calendar day following the date on which the
Company first knows, or reasonably should have known, that such
additional Registration Statement is required hereunder; provided,
however, in the event the Company is notified by the Commission that one
of the above Registration Statements will not be reviewed or is no
longer subject to further review and comments, the Effectiveness Date as
to such Registration Statement shall be the fifth Trading Day following
the date on which the Company is so notified if such date precedes the
dates required above.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Event" shall have the meaning set forth in Section 2(b).
"Event Date" shall have the meaning set forth in Section 2(b).
"Filing Date" means, with respect to the initial Registration
Statement required hereunder, the 30th calendar day following the date
hereof and, with respect to any additional Registration Statements which
may be required pursuant to Section 3(c), the 30th day following the
date on which the Company first knows, or reasonably should have known
that such additional Registration Statement is required hereunder
(including an additional Registration Statement filed pursuant to the
second clause of the first sentence of Section 2(a), as to which the
Filing Date shall be the 30th calendar day following the date a Holder
requests that the Company file such additional Registration Statement) .
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in
Section 5(c).
"Indemnifying Party" shall have the meaning set forth in
Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Plan of Distribution" shall have the meaning set forth in
Section 2(a).
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in a Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A promulgated
under the Securities Act), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of
the Registrable Securities covered by a Registration Statement, and all
other amendments and supplements to the Prospectus, including
post-effective amendments, and all material incorporated by reference or
deemed to be incorporated by reference in such Prospectus.
"Registrable Securities" means (i) all of the shares of Common
Stock issuable upon conversion in full of the Debentures, (ii) all
shares issuable as interest on the Debentures assuming all permissible
interest payments are made in shares of Common Stock and the Debentures
are held until maturity, (iii) all Warrant Shares, (iv) any securities
issued or issuable upon any stock split, dividend or other distribution,
recapitalization or similar event with respect to the foregoing and (v)
any additional shares issuable in connection with any anti-dilution
provisions in the Debentures or the Warrants (in each case, without
giving effect to any limitations on conversion set forth in the
Debenture or limitations on exercise set forth in the Warrant).
"Registration Statement" means the registration statements
required to be filed hereunder and any additional registration
statements contemplated by Section 3(c), including (in each case) the
Prospectus, amendments and supplements to such registration statement or
Prospectus, including pre- and post-effective amendments, all exhibits
thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
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"Rule 415" means Rule 415 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or
any similar rule or regulation hereafter adopted by the Commission
having substantially the same purpose and effect as such Rule.
"Rule 424" means Rule 424 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or
any similar rule or regulation hereafter adopted by the Commission
having substantially the same purpose and effect as such Rule.
"Selling Shareholder Questionnaire" shall have the meaning set
forth in Section 3(a).
2. Shelf Registration
(a) On or prior to the initial Filing Date, the Company
shall prepare and file with the Commission a "Shelf" Registration
Statement covering the resale of 110% of the Registrable Securities
(other than as to the Warrant Shares) on such Filing Date for an
offering to be made on a continuous basis pursuant to Rule 415, and on
or prior to each subsequent Filing Date, (including the Filing Date as
to the Warrant Shares and any other Registrable Securities not covered
by such initial Registration Statement, which Registration Statement
shall be filed only after the Effective Date and within 30 calendar days
that a Holder requests in writing that the Company file such
Registration Statement), the Company shall prepare and file with the
Commission a "Shelf" Registration Statement covering the resale of 130%
of the Registrable Securities (including the Warrant Shares) on such
Filing Date for an offering to be made on a continuous basis pursuant to
Rule 415. Each Registration Statement filed hereunder shall be on Form
S-3 (except if the Company is not then eligible to register for resale
the Registrable Securities on Form S-3, in which case such registration
shall be on another appropriate form in accordance herewith) and shall
contain (unless otherwise directed by the Holders) substantially the
"Plan of Distribution" attached hereto as Annex A. Subject to the terms
of this Agreement, the Company shall use its best efforts to cause a
Registration Statement to be declared effective under the Securities Act
as promptly as possible after the filing thereof, but in any event prior
to the applicable Effectiveness Date, and shall use its best efforts to
keep such Registration Statement continuously effective under the
Securities Act until all Registrable Securities covered by such
Registration Statement have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) as determined by the counsel to the
Company pursuant to a written opinion letter to such effect, addressed
and acceptable to the Company's transfer agent and the affected Holders
(the "Effectiveness Period"). The Company shall telephonically request
effectiveness of a Registration Statement as of 5:00 pm Eastern Time on
a Trading Day. The Company shall immediately notify the Holders via
facsimile of the effectiveness of a Registration Statement on the same
Trading Day that the Company telephonically confirms effectiveness with
the Commission, which shall be the date requested for effectiveness of a
Registration Statement. The Company shall, by 9:30 am Eastern Time on
the Trading Day after the Effective Date (as defined in the Purchase
Agreement), file a Form 424(b)(5) with the Commission. Failure to so
notify the Holder within 1 Trading Day of such notification shall be
deemed an Event under Section 2(b).
