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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: DECEMBER 31, 2008
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from: ___ to ____
Commission File Number 0-14266
UNIVERSAL DETECTION TECHNOLOGY
(Name of Small Business Issuer in Its Charter)
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CALIFORNIA 95-2746949
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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9595 WILSHIRE BLVD., SUITE 700 90212
BEVERLY HILLS, CALIFORNIA (Zip Code)
(Address of principal executive offices)
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Issuer's telephone number: (310) 248-3655
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value.
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year: $109,649.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: $389,500 as of April 15, 2009.
The number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 95,695,053 common shares, no par
value, outstanding as of April 15, 2009.
Documents Incorporated By Reference: None.
Transitional Small Business Disclosure Format (check one): Yes [ ] No |X|
PART 1
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, which we refer
to in this annual report as the Securities Act, and Section 21E of the
Securities Exchange Act of 1934, as amended, which we refer to in this annual
report as the Exchange Act. Forward-looking statements are not statements of
historical fact but rather reflect our current expectations, estimates and
predictions about future results and events. These statements may use words such
as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project"
and similar expressions as they relate to us or our management. When we make
forward-looking statements, we are basing them on our management's beliefs and
assumptions, using information currently available to us. These forward-looking
statements are subject to risks, uncertainties and assumptions, including but
not limited to, risks, uncertainties and assumptions discussed in this annual
report. Factors that can cause or contribute to these differences include those
described under the headings "Risk Factors" and "Management Discussion and
Analysis and Plan of Operation."
If one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may vary materially
from what we projected. Any forward-looking statement you read in this annual
report reflects our current views with respect to future events and is subject
to these and other risks, uncertainties and assumptions relating to our
operations, results of operations, growth strategy and liquidity. All subsequent
written and oral forward-looking statements attributable to us or individuals
acting on our behalf are expressly qualified in their entirety by this
paragraph. You should specifically consider the factors identified in this
annual report which would cause actual results to differ before making an
investment decision. We are under no duty to update any of the forward-looking
statements after the date of this annual report or to conform these statements
to actual results.
ITEM 1. DESCRIPTION OF BUSINESS
CORPORATE HISTORY
Universal Detection Technology (the "Company" or "We") is engaged in the
research and development of bioterrorism detection devices. We were incorporated
on December 24, 1971, under the laws of California. Our core business for over
twenty years was the design, manufacture, marketing and sale of automated
continuous air monitoring instruments used to detect and measure various types
of air pollution, such as acid rain, ozone depletion and smog episodes. We also
supplied computer-controlled calibration systems that verified the accuracy of
our instruments, data loggers to collect and manage pollutant information, and
our reporting software for remote centralized applications. In September 2001,
we retained a new management team. At that same time, the members of the Board
of Directors resigned and new members were appointed. In the first quarter of
2002, management recommended to the Board, and the Board approved, a change to
our strategic direction. In March 2002, we sold our sole operating subsidiary
and reconfigured one of our existing air monitoring instruments in order to
develop the Anthrax Detector, later renamed BSM-2000. In 2006 we expanded our
business activities and included new products and services that would compliment
our core counter bioterrorism expertise. These products and services include
anthrax detection kits, first responder training courses and reference videos,
radiation detection systems, and research & development.
OVERVIEW
We are engaged in the research, development, and marketing of bioterrorism
detection devices. Our strategy is to identify qualified strategic partners with
whom to collaborate in order to develop commercially viable bioterrorism
detection devices. Consistent with this strategy, in August 2002, we entered
into a Technology Affiliates Agreement with NASA's Jet Propulsion Laboratory,
commonly referred to as JPL, to develop technology for our bioterrorism
detection equipment. Under the Technology Affiliates Agreement, JPL developed
its proprietary bacterial spore detection technology and integrated it into our
existing aerosol monitoring system, resulting in a product named BSM-2000.
BSM-2000 is designed to provide continuous unattended monitoring of airborne
bacterial spores in large public places, with real-time automated alert
functionality. The device is designed to detect an increase in the concentration
of bacterial spores, which is indicative of a potential presence of Anthrax.
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Our management continues to gain expertise in anti-terrorism techniques and
solutions. Through our partnership with Security Solutions International, we
have begun providing training seminars on terrorism detection and response
methods. The seminars are designed for security officials, building safety
managers, and law enforcement personnel. Through partnerships with various third
parties, we have commenced sales and marketing of bioterrorism detection kits,
radiation detection systems, surveillance cameras, and training references. In
2008 we stopped marketing anti-microbial chemicals and products used for
cleaning surfaces of antibiotic resistant bacteria such as MRSA. We had supplied
such products in the past by partnering with third party suppliers and have
terminated such partnerships due to various reasons including lack of
marketability of some such products.
In 2008 we have realized revenues of $109,649 from sales. We have incurred
losses for the fiscal years ended December 31, 2008 and 2007 in the approximate
amounts of $2.3 and $3.6 million, respectively, and have an accumulated deficit
of $38.6 million as of December 31, 2008. At December 31, 2008, we were in
default on certain debt obligations totaling approximately $311,000, in addition
to accumulated interest of approximately $463,000. We require approximately $1.6
million in the next 12 months to repay debt obligations. We do not anticipate
that our cash on hand is adequate to meet our operating expenses over the next
12 months. In addition, we do not have adequate capital to repay all of our debt
currently due and becoming due in the next 12 months. We principally expect to
raise funds through the sale of equity or debt securities. However, during the
past 12 months, management spent the substantial majority of its time on sales
and marketing of Company's products and services in target markets. These
activities diverted management from the time it otherwise would spend
negotiating sales of securities to raise capital. In addition, the recent price
and volume volatility in the common stock has made it more difficult for
management to negotiate sales of its securities at a fair price. We actively
continue to pursue additional equity or debt financing, but cannot provide any
assurances that it will be successful. If we are unable to pay our debts as they
becomes due and are unable to obtain financing on terms acceptable to us, or at
all, we will not be able to accomplish any or all of our initiatives and will be
forced to consider other alternatives.
In May 2004, we unveiled the first functional prototype of BSM-2000. The
prototype operated on external software. In July 2004, we commenced simulated
tests with benign bacterial spores having anthrax-like properties in order to
fine tune our product. The use of benign spores is as effective as testing with
anthrax spores because our device is designed to detect an increase in bacterial
spore concentration levels. Based on results we obtained, we were able to
enhance the sensitivity of BSM-2000 by improving the sample collection
efficiency of the device, and made certain other modifications to improve
efficiency. While more testing and development is needed to enhance the
performance of our BSM-2000 and to make it more user-friendly, the device is a
functional product, available for sale.
Starting in 2006, we followed a diversification strategy pursuant to which we
have added various other services to our BSM-2000, biological detection system.
By combining our in-house experience and knowledge and outside expertise offered
by various consultants and third parties, we have added threat evaluation and
consulting services, training courses, and event security to our services. We
have also started sales and marketing of security and counter-terrorism products
including bioterrorism detection kits, surveillance cameras, radiation detection
systems, and training references. Some of our products and services have not
been sold to date and there is no guarantee that any of them will be demanded
and sold in the market in the future. In 2008 we stopped marketing
anti-microbial chemicals and products used for cleaning surfaces of antibiotic
resistant bacteria such as MRSA. We had supplied such products in the past by
partnering with third party suppliers and have terminated such partnerships due
to various reasons including lack of marketability of some such products.
We plan to seek and find third parties interested in collaborating on further
research and development on BSM-2000. Such research shall be aimed at making
BSM-2000 more user-friendly, developing a less complicated interface and
software, designing a lighter casing, and some cosmetics. The ideal third party
collaborator would also assist us in marketing BSM-2000 more aggressively. There
is no guarantee that any such collaborators will be found and, if found, that
this strategy will be successful. The current version of BSM-2000 is fully
functional and available for sale. To date, we have sold two units to the
Government of the United Kingdom and we intend to develop a more wide-spread use
for BSM-2000 through our planned collaborative research, development, sales, and
marketing efforts.
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Our list price for BSM-2000 is $109,000. The manufacturing of BSM-2000 is
outsourced to Original Equipment Manufacturers (OEM). We do not have any
in-house manufacturing capabilities and do not intend to develop any until we
reach high volumes of sales for BSM-2000 that would justify such facilities. To
date we have used services of two OEMs for manufacturing of our units. We may
decide to use services of other manufacturers in the future.
While we initially planned to secure and lease a testing facility close to the
JPL laboratories where we would be able to implement a quality assurance program
and test our products against the required specifications before shipping them
to customers, that plan was never materialized and we do not anticipate to open
such facilities in the foreseeable future and unless we receive a substantial
order for our BSM-2000.
In February 2006, the Company expanded its relationship with Caltech by
licensing additional technologies in the field of microbial monitoring and
sterility verification. While the Company plans to commercialize the microbial
monitoring technology for use in hospitals, it has not yet started any such
activities and there is no guarantee that it will in the near future. The
Company also commenced work on developing smart ticket assay for detection of
anthrax spores. Smart ticket assays are rapid field tests that are similar to
common home pregnancy tests. Further research and development is needed to fully
commercialize these smart ticket assays and presently there is no guarantee that
the Company will have necessary funding and resources to conduct such research
and development. Through parallel efforts for development of its proprietary
smart ticket assays, the Company entered an agreement with a third party,
whereby it markets and sells lateral flow assays capable of rapid on-site
detection of five bioterrorism agents.
INDUSTRY BACKGROUND
The attacks of September 11, 2001, and the subsequent spread of and potential
future threat of anthrax spores have created a new sense of urgency in the
public health systems across the world, and especially in the United States.
During the 2001 anthrax attacks in the United States, emergency response
personnel, clinicians, laboratories, and public health officials were
overwhelmed by requests for evaluation of suspicious powders and by calls from
patients concerned about exposures to bioterrorism agents. Systems designed to
detect bioterrorism agents in clinical and environmental samples have become
essential components of responses to both hoaxes and actual bioterrorism events.
First responders and public health officials require sensitive and specific
detection systems that can identify bioterrorism agents early enough to take
actions that limit their spread.
The United States government has responded to this urgent need for preparedness
against terrorism by establishing the Department of Homeland Security ("DHS").
The Department of Homeland Security is intended to consolidate the federal
government's efforts to secure the homeland, with the primary goal being an
America that is stronger, safer, and more secure.
The private sector also has responded to the need for preparedness against
bioterrorism. A number of companies have developed or are in the process of
developing various methods to detect harmful pathogens in the air, on surfaces,
and in food and water through genetic analysis, including DNA or RNA analysis.
In recent years, significant advances in molecular biology have led to the
development of increasingly efficient and sensitive techniques for detecting and
measuring the presence of a particular genetic sequence in a biological sample.
Genetic testing involves highly technical procedures, including:
o Sample preparation - procedures that must be performed to isolate the target
cells and to separate and purify their nucleic acids;
o Amplification - a chemical process to make large quantities of DNA from the
nucleic acids isolated from the sample; and
o Detection - the method of determining the presence or absence of the target
DNA or RNA, typically through the use of fluorescent dyes.
Existing technologies for determining the genetic composition of a cell or
organism generally face the following limitations:
o Require skilled technicians and special laboratories. Currently available
methods and systems for genetic analysis require skilled technicians in a
controlled laboratory setting, including, in many cases, separate rooms to
prevent contamination of one sample by another. Some progress has been made
to automate this process.
o Large and inflexible equipment. Most currently available genetic analysis
equipment is large and inflexible and requires a technically complex
operating environment. New designs are attempting to address miniaturization
of equipment.
o Timeliness of result. Current sample preparation, amplification and
detection technologies rely on processes that often require hours to
complete, rendering results that may not be timely enough to be medically
useful. Some new instruments are attempting to reduce analysis times.
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o Sensitivity constraints. Some existing technologies accept and process only
very small sample volumes, forcing laboratory technicians to spend
significant effort in concentrating larger samples in order to obtain the
required level of sensitivity for detecting and measuring the presence of a
genetic sequence.
o Lack of integration. We believe that current amplification and detection
systems do not fully automate and integrate sample preparation into their
processes in a manner that can be useful in a non-laboratory setting in a
cost effective fashion.
o Operational Cost. The operating costs for existing technologies can be
extremely high, making the implementation of the device cost-prohibitive.
o False Positives. Most existing technologies are susceptible to false
positive results, which can have significant social and economic
consequences.
Currently, the two most commonly used methods for genetic testing are microbial
culture and Polymerase Chain Reaction, commonly referred to as PCR. With
microbial culture, a sample from the environment is placed into a small
laboratory dish containing a nutrient rich media. The microbial culture is
allowed to grow for a specified period of time, usually between 24-48 hours. The
sample is then examined and a determination is made as to whether an organism is
present in the sample. Although highly accurate, the disadvantages of microbial
cultures are the time required to determine the presence of an organism and the
need for a laboratory and an expertise in culture preparation and analysis.
PCR has been one of the most promising methods for an automated anthrax
detection system. PCR amplifies DNA targets of choice, such as gene sequences
encoded for the anthrax toxins to detectable levels. PCR is very sensitive and
is able to detect very small amounts of DNA. But, the PCR process typically
requires about three to eight hours to complete, plus an additional three hours
for sample preparation time, which must usually be performed by a trained
technician. Some developments have been made to automate the PCR process and
reduce the analysis time. Nonetheless, the process is very expensive. We believe
that the principal desired characteristics of an anthrax detection system are
sustained, online operation with minimal maintenance, minimal susceptibility to
false alarms, and low operating costs. These attributes require that we address
the limitations inherent in most current technologies with a product that can
operate as a stand-alone detection device.
OUR SOLUTION
Universal Detection Technology's BSM-2000 combines a bio-aerosol capture device
with a chemical test for bacterial spores that is designed to accurately detect
a potential anthrax attack in a timely fashion. Our system is designed to
function as a first line of defense to detect a potential anthrax attack, on a
fully automated basis and at a low cost compared to existing technologies. Only
upon actual detection of a possible attack would first responders implement the
more expensive tests such as immunoassay or DNA testing techniques to verify the
identity of the detected spores. The BSM-2000 device, coupled with a testing
device to be used only in the event of actual detection, is designed to be
significantly less expensive than the existing competing technologies that are
used to detect and test for a possible anthrax attack. This is true in large
part because our device does not require the constant presence of experts or any
continuous testing mechanism for anthrax, both of which substantially increase
costs.
Universal Detection Technology has also situated itself to provide various
counter-terrorism products services that can be complimentary to BSM-2000. These
products and services include rapid anthrax detection handheld assays, training
courses for first responders, event security, threat evaluation & consulting,
radiation detection systems, and DVDs aimed at providing information and
training regarding combating terrorism and managing emergency situations. The
Company's bioterrorism detection kits can be used by emergency personnel to
determine whether a suspicious substance is actually anthrax, botulinum toxin,
ricin toxin, plague, or SEBs. So far the company has sold these kits to both the
US Army and private customers. In 2007 the Company sold its bioterrorism
detection kits to the Washington DC, Fire and Safety Management and other users.
In 2008 we stopped marketing anti-microbial chemicals and products used for
cleaning surfaces of antibiotic resistant bacteria such as MRSA. We had supplied
such products in the past by partnering with third party suppliers and have
terminated such partnerships due to various reasons including lack of
marketability of some such products.
COMPANY PRODUCTS
The Company has situated itself to serve as a provider of counter terrorism
products, consulting, and solutions with a focus on bioterrorism detection. The
Company's flagship product is an automated real-time bacterial spore detector,
called BSM-2000, used for detection of abnormal levels of airborne endospores
such as anthrax. In 2007, we expanded our product base to include small anthrax
detection test kits, newer kits capable of detecting up to five bioterrorism
agents, radiation detection systems, surveillance cameras, and training material
and references DVDs.
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Our BSM-2000 consists of the following four components:
o an air sampler for aerosol capture, which collects aerosolized particles on
a fiber tape;
o thermal lysis for releasing the dipicolinic acid from the spores;
o reagent delivery via syringe pump; and
o a lifetime gated luminescence detection of the terbium-dipicolinate complex.
The BSM-2000 is designed to continuously monitor the air and measure the
concentration of airborne bacterial spores. The testing intervals are adjustable
to respond to varying client needs and can be as short as 15 minutes. Bacterial
spores are captured on the glass fiber tape. Next, thermal lysis "pops" the
endospores, releasing a chemical from inside the endospore called dipicolinic
acid, which is unique to bacterial spores. Then, a syringe pump adds a drop of
terbium containing solution to the tape on the location where the endospores
were lysed. Finally, a lifetime gated photometer measures the resultant terbium
dipicolinate luminescence intensity, which is proportional to the bacterial
spore concentration on the tape. A large change in endospore concentration is a
strong indication of an anthrax attack, because endospores are the means by
which anthrax travels.
Pursuant to our development plan, if an increase in spore concentration is
detected, an alarm can sound notifying both a building's internal security as
well as local emergency services through the device's landline or wireless
networking capability. The system can be adjusted to ensure that the maximum
time it takes to detect, and generate an alarm in response to a release of
bacterial spores is approximately 15 minutes, which is designed to be adequate
to substantially reduce the likelihood of widespread contamination. This
response time also provides adequate time to begin antibiotic treatment prior to
the onset of symptoms which can arise within two to three days if left
untreated. The system is designed for constant and unattended monitoring of
spaces such as public facilities and commercial buildings.
JPL's detection technology is designed to sound an alarm only when it detects a
significant increase in spore count. Natural background fluctuation of airborne
endospores are very low, approximately 0.1 to 1 spore per liter of air, compared
to an anthrax attack which would result in a concentration swing many orders of
magnitude greater than background levels. Also, our device does not detect
spores from other microorganisms, such as fungi and molds, and discriminates
against detecting aerosol components such as dust. In addition, upon
installation of the device, we expect to operate it for seven to ten days to
measure the natural concentrations of bacterial spores in the area in which the
device operates, so that the triggering threshold of that device will be set at
an appropriate level for that environment.
It is only upon detection of a significant increase in spore count, that our
device is triggered and the sample collected is tested. In contrast, existing
competing technologies require testing of ambient air samples continuously,
which is very expensive, either because of the expert personnel required or the
costs of the continuous immunoassay or DNA testing. In addition, these competing
technologies may be more likely to result in false positives due to the volume
of tests performed. In contrast, BSM-2000 is designed so that testing occurs
only following an actual detection of substantially increased spore count, which
significantly reduces the number of overall tests performed. Also, generally an
increase in spore count, whether anthrax or benign, is unusual, and arises as a
result of intentional conduct, which may be important to investigate even if the
spores released ultimately were not harmful.
False positive results are problematic not only for the obvious reason relating
to their level of accuracy, but also because of the cost and consequences of a
false alarm. On one occasion, a false anthrax alarm shut down 11 postal
facilities in the Washington D.C. area. BSM-2000 is designed to function as a
stand-alone product to detect a likely Anthrax threat, but does not provide a
testing mechanism for samples collected that trigger the device. The BSM-2000
device is designed to function as a complement to an existing bioterrorism
detection device in places such as public buildings and stadiums. For example,
BSM-2000 is designed to serve as a front-end monitor to a PCR-based device. In
the case that our device detects a substantial increase in spore count, the
PCR-based device would be employed to test the sample collected.
MARKETING AND SALES
Our sales and marketing plan includes strategic partnership agreements and
retention of our in-house staff and outside consultants. The Company has
retained the services of consultants to market BSM-2000 in the United States and
internationally. In 2008 we continued to work closely with our international
distributors to market our automatic detection systems to government and private
entities outside of the U.S.
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In the United States, we plan to continue presenting our technology at industry
events and trade shows. We also retain domestic distributors and consultants to
arrange meetings with and presentations to building owners and operators,
government officials in charge of decisions for safety and security of
government and private venues and buildings, homeland security officials, and
security companies. The United States Army, Washington DC Fire and Safety
Management, and the Burbank Police Department have all purchased our detection
test kits and we plan to try and sell more in 2009.
In 2008 we continued to aggressively use the internet for spreading the word
about Universal Detection Technology and its products and services to the
public. This strategy includes creation of an interactive and informational
presence through our website and use of various third parties to bring traffic
to our website. We have been successful in generating interest and traffic in
Universal Detection and its services. We intend to do more internet marketing
and search engine optimization activities in 2009.
We also plan to develop brand recognition for our company and for our product
through attendance at national and international defense related exhibitions,
use of print and video promotional materials, and by granting interviews to
national and international news media.
MANUFACTURING
Currently, we do not have any manufacturing capabilities. In the past we have
used two third-party contractors, Met One Instruments and Horiba Jobin Yvon,
regarding the manufacturing of our BSM-2000. Met One and Horiba Jobin Yvon have
each manufactured three units for us to date. We have no agreements and are not
obligated to continue to work with any of our Original Equipment Manufacturers
(OEM). As such, we may choose to work with other OEMs in the future.
RESEARCH AND DEVELOPMENT
Under the Technology Affiliates Agreement, JPL developed its proprietary
bacterial spore detection technology and integrated it into our existing aerosol
monitoring system, resulting in a product which initially we referred to as the
Anthrax Smoke Detector, and which we renamed BSM-2000 on April 21, 2005.
BSM-2000 is designed to provide continuous unattended monitoring of airborne
bacterial spores in large public places, with real-time automated alert
functionality. The device operates to detect an increase in the concentration of
bacterial spores, which is indicative of a potential presence of Anthrax. Under
our agreement with JPL, we paid it approximately $250,000 for its services and
we received an option to license all technology developed under the Technology
Affiliates Agreement from Caltech. On September 30, 2003, we exercised our
option and Caltech granted to us a worldwide exclusive license to the patent
rights referenced in the Technology Affiliates Agreement and a worldwide
nonexclusive license to rights in related proprietary technology. To maintain
our license with Caltech, a minimum annual royalty of $10,000 was due to Caltech
on August 1, 2006, and is due on each anniversary thereof, regardless of any
product sales. Any royalties paid from product sales for the 12-month period
preceding the date of payment of the minimum annual royalty will be credited
against the annual minimum. We are in default of the August 1, 2008 annual
royalty of $10,000. Pursuant to the terms of the license, we must pay four
percent royalties on product sales in countries where a patent is issued and two
percent royalties on product sales in countries where a patent is not issued, as
well as 35 percent of net revenues received from sub-licensees. According to our
license agreement with Caltech, Caltech shall have the right to terminate our
license agreement and the rights and licenses granted to us if we fail to make
any payment due including patent expense or minimum annual royalties for a
period of fifteen days after receiving a second written notice from Caltech
specifying our failure. To date we have not received any notices from Caltech
with regards to our August 1, 2008 minimum annual royalty due of $10,000 and we
are in negotiations on new payment terms. Furthermore, we reached an agreement
with Caltech with regards to the payment of patent fees. This agreement is
signed in the form of a second amendment to our license agreement with Caltech.
Accordingly, we have agreed that we owe the amount of $86,318.48 for patent
costs incurred by Caltech prior to December 1, 2006 and that this amount shall
be paid to Caltech in ten monthly installments of $8,631.85. To date, we are not
up to date with the monthly installments called for in the second amendment to
our license agreement with Caltech. We are in negotiations with Caltech on new
payment terms.
We spent $-0- and $19,000 research and development for the years ended December
31, 2008 and 2007, respectively. We also spent an aggregate of 262,125 on
research and development for the years ended December 31, 2003 to December 31,
2006. We paid the substantial majority of these amounts ($169,000 in fiscal
2003) to JPL under the Technology Affiliates Agreement.
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TESTING
In May 2004, we unveiled the first functional prototype of BSM-2000. The
prototype operated on external software. In July 2004, we commenced simulated
tests with benign bacterial spores having anthrax-like properties in order to
fine tune our product. The use of benign spores is as effective as testing with
anthrax spores because our device is designed to detect an increase in bacterial
spore concentration levels. Based on results we obtained, we were able to
enhance the sensitivity of BSM-2000 by improving the sample collection
efficiency of the device, and made certain other modifications to improve
efficiency. Our device is a functional viable product, available for sale. We
are in discussions with third parties to conduct more research & development and
testing on BSM-2000 aimed at performance enhancement, weight reduction,
ruggedizing the device, and other cosmetic enhancements.
GOVERNMENTAL APPROVAL
We are not presently aware of any governmental agency approval required for
BSM-2000 before we can sell it in the United States. We cannot assure you that
BSM-2000 is not subject to or will not become subject to governmental approval.
To the extent that any governmental approval is required in the future, we
intend to obtain all required approvals consistent with applicable law. We
cannot assure you that future governmental regulation will not adversely affect
our ability to successfully commercialize a viable product.
EMPLOYEES
As of December 31, 2008, we had a total of five employees. We also employ
outside consultants from time to time to provide various services. None of our
employees are represented by a labor union. We consider our employee relations
to be good.
SCIENTIFIC ADVISORY BOARD
We are building a Scientific Advisory Board and to date have assembled two
scientific advisors with demonstrated expertise in fields related to molecular,
chemical and medical pharmacology and hepatic science. Some of these advisors
are members of our Board of Directors. The role of our Scientific Advisory Board
principally is to meet periodically with our Chief Executive Officer and certain
of our consultants and members of JPL to discuss our present and long-term
research and development activities, provide input and evaluation of our overall
product line, assist and consult on our strategic direction, and introduce us to
business relationships, industry contacts, and other strategic relationships
that may be of value to us. Scientific Advisory Board members include: Leonard
Makowka, M.D., Ph.D., a distinguished clinical surgeon, transplantation
specialist and medical researcher, recognized as one of the world's leading
authorities in hepatic science (study relating to the liver), and Louis Ignarro,
Ph.D., Distinguished Professor of Pharmacology, University of California at Los
Angeles School of Medicine. As medical doctors, both of these individuals are
knowledgeable on the properties of bacterial spores, including Anthrax, how
these spores operate in our environment, and their effect on the human body,
which has been valuable in the overall development of BSM-2000. In August 2003,
we began paying Dr. Makowka a monthly consulting fee of $5,000. We also issued
475,000 shares of our common stock to Dr. Makowka as compensation for his
services. These shares were valued at $85,000, the market value of our common
stock on the date issued. We stopped paying Dr. Makowka as of June 2005.
However, we maintain close relationships with Dr. Makowka and he is available
for help and consultation upon request and he maintains his seat on the
scientific advisory board. Dr. Makowka has also recently become a member of our
Board.
COMPETITION
We face intense competition from a number of companies that offer products in
our targeted application areas. Our competitors may offer or be developing
products superior to ours. From time to time, we have been required to reduce
our research efforts while we seek to raise additional funds. Our competitors
may be significantly better financed than us. There are various technological
approaches available to our competitors and us that may be applicable to the
detection of pathogens in the air, and the feasibility and effectiveness of
these techniques has yet to be fully evaluated or demonstrated. Several
companies provide or are in the process of developing instruments for detection
of bioterrorism agents.
Cepheid, a publicly traded company, focuses on the detection and analysis of DNA
in samples such as blood, urine, cell cultures, food and industrial air and
water. According to public disclosures of Cepheid, Northrop Grumnan is
developing a Biohazard Detection System that consists of a detection system
(GeneXpert(R)) manufactured by Cepheid. This detection system offers rapid
(about one hour) and sensitive detection of specific gene sequences present in
Bacillus anthracis, the causative agent for anthrax. According to news releases
of Cepheid, the Biohazard Detection System has been installed at over 35 U.S.
Postal Service mail sorting facilities throughout the United States.
8
We also expect to encounter intense competition from a number of established and
development-stage companies that continually enter the bioterrorism detection
device market. Our competitors may succeed in developing or marketing
technologies and products that are more effective or commercially attractive
than our potential products or that render our technologies and potential
products obsolete. As these companies develop their technologies, they may
develop proprietary positions that prevent us from successfully commercializing
our products.
INTELLECTUAL PROPERTY
On September 30, 2003, we entered into a license agreement with Caltech whereby
we received licenses to produce, provide and sell proprietary products,
processes and services for use in the detection of pathogens, spores, and
biological warfare agents. These licenses include a worldwide exclusive license
to the patent rights referenced in the Technology Affiliates Agreement with JPL
and a worldwide nonexclusive license to rights in related proprietary
technology. We also have a right under the agreement to grant sublicenses
without rights to sublicense further. Caltech reserves the right to produce,
provide and sell the licensed products, processes and services solely for
noncommercial educational and research purposes. The United States government
also has a worldwide, non-exclusive, non-transferable license to use or have
used, for the performance of work for it or on its behalf, any inventions
covered by the patent rights or the rights in the proprietary technology. The
terms of the license further require that our licensed products are manufactured
substantially in the United States, unless we can show that domestic
manufacturing is not commercially feasible.
As part of the sale of our wholly-owned subsidiary, Dasibi Environmental Corp.
to a third party in March 2002, we obtained a perpetual nonexclusive license to
exploit all of Dasibi's intellectual property rights outside of mainland China.
Dasibi's core business had been the design, manufacture and marketing of
automated continuous monitoring instruments used to detect and measure various
types of air pollution, such as "acid rain," "ozone depletion" and "smog
episodes." Dasibi also supplied computer-controlled calibration systems that
verify the accuracy of our instruments, data loggers to collect and manage
pollutant information, and final reporting software for remote centralized
applications.
ITEM 1A. RISK FACTORS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS TOGETHER WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
ANNUAL REPORT. SOME OF THE INFORMATION CONTAINED IN THIS DISCUSSION AND ANALYSIS
OR SET FORTH ELSEWHERE IN THIS ANNUAL REPORT, INCLUDING INFORMATION WITH RESPECT
TO OUR PLANS AND STRATEGIES FOR OUR BUSINESS, INCLUDES FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD REVIEW THE "RISK
FACTORS" SECTION OF THIS REPORT FOR A DISCUSSION OF IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE RESULTS DESCRIBED IN OR
IMPLIED BY THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS COULD SUFFER.
OUR INDEPENDENT AUDITORS' REPORT EXPRESSES DOUBT ABOUT OUR ABILITY TO CONTINUE
AS A GOING CONCERN.
Our independent auditors' report, dated April 10, 2009, includes an explanatory
paragraph expressing substantial doubt as to our ability to continue as a going
concern, due to our working capital deficit at December 31, 2008. We have
experienced operating losses since the date of the auditors' report. Our
auditor's opinion may impede our ability to raise additional capital on terms
acceptable to us. If we are unable to obtain financing on terms acceptable to
us, or at all, we will not be able to accomplish any or all of our initiatives
and will be forced to consider steps that would protect our assets against our
creditors. If we are unable to continue as a going concern, your entire
investment in us could be lost.
WE ARE IN DEFAULT OF A SUBSTANTIAL PORTION OF OUR DEBT AND DO NOT HAVE ADEQUATE
CASH TO FUND OUR WORKING CAPITAL NEEDS. OUR FAILURE TIMELY TO PAY OUR
INDEBTEDNESS MAY REQUIRE US TO CONSIDER STEPS THAT WOULD PROTECT OUR ASSETS
AGAINST OUR CREDITORS.
If we cannot raise additional capital, we will not be able to repay our debt or
pursue our business strategies as scheduled, or at all, and we may cease
operations. We have been unable to pay all of our creditors and certain other
obligations in accordance with their terms, and as a result, at December 31,
2008 we are in default on a portion of our debt totaling approximately $331,000
excluding accumulated interest of approximately $463,000. In the aggregate, as
of December 31, 2008, we have approximately $2.3 million in debt obligations,
including interest, owing within the next 12 months. We cannot assure you that
any of these note-holders will agree to extend payment of these debt obligations
or ultimately agree to revise the terms of this debt to allow us to make
scheduled payments over an extended period of time.