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(b) If: (i) a Registration Statement is not filed on or
prior to its Filing Date (if the Company files a Registration Statement
without affording the Holders the opportunity to review and comment on
the same as required by Section 3(a), the Company shall not be deemed to
have satisfied this clause (i)), or (ii) the Company fails to file with
the Commission a request for acceleration in accordance with Rule 461
promulgated under the Securities Act, within five Trading Days of the
date that the Company is notified (orally or in writing, whichever is
earlier) by the Commission that a Registration Statement will not be
"reviewed," or not subject to further review, or (iii) prior to its
Effectiveness Date, the Company fails to file a pre-effective amendment
and otherwise respond in writing to comments made by the Commission in
respect of such Registration Statement within 15 calendar days after the
receipt of comments by or notice from the Commission that such amendment
is required in order for a Registration Statement to be declared
effective, or (iv) a Registration Statement filed or required to be
filed hereunder is not declared effective by the Commission by its
Effectiveness Date, or (v) after the Effectiveness Date, a Registration
Statement ceases for any reason to remain continuously effective as to
all Registrable Securities for which it is required to be effective, or
the Holders are not permitted to utilize the Prospectus therein to
resell such Registrable Securities for 20 consecutive calendar days but
no more than an aggregate of 30 calendar days during any 12-month period
(which need not be consecutive Trading Days) (any such failure or breach
being referred to as an "Event", and for purposes of clause (i) or (iv)
the date on which such Event occurs, or for purposes of clause (ii) the
date on which such five Trading Day period is exceeded, or for purposes
of clause (iii) the date which such 15 calendar day period is exceeded,
or for purposes of clause (v) the date on which such 20 or 30 calendar
day period, as applicable, is exceeded being referred to as "Event
Date"), then in addition to any other rights the Holders may have
hereunder or under applicable law, on each such Event Date and on each
monthly anniversary of each such Event Date (if the applicable Event
shall not have been cured by such date) until the applicable Event is
cured, the Company shall pay to each Holder an amount in cash, as
partial liquidated damages and not as a penalty, equal to 2% of the
aggregate purchase price paid by such Holder pursuant to the Purchase
Agreement for any Registrable Securities then held by such Holder. If
the Company fails to pay any partial liquidated damages pursuant to this
Section in full within seven days after the date payable, the Company
will pay interest thereon at a rate of 18% per annum (or such lesser
maximum amount that is permitted to be paid by applicable law) to the
Holder, accruing daily from the date such partial liquidated damages are
due until such amounts, plus all such interest thereon, are paid in
full. The partial liquidated damages pursuant to the terms hereof shall
apply on a daily pro-rata basis for any portion of a month prior to the
cure of an Event.
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3. Registration Procedures.
In connection with the Company's registration obligations hereunder, the
Company shall:
(a) Not less than three Trading Days prior to the filing of
each Registration Statement or any related Prospectus or any amendment
or supplement thereto (including any document that would be incorporated
or deemed to be incorporated therein by reference), the Company shall,
(i) furnish to each Holder copies of all such documents proposed to be
filed, which documents (other than those incorporated or deemed to be
incorporated by reference) will be subject to the review of such
Holders, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as
shall be necessary, in the reasonable opinion of respective counsel to
conduct a reasonable investigation within the meaning of the Securities
Act. The Company shall not file a Registration Statement or any such
Prospectus or any amendments or supplements thereto to which the Holders
of a majority of the Registrable Securities shall reasonably object in
good faith, provided that, the Company is notified of such objection in
writing no later than 5 Trading Days after the Holders have been so
furnished copies of such documents. Each Holder agrees to furnish to the
Company a completed Questionnaire in the form attached to this Agreement
as Annex B (a "Selling Shareholder Questionnaire") not less than two
Trading Days prior to the Filing Date or by the end of the fourth
Trading Day following the date on which such Holder receives draft
materials in accordance with this Section.