9
We have nominal cash on hand and short-term investments and we do not expect to
generate material cash from operations within the next 12 months. We have
attempted to raise additional capital through debt or equity financings and to
date have had limited success. The downtrend in the financial markets has made
it extremely difficult for us to raise additional capital. In addition, our
common stock trades on The Over the Counter Bulletin Board which makes it more
difficult to raise capital than if we were trading on The NASDAQ Stock Market.
Also, our default in repaying our debt restricts our ability to file
registration statements, including those relating to capital-raising
transactions, on Form S-3, which may make it more difficult for us to raise
additional capital. In July 2004, we completed a private placement resulting in
net proceeds to us of approximately $2.5 million, all of which have been used.
As a condition to this financing however, we agreed that we would not use the
net proceeds to repay any of our debt outstanding as of the closing of the
financing. If we are unable to obtain financing on terms acceptable to us, or at
all, we will not be able to accomplish any or all of our initiatives and will be
forced to consider steps that would protect our assets against our creditors.
WE HAVE A HISTORY OF LOSSES AND WE DO NOT ANTICIPATE THAT WE WILL BE PROFITABLE
IN FISCAL 2009.
We do not anticipate generating significant sales of the BSM-2000 until after we
complete all testing and modifications, which is contingent principally upon
receipt of adequate funding and our ability to continue to form collaborative
arrangements with qualified third parties to engage in that testing at nominal
cost to us. We have not been profitable in the past years and had an accumulated
deficit of approximately $38.6 million at December 31, 2008. We have had little
revenues from sales of our products since the beginning of fiscal 2002, the
commencement of development of our BSM-2000. During the fiscal years ended
December 31, 2008 and 2007, we had losses of $2.3 and $3.6 million,
respectively. Achieving profitability depends upon numerous factors, including
our ability to develop, market and sell commercially accepted products timely
and cost-efficiently. We do not anticipate that we will be profitable in fiscal
2009.
IF WE OBTAIN FINANCING, EXISTING SHAREHOLDER INTERESTS MAY BE DILUTED.
If we raise additional funds by issuing equity or convertible debt securities,
the percentage ownership of our shareholders will be diluted. In addition, any
convertible securities issued may not contain a minimum conversion price, which
may make it more difficult for us to raise financing and may cause the market
price of our common stock to decline because of the indeterminable overhang that
is created by the discount to market conversion feature. In addition, any new
securities could have rights, preferences and privileges senior to those of our
common stock. Furthermore, we cannot assure you that additional financing will
be available when and to the extent we require or that, if available, it will be
on acceptable terms.
IF WE CANNOT PARTNER WITH THIRD PARTIES TO ENGAGE IN RESEARCH AND DEVELOPMENT
AND TESTING OF OUR DEVICE AT MINIMAL COST TO US, OUR PRODUCT DEVELOPMENT WILL BE
DELAYED.
We contract with third parties at minimal cost to us to conduct research and
development activities and we expect to continue to do so in the future. Under
our agreement with JPL, it will engage in limited testing of our device. Because
we are unable to pay third parties to test our product and instead must rely on
a qualified third party's willingness to partner with us to test our product,
our research and development activities and the testing of our product may be
delayed. In addition, since we contract with third parties for these services,
we have less direct control over those activities and cannot assure you that the
research or testing will be done properly or in a timely manner.
MANAGEMENT HAS NO EXPERIENCE IN PRODUCT MANUFACTURING, MARKETING, SALES, OR
DISTRIBUTION. WE MAY NOT BE ABLE TO MANUFACTURE OUR BACTERIAL SPORE DETECTOR IN
SUFFICIENT QUANTITIES AT AN ACCEPTABLE COST, OR IN A TIMELY FASHION, AND MAY NOT
BE ABLE TO MARKET AND DISTRIBUTE IT EFFECTIVELY, EACH OF WHICH COULD HARM OUR
FUTURE PROSPECTS.
If we are unable to establish an efficient manufacturing process for the
BSM-2000, our costs of production will increase, our projected margins may
decrease, and we may not be able to timely deliver our product to customers.
When and if we complete all design and testing of our product, we will need to
establish the capability to manufacture it. Management has no experience in
establishing, supervising, or conducting commercial manufacturing. We plan to
rely on third party contractors to manufacture our product, although to date we
have not entered into any manufacturing arrangements with any third party.
Relying on third parties may expose us to the risk of not being able to directly
oversee the manufacturing process, which may adversely affect the production and
quality of our BSM-2000. In addition, these third party contractors may
experience regulatory compliance difficulty, mechanical shutdowns, employee
strikes, or other unforeseeable acts that may increase the cost of production or
delay or prevent production.
10
In addition, if we are unable to establish a successful sales, marketing, and
distribution operation, we will not be able to generate sufficient revenue in
order to maintain operations. We have no experience in marketing or distributing
new products. We have not yet established marketing, sales, or distribution
capabilities for our BSM-2000. We plan on entering into distribution agreements
with third parties to sell our BSM-2000. If we are unable to enter into
relationships with third parties to market, sell, and distribute our products,
we will need to develop our own capabilities. We have no experience in
developing, training, or managing a sales force. If we choose to establish a
direct sales force, we will incur substantial additional expense. We may not be
able to build a sales force on a cost effective basis or at all. Any direct
marketing and sales efforts may prove to be unsuccessful. In addition, our
marketing and sales efforts may be unable to compete with the extensive and
well-funded marketing and sales operations of some of our competitors. We also
may be unable to engage qualified distributors. Even if engaged, they may fail
to satisfy financial or contractual obligations to us, or adequately market our
products.
WE CANNOT GUARANTEE THAT OUR BIOTERRORISM DETECTION DEVICE WILL WORK OR BE
COMMERCIALLY VIABLE.
Our product in development requires testing, third party verification,
potentially additional modifications and demonstration of commercial scale
manufacturing before it can be proven to be commercially viable. Potential
products that appear to be promising at early stages of development may not
reach the market for a number of reasons. These reasons include the
possibilities that the product may be ineffective, unsafe, difficult or
uneconomical to manufacture on a large scale, or precluded from
commercialization by proprietary rights of third parties. We cannot predict with
any degree of certainty when, or if, the testing, modification and validation
process will be completed. If our product development efforts are unsuccessful
or if we are unable to develop a commercially viable product timely, we would
need to consider steps to protect our assets against our creditors.
OUR PRODUCTS MAY NOT BE COMMERCIALLY ACCEPTED WHICH WILL ADVERSELY AFFECT OUR
REVENUES AND PROFITABILITY.
Our ability to enter into the bioterrorism detection device market, establish
brand recognition and compete effectively depends upon many factors, including
broad commercial acceptance of our products. If our products are not
commercially accepted, we will not recognize meaningful revenue and may not
continue to operate. The success of our products will depend in large part on
the breadth of information these products capture and the timeliness of delivery
of that information. The commercial success of our products also depends upon
the quality and acceptance of other competing products, general economic and
political conditions and other factors, all of which can change and cannot be
predicted with certainty. We cannot assure you that our new products will
achieve market acceptance or will generate significant revenue.
EXISTING AND DEVELOPING TECHNOLOGIES MAY ADVERSELY AFFECT THE DEMAND FOR OUR
ONLY PRODUCT, THE BSM-2000.
Our industry is subject to rapid and substantial technological change.
Developments by others may render our technology and planned product
noncompetitive or obsolete, or we may be unable to keep pace with technological
developments or other market factors. Competition from other biotechnology
companies, universities, governmental research organizations and others
diversifying into our field is intense and is expected to increase. According to
the public filings of Cepheid, one of our competitors, it has begun shipping its
detection technology product, including for use by the U.S. Postal Service.
Cepheid's entry into the market before us may make it more difficult for us to
penetrate the market. In addition, our competitors offer technologies different
than ours which potential customers may find more suitable to their needs. For
example, Cepheid's technology specifically detects for Anthrax whereas our
technology detects for an increase in the level of bacterial spores. Many of our
competitors also have significantly greater research and development
capabilities than we do, as well as substantially greater marketing,
manufacturing, financial and managerial resources.
SHARES ISSUED UPON THE EXERCISE OF OUR OUTSTANDING OPTIONS AND WARRANTS MAY
DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE.
If exercised, our outstanding options and warrants will cause immediate and
substantial dilution to our stockholders. We have issued options and warrants to
acquire our common stock to our employees, consultants, and investors at various
prices, some of which are or may in the future be below the market price of our
stock. As of December 31, 2008, we had outstanding options and warrants to
purchase a total of 592,750 shares of common stock. Of these options and
warrants, all have exercise prices at or above the recent market price of $0.003
per share (as of March 31, 2009) and none have exercise prices at or below this
price.
11
WE USE A SIGNIFICANT PORTION OF OUR CASH ON HAND AND STOCK TO PAY CONSULTING
FEES. WE MAY NOT RECEIVE THE BENEFIT WE EXPECT FROM THESE CONSULTANTS.
The consultants that we hire may not provide us with the level of services, and
consequently, the operating results, we anticipate. We spent approximately $0.3
and $0.7 million in consulting fees during the years ended December 31, 2008 and
2007 respectively, and utilized approximately 10 consultants during this period.
The consultants we engage provide us with a variety of services.
THE LOSS OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER WOULD DISRUPT OUR
BUSINESS.
Our success depends in substantial part upon the services of Jacques Tizabi, our
President, Chief Executive Officer and Chairman of the Board of Directors. The
loss of or the failure to retain the services of Mr. Tizabi would adversely
affect the development of our business and our ability to realize profitable
operations. We do not maintain key-man life insurance on Mr. Tizabi and have no
present plans to obtain this insurance.
IF INTERNATIONAL PATENTS FOR THE BACTERIAL SPORE DETECTION TECHNOLOGY ARE NOT
ISSUED, COMPETITORS MAY BE ABLE TO COPY AND SELL PRODUCTS SIMILAR TO OURS
WITHOUT PAYING A ROYALTY, WHICH WOULD HAVE A MATERIAL ADVERSE IMPACT ON OUR
ABILITY TO COMPETE.
If BSM-2000 is commercialized, the lack of foreign patent protection could allow
competitors to copy and sell products similar to ours without paying a royalty.
Caltech owns the bacterial spore detection technology that is integrated into
BSM-2000. On January 31, 2003, Caltech filed a U.S. patent application covering
the technology, which was granted by the U.S. Patent and Trademark Office in
December 2007. Caltech also filed a patent application with the European Patent
Office. We paid and filed on behalf of Caltech a patent application in Japan as
well. No international patents have been issued and we cannot assure you that
any international patents will be issued.
WE MAY BE SUED BY THIRD PARTIES WHO CLAIM OUR PRODUCT INFRINGES ON THEIR
INTELLECTUAL PROPERTY RIGHTS. DEFENDING AN INFRINGEMENT LAWSUIT IS COSTLY AND WE
MAY NOT HAVE ADEQUATE RESOURCES TO DEFEND OURSELVES.
We may be exposed to future litigation by third parties based on claims that our
technology, product, or activity infringes on the intellectual property rights
of others or that we have misappropriated the trade secrets of others. This risk
is compounded by the fact that the validity and breadth of claims covered in
technology patents in general and the breadth and scope of trade secret
protection involves complex legal and factual questions for which important
legal principles are unresolved. Any litigation or claims against us, whether or
not valid, could result in substantial costs, could place a significant strain
on our financial and managerial resources, and could harm our reputation. Our
license agreement with Caltech requires that we pay the costs associated with
initiating an infringement claim and defending claims by third parties for
infringement, subject to certain offsets that may be allowed against amounts we
may owe to Caltech under the licensing agreement. In addition, intellectual
property litigation or claims could force us to do one or more of the following:
o cease selling, incorporating, or using any of our technology and/or products
that incorporate the challenged intellectual property, which could adversely
affect our potential revenue;
o obtain a license from the holder of the infringed intellectual property
right, which license may be costly or may not be available on reasonable
terms, if at all; or
o redesign our products, which would be costly and time consuming.
THE U.S. GOVERNMENT HAS RIGHTS TO THE TECHNOLOGY WE LICENSE FROM CALTECH.
Under the license rights provided to the U.S. government in our license
agreement with Caltech, a U.S. government agency or the U.S. armed forces may,
either produce the proprietary products or use the proprietary processes or
contract with third parties to provide the proprietary products, processes, and
services to one or more Federal agencies or the armed forces of the U.S.
government, for use in activities carried out by the U.S. government, its
agencies, and the armed forces, including, for instance, the war on terrorism or
the national defense. Further, the Federal agency that provided funding to
Caltech for the research that produced the inventions covered by the patent
rights referenced in the Technology Affiliates Agreement and the related
technology may require us to grant, or if we refuse, itself may grant a
nonexclusive, partially exclusive, or exclusive license to these intellectual
property rights to a third party if the agency determines that action is
necessary:
12
o because we have not taken, or are not expected to take within a reasonable
time, effective steps to achieve practical application of the invention in
the detection of pathogens, spores, and biological warfare agents;
o to alleviate health or safety needs which are not reasonably satisfied by us
or our sublicensees;
o to meet requirements for public use specified by Federal regulations and
those regulations are not reasonably satisfied by us; or
o because we have not satisfied, or obtained a waiver of, our obligation to
have the licensed products manufactured substantially in the United States.
THE BACTERIAL SPORE DETECTION TECHNOLOGY IS LICENSED TO US BY CALTECH. IF OUR
LICENSE TERMINATES, OUR FUTURE PROSPECTS WOULD BE HARMED.
The loss of our technology license would require us to cease operations until we
identify, license and integrate into our product another technology, if
available. If we fail to fulfill any payment obligation under the terms of the
license agreement or materially breach the agreement, Caltech may terminate the
license. To maintain our license with Caltech, a minimum annual royalty of
$10,000 was due to Caltech on August 1, 2005, and is due on each anniversary
thereof, regardless of any product sales. Any royalties paid from product sales
for the 12-month period preceding the date of payment of the minimum annual
royalty will be credited against the annual minimum. As of the date of this
report, we have not yet paid the minimum annual royalty of $10,000 due on August
1, 2008. Under our license agreement, Caltech has the option to revoke our
license if payment has not been made fifteen days after receipt of the second
default notice from Caltech. To date, we have not yet received any default
notices from Caltech in relation to the August 1, 2008 minimum annual royalty
payment.
OUR STOCK PRICE IS VOLATILE.
The trading price of our common stock fluctuates widely and in the future may be
subject to similar fluctuations in response to quarter-to-quarter variations in
our operating results, announcements of technological innovations or new
products by us or our competitors, general conditions in the bioterrorism
detection device industry in which we compete and other events or factors. In
addition, in recent years, broad stock market indices, in general, and the
securities of technology companies, in particular, have experienced substantial
price fluctuations. These broad market fluctuations also may adversely affect
the future trading price of our common stock.
OUR STOCK HISTORICALLY HAS BEEN THINLY TRADED. THEREFORE, SHAREHOLDERS MAY NOT
BE ABLE TO SELL THEIR SHARES FREELY.
The volume of trading in our common stock historically has been low and a
limited market presently exists for the shares. We have no analyst coverage of
our securities. The lack of analyst reports about our stock may make it
difficult for potential investors to make decisions about whether to purchase
our stock and may make it less likely that investors will purchase our stock. We
cannot assure you that our trading volume will increase, or that our
historically light trading volume or any trading volume whatsoever will be
sustained in the future. Therefore, we cannot assure you that our shareholders
will be able to sell their shares of our common stock at the time or at the
price that they desire, or at all.
POTENTIAL ANTI-TAKEOVER TACTICS AND RIGHTS AND PREFERENCES GRANTED THROUGH THE
ISSUANCE OF PREFERRED STOCK RIGHTS MAY BE DETRIMENTAL TO COMMON SHAREHOLDERS.