(b) (i) Prepare and file with the Commission such
amendments, including post-effective amendments, to a Registration
Statement and the Prospectus used in connection therewith as may be
necessary to keep a Registration Statement continuously effective as to
the applicable Registrable Securities for the Effectiveness Period and
prepare and file with the Commission such additional Registration
Statements in order to register for resale under the Securities Act all
of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement (subject
to the terms of this Agreement), and as so supplemented or amended to be
filed pursuant to Rule 424; (iii) respond as promptly as reasonably
possible to any comments received from the Commission with respect to a
Registration Statement or any amendment thereto and as promptly as
reasonably possible provide the Holders true and complete copies of all
correspondence from and to the Commission relating to a Registration
Statement; and (iv) comply in all material respects with the provisions
of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by a Registration
Statement during the applicable period in accordance (subject to the
terms of this Agreement) with the intended methods of disposition by the
Holders thereof set forth in such Registration Statement as so amended
or in such Prospectus as so supplemented.
(c) If during the Effectiveness Period, the number of
Registrable Securities at any time exceeds 90% of the number of shares
of Common Stock then registered in a Registration Statement, then the
Company shall file as soon as reasonably practicable but in any case
prior to the applicable Filing Date, an additional Registration
Statement covering the resale by the Holders of not less than 130% of
the number of such Registrable Securities.
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(d) Notify the Holders of Registrable Securities to be sold
(which notice shall, pursuant to clauses (ii) through (vi) hereof, be
accompanied by an instruction to suspend the use of the Prospectus until
the requisite changes have been made) as promptly as reasonably possible
(and, in the case of (i)(A) below, not less than five Trading Days prior
to such filing) and (if requested by any such Person) confirm such
notice in writing no later than one Trading Day following the day (i)(A)
when a Prospectus or any Prospectus supplement or post-effective
amendment to a Registration Statement is proposed to be filed; (B) when
the Commission notifies the Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in
writing on such Registration Statement (the Company shall provide true
and complete copies thereof and all written responses thereto to each of
the Holders); and (C) with respect to a Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of
any request by the Commission or any other Federal or state governmental
authority for amendments or supplements to a Registration Statement or
Prospectus or for additional information; (iii) of the issuance by the
Commission or any other federal or state governmental authority of any
stop order suspending the effectiveness of a Registration Statement
covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) of the receipt by the Company of
any notification with respect to the suspension of the qualification or
exemption from qualification of any of the Registrable Securities for
sale in any jurisdiction, or the initiation or threatening of any
Proceeding for such purpose; (v) of the occurrence of any event or
passage of time that makes the financial statements included in a
Registration Statement ineligible for inclusion therein or any statement
made in a Registration Statement or Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in
any material respect or that requires any revisions to a Registration
Statement, Prospectus or other documents so that, in the case of a
Registration Statement or the Prospectus, as the case may be, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; and (vi) the occurrence or existence of any
pending corporate development with respect to the Company that the
Company believes may be material and that, in the determination of the
Company, makes it not in the best interest of the Company to allow
continued availability of a Registration Statement or Prospectus;
provided that any and all of such information shall remain confidential
to each Holder until such information otherwise becomes public, unless
disclosure by a Holder is required by law; provided, further,
notwithstanding each Holder's agreement to keep such information
confidential, the Holders make no acknowledgement that any such
information is material, non-public information.
(e) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the
effectiveness of a Registration Statement, or (ii) any suspension of the
qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction, at the earliest
practicable moment.
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(f) Furnish to each Holder, without charge, at least one
conformed copy of each such Registration Statement and each amendment
thereto, including financial statements and schedules, all documents
incorporated or deemed to be incorporated therein by reference to the
extent requested by such Person, and all exhibits to the extent
requested by such Person (including those previously furnished or
incorporated by reference) promptly after the filing of such documents
with the Commission.