We are authorized to issue up to 20,000,000 shares of preferred stock. The
issuance of preferred stock does not require approval by the shareholders of our
common stock. Our Board of Directors, in its sole discretion, has the power to
issue preferred stock in one or more series and establish the dividend rates and
preferences, liquidation preferences, voting rights, redemption and conversion
terms and conditions and any other relative rights and preferences with respect
to any series of preferred stock. Holders of preferred stock may have the right
to receive dividends, certain preferences in liquidation and conversion and
other rights, any of which rights and preferences may operate to the detriment
of the shareholders of our common stock. Further, the issuance of any preferred
stock having rights superior to those of our common stock may result in a
decrease in the market price of the common stock and, additionally, could be
used by our Board of Directors as an anti-takeover measure or device to prevent
a change in our control.
13
150 shares of our preferred stock have been designated as Series A-1 Preferred
Stock (the "Series A-1 Shares") and have been issued to Mr. Jacques Tizabi, our
President, Chief Executive Officer, Acting Chief Financial Officer, and Chairman
of the Board of Directors. The Series A-1 Shares entitled Mr. Tizabi to
1,000,000 votes per share, which shall vote together with the common stock of
the Company for all purposes, except where a separate vote of the classes of
capital stock is required by California law. The aggregate value of the 150
shares issued to Mr. Tizabi was $50,000. The shares had a liquidation value, as
described in the Company's Articles of Incorporation, of $50,000. Mr. Tizabi was
prohibited, by agreement with the Company, from transferring or selling such
stock, or any interest in such stock for so long as the shares were outstanding.
In the manners discussed above, the rights and preferences of the Series A-1
Shares may have operated to the detriment of our common shareholders. In July
2007, Mr. Tizabi surrendered the 150 shares of the Series A-1 preferred stock of
the Company in the amount of $50,000 in return for a promissory note that bears
no interest and is due on or before July 1, 2008. The shares were cancelled by
the Company.
WE ARE SUBJECT TO THE REQUIREMENTS OF SECTION 404 OF THE SARBANES-OXLEY ACT. IF
WE ARE UNABLE TO TIMELY COMPLY WITH SECTION 404 OR IF THE COSTS RELATED TO
COMPLIANCE ARE SIGNIFICANT, OUR PROFITABILITY, STOCK PRICE AND RESULTS OF
OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED.
We are required to comply with the provisions of Section 404 of the
Sarbanes-Oxley Act of 2002, which require us to maintain an ongoing evaluation
and integration of the internal controls of our business. We were required to
document and test our internal controls and certify that we are responsible for
maintaining an adequate system of internal control procedures for the year ended
December 31, 2007. In sequent years, our independent registered public
accounting firm will be required to opine on those internal controls and
management's assessment of those controls. In the process, we may identify areas
requiring improvements, and we may have to design enhanced processes and
controls to address issued indentified through this review.
We evaluated our existing controls for the year ended December 31, 2008. Our
Chief Executive Officer and Chief Financial Officer identified material
weaknesses in our internal control over financial reporting and determined that
we did not maintain effective internal control over financial reporting as of
December 31, 2008. The identified material weaknesses did not result in material
audit adjustments to our 2008 financial statements; however, uncured material
weaknesses could negatively impact our financial statements for subsequent
years.
We cannot be certain that we will be able to successfully complete the
procedures, certification and attestation requirements of Section 404 or that
our auditors will not have to report a material weakness in connection with the
presentation of our financial statements. If we fail to comply with the
requirements of Section 404 or if our auditors report such material weakness,
the accuracy and timeliness of the filing of our annual report may be materially
adversely affected and could cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price
of our common stock. In addition, a material weakness in the effectiveness of
our internal controls over financial reporting could result in an increased
chance of fraud and the loss of customers, reduce our ability to obtain
financing and require additional expenditures to comply with these requirements,
each of which could have a material adverse effect on our business, result of
operations and financial condition.
Further, we believe that the out-of-pocket costs, the diversion of management's
attention from running the day-to-day operations and operational changed caused
by the need to comply with the requirements of Section 404 of the Sarbanes-Oxley
Act could be significant. If the time and costs associated with such compliance
exceed our current expectations, our results of operations could be adversely
affected.
ITEM 2. DESCRIPTION OF PROPERTY
We currently do not own any property. As of February 2004, we moved our
corporate headquarters to 9595 Wilshire Blvd., Suite 700, Beverly Hills,
California. Our offices are still at this address under a month to month lease
arrangement with the landlord.
14
ITEM 3. LEGAL PROCEEDINGS
On or about April 16, 2004, Plaintiffs A. Sean Rose, Claire F. Rose, and Mark
Rose commenced an action in the Los Angeles Superior Court against the Company
(A. SEAN ROSE, CLAIRE F. ROSE AND MARK ROSE V. UNIVERSAL DETECTION TECHNOLOGY,
FKA POLLUTION RESEARCH AND CONTROL CORPORATION) for amounts allegedly due
pursuant to four unpaid promissory notes. On August 2, 2004, the parties
executed a Confidential Settlement Agreement and Mutual Releases (the
"Agreement"). On December 30, 2005, Plaintiffs commenced an action against the
Company, alleging the Company breached the Agreement and sought approximately
$205,000 in damages. A judgment was entered on April 11, 2006 for $209,277.58.
The Company has previously accrued for this settlement. We entered into a
settlement agreement in the third quarter of 2004 with each of these parties. As
of December 31, 2009, we have accrued $456,607 for this settlement including
principal and interest.
On June 2, 2006, Plaintiff Trilogy Capital Partners instituted an action in the
Los Angeles Superior Court (TRILOGY CAPITAL PARTNERS V. UNIVERSAL DETECTION
TECHNOLOGY, ET. AL., Case No. SC089929) against the Company. Plaintiff's
Complaint alleged damages against UDT for breach of an engagement letter in the
amount of $93,448.54. Also, Plaintiff alleged that UDT had failed to issue
warrants to it pursuant to a written agreement. After completing the initial
stages of litigation and conducting extensive mediation, Plaintiff and UDT
reached a settlement wherein commencing December 15, 2006, UDT would make
monthly payments to Plaintiff of $2,000 until a debt of $90,000 plus accrued
interest at six percent per annum was fully paid. In exchange, Plaintiff would
release all of its claims against UDT. UDT has been current on all of its agreed
payments to Plaintiff. As of February 15, 2009, $40,000 was due under the
agreement.
On November 15, 2006, Plaintiff NBGI, Inc. instituted an action in the Los
Angeles Superior Court (NBGI, Inc. v. Universal Detection Technology, et. al.,
Case No. BC361979) against the Company. NBGI, Inc.'s Complaint alleged breach of
contract, and requested damages in the amount of $111,014.34 plus interest at
the legal rate and for costs of suit. There is also a Motion for Summary
Judgment set for September 11, 2007. The Summary Judgment was granted in NBGI's
favor and Judgment has been entered.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
15
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDERS MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the OTC Bulletin Board under the symbol "UDTT."
The following table sets forth the high and low bid information of our common
stock on the OTC Bulletin Board for each quarter during the last two fiscal
years and the subsequent interim period, as reported by the OTC Bulletin Board.
This information reflects inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
Year Period High Bid Low Bid
---- ------ -------- -------
2007 First Quarter 2.2 0.84
Second Quarter 1.14 0.32
Third Quarter 0.62 0.26
Fourth Quarter 0.74 0.12
2008 First Quarter 0.36 0.04
Second Quarter 0.26 0.04
Third Quarter 0.35 0.009
Fourth Quarter 0.05 0.0042
2009 First Quarter 0.01 0.0033
As of April 15, 2009, we had 2,574 shareholders of record of our common stock.
DIVIDEND POLICY
We do not currently pay any dividends on our common stock, and we currently
intend to retain any future earnings for use in our business. Any future
determination as to the payment of dividends on our common stock will be at the
discretion of our Board of Directors and will depend on our earnings, operating
and financial condition, capital requirements and other factors deemed relevant
by our Board of Directors including the General Corporation Law of the State of
California, which provides that dividends are only payable out of retained
earnings or if certain minimum ratios of assets to liabilities are satisfied.
The declaration of dividends on our common stock also may be restricted by the
provisions of credit agreements that we may enter into from time to time.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Set forth in the table below is information regarding awards made through equity
compensation plans, through December 31, 2008, for our last fiscal year.
PLAN CATEGORY NUMBER OF WEIGHTED- NUMBER OF
SECURITIES TO BE AVERAGE EXERCISE SECURITIES
ISSUED UPON PRICE OF AVAILABLE FOR
EXERCISES OF OUTSTANDING FUTURE PLAN
OUTSTANDING OPTIONS, OPTIONS, WARRANTS, ISSUANCE
WARRANTS, AND RIGHTS AND RIGHTS
EQUITY COMPENSATION PLANS APPROVED BY
SECURITY HOLDERS N/A N/A N/A
EQUITY COMPENSATION PLANS NOT APPROVED
BY SECURITY HOLDERS
2006 STOCK COMPENSATION PLAN 37,500 (1) N/A 0
2006 CONSULTANT STOCK PLAN 125,000 (1) N/A 0
2006-II CONSULTANT STOCK PLAN 187,500 (1) N/A 0
2007 EQUITY INCENTIVE PLAN 375,000 N/A 0
2007 EQUITY INCENTIVE PLAN II&III 295,000 (1)(2) N/A 0
2007 EQUITY INCENTIVE PLAN IV 450,000 N/A 31
2007 EQUITY INCENTIVE PLAN V & VI 1,350,000 N/A 16,109
2008 EQUITY INCENTIVE PLAN 1,500,000 N/A 45
2008 EQUITY INCENTIVE PLAN II 1,650,000 N/A 15,730
2008 EQUITY INCENTIVE PLAN III 2,500,000 N/A 0
2008 EQUITY INCENTIVE PLAN IV 3,800,000 N/A 0
(1) Represents total number of shares of common stock originally authorized
for stock grants. Stock option grants were not authorized.
(2) Consists of the second and third plans
(3) Consists of the fourth and fifth plans
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On February 13, 2006, our Board of Directors adopted the 2006 Stock Compensation
Plan (the "Plan"). The Plan authorizes common stock grants to our non-executive
employees, professional advisors and consultants. We reserved 7,500,000 shares
of our common stock for awards to be made under the Plan. The Plan is to be
administered by our Board of Directors, or by any committee to which such duties
are delegated by the Board.
On June 29, 2006, our Board of Directors adopted the 2006 Consultant Stock Plan
(the "2006 Plan"). The 2006 Plan authorizes common stock grants to our
employees, officers, directors, consultants, independent contractors, advisors,
or other service providers, provided that such services are not in connection
with the offer and sale of securities in a capital-raising transaction. We
reserved 25,000,000 shares of our common stock for awards to be made under the
2006 Plan. The 2006 Plan is to be administered by a committee of one or more
members of our Board of Directors.
On November 22, 2006, our Board of Directors adopted the 2006-II Consultant
Stock Plan (the "2006-II Plan"). The 2006-II Plan authorizes common stock grants
to our employees, officers, directors, consultants, independent contractors,
advisors, or other service providers, provided that such services are not in
connection with the offer and sale of securities in a capital-raising
transaction. We reserved 37,500,000 shares of our common stock for awards to be
made under the 2006-II Plan. The 2006-II Plan is to be administered by a
committee of two or more members of our Board of Directors.
On April 17, 2007, the Board of Directors adopted the 2007 Equity Incentive Plan
(the "2007 Plan"). The 2007 Plan grants to our employees, officers, directors,
consultants, independent contractors, advisors, or other service providers,
provided that such services are not in connection with the offer and sale of
securities in a capital-raising transaction. We reserved 375,000 shares of our
common stock for awards to be made under the 2007 Plan. The 2007 Plan is to be
administered by a committee of two or more members of our Board of Directors.
On June 5, 2007, the Board of Directors adopted the 2007 Equity Incentive Plan
(the "2007-III Plan"). The 2007-III Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
145,000 shares of its common stock for awards to be made under the 2007-III
Plan. The 2007-III Plan is to be administered by a committee of two or members
of the Board of Directors.
On July 13, 2007, the Board of Directors adopted the 2007 Equity Incentive Plan
(the "2007-IV Plan"). The 2007-IV Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
450,000 shares of our common stock for awards to be made under the 2007-IV Plan.
The 2007-IV Plan is to be administered by a committee of two or more members of
the Board of Directors.
On October 10, 2007, the Board of Directors adopted the 2007 Equity Incentive
Plan (the "2007-V Plan"). The 2007-V Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
600,000 shares of common stock for awards to be made under the 2007-V Plan. The
2007-V Plan is to be administered by a committee of two or more members of our
Board of Directors.
On November 1, 2007, the Board of Directors adopted the 2007 Equity Incentive
Plan (the "2007-VI Plan"). The 2007-VI Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
750,000 shares of common stock for awards to be made under the 2007-VI Plan. The
2007-VI Plan is to be administered by a committee of two or more members of our
Board of Directors.
On February 11, 2008, the Board of Directors adopted the 2008 Equity Incentive
Plan (the "2008 Plan"). The 2008 Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
1,500,000 shares of common stock for awards to be made under the 2008 Plan. The
2008 Plan is to be administered by a committee of two or more members of our
Board of Directors.
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On April 29, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan
(the "2008-II Plan"). The 2008-II Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
1,650,000 shares of common stock for awards to be made under the 2008-III Plan.
The 2008-II Plan is to be administered by a committee of two or more members of
our Board of Directors.
On July 1, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan
(the "2008-III Plan"). The 2008-III Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
2,500,000 shares of common stock for awards to be made under the 2008-III Plan.
The 2008-III Plan is to be administered by a committee of two or more members of
our Board of Directors.
On September 2, 2008, the Board of Directors adopted the 2008 Equity Incentive
Plan (the "2008-IV Plan"). The 2008-IV Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
3,800,000 shares of common stock for awards to be made under the 2008-IV Plan.
The 2008-IV Plan is to be administered by a committee of two or more members of
our Board of Directors.
With respect to each of the above Plans, and subject to the provisions of each
Plan, the Board and/or committee shall have authority to (a) grant, in its
discretion, stock awards; (b) determine in good faith the fair market value of
the stock covered by any grant; (c) determine which eligible persons shall
receive grants and the number of shares, restrictions, terms and conditions to
be included in such grants; (d) construe and interpret the Plans; (e)
promulgate, amend and rescind rules and regulations relating to its
administration, and correct defects, omissions and inconsistencies in the Plans
or any grants; (f) consistent with the Plans and with the consent of the
participant, amend any outstanding grant; and (g) make all other determinations
necessary or advisable for the Plans' administration. The interpretation and
construction by the Board of any provisions of the Plans shall be conclusive and
final.
SALES OF UNREGISTERED SECURITIES
During fiscal 2008, we issued the following securities which were not registered
under the securities which were not registered under the Securities Act of 1933,
as amended. We did not employ any form of general solicitation or advertising in
connection with the offer and sale of the securities described below. In
addition, we believe the purchasers of securities are "ACCREDITED INVESTORS" for
the purpose of Rule 501 of the Securities Act. For these reasons, among others,
the offer and sale of the following securities were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act or
Regulation D promulgated by the SEC under the Securities Act:
o During 2008, we used 15,088,690 shares of common stock to various note
holders to convert outstanding debt obligations valued at approximately
$929,461.
ITEM 6. SELECTED FINANCIAL DATA
Please see the Financial Statements of the Company filed herewith.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with our consolidated
financial statements provided in this annual report on Form 10-K. Certain
statements contained herein may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements involve a number of risks, uncertainties and other factors that could
cause actual results to differ materially, as discussed more fully herein.
The forward-looking information set forth in this annual report is as of the
date of this filing, and we undertake no duty to update this information. More
information about potential factors that could affect our business and financial
results is included in the section entitled "Risk Factors" of this annual
report.
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OVERVIEW
We are engaged in the research, development, and marketing of bioterrorism
detection devices. Our strategy is to identify qualified strategic partners with
whom to collaborate in order to develop commercially viable bioterrorism
detection devices. Consistent with this strategy, in August 2002, we entered
into a Technology Affiliates Agreement with NASA's Jet Propulsion Laboratory,
commonly referred to as JPL, to develop technology for our bioterrorism
detection equipment. Under the Technology Affiliates Agreement, JPL developed
its proprietary bacterial spore detection technology and integrated it into our
existing aerosol monitoring system, resulting in a product named BSM-2000.
BSM-2000 is designed to provide continuous unattended monitoring of airborne
bacterial spores in large public places, with real-time automated alert
functionality. The device is designed to detect an increase in the concentration
of bacterial spores, which is indicative of a potential presence of Anthrax.
Our management continues to gain expertise in anti-terrorism techniques and
solutions. Through our partnership with Security Solutions International, we
have begun providing training seminars on terrorism detection and response
methods. The seminars are designed for security officials, building safety
managers, and law enforcement personnel. Through partnerships with various third
parties, we have commenced sales and marketing of bioterrorism detection kits,
radiation detection systems, surveillance cameras, and training references.
In 2008 we have realized revenues of $109,649 from sales. We have incurred
losses for the fiscal years ended December 31, 2008 and 2007 in the approximate
amounts of $2.3 and $3.6 million, respectively, and have an accumulated deficit
of $38.6 million as of December 31, 2008. At December 31, 2008, we were in
default on certain debt obligations totaling approximately $311,000, in addition
to accumulated interest of approximately $463,000. We require approximately $1.6
million in the next 12 months to repay debt obligations. We do not anticipate
that our cash on hand is adequate to meet our operating expenses over the next
12 months. In addition, we do not have adequate capital to repay all of our debt
currently due and becoming due in the next 12 months. We principally expect to
raise funds through the sale of equity or debt securities. However, during the
past 12 months, management spent the substantial majority of its time on sales
and marketing of Company's products and services in target markets. These
activities diverted management from the time it otherwise would spend
negotiating sales of securities to raise capital. In addition, the recent price
and volume volatility in the common stock has made it more difficult for
management to negotiate sales of its securities at a fair price. We actively
continue to pursue additional equity or debt financing, but cannot provide any
assurances that it will be successful. If we are unable to pay our debts as they
becomes due and are unable to obtain financing on terms acceptable to us, or at
all, we will not be able to accomplish any or all of our initiatives and will be
forced to consider other alternatives.
In May 2004, we unveiled the first functional prototype of BSM-2000. The
prototype operated on external software. In July 2004, we commenced simulated
tests with benign bacterial spores having anthrax-like properties in order to
fine tune our product. The use of benign spores is as effective as testing with
anthrax spores because our device is designed to detect an increase in bacterial
spore concentration levels. Based on results we obtained, we were able to
enhance the sensitivity of BSM-2000 by improving the sample collection
efficiency of the device, and made certain other modifications to improve
efficiency. While more testing and development is needed to enhance the
performance of our BSM-2000 and to make it more user-friendly, the device is a
functional product, available for sale.
Starting in 2006, we followed a diversification strategy pursuant to which we
have added various other services to our BSM-2000, biological detection system.
By combining our in-house experience and knowledge and outside expertise offered
by various consultants and third parties, we have added threat evaluation and
consulting services, training courses, and event security to our services. We
have also started sales and marketing of security and counter-terrorism products
including bioterrorism detection kits, surveillance cameras, radiation detection
systems, and training references. Some of our products and services have not
been sold to date and there is no guarantee that any of them will be demanded
and sold in the market in the future. In 2008 we stopped marketing
anti-microbial chemicals and products used for cleaning surfaces of antibiotic
resistant bacteria such as MRSA. We had supplied such products in the past by
partnering with third party suppliers and have terminated such partnerships due
to various reasons including lack of marketability of some such products.
19
We plan to seek and find third parties interested in collaborating on further
research and development on BSM-2000. Such research shall be aimed at making
BSM-2000 more user-friendly, developing a less complicated interface and
software, designing a lighter casing, and some cosmetics. The ideal third party
collaborator would also assist us in marketing BSM-2000 more aggressively. There
is no guarantee that any such collaborators will be found and, if found, that
this strategy will be successful. The current version of BSM-2000 is fully
functional and available for sale. To date, we have sold two units to the
Government of the United Kingdom and we intend to develop a more wide-spread use
for BSM-2000 through our planned collaborative research, development, sales, and
marketing efforts.
Our list price for BSM-2000 is $109,000. The manufacturing of BSM-2000 is
outsourced to Original Equipment Manufacturers (OEM). We do not have any
in-house manufacturing capabilities and do not intend to develop any until we
reach high volumes of sales for BSM-2000 that would justify such facilities. To
date we have used services of two OEMs for manufacturing of our units. We may
decide to use services of other manufacturers in the future.
In March 2006, we sold two units of UDTT's BSM-2000 Anthrax Detection Systems to
the government of the United Kingdom. While we initially planned to secure and
lease a testing facility close to the JPL laboratories where we would be able to
implement a quality assurance program and test our products against the required
specifications before shipping them to customers, that plan was never
materialized and we do not anticipate to open such facilities in the foreseeable
future and unless we receive a substantial order for our BSM-2000.
In February 2006, the Company expanded its relationship with Caltech by
licensing additional technologies in the field of microbial monitoring and
sterility verification. While the Company plans to commercialize the microbial
monitoring technology for use in hospitals, it has not yet started any such
activities and there is no guarantee that it will in the near future. The
Company also commenced work on developing smart ticket assay for detection of
anthrax spores. Smart ticket assays are rapid field tests that are similar to
common home pregnancy tests. Further research and development is needed to fully
commercialize these smart ticket assays and presently there is no guarantee that
the Company will have necessary funding and resources to conduct such research
and development. Through parallel efforts for development of its proprietary
smart ticket assays, the Company entered an agreement with a third party,
whereby it markets and sells lateral flow assays capable of rapid on-site
detection of five bioterrorism agents.
PLAN OF OPERATION
In 2008 we have continued to diversify our activities. We plan to engage more in
value added services to complement our bioterrorism detection technologies. We
now supply our proprietary bacterial spore detection system (BSM-2000),
bioterrorism detection kits capable of detecting anthrax, ricin, botulinum,
plague, and SEBs, surveillance cameras, radiation detection systems, and
counter-terrorism training references. In 2008 we stopped marketing
anti-microbial chemicals and products used for cleaning surfaces of antibiotic
resistant bacteria such as MRSA. We had supplied such products in the past by
partnering with third party suppliers and have terminated such partnerships due
to various reasons including lack of marketability of some such products.
We plan to continue expanding our product base and to sell our products to more
users inside and outside the U.S. There is no guarantee that we will succeed in
implementing this strategy or if implemented, that this strategy will be
successful.
LIQUIDITY AND CAPITAL RESOURCES
We require approximately $3.0 million in the next 12 months to repay debt
obligations and execute our business plan. We do not anticipate that our cash on
hand is adequate to meet our operating expenses over the next 12 months. Also,
we do not believe we have adequate capital to repay all of our debt currently
due and becoming due in the next 12 months. We anticipate that our uses of
capital during the next 12 months principally will be for:
o administrative expenses, including salaries of officers and other
employees we plan to hire;
o repayment of debt;
o sales and marketing;
o product testing and manufacturing; and
o expenses of professionals, including accountants and attorneys.
20
To maintain our license with Caltech, a minimum annual royalty of $10,000 is due
to Caltech on each year on August 1, regardless of any product sales. Any
royalties paid from product sales for the 12-month period preceding the date of
payment of the minimum annual royalty will be credited against the annual
minimum. Pursuant to the terms of the license, we must pay 4% royalties on
product sales in countries where a patent is issued and 2% royalties on product
sales in countries where a patent is not issued, as well as 35% of net revenues
received from sublicensees.
Our working capital deficit at December 31, 2009 was 4,463,803. Our independent
auditors' report includes an explanatory paragraph relating to substantial doubt
as to our ability to continue as a going concern, due to our working capital
deficit at December 31, 2008. We require approximately $1.9 million to repay
indebtedness including interest in the next 12 months. The following provides
the principal terms of our outstanding debt as of December 31, 2008:
o One loan from three family members, each of whom is an unaffiliated
party, evidenced by four promissory notes in the aggregate principal
amounts of $100,000, $50,000, $50,000, and $100,000, each due June 24,
2001 with interest rates ranging from 11% to 12%. We entered into a
settlement agreement in the third quarter of 2004 with each of these
parties. Pursuant to this agreement, at June 30, 2005, we were required
to pay an additional $80,000 as full payment of our obligations. We did
not make this payment and are in default of these notes. As of December
31, 2008, we have $456,607 accrued for including interest relating to
this matter.
o One loan from an unaffiliated party in the aggregate principal amount
of $195,000 with interest at a rate of 12% per annum. Pursuant to a
letter agreement dated as of August 10, 2004, we entered into a
settlement with this party and agreed to pay a total of $261,000
pursuant to a scheduled payment plan through July 2005. Additionally,
the Company, in September 2004, issued 206,250 shares of common stock
upon the conversion of unpaid interest in the aggregate amount of
$33,000. At December 31, 2008, there was $161,000 principal amount (and
$67,128 in interest) remaining on this note. We did not make our
scheduled payment under this note in July 2005, and are in default of
this note.
o One loan from an unaffiliated party in the aggregate principal amount
of $98,500, due July 31, 2005, with interest at the rate of 9% per
annum. Pursuant to a letter agreement dated August 10, 2004, between us
and this third party, we agreed to pay a total of $130,800 pursuant to
a scheduled payment plan through July 2005. At December 31, 2008, there
was $71,500 principal amount (and $34,709 in interest) remaining on
this note. We did not make our scheduled payment under this note in
July 2005, and are in default of this note.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $100,000 due on March 31, 2006 with
an interest rate of 12% per annum. As of December 31, 2008 we owed
$34,500 in interest. We did not make our scheduled payment on March 31,
2006. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $14,975 due on August 31, 2006 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$4,368 in interest. We did not make our scheduled payment on August 31,
2006. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $25,000 due on August 21, 2006 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$10,000 in principal and $654 in interest. We did not make our
scheduled payment on August 21, 2006. We have verbally extended the
unpaid note and the due date and other terms are being renegotiated so
the note is not considered in default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $100,000 due on February 14, 2007
with an interest rate of 12.5% per annum. As of December 31, 2008 we
owed $62,998 in principal and $11,343 in interest. We did not make our
scheduled payment on February 14, 2007. We have verbally extended the
unpaid note and the due date and other terms are being renegotiated so
the note is not considered in default.
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o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $15,000 due on February 20, 2007 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$4,500 in principal and $3,266 in interest. We did not make our
scheduled payment on February 20, 2007. We have verbally extended the
unpaid note and the due date and other terms are being renegotiated so
the note is not considered in default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $35,000 due on February 23, 2007 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$3,498 in principal and $7,401 in interest. We did not make our
scheduled payment on February 23, 2007. We have verbally extended the
unpaid note and the due date and other terms are being renegotiated so
the note is not considered in default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $50,000 due on March 20, 2007 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$11,719 in interest. We did not make our scheduled payment on March 20,
2007. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $50,000 due on April 5, 2007 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$11,458 in interest. We did not make our scheduled payment on April 5,
2007. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $30,000 due on April 13, 2007 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$6,563 in interest. We did not make our scheduled payment on April 13,
2007. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $60,000 due on November 1, 2007 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$12,500 in interest. We did not make our scheduled payment on November
1, 2007. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $30,000 due on December 7, 2007 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$5,938 in interest. We did not make our scheduled payment on December
7, 2007. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $30,000 due on January 11, 2008 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$20,000 in principal and $3,000 in interest. We did not make our
scheduled payment on January 11, 2008. We have verbally extended the
unpaid note and the due date and other terms are being renegotiated so
the note is not considered in default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $30,000 due on February 13, 2008 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$6,875 in interest. We did not make our scheduled payment on February
13, 2008. We have verbally extended the unpaid note and the due date
and other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $25,000 due on March 6, 2008 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$4,115 in interest. We did not make our scheduled payment on March 6,
2008. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
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o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $40,000 due on March 12, 2008 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$61,500 in interest. We did not make our scheduled payment on March 12,
2008. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $25,000 due on October 3, 2008 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$3,646 in interest. We did not make our scheduled payment on October 3,
2008. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $40,000 due on April 11, 2008 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$5,833 in interest. We did not make our scheduled payment on April 11,
2008. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $60,000 due on May 30, 2008 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$8,125 in interest. We did not make our scheduled payment on May 30,
2008. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $30,000 due on November 2, 2008 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$4,063 in interest. We did not make our scheduled payment on November
12, 2008. We have verbally extended the unpaid note and the due date
and other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $20,000 due on January 11, 2008 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$1,875 in interest. We did not make our scheduled payment on January
11, 2008. We have verbally extended the unpaid note and the due date
and other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $20,000 due on July 8, 2008 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$2,500 in interest. We did not make our scheduled payment on July 8,
2008. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $17,000 due on August 4, 2008 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$1,650 in interest. We did not make our scheduled payment on August 4,
2008. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $20,000 due on August 13, 2008 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$2,100 in interest. We did not make our scheduled payment on August 13,
2008. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of 30,000 due on August 27, 2008 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$3,000 in interest. We did not make our scheduled payment on August 27,
2008. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
23
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $13,000 due on August 28, 2008 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$1,300 in interest. We did not make our scheduled payment on August 28,
2008. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $13,000 due on September 6, 2008 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$1,328 in interest. We did not make our scheduled payment on September
6, 2008. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $20,000 due on April 2, 2009 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$1,875 in interest. We did not make our scheduled payment on April 2,
2009. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $19,000 due on April 2, 2009 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$1,781in interest. We did not make our scheduled payment on April 2,
2009. We have verbally extended the unpaid note and the due date and
other terms are being renegotiated so the note is not considered in
default.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $30,000 due on May 2, 2009 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$2,500 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $35,000 due on June 13, 2009 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$2,917 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $30,000 due on May 2, 2009 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$2,500 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $20,000 due on June 13, 2009 with an
interest rate of 12.5% per annum. As of December 31, 2008 we owed
$2,708 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $40,000 due on December 24, 2009 with
an interest rate of 12.5% per annum. As of December 31, 2008 we owed
$2,500 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $35,000 due on July 15, 2009 with an
interest rate of 12% per annum. As of December 31, 2008 we owed $1,925
in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $15,000 due on July 17, 2009 with an
interest rate of 12% per annum. As of December 31, 2008 we owed $793 in
interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $34,000 due on July 22, 2009 with an
interest rate of 12% per annum. As of December 31, 2008 we owed $1,700
in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $17,000 due on August 5, 2009 with an
interest rate of 12% per annum. As of December 31, 2008 we owed $793 in
interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $23,500 due on August 27, 2009 with
an interest rate of 12% per annum. As of December 31, 2008 we owed $940
in interest.
24
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $55,500 due on August 28, 2009 with
an interest rate of 12% per annum. As of December 31, 2008 we owed
$2,200 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $25,000 due on November 13, 2009 with
an interest rate of 12% per annum. As of December 31, 2008 we owed $500
in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $18,000 due on November 18, 2009 with
an interest rate of 12% per annum. As of December 31, 2008 we owed $190
in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $27,000 due on December 2, 2009 with
an interest rate of 12% per annum. As of December 31, 2008 we owed $270
in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $30,000 due on December 15, 2009 with
an interest rate of 12% per annum. As of December 31, 2008 we owed $0
in interest.
o One loan from an unaffiliated party evidenced by a promissory note in
the aggregate principal amount of $25,000 due on October 9, 2009 with
an interest rate of 12% per annum. As of December 31, 2008 we owed $750
in interest. Management continues to take steps to address the
Company's liquidity needs. Recently management concluded discussions
with most of our note holders and amended the terms of these notes to
provide for extended scheduled payment arrangements. Management
continues to seek extensions with respect to debt past due. Management
also may seek additional extensions with respect to these notes and the
Company's debt as it becomes due. In addition, management may continue
to convert some portion of the principal amount and interest on our
debt into shares of common stock. During 2008, the Company issued
15,088,690 shares of its common stock for an aggregate value of
$929,461 to satisfy outstanding debt and accrued interest.