(g) Promptly deliver to each Holder, without charge, as many
copies of the Prospectus or Prospectuses (including each form of
prospectus) and each amendment or supplement thereto as such Persons may
reasonably request in connection with resales by the Holder of
Registrable Securities. Subject to the terms of this Agreement, the
Company hereby consents to the use of such Prospectus and each amendment
or supplement thereto by each of the selling Holders in connection with
the offering and sale of the Registrable Securities covered by such
Prospectus and any amendment or supplement thereto, except after the
giving on any notice pursuant to Section 3(d).
(h) If NASDR Rule 2710 requires any broker-dealer to make a
filing prior to executing a sale by a Holder, the Company shall (i) make
an Issuer Filing with the NASDR, Inc. Corporate Financing Department
pursuant to proposed NASDR Rule 2710(b)(10)(A)(i), (ii) respond within
five Trading Days to any comments received from NASDR in connection
therewith, (iii) and pay the filing fee required in connection
therewith.
(i) Prior to any resale of Registrable Securities by a
Holder, use its commercially reasonable efforts to register or qualify
or cooperate with the selling Holders in connection with the
registration or qualification (or exemption from the Registration or
qualification) of such Registrable Securities for the resale by the
Holder under the securities or Blue Sky laws of such jurisdictions
within the United States as any Holder reasonably requests in writing,
to keep each registration or qualification (or exemption therefrom)
effective during the Effectiveness Period and to do any and all other
acts or things reasonably necessary to enable the disposition in such
jurisdictions of the Registrable Securities covered by each Registration
Statement; provided, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so
qualified, subject the Company to any material tax in any such
jurisdiction where it is not then so subject or file a general consent
to service of process in any such jurisdiction.
(j) If requested by the Holders, cooperate with the Holders
to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be delivered to a transferee
pursuant to a Registration Statement, which certificates shall be free,
to the extent permitted by the Purchase Agreement, of all restrictive
legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such Holders may
request.
(k) Upon the occurrence of any event contemplated by this
Section 3, as promptly as reasonably possible under the circumstances
taking into account the Company's good faith assessment of any adverse
consequences to the Company and its stockholders of the premature
disclosure of such event, prepare a supplement or
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amendment, including a post-effective amendment, to a Registration
Statement or a supplement to the related Prospectus or any document
incorporated or deemed to be incorporated therein by reference, and file
any other required document so that, as thereafter delivered, neither a
Registration Statement nor such Prospectus will contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
If the Company notifies the Holders in accordance with clauses (ii)
through (vi) of Section 3(d) above to suspend the use of any Prospectus
until the requisite changes to such Prospectus have been made, then the
Holders shall suspend use of such Prospectus. The Company will use its
best efforts to ensure that the use of the Prospectus may be resumed as
promptly as is practicable. The Company shall be entitled to exercise
its right under this Section 3(k) to suspend the availability of a
Registration Statement and Prospectus, subject to the payment of partial
liquidated damages pursuant to Section 2(b), for a period not to exceed
60 days (which need not be consecutive days) in any 12 month period.
(l) Comply with all applicable rules and regulations of the
Commission.
(m) The Company may require each selling Holder to furnish
to the Company a certified statement as to the number of shares of
Common Stock beneficially owned by such Holder and, if required by the
Commission, the person thereof that has voting and dispositive control
over the Shares. During any periods that the Company is unable to meet
its obligations hereunder with respect to the registration of the
Registrable Securities solely because any Holder fails to furnish such
information within three Trading Days of the Company's request, any
liquidated damages that are accruing at such time as to such Holder only
shall be tolled and any Event that may otherwise occur solely because of
such delay shall be suspended as to such Holder only, until such
information is delivered to the Company.
4. Registration Expenses. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to a
Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with the Trading Market on which the Common Stock is then
listed for trading, (B) in compliance with applicable state securities or Blue
Sky laws reasonably agreed to by the Company in writing (including, without
limitation, fees and disbursements of counsel for the Company in connection with
Blue Sky qualifications or exemptions of the Registrable Securities and
determination of the eligibility of the Registrable Securities for investment
under the laws of such jurisdictions as requested by the Holders) and (C) if not
previously paid by the Company in connection with an Issuer Filing, with respect
to any filing that may be required to be made by any broker through which a
Holder intends to make sales of Registrable Securities with NASD Regulation,
Inc. pursuant to the NASD Rule 2710, so long as the broker is receiving no more
than a customary brokerage commission in connection with such sale, (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities and of printing prospectuses if the
printing of prospectuses is reasonably requested by the holders of a
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majority of the Registrable Securities included in a Registration Statement),
(iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company, (v) Securities Act liability insurance, if the Company
so desires such insurance, and (vi) fees and expenses of all other Persons
retained by the Company in connection with the consummation of the transactions
contemplated by this Agreement. In addition, the Company shall be responsible
for all of its internal expenses incurred in connection with the consummation of
the transactions contemplated by this Agreement (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit and the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder. In no event shall the Company be
responsible for any broker or similar commissions or, except to the extent
provided for in the Transaction Documents, any legal fees or other costs of the
Holders.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold
harmless each Holder, the officers, directors, agents, brokers
(including brokers who offer and sell Registrable Securities as
principal as a result of a pledge or any failure to perform under a
margin call of Common Stock), investment advisors and employees of each
of them, each Person who controls any such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) and
the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and
against any and all losses, claims, damages, liabilities, costs
(including, without limitation, reasonable attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or relating to (1)
any untrue or alleged untrue statement of a material fact contained in a
Registration Statement, any Prospectus or any form of prospectus or in
any amendment or supplement thereto or in any preliminary prospectus, or
arising out of or relating to any omission or alleged omission of a
material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus
or supplement thereto, in light of the circumstances under which they
were made) not misleading or (2) any violation or alleged violation by
the Company of the Securities Act, the Exchange Act or any state
securities law, or any rule or regulation thereunder, in connection with
the performance of its obligations under this Agreement, except to the
extent, but only to the extent, that (i) such untrue statements or
omissions or violations of law, rule or regulation are based solely upon
information regarding such Holder furnished in writing to the Company by
such Holder expressly for use therein, or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in a Registration
Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto (it being understood that the Holder has
approved Annex A hereto for this purpose) or (ii) in the case of an
occurrence of an event of the type specified in Section 3(d)(ii)-(vi),
the use by such Holder of an outdated or defective Prospectus after the
Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the
Advice contemplated in Section 6(d). The Company shall notify the
Holders promptly of the institution, threat or assertion of any
Proceeding arising from or in connection with the transactions
contemplated by this Agreement of which the Company is aware.
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(b) Indemnification by Holders. Each Holder shall,
severally and not jointly, indemnify and hold harmless the Company, its
directors, officers, agents and employees, each Person who controls the
Company (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act), and the directors, officers, agents or
employees of such controlling Persons, to the fullest extent permitted
by applicable law, from and against all Losses, as incurred, to the
extent arising out of or based solely upon: (x) such Holder's failure to
comply with the prospectus delivery requirements of the Securities Act
or (y) any untrue or alleged untrue statement of a material fact
contained in any Registration Statement, any Prospectus, or any form of
prospectus, or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or relating to any omission or
alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading (i) to the
extent, but only to the extent, that such untrue statement or omission
is contained in any information so furnished in writing by such Holder
to the Company specifically for inclusion in such Registration Statement
or such Prospectus or (ii) to the extent that (1) such untrue statements
or omissions are based solely upon information regarding such Holder
furnished in writing to the Company by such Holder expressly for use
therein, or to the extent that such information relates to such Holder
or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such
Holder expressly for use in a Registration Statement (it being
understood that the Holder has approved Annex A hereto for this
purpose), such Prospectus or such form of Prospectus or in any amendment
or supplement thereto or (2) in the case of an occurrence of an event of
the type specified in Section 3(d)(ii)-(vi), the use by such Holder of
an outdated or defective Prospectus after the Company has notified such
Holder in writing that the Prospectus is outdated or defective and prior
to the receipt by such Holder of the Advice contemplated in Section
6(d). In no event shall the liability of any selling Holder hereunder be
greater in amount than the dollar amount of the net proceeds received by
such Holder upon the sale of the Registrable Securities giving rise to
such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any
Proceeding shall be brought or asserted against any Person entitled to
indemnity hereunder (an "Indemnified Party"), such Indemnified Party
shall promptly notify the Person from whom indemnity is sought (the
"Indemnifying Party") in writing, and the Indemnifying Party shall have
the right to assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment
of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice
shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent
that it shall be finally determined by a court of competent jurisdiction
(which determination is not subject to appeal or further review) that
such failure shall have prejudiced the Indemnifying Party.