Historically, we have financed operations through private debt and equity
financings. In recent years, financial institutions have been unwilling to lend
to us and the cost of obtaining working capital from investors has been
expensive. We principally expect to raise funds through the sale of equity or
debt securities. During the years ended December 31, 2008 and 2007, the Company
received gross proceeds of approximately $0.0 million and $0.9 million,
respectively, from the sale of equity and debt securities. The Company actively
continues to pursue additional equity or debt financings, but cannot provide any
assurance that it will be successful. If we are unable to pay our debt as it
becomes due and are unable to obtain financing on terms acceptable to us, or at
all, we will not be able to accomplish any or all of our initiatives and will be
forced to consider steps that would protect our assets against our creditors.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources, and that would be
considered material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for Smaller Reporting Companies.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and related notes are set forth at pages ___ through
____ .
25
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Universal Detection Technology and Subsidiaries
Beverly Hills, California
We have audited the accompanying consolidated balance sheets of Universal
Detection Technology and Subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of operations, consolidated shareholders'
Deficit, and consolidated cash flows for the year ended December 31, 2008 and
2007. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits of these consolidated statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Universal Detection Technology
and Subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and cash flows for the year ended December 31, 2008 and 2007 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the year ended
December 31, 2008, the Company incurred net losses of $2,279,058 and has
accumulated deficit of $38,610,712 as of December 31, 2008. These factors, among
others, as discussed in Note 1 to the consolidated financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Kabani & Company, Inc.
- --------------------------
Los Angeles, California
April 14, 2009
F-2
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND 2007
ASSETS
2008 2007
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,910 $ 9,555
Restricted cash 10,477 10,209
Accounts Receivable,net 1,058 4,282
Prepaid expenses 3,666 10,827
------------ ------------
Total current assets 17,111 34,873
Deposits 10,226 10,226
Equipment, net 32,946 57,673
Patent, net 84,008 89,413
------------ ------------
Total assets $ 144,291 $ 192,185
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable, trade $ 1,030,865 $ 1,000,478
Accrued liabilities 480,126 519,382
Accrued payroll - officers 809,136 522,573
Notes payable - related party 10,325 72,543
Notes payable 1,630,711 1,385,760
Accrued interest expense 657,110 514,773
------------ ------------
Total current liabilities 4,618,273 4,015,509
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value, 20,000,000 shares
authorized, -0- issued and outstanding -- --
Common stock, no par value,100,000,000 shares
authorized, 35,286,671 shares issued and
outstanding as of December 31, 2008 and
4,178,479 shares issued and outstanding as
of December 31, 2007 28,823,641 27,195,242
Additional paid-in-capital 5,313,089 5,313,089
Accumulated deficit (38,610,712) (36,331,655)
------------ ------------
Total stockholders' deficit (4,473,982) (3,823,324)
------------ ------------
Total liabilities and stockholders' deficit $ 144,291 $ 192,185
============ ============
See accompanying notes to consolidated financial statements.
F-3
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
------------ ------------
REVENUE, NET $ 109,649 $ 8,011
COST OF GOODS SOLD 86,405 6,862
------------ ------------
GROSS PROFIT 23,244 1,149
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 1,461,042 3,100,759
Marketing 34,175 25,410
Research and development -- 19,264
Depreciation and amortization 30,132 52,655
------------ ------------
Total expenses 1,525,349 3,198,088
------------ ------------
LOSS FROM OPERATIONS (1,502,105) (3,196,939)
OTHER INCOME (EXPENSE):
Interest income 268 1,612
Interest expense (191,046) (185,651)
Loss on settlement of debt (586,175) (211,287)
------------ ------------
Total other expenses (776,953) (395,326)
------------ ------------
NET LOSS $ (2,279,058) $ (3,592,265)
============ ============
NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: $ (0.15) $ (1.49)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,793,963 2,417,936
============ ============
Weighted average number of dilutive securities has no been calculated as the
effect of dilutive securities would be anti-dilutive
See accompanying notes to consolidated financial statements.
F-4
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT PAID-IN-CAPITAL DEFICIT DEFICIT
------ -------- ----------- ------------ --------------- ------------ ------------
BALANCE, DECEMBER 31, 2006 -- $ -- 887,045 $ 25,483,357 $ 4,101,605 $(32,739,390) $ (3,154,428)
Preferred stock issued to a officer 150 50,000 -- -- -- -- --
Cancellation of preferred stock (150) (50,000) -- -- -- -- --
Stock issued under investment agreement -- -- 166,686 146,500 -- -- 146,500
Stock issued for conversion of debt -- -- 859,419 345,373 -- -- 345,373
Stock issued for services -- -- 2,265,329 1,220,012 -- -- 1,220,012
Forgiveness of Officer's accrued salary -- -- -- -- 550,000 -- 550,000
Stock Options granted -- -- -- -- 661,484 -- 661,484
Net loss for the year -- -- -- -- -- (3,592,265) (3,592,265)
------ -------- ----------- ------------ --------------- ------------ ------------
BALANCE, DECEMBER 31, 2007 -- -- 4,178,479 27,195,242 5,313,089 (36,331,655) (3,823,324)
Adjustment -- -- 10,184 -- -- -- --
Stock issued for conversion of debt -- -- 15,088,690 929,461 -- -- 929,461
Stock issued for services -- -- 16,009,318 698,938 -- -- 698,938
Net loss for the year -- -- -- -- -- (2,279,057) (2,279,057)
------ -------- ----------- ------------ --------------- ------------ ------------
BALANCE, DECEMBER 31, 2008 -- -- 35,286,671 28,823,641 5,313,089 (38,610,712) (4,473,982)
====== ======== =========== ============ =============== ============ ============
See accompanying notes to consolidated financial statements.
F-5
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,279,058) $ (3,592,265)
Adjustments to reconcile net loss to
net cash used in operations:
Stocks issued for services 698,938 1,220,012
Stock option expenses -- 661,484
Loss on settlement of debt 586,175 211,287
Depreciation 24,727 24,727
Changes in operating assets and liabilities:
Assets held for sale -- --
Patent costs 5,405 27,928
Accounts receivable 3,224 (4,282)
Prepaid expenses 7,161 27,144
Accounts payable and accrued liabilities 430,922 655,234
-------------- --------------
Net cash used in operating activities (522,506) (768,731)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (269) 52,098
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft -- --
Proceeds from sale of common stock -- 146,500
Proceeds from notes payable-related party 62,487 70,043
Proceeds from notes payable 607,347 690,000
Payments on notes payable - related party (124,704) --
Payments on notes payable (30,000) (198,468)
-------------- --------------
Net cash provided by financing activities 515,130 708,075
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,645) (8,558)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,555 18,113
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,910 $ 9,555
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax $ -- $ --
============== ==============
Interest Paid $ 818 $ 54,007
============== ==============
SUPPLEMENTAL DISCLOSURES FOR NON CASH INVESTING AND
FINANCING ACTIVITIES:
Shares issued for settlement of debt and accrued interest $ 929,461 $ 1,727
============== ==============
Compensation contribution $ -- $ 550,000.00
============== ==============
See accompanying notes to consolidated financial statements.
F-6
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 1 - BUSINESS ACTIVITY
Universal Detection Technology, a California corporation, primarily designs,
manufacturs and marketsd air pollution monitoring instruments. Beginning in
2002, the Company has focused its research and development efforts in developing
a real time biological weapon detection device. To accelerate development of its
initial biological weapon detection device, the Company has developed and is
implementing a collaborative partnering strategy. Under this strategy, the
Company identifies and partners with researchers and developers. The Company has
expanded its services to include security related consulting, event security and
counterterrorism training.
The Company is a reseller of a range of products, which include rapid anthrax
detection test kits, training courses for first responders, event security,
threat evaluation & consulting, radiation detection systems, anti-microbial
products, and DVDs aimed at providing information and training regarding
combating terrorism and managing emergency situations.
GOING CONCERN AND MANAGEMENT'S PLANS
As of December 31, 2008, the Company had a working capital deficit of $4,590,936
and a capital deficit of $4,473,982. During the year ended December 31, 2008,
the Company incurred net losses of $2,279,058 and has accumulated deficit of
$38,610,712 as of December 31, 2008. These conditions raise substantial doubt
about its ability to continue as a going concern. Its ability to continue as a
going concern is dependent upon its ability to develop additional sources of
capital and ultimately achieve profitable operations. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty. The Company's financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
During 2007 and 2008, the Company entered into various agreements to sell shares
of its common stock to third parties in order to covert their debts to the
respective parties. In 2007, 859,419 shares were issued in the aggregate amount
of $345,373. In 2008, 15,088,690 shares were issued in the aggregate amount of
$929,461.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STOCK SPLIT
On July 25, 2008, the Company effected a reverse stock split of their common
stock. The reverse split was effected on a one-for-two hundred basis, resulting
in 14,211,953 shares outstanding immediately following the stock split. All
common stock numbers in these consolidated financial statements have been
retroactively restated for the effect of the reverse split.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Universal
Detection Technology and its wholly-owned subsidiaries Nutek, Inc. ("Nutek") and
Logan Medical Devices, Inc. ("Logan"). The two subsidiaries are currently
inactive. All significant intercompany balances and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with Staff
accounting bulletin (SAB) 104. Sales revenue is recognized at the date of
shipment to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectability is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue. Service revenue is recognized when services are performed
and amounts are due.
INVENTORIES
Inventories, consisting of finished goods, are stated at the lower of cost
(first-in first-out) basis or market.
F-7
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year's presentation, none of which had an impact on total assets, stockholders'
equity (deficit), net loss, or net loss per share.
PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property and equipment, consist of office furniture and equipment, leasehold
improvements and lab testing equipment, is recorded at cost less accumulated
depreciation. Depreciation and amortization is provided for on the straight-line
method over the estimated useful lives of the assets, generally three to five
years or over the term of the lease.
2008 2007
--------- ---------
Equipment $ 51,998 $ 51,998
Furniture 64,669 64,669
Leasehold Improvements 25,444 25,444
--------- ---------
142,111 142,111
Accumulated Depreciation (109,165) (84,438)
--------- ---------
Fixed Assets, Net of Depreciation $ 32,946 $ 57,673
--------- ---------
Total depreciation expense was $24,727 and $24,727 for the years ended December
31, 2008 and 2007, respectively.
STOCK-BASED COMPENSATION
In December 2004 the Financial Accounting Standards Board issued FAS 123-R. FAS
123-R is a revision of FAS No. 123, as amended, Accounting for Stock-Based
Compensation ("FAS 123") and supersedes Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees. FAS 123-R eliminates
the alternative to use the intrinsic value method of accounting that was
provided in FAS 123, which generally resulted in no compensation expense
recorded in the financial statements related to the issuance of equity awards to
employees. FAS 123-R requires that the cost resulting from all share-based
payment transactions be recognized in the financial statements. FAS 123-R
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all companies to apply a
fair-value-based measurement method in accounting for generally all share-based
payment transactions with employees. The Company has adopted FAS 123-R. All
previously granted stock options were fully vested prior to the adoption of FAS
123-R. The Company recognized $0 and $661,484 in share based compensation
expense for the years ended December 31, 2008 and 2007, respectively.
RESTRICTED CASH
Restricted cash is the balance required under the Company's office lease.
STOCK BASED COMPENSATION TO OTHER THAN EMPLOYEES
The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees in accordance with Statement of
Financial Accounting Standards No. 123, "Accounting FOR STOCK-BASED
COMPENSATION," and the conclusions reached by the Emerging Issues Task Force in
Issue No. 96- 18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling Goods or Services"
("EITF 96-18"). Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably determinable. The value of equity instruments
issued for consideration other than employee services is determined on the
earlier of a performance commitment or completion of performance by the provider
of goods or services as defined by EITF 96-18. In the case of equity instruments
issued to consultants, the fair value of the equity instrument is recognized
over the term of the consulting agreement.
EARNINGS PER COMMON SHARE
The Company computes earnings per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). The
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic loss per
share is computed by dividing loss available to common shareholders by the
weighted average number of common shares outstanding. The computation of diluted
F-8
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
loss per share is similar to the basic loss per share computation except the
denominator is increased to include the number of additional shares that would
have been outstanding if the dilutive potential common shares had been issued.
In addition, the numerator is adjusted for any changes in income or loss that
would result from the assumed conversions of those potential shares. However,
such presentation is not required if the effect is antidilutive. Accordingly,
the diluted per share amounts do not reflect the impact of warrants and options
or convertible debt outstanding for 592,750 and 10,250,000 shares at December
31, 2008 and 2007, respectively, because the effect of each is antidilutive.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all short term,
interest bearing deposits with original maturities of three months or less to be
cash equivalents.
PATENTS AND IMPAIRMENT OF LONG-LIVED ASSETS
Patents and other intangible assets with finite useful lives are amortized on a
straight-line basis over their estimated useful lives. In accordance with
Statement of Financial Accounting Standard (SFAS) No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS ("SFAS 142"), the Company periodically evaluates its
long-lived assets by measuring the carrying amounts of assets against the
estimated undiscounted future cash flows associated with them. At the time the
carrying value of such assets exceeds the fair value of such assets, impairment
is recognized. To date, no adjustments to the carrying value of the assets have
been made. The Company has recorded $5,405 in amortization expenses related to
its patent acquisition costs.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, notes receivable, accounts
payable, accrued expenses and notes payable approximate fair value because of
the short maturity of these items.
RESEARCH AND DEVELOPMENT COSTS
In 2002, the Company entered into a technology affiliates agreement with NASA's
Jet Propulsion Laboratory ("JPL") to develop technology for its bio-terrorism
detection equipment. Research and development costs are charged to expense as
incurred. Research and development expenses were $-0- and $19,264 for the years
ended December 31, 2008 and 2007, respectively.
INCOME TAXES
Deferred income taxes are recorded to reflect the tax consequences in future
years of temporary differences between the tax basis of the assets and
liabilities and their financial statement amounts at the end of each reporting
period. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is the tax
payable for the current period and the change during the period in deferred tax
assets and liabilities. The deferred tax assets and liabilities have been netted
to reflect the tax impact of temporary differences. At December 31, 2008, a full
valuation allowance has been established for the deferred tax asset as
management believes that it is more likely than not that a tax benefit will not
be realized.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates include collectability of accounts
receivable, accounts payable, sales returns and recoverability of long-term
assets.
F-9
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
CONCENTRATION OF CREDIT RISK
Generally, the Company required no collateral when it extends credit to its
customers. The Company's credit losses in the aggregate have not exceeded
managements' expectations. The Company maintains all cash in bank accounts,
which at times may exceed federally insured limits. The Company has not
experienced a loss in such accounts.
SEGMENT REPORTING
SFAS No. 131, Disclosures about segments of an enterprise and related
information, which superseded statement of financial accounting standards No.
14, Financial reporting for segments of a business enterprise, establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to o allocate resources and in
assessing performances. In 2008 and 2007, the Company operated in one segment.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements", which is an amendment of Accounting Research
Bulletin ("ARB") No. 51. This statement clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements. This statement
changes the way the consolidated income statement is presented, thus requiring
consolidated net income to be reported at amounts that include the amounts
attributable to both parent and the noncontrolling interest. This statement is
effective for the fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Based on current conditions, the
Company does not expect the adoption of SFAS 160 to have a significant impact on
its results of operations or financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations." This statement replaces FASB Statement No. 141, "Business
Combinations." This statement retains the fundamental requirements in SFAS 141
that the acquisition method of accounting (which SFAS 141 called the purchase
method) be used for all business combinations and for an acquirer to be
identified for each business combination. This statement defines the acquirer as
the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. This statement requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company does not expect the adoption of SFAS 160 to have
a significant impact on its results of operations or financial position.
In March, 2008, the FASB issued FASB Statement No. 161, "Disclosures about
Derivative Instruments and Hedging Activities". The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity's financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows.