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An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Party or Parties unless: (1) the
Indemnifying Party has agreed in writing to pay such fees and expenses;
(2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory
to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include
both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall reasonably believe that a material conflict of
interest is likely to exist if the same counsel were to represent such
Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it
elects to employ separate counsel at the expense of the Indemnifying
Party, the Indemnifying Party shall not have the right to assume the
defense thereof and the reasonable fees and expenses of one separate
counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not
be unreasonably withheld. No Indemnifying Party shall, without the prior
written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party,
unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject
matter of such Proceeding.
Subject to the terms of this Agreement, all reasonable fees and
expenses of the Indemnified Party (including reasonable fees and
expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with
this Section) shall be paid to the Indemnified Party, as incurred,
within ten Trading Days of written notice thereof to the Indemnifying
Party; provided, that the Indemnified Party shall promptly reimburse the
Indemnifying Party for that portion of such fees and expenses applicable
to such actions for which such Indemnified Party is not entitled to
indemnification hereunder, determined based upon the relative faults of
the parties.
(d) Contribution. If the indemnification under Section 5(a)
or 5(b) is unavailable to an Indemnified Party or insufficient to hold
an Indemnified Party harmless for any Losses, then each Indemnifying
Party shall contribute to the amount paid or payable by such Indemnified
Party, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with
the actions, statements or omissions that resulted in such Losses as
well as any other relevant equitable considerations. The relative fault
of such Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or
omission or alleged omission of a material fact, has been taken or made
by, or relates to information supplied by, such Indemnifying Party or
Indemnified Party, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such action,
statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set
forth in this Agreement, any
11
reasonable attorneys' or other reasonable fees or expenses incurred by
such party in connection with any Proceeding to the extent such party
would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party
in accordance with its terms.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro
rata allocation or by any other method of allocation that does not take
into account the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section
5(d), no Holder shall be required to contribute, in the aggregate, any
amount in excess of the amount by which the proceeds actually received
by such Holder from the sale of the Registrable Securities subject to
the Proceeding exceeds the amount of any damages that such Holder has
otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission, except in the case of
fraud by such Holder.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties
may have to the Indemnified Parties.
6. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) No Piggyback on Registrations. Except as set forth on
Schedule 6(b) attached hereto, neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the initial Registration Statement other than the
Registrable Securities. No Person has any right to cause the Company to effect
the registration under the Securities Act of any securities of the Company. The
Company shall not file any other registration statements until the initial
Registration Statement required hereunder is declared effective by the
Commission, provided that this Section 6(b) shall not prohibit the Company from
filing amendments to registration statements already filed.
(c) Compliance. Each Holder covenants and agrees that it will comply
with the prospectus delivery requirements of the Securities Act as applicable to
it in connection with sales of Registrable Securities pursuant to a Registration
Statement.
12
(d) Discontinued Disposition. Each Holder agrees by its acquisition
of such Registrable Securities that, upon receipt of a notice from the Company
of the occurrence of any event of the kind described in Section 3(d), such
Holder will forthwith discontinue disposition of such Registrable Securities
under a Registration Statement until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement, or until it is
advised in writing (the "Advice") by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement. The
Company will use its best efforts to ensure that the use of the Prospectus may
be resumed as promptly as it practicable. The Company agrees and acknowledges
that any periods during which the Holder is required to discontinue the
disposition of the Registrable Securities hereunder shall be subject to the
provisions of Section 2(b).
(e) Piggy-Back Registrations. If at any time during the
Effectiveness Period there is not an effective Registration Statement covering
all of the Registrable Securities and the Company shall determine to prepare and
file with the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated under
the Securities Act) or their then equivalents relating to equity securities to
be issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with the stock option or other employee
benefit plans, then the Company shall send to each Holder a written notice of
such determination and, if within fifteen days after the date of such notice,
any such Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
Holder requests to be registered; provided, however, that, the Company shall not
be required to register any Registrable Securities pursuant to this Section 6(e)
that are eligible for resale pursuant to Rule 144(k) promulgated under the
Securities Act or that are the subject of a then effective Registration
Statement.
(f) 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 of the then outstanding Registrable Securities. Notwithstanding
the foregoing, a waiver or consent to depart from the provisions hereof with
respect to a matter that relates exclusively to the rights of Holders and that
does not directly or indirectly affect the rights of other Holders may be given
by Holders of all of the Registrable Securities to which such waiver or consent
relates; provided, however, that the provisions of this sentence may not be
amended, modified, or supplemented except in accordance with the provisions of
the immediately preceding sentence.
(g) 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.
(h) 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 its rights or obligations hereunder without the prior written consent of
all of the Holders of the then-outstanding Registrable Securities. Each Holder
may assign their respective rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.
13
(i) No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities, that would have the effect of
impairing the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof. Except as set forth on Schedule 6(i),
neither the Company nor any of its subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its securities
to any Person that have not been satisfied in full.
(j) Execution and Counterparts. This Agreement may be executed in
any number of counterparts, each of which when so executed shall be deemed to be
an original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(k) Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be determined
with the provisions of the Purchase Agreement.
(l) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(m) 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 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.
(n) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(o) Independent Nature of Holders' Obligations and Rights. The
obligations of each Holder hereunder are several and not joint with the
obligations of any other Holder 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 or thereto, 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
14
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.
********************
15
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
ELECTRONIC SENSOR TECHNOLOGY, INC.
By:
-----------------------------
Name:
Title:
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
16
[SIGNATURE PAGE OF HOLDERS TO ESNR RRA]
Name of Holder: _________________________
Signature of Authorized Signatory of Holder: _____________________________
Name of Authorized Signatory:_________________________
Title of Authorized Signatory:________________________
[SIGNATURE PAGES CONTINUE]
17
Plan of Distribution
Each Selling Stockholder (the "Selling Stockholders") of the common
stock ("Common Stock") of Electronic Sensor Technology, Inc., a Nevada
corporation (the "Company") and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on the Trading Market or any other stock exchange, market or
trading facility on which the shares are traded or in private transactions.
These sales may be at fixed or negotiated prices. A Selling Stockholder may use
any one or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the effective date
of the registration statement of which this prospectus is a
part;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
or
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available, rather
than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated, but, except as set forth in a supplement to this Prospectus, in the
case of an agency transaction not in excess of a customary brokerage commission
in compliance with NASDR Rule 2440; and in the case of a principal transaction a
markup or markdown in compliance with NASDR IM-2440.
18
In connection with the sale of the Common Stock or interests therein,
the Selling Stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the
Common Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the Common Stock short and deliver these
securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each Selling Stockholder has
informed the Company that it does not have any written or oral agreement or
understanding, directly or indirectly, with any person to distribute the Common
Stock. In no event shall any broker-dealer receive fees, commissions and markups
which, in the aggregate, would exceed eight percent (8%).
The Company is required to pay certain fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. In addition, any securities covered
by this prospectus which qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this prospectus.
Each Selling Stockholder has advised us that they have not entered into any
written or oral agreements, understandings or arrangements with any underwriter
or broker-dealer regarding the sale of the resale shares. There is no
underwriter or coordinating broker acting in connection with the proposed sale
of the resale shares by the Selling Stockholders.
We agreed to keep this prospectus effective until the earlier of (i) the
date on which the shares may be resold by the Selling Stockholders without
registration and without regard to any volume limitations by reason of Rule
144(e) under the Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold pursuant to the prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale shares will be
sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
19
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the resale shares may not simultaneously
engage in market making activities with respect to the Common Stock for the
applicable restricted period, as defined in Regulation M, prior to the
commencement of the distribution. In addition, the Selling Stockholders will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the timing of
purchases and sales of shares of the Common Stock by the Selling Stockholders or
any other person. We will make copies of this prospectus available to the
Selling Stockholders and have informed them of the need to deliver a copy of
this prospectus to each purchaser at or prior to the time of the sale.
20
ANNEX B
ELECTRONIC SENSOR TECHNOLOGY, INC.
SELLING SECURITYHOLDER NOTICE AND QUESTIONNAIRE
The undersigned beneficial owner of common stock, par value $.001 per
share (the "Common Stock"), of Electronic Sensor Technology, Inc., a Nevada
corporation (the "Company"), (the "Registrable Securities") understands that the
Company has filed or intends to file with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-3 (the "Registration
Statement") for the registration and resale under Rule 415 of the Securities Act
of 1933, as amended (the "Securities Act"), of the Registrable Securities, in
accordance with the terms of the Registration Rights Agreement, dated as of
December __, 2005 (the "Registration Rights Agreement"), among the Company and
the Purchasers named therein. A copy of the Registration Rights Agreement is
available from the Company upon request at the address set forth below. All
capitalized terms not otherwise defined herein shall have the meanings ascribed
thereto in the Registration Rights Agreement.