FASB Statement No. 161 achieves these improvements by requiring disclosure of
the fair values of derivative instruments and their gains and losses in a
tabular format. It also provides more information about an entity's liquidity by
requiring disclosure of derivative features that are credit risk-related.
Finally, it requires cross-referencing within footnotes to enable financial
statement users to locate important. Based on current conditions, the Company
does not expect the adoption of SFAS 161 to have a significant impact on its
results of operations or financial position.
F-10
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
In May 208, FASB issued SFASB No. 162, "THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES." The pronouncement mandates that the GAPP hierarchy
reside in the accounting literature as opposed to the audit literature. This has
the practical impact of elevating FASB Statements of Financial Accounting
Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days
following SEC approval. The Company does not believe this pronouncement will
impact its financial statements.
In May of 2008, FASB issued SFASB no. 163, "ACCOUNTING FOR FINANCIAL GUARANTEE
INSURANCE CONTRACTS," - an interpretation of FASB Statement No. 60. The scope of
the statement is limited to financial guarantee insurance (and reinsurance)
contracts. The pronouncement is effective for fiscal years beginning after
December 31, 2008. The Company does not believe this pronouncement will impact
its financial statements.
On December 30, 2008 FASB issued FIN 48-3, "Effective Date of FASB
Interpretation No. 48 for Certain Nonpublic Enterprises". This FSP defers the
effective date of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, for certain non-public enterprises as defined in paragraph 289, as
amended, of FASB Statement No. 109, Accounting for Income Taxes, including
non-public not-for-profit organizations. However, non-public consolidated
entities of public enterprises that apply U. S. GAAP are not eligible for the
deferral. Nonpublic enterprises that have applied the recognition, measurement,
and disclosure provisions of Interpretation 48 in a full set of annual financial
statements issued prior to the issuance of this FSP also are not eligible for
the deferral. This FSP shall be effective upon issuance. The Company does not
believe this pronouncement will impact its financial statements. On January 12,
2009 FASB issued FSP EITF 99-20-01, "Amendment to the Impairment Guidance of
EITF Issue No. 99-20". This FSP amends the impairment guidance in EITF Issue No.
99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial
Interests and Beneficial Interests That Continue to be Held by a Transferor in
Securitized Financial Assets," to achieve more consistent determination of
whether an other-than-temporary impairment has occurred. The FSP also retains
and emphasizes the objective of an other-than-temporary impairment assessment
and the related disclosure requirements in FASB Statement No. 115, Accounting
for Certain Investments in Debt and Equity Securities, and other related
guidance. The FSP is shall be effective for interim and annual reporting periods
ending after December 15, 2008, and shall be applied prospectively.
Retrospective application to a prior interim or annual reporting period is not
permitted. The Company does not believe this pronouncement will impact its
financial statements.
NOTE 3 - PATENTS
As of December 31, 2008, the patent value is as follows:-
2008 2007
--------------------------------- ------------------ ------------------
Patent Costs $117,341 $117,341
--------------------------------- ------------------ ------------------
Accumulated Amortization (33,333) (27,928)
--------------------------------- ------------------ ------------------
Patent, Net $ 84,008 $ 89,413
--------------------------------- ------------------ ------------------
Total amortization expense was $5,405 and $27,928 for the years ended December
31, 2008 and 2007, respectively.
Future amortization expense at December 31, 2008 consist of the following:
2008 5,405
2009 5,405
2010 5,405
2011 5,405
2012 5,405
After 56,983
Total $ 84,008
F-11
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 4 - ACCRUED LIABILITIES
The accrued liabilities consist of the following at December 31, 2008 and 2007:
2008 2007
- ------------------------------------------------------ ---------- ----------
Accrued Credit Card Payable $ -- $ 39,282
- ------------------------------------------------------ ---------- ----------
Loan Fees Payable 68,600 68,600
Sales tax payable 26 --
- ------------------------------------------------------ ---------- ----------
Accrued Settlement (Refer to Note 10) 411,500 411,500
- ------------------------------------------------------ ---------- ----------
TOTAL ACCRUED LIABILITIES $ 480,126 $ 519,382
- ------------------------------------------------------ ---------- ----------
The loan fees payable of $68,600 is the value of 300,000 shares payable to third
parties in connection with certain loan fees.
NOTE 5 - ACCRUED PAYROLL - OFFICERS
Accrued payroll - officers as of December 31, 2008 and 2007 is comprised of
accrued payroll to the officers of the company amounting to $809,136 and
$522,573, respectively. This payable is interest free, unsecured and due on
demand.
NOTE 6 - NOTES PAYABLE, RELATED PARTY
During the year ended December 31, 2008, the Company borrowed a total of $23,500
from its president and chief executive officer under promissory notes executed
by the Company. The notes had interest rates ranging from 12% to 12.5%. The
Company repaid notes totaling $90,555. No interest was paid on the notes. No
principal or interest was due as of December 31, 2008.
The Company has $1,500 in principal and $297 in accrued interest payable to its
vice president of Global Strategy under a promissory note agreement. No payments
were made on this note during 2008.
NOTE 7 - NOTES PAYABLE
Notes payable consisted of the following at December 31,2008:
Notes payable to individuals, subject to contingent settlement agreement and
summary judgement, $ interest at 11.67% per annum, princpal and interest due
January 1, 2006, in default, unsecrured $ 95,740
Note payable, subject to settlement agreement, interest at 12% oer annum,
principal and interest due July 2005, in default, unsecured 161,000
Note payable, subject to settlement agreement, interest at 9.17% per annum,
principal and interest due July 2005, unsecured 71,500 Note payable, subject
to settlement agreement, interest at 12% per annum, principal and interest due
December 2005, unsecured 100,000
Note payable, interest at 12.5% per annum, due August 2006 and verbally
extended, unsecured 14,975
Note payable, interest at 12.5% per annum, due August 2006 and verbally
extended, unsecured 10,000
Note payable, interest at 12.5% per annum, due February 2007 and verbally
extended, unsecured 62,998
Note payable, interest at 12.5% per annum, due February 2007 and verbally
extended, unsecured 4,500
Note payable, interest at 12.5% per annum, due February 2007 and verbally
extended, unsecured 3,498
F-12
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Note payable, interest at 12.5% per annum, due March 2007 and verbally extended,
unsecured 50,000
Note payable, interest at 12.5% per annum, due April 2007 and verbally extended,
unsecured 50,000
Note payable, interest at 12.5% per annum, due April 2007 and verbally extended,
unsecured 30,000
Note payable, interest at 12.5% per annum, due November 2007 and verbally
extended, unsecured 60,000
Note payable, interest at 12.5% per annum, due December 2007 and verbally
extended, unsecured 30,000
Note payable, interest at 12% per annum, due January 2008 and verbally extended,
unsecured 20,000
Note payable, interest at 12.5% per annum, due February 2008 and verbally
extended, unsecured 30,000
Note payable, interest at 12.5% per annum, due March 2008 and verbally extended,
unsecured 25,000
Note payable, interest at 12.5% per annum, due March 2008 and verbally extended,
unsecured 40,000
Note payable, interest at 12.5% per annum, due October 2008 and verbally
extended, unsecured 25,000
Note payable, interest at 12.5% per annum, due April 2008 and verbally extended,
unsecured 40,000
Note payable, interest at 12.5% per annum, due May 2008 and verbally extended,
unsecured 60,000
Note payable, interest at 12.5% per annum, due November 2008 and verbally
extended, unsecured 30,000
Note payable, interest at 12.5% per annum, due November 2008 and verbally
extended, unsecured 20,000
Note payable, interest at 12.5% per annum, due July 2008 and verbally extended,
unsecured 20,000
Note payable, interest at 12% per annum, due August 2008 and verbally extended,
unsecured 15,000
Note payable, interest at 12% per annum, due August 2008 and verbally extended,
unsecured 17,000
Note payable, interest at 12% per annum, due August 2008 and verbally extended,
unsecured 20,000
Note payable, interest at 12% per annum, due August 2008 and verbally extended,
unsecured 30,000
Note payable, interest at 12% per annum, due August 2008 and verbally extended,
unsecured 13,000
Note payable, interest at 12.5% per annum, due September 2008 and verbally
extended, unsecured 13,000
Note payable, interest at 12.5% per annum, due April 2009 and verbally extended,
unsecured 20,000
Note payable, interest at 12.5% per annum, due April 2009 and verbally extended,
unsecured 19,000
Note payable, interest at 12.5% per annum, due May 2009, unsecured 30,000
Note payable, interest at 12.5% per annum, due May 2009, unsecured 35,000
Note payable, interest at 12.5% per annum, due June 2009, unsecured 20,000
F-13
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Note payable, interest at 12.5% per annum, due December 2009, unsecured 40,000
Note payable, interest at 12% per annum, due July 2009, unsecured 35,000
Note payable, interest at 13% per annum, due July 2009, unsecured 15,000
Note payable, interest at 12% per annum, due July 2009, unsecured 34,000
Note payable, interest at 12% per annum, due August 2009, unsecured 17,000
Note payable, interest at 12% per annum, due August 2009, unsecured 23,500
Note payable, interest at 12% per annum, due August 2009, unsecured 55,000
Note payable, interest at 12% per annum, due November 2009, unsecured 25,000
Note payable, interest at 12% per annum, due November 2009, unsecured 18,000
Note payable, interest at 12% per annum, due December 2009, unsecured 27,000
Note payable, interest at 12% per annum, due December 2009, unsecured 30,000
Note payable, interest at 12% per annum, due October 2009, unsecured 25,000
Total notes payable $1,630,711
Less: Long-term portion -
Current Notes Payable $1,630,711
Notes payable consisted of the following at December 31, 2007:
Notes payable to individuals, subject to contingent settlement agreement and $ 95,740
summary judgment, interest at 11.67% per annum, principal and interest
due January 1, 2006, in default, unsecured
Note payable, subject to settlement agreement, interest at 12% per annum,
principal and interest due July 2005, in default, unsecured 161,000
Note payable, subject to settlement agreement, interest at 9.17% per annum,
principal and interest due July 2005, unsecured 74,500
Note payable, interest at 12% per annum, due October 2005 and verbally extended,
unsecured 20,600
Note payable, interest at 12% per annum, due November 2005 and verbally
extended, unsecured 29,791
Note payable, interest at 12% per annum, due November 2005 and verbally
extended, unsecured 90,000
Note payable, interest at 12.5% per annum, due December 2005 and verbally
extended, unsecured 15,000
Note payable, interest at 12% per annum, due March 2006 and verbally extended,
unsecured 100,000
Note payable, interest at 12.5% per annum, due May 2006 and verbally extended,
unsecured 20,000
Note payable, interest at 12.5% per annum, due May 2006 and verbally extended,
unsecured 30,000
Note payable, interest at 12.5% per annum, due August 2006 and verbally
extended, unsecured 14,975
Note payable, interest at 12.5% per annum, due August 2006 and verbally
extended, unsecured 25,000
Note payable, interest at 12.5% per annum, due February 2007 and verbally
extended, unsecured 100,000
F-14
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Note payable, interest at 12.5% per annum, due February 2007 and verbally
extended, unsecured 15,000
Note payable, interest at 12.5% per annum, due February 2007 and verbally
extended, unsecured 35,000
Note payable, interest at 12.5% per annum, due March 2007 and verbally extended,
unsecured 20,000
Note payable, interest at 12.5% per annum, due March 2007 and verbally extended,
unsecured 50,000
Note payable, interest at 12.5% per annum, due April 2007 and verbally extended,
unsecured 50,000
Note payable, interest at 12.5% per annum, due April 2007 and verbally extended,
unsecured 30,000
Note payable, interest at 12.5% per annum, due November 2007 and verbally
extended, unsecured 60,000
Note payable, interest at 12.5% per annum, due December 2007 and verbally
extended, unsecured 30,000
Note payable, interest at 12.5% per annum, due January 2008 and verbally
extended, unsecured 30,000
Note payable, interest at 12.5% per annum, due February 2008 and verbally
extended, unsecured 30,000
Note payable, interest at 12.5% per annum, due March 2008 and verbally extended,
unsecured 25,000
Note payable, interest at 12.5% per annum, due March 2008 and verbally extended,
unsecured 40,000
Note payable, interest at 12.5% per annum, due October 2008 unsecured 25,000
Note payable, interest at 12.5% per annum, due April 2008 and verbally extended,
unsecured 40,000
Note payable, interest at 12.5% per annum, due May 2008 unsecured 60,000
Note payable, interest at 12.5% per annum, due November 2008 unsecured 30,000
Note payable, interest at 12.5% per annum, due November 2008 unsecured 20,000
Note payable, interest at 16.75% per annum, due October 2008 19,153
Total notes payable 1,385,760
Less: Long-term portion
-
Current Notes Payable $1,385,760
The interest expense for the years ended December 31, 2008 and December 31, 2007
is $191,046 and $185,651, respectively.
The Company entered into a contingent settlement agreement on July 26, 2004
related to $440,765 of notes payable to individuals and related accrued
interest. In July 2004, the Company paid a total of $73,333 towards the debt and
agreed to pay a total of $298,667, including interest through January 2006 in
full payment. The Settlement Agreement provides for an accelerated payment
schedule at the Company's option, which would reduce the total payment made by
the Company by approximately $12,000. The Company defaulted on the two remaining
payments totaling $80,000 at which time the entire remaining balance became due,
including default interest and legal fees. The Company currently has accrued
$360,866 for interest and legal fees in addition to the $95,740 principal
balance
F-15
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
During August 2004, the Company entered into an agreement to settle a note
payable in the amount of $200,000 plus accrued interest. The parties agreed to
settle the debt for $261,000 payable as follows: Twelve consecutive payments of
$12,500 payable monthly commencing August 31, 2004 and ending July 31, 2005; a
lump-sum payment of $95,000 payable on July 31, 2005; and a one-time interest
payment of $16,000 on July 31, 2005. This agreement includes an additional
$7,500 as inducement to the note holder to enter into the extended agreement,
which was amortized as a loan fee over the term of the agreement. Scheduled
payments were not made on the note and the company is currently in default. The
Company currently has accrued $67,128 for interest in addition to the $161,000
principal balance.
During August 2004, the Company entered into an agreement to settle a note
payable in the amount of $100,000 plus accrued interest. The parties agreed to
settle the debt for $130,800 payable as follows: Twelve consecutive payments of
$6,000 payable monthly commencing August 31, 2004 and ending July 31, 2005; a
lump-sum payment of $50,500 payable on July 31, 2005; and a one-time interest
payment of $8,300 on July 31, 2005. The Company has recognized a $38,610 gain on
forgiveness of accrued interest related to this transaction. Scheduled payments
were not made on the note and the company is currently in default. The Company
currently has accrued $34,709 for interest in addition to the $74,500 principal
balance.
NOTE 8-STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue up to 20,000,000 shares of preferred stock,
$.01 par value per share in series to be designated by the Board of Directors.
On March 28, 2007, the Board of Directors approved the creation of the Series
A-1 Preferred Stock of the Company and the issuance of 150 shares of such stock
to Jacques Tizabi for $50,000 in accrued compensation. The stock entitles the
holder to 1,000,000 votes per share, which shall vote together with the Common
Stock of the Company for all purposes, except where a separate vote of the
classes of capital stock is required by California law. The aggregate value of
the 150 shares issued to Mr. Tizabi is $50,000. The shares have a liquidation
value, as described in the Company's Articles of Incorporation, of $50,000. Mr.
Tizabi is prohibited, by agreement with the Company, from transferring or
selling such stock, or any interest in such stock for so long as the shares are
outstanding. On July 31, 2007, Mr. Tizabi surrendered the 150 shares of the
Series A-1 Preferred Stock of the Company in exchange for promissory note in the
amount of $50,000. The promissory note bears no interest and is due on or before
July 1, 2008. The note has been paid in full. The shares were then cancelled by
the Company.