Certain legal consequences arise from being named as a selling
securityholder in the Registration Statement and the related prospectus.
Accordingly, holders and beneficial owners of Registrable Securities are advised
to consult their own securities law counsel regarding the consequences of being
named or not being named as a selling securityholder in the Registration
Statement and the related prospectus.
NOTICE
The undersigned beneficial owner (the "Selling Securityholder") of
Registrable Securities hereby elects to include the Registrable Securities owned
by it and listed below in Item 3 (unless otherwise specified under such Item 3)
in the Registration Statement.
21
The undersigned hereby provides the following information to the Company and
represents and warrants that such information is accurate:
QUESTIONNAIRE
1. NAME.
(a) Full Legal Name of Selling Securityholder
________________________________________________________________
(b) Full Legal Name of Registered Holder (if not the same as (a)
above) through which Registrable Securities Listed in Item 3
below are held:
________________________________________________________________
(c) Full Legal Name of Natural Control Person (which means a natural
person who directly or indirectly alone or with others has power
to vote or dispose of the securities covered by the
questionnaire):
________________________________________________________________
2. ADDRESS FOR NOTICES TO SELLING SECURITYHOLDER:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Telephone: _____________________________________________________________________
Fax: ___________________________________________________________________________
Contact Person:_________________________________________________________________
3. BENEFICIAL OWNERSHIP OF REGISTRABLE SECURITIES:
(a) Type and Principal Amount of Registrable Securities beneficially
owned:
________________________________________________________________
________________________________________________________________
________________________________________________________________
22
4. BROKER-DEALER STATUS:
(a) Are you a broker-dealer?
Yes [ ] No [ ]
(b) If "yes" to Section 4(a), did you receive your Registrable
Securities as compensation for investment banking services to
the Company.
Yes [ ] No [ ]
Note: If no, the Commission's staff has indicated that you should be
identified as an underwriter in the Registration Statement.
(c) Are you an affiliate of a broker-dealer?
Yes [ ] No [ ]
(d) If you are an affiliate of a broker-dealer, do you certify that
you bought the Registrable Securities in the ordinary course of
business, and at the time of the purchase of the Registrable
Securities to be resold, you had no agreements or
understandings, directly or indirectly, with any person to
distribute the Registrable Securities?
Yes [ ] No [ ]
Note: If no, the Commission's staff has indicated that you should be
identified as an underwriter in the Registration Statement.
5. BENEFICIAL OWNERSHIP OF OTHER SECURITIES OF THE COMPANY OWNED BY THE
SELLING SECURITYHOLDER.
Except as set forth below in this Item 5, the undersigned is not the
beneficial or registered owner of any securities of the Company other
than the Registrable Securities listed above in Item 3.
(a) Type and Amount of Other Securities beneficially owned by the
Selling Securityholder:
________________________________________________________________
________________________________________________________________
23
6. RELATIONSHIPS WITH THE COMPANY:
Except as set forth below, neither the undersigned nor any of its
affiliates, officers, directors or principal equity holders (owners of
5% of more of the equity securities of the undersigned) has held any
position or office or has had any other material relationship with the
Company (or its predecessors or affiliates) during the past three years.
State any exceptions here:
________________________________________________________________________
________________________________________________________________________
The undersigned agrees to promptly notify the Company of any
inaccuracies or changes in the information provided herein that may occur
subsequent to the date hereof at any time while the Registration Statement
remains effective.
By signing below, the undersigned consents to the disclosure of the
information contained herein in its answers to Items 1 through 6 and the
inclusion of such information in the Registration Statement and the related
prospectus and any amendments or supplements thereto. The undersigned
understands that such information will be relied upon by the Company in
connection with the preparation or amendment of the Registration Statement and
the related prospectus.
IN WITNESS WHEREOF the undersigned, by authority duly given, has caused
this Notice and Questionnaire to be executed and delivered either in person or
by its duly authorized agent.
Dated: _________________ Beneficial Owner:________________________
By:
-----------------------------------
Name:
Title:
PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND
RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:
24