COMMON STOCK
CONVERSION OF DEBT
During 2008, the Company entered into various agreements to covert $332,395 of
principal and $10,941 of accrued interest into 15,088,690 shares of common
stock. The fair market value of the stock on the dates of agreement and issuance
was $929,461. The Company recorded a loss on settlement of debt of $586,125.
During 2007, the Company entered in various agreements to convert $116,736 of
principal and $19,031 of accrued interest into 859,419 shares of common stock.
The fair market value of the stock on the dates of agreement and issuance was
$345,373. The Company recorded a loss on settlement of debt of $209,607.
During 2007 the Company issued 150,000 shares of common stock issued for debt
cancellation of $50,000. The company subsequently cancelled the shares. The debt
cancellation was also reversed.
SALE OF COMMON STOCK
In February 2006, the Company entered into an Investment Agreement with a third
party, for the future issuance and purchase of shares of its common stock. This
Investment Agreement is an arrangement similar to an equity line of credit or an
equity drawdown facility. The Company will be provided up to $10,000,000, as
requested over a 36 month period. The Company may during the Open Period (36
months) deliver a "put notice" to the lender which states the dollar amount the
Company intends to sell its stock. The amount that the Company is entitled to
Put is subject to certain limitations and terms of the agreement.
F-16
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
As of December 31, 2008 493,950 shares have been issued for an aggregate price
of $681,491. The Company received proceeds of $213,629. The remaining $467,862
was used to pay off outstanding notes payable and accrued interest. The
obligations were paid directly by the investor.
During the year ended December 31, 2008, the Company issued no shares under this
agreement.
During the year ended December 31, 2007, the Company issued an aggregate of
858,775 shares and received cash of $146,500. Out of this money received,
$125,000 was used to pay off outstanding notes payable and accrued interest. The
obligations were paid directly by the investor.
STOCK ISSUED FOR SERVICES
During the year ended December 31, 2008, the Company issued an aggregate of
11,878,886 shares of its common stock to various employees of the Company as
compensation. The shares were valued at a total of $422,896.
During the year ended December 31, 2008, the Company entered into various
agreements for strategic business planning, financial advisory, investor
relations, professional and public relations services. As compensation for the
services rendered, the Company issued 4,130,472 shares of common stock, valued
at $276,042, the fair value of the stock on the day of issuance.
During the year ended December 31, 2007, the Company issued an aggregate of
858,775 shares of its common stock to various employees of the Company as
compensation. The shares were valued at a total of $471,103.
During the year ended December 31, 2007, the Company entered into various
agreements for strategic business planning, financial advisory, investor
relations, professional and public relations services. As compensation for the
services rendered, the Company issued 1,406,552 shares of common stock, valued
at $748,909, the fair value of the stock on the day of issuance.
OTHER
During 2007, the Company cancelled 300,000 shares issued to a vendor earlier in
the year in exchange of inventory credits worth $1,800,000. The value of the
stock on the day of issuance was $288,000. The inventory credits were also
reversed with the cancellation of the agreement.
During 2007, the Company cancelled an aggregate 145,000 shares of common stock.
The holders of these shares have agreed with the cancellation for no
consideration.
ISSUANCE OF OPTIONS AND WARRANTS
On March 28, 2007, the Company granted to Jacques Tizabi, its president and CEO,
an option to purchase 500,000 shares of Common Stock at an exercise price of
$0.01 per share, for a term of five years. The option is fully vested and
immediately exercisable. The options were valued at $661,484 using the Black
Scholes model for Options Valuation, with volatility of 174% and risk-free
interest rate of 4.65%. The market price on the day of grant was $0.007. The
Company recognized $661,484 as expense during the year ended 2007.
STOCK OPTION PLAN
During 2003, the Company adopted the 2003 Stock Incentive Plan ("the Plan"),
which provides for the granting of stock and options to selected officers,
directors, employees and consultants of the Company. 22,500 shares are reserved
for issuance under the Plan for the granting of options. Unless terminated
sooner, the Plan will terminate on June 22, 2013. The options issued under the
Plan may be exercisable to purchase stock for a period of up to ten years from
the date of grant.
On February 13, 2006, the Board of Directors adopted the 2006 Stock Compensation
Plan ("THE PLAN"), which provides for the granting of stock and options to
selected officers, directors, employees and consultants of the Company. 37,500
shares are reserved for issuance under the Plan for the granting of options.
Unless terminated sooner, the Plan will terminate on June 22, 2013. The options
issued under the Plan may be exercisable to purchase stock for a period of up to
ten years from the date of grant.
F-17
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
On June 29, 2006, the Company's Board of Directors adopted the 2006 Consultant
Stock Plan ("the 2006 Plan"). The 2006 Plan authorizes common stock grants to
its employees, officers, directors, consultants, independent contractors,
advisors, or other service providers, provided that such services are not in
connection with the offer and sale of securities in a capital-raising
transaction. The Company reserved 125,000 shares of common stock for awards to
be made under the 2006 Plan.
On November 22, 2006, the Company's Board of Directors adopted the 2006-II
Consultant Stock Plan (the "2006-II Plan"). The 2006-II Plan authorizes common
stock grants to our employees, officers, directors, consultants, independent
contractors, advisors, and other service providers, provided that such services
are not in connection with the offer and sale of securities in a capital
raising-transaction. The Company reserved 187,500 shares of common stock for
awards to be made under the 2006-II Plan.
On April 17, 2007, the Board of Directors adopted the 2007 Equity Incentive Plan
(the "2007 Plan"). The 2007 Plan grants to our employees, officers, directors,
consultants, independent contractors, advisors, or other service providers,
provided that such services are not in connection with the offer and sale of
securities in a capital-raising transaction. We reserved 375,000 shares of our
common stock for awards to be made under the 2007 Plan. The 2007 Plan is to be
administered by a committee of two or more members of our Board of Directors.
On June 5, 2007, the Board of Directors adopted the 2007 Equity Incentive Plan
(the "2007-III Plan"). The 2007-III Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
145,000 shares of its common stock for awards to be made under the 2007-III
Plan. The 2007-III Plan is to be administered by a committee of two or members
of the Board of Directors.
On June 27, 2007, our Board of Directors adopted the 2007 Equity Incentive
Plan(the "2007-III Plan). The 2007-III plan grants to our employees,
officers,directors, consultants, independent contractors, advisors, or other
serviceproviders, provided that such services are not in connection with the
offer and sale of securities in a capital-raising transaction. We reserved
29,000,000 shares of our common stock for awards to be made under the 2007-III
Plan. The 2007-III Plan is to be administered by a committee of two or more
members of our Board of Directors.
On July 13, 2007, the Board of Directors adopted the 2007 Equity Incentive Plan
(the "2007-IV Plan"). The 2007-IV Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
450,000 shares of our common stock for awards to be made under the 2007-IV Plan.
The 2007-IV Plan is to be administered by a committee of two or more members of
the Board of Directors.
On October 10, 2007, the Board of Directors adopted the 2007 Equity Incentive
Plan (the "2007-V Plan"). The 2007-V Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
600,000 shares of common stock for awards to be made under the 2007-V Plan. The
2007-V Plan is to be administered by a committee of two or more members of our
Board of Directors.
On November 1, 2007, the Board of Directors adopted the 2007 Equity Incentive
Plan (the "2007-VI Plan"). The 2007-VI Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
750,000 shares of common stock for awards to be made under the 2007-VI Plan. The
2007-VI Plan is to be administered by a committee of two or more members of our
Board of Directors.
F-18
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
On February 11, 2008, the Board of Directors adopted the 2008 Equity Incentive
Plan (the "2008 Plan"). The 2008 Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
1,500,000 shares of common stock for awards to be made under the 2008 Plan. The
2008 Plan is to be administered by a committee of two or more members of our
Board of Directors.
On April 29, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan
(the "2008-II Plan"). The 2008-II Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
1,650,000 shares of common stock for awards to be made under the 2008-III Plan.
The 2008-II Plan is to be administered by a committee of two or more members of
our Board of Directors.
On July 1, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan
(the "2008-III Plan"). The 2008-III Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
2,500,000 shares of common stock for awards to be made under the 2008-III Plan.
The 2008-III Plan is to be administered by a committee of two or more members of
our Board of Directors.
On September 2, 2008, the Board of Directors adopted the 2008 Equity Incentive
Plan (the "2008-IV Plan"). The 2008-IV Plan grants to our employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers, provided that such services are not in connection with the offer and
sale of securities in a capital-raising transaction. The Company reserved
3,800,000 shares of common stock for awards to be made under the 2008-IV Plan.
The 2008-IV Plan is to be administered by a committee of two or more members of
our Board of Directors.
WARRANTS
There were no warrants granted during 2008 and 2007.
The following table summarizes the activity of options and warrants under all
agreements and plans for the two years ended December 31, 2007 and 2008:
Weighted
Number of Average Aggregate
-------------------- Exercise Intrinsic
Options Warrants Price Value
-------- -------- -------- ---------
Outstanding, December 31,
2006 40,300 76,083 68 --
Granted 500,000 -- 2 --
Exercised -- -- -- --
Expired/cancelled (550) (833) 166 --
-------- -------- -------- ---------
Outstanding, December 31,
2007 539,750 75,250 16 --
Granted -- -- -- --
Exercised -- -- -- --
Expired/cancelled -- (22,250) 50 --
-------- -------- -------- ---------
Outstanding, December 31,
2008 539,750 53,000 15 --
======== ======== ======== =========
F-19
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
The following table summarizes information about stock options and warrants
outstanding at December 31, 2008:
OPTIONS AND WARRANTS
---------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ----------- --------
2 to $30 544,750 2.39 6.6 544,750 6.6
50 to $100 33,000 0.43 100 33,000 100
106 to $140 15,000 0.43 140 15,000 140
----------- ----------- -------- ----------- --------
592,750 2.23 15 592,750 15
=========== =========== ======== =========== ========
The weighted average exercise price of options at their grant date during the
years ended December 31, 2008 and 2007 where the exercise price equaled the
market price at the grant date, was $0.00 and $0.00 respectively. The weighted
average exercise price of options and warrants at their grant date during the
years ended December 31, 2008 and 2007, where the exercise price exceeded the
market price was $0.00 and $0.01, respectively. The weighted average exercise
price of options and warrants at their date of grant during the years December
31, 2008 and 2007, where the exercise price was less than the market price on
the grant date, was $0.00 and $0.00, respectively.
The weighted average fair values of options and warrants at their grant date
during the years ended December 31, 2008 and 2007 where the exercise price
equaled the market price on the day of grant, were $0.00 and $0.00,
respectively. The weighted average fair values of options and warrants at their
date of grant during the years ended December 31, 2008 and 2007, where the
exercise price exceeded the market price on the grant date was $0.00 and $0.01
respectively. The weighted average fair value of the of options and warrants
during the years December 31, 2008 and 2007, where the exercise price was less
than the market price at the date of grant, was $0.00 and $0.00 respectively.
The estimated fair value of each option granted is calculated using the
Black-Sholes model for American options. The weighted average assumptions used
in the model were as follows:
2008 2007
-------- --------
Risk-free interest rate N/A 4.65%
Volatility N/A 174%
Expected life N/A 5 years
Dividend yield 0% 0%
NOTE 9 - INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 2008 and
2007 differs from the computed expected provision (benefit) at the federal
statutory rate for the following reasons:
2008 2007
----------- -----------
Computed expected income tax provision (benefit) $ (770,739) $(1,221,370)
Increase in allowance for doubtful accounts 18,020
Net operating loss carryforward 846,494 1,145,102
Increased
Accrued liabilities (97,431) (153,518)
Stock-based expenses -0- 225,041
Non-deductible meals & entertainment 596 1,686
Depreciation 3,060 3,059
----------- -----------
Income tax provision (benefit) $ -- $ --
=========== ===========
F-20
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
The components of the deferred tax assets and (liabilities) as of December 31,
2008 and 2007 were as follows:
2008 2007
------------ ------------
Deferred tax assets:
Temporary differences:
Depreciation $ (12,270) (12,270)
Accrued liabilities (114,625)
Allowance for bad debt (21,200) (180,610)
Net operating loss carryforward 11,602,779 10,606,904
Valuation allowance (11,454,684) ((10,414,024)
------------ ------------
Net long-term deferred tax asset $ -- $ --
============ ============
The components of the deferred tax (expense) benefit were as follows for the
years ended December 31, 2008 and 2007:
December 31,
2008 2007
----------- -----------
Deferred tax assets:
Accrued expenses $ 65,985 (271,401)
Allowance for bad debt (21,200) 3,600
Increase in net operating loss carryforward 995,875 1,347,178
Change in valuation allowance (1,040,660) (1,079,377)
----------- -----------
$ -- $ --
=========== ===========
As of December 31, 2008, the Company has net operating losses carryforwards of
approximately $ 28,650,000 expiring in 2009 through 2023.
NOTE 10- COMMITMENTS AND CONTINGENCIES
LITIGATION
a) A. Sean Rose, Claire F. Rose and Mark Rose v. Universal Detection
Technology, fka Pollution Research and Control Corporation (Superior Court
of the State of California for the County of Los Angeles, North Central
District, Case No. EC042040)
On or about April 16, 2004, Plaintiffs commenced an action against the
Company (Case No. EC 038824) for amounts allegedly due pursuant to four
unpaid promissory notes. On August 2, 2004, the parties executed a
Confidential Settlement Agreement and Mutual Releases (the "AGREEMENT"). On
December 30, 2005, Plaintiffs commenced the above-referenced action against
the Company, alleging the Company breached the Agreement and seeking
approximately $205,000 in damages. A judgment was entered on April 11,
2006. The Company has accrued for this settlement. We entered into a
settlement agreement in the third quarter of 2004 with each of these three
parties. Pursuant to this agreement, at June 30, 2005, we were required to
pay an additional $80,000 as full payment of our obligations. We did nto
make this payment and are in default of these notes. As of December 31,
2008, we have $456,607 accrued for including interest relating to this
matter.
F-21
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
b) On June 2, 2006, Plaintiff Trilogy Capital Partners instituted an action in
the Los Angeles Superior Court (TRILOGY CAPITAL PARTNERS V. UNIVERSAL
DETECTION TECHNOLOGY, ET. AL., Case No. SC089929) against the Company.
Plaintiff's Complaint alleged damages against UDT for breach of an
engagement letter in the amount of $93,449. Also, Plaintiff alleged that
UDT had failed to issue warrants to it pursuant to a written agreement.
After completing the initial stages of litigation and conducting extensive
mediation, Plaintiff and UDT reached a settlement wherein commencing
December 15, 2006, UDT would make monthly payments to Plaintiff of $2,000
until a debt of $90,000 plus accrued interest at six percent per annum was
fully paid. In exchange, Plaintiff would release all of its claims against
UDT. UDT has been current on all of its agreed payments to Plaintiff. As of
December 31, 2008, $50,457 was due under the agreement.
On November 15, 2006, Plaintiff NBGI, Inc. instituted an action in the Los
Angeles Superior Court (NBGI, Inc. v. Universal Detection Technology, et.
al., Case No. BC361979) against the Company. NBGI, Inc.'s Complaint alleged
breach of contract, and requested damages in the amount of $111,014 plus
interest at the legal rate and for costs of suit. A Summary Judgment was
granted in NBGI's favor and Judgment has been entered.
From time to time, the Company is a party to a number of lawsuits arising in the
normal course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's operations,
cash flows or financial position.
EMPLOYMENT AGREEMENTS
In September 2001, the Company entered into an employment agreement with its
President and Chief Executive Officer. Under the agreement, base salary is
$250,000 to be adjusted on an annual basis. The Company granted options to
purchase 5,750 shares of its common stock exercisable at $60 per share.
On August 23, 2004, the Company entered into an amendment of the employment
agreement with its President and Chief Executive Officer. The amendment provides
that $100,000 of the Officer's annual salary shall be accrued as payable until
such time as the Company has the financial resources to pay any or all of the
accrued amount. The agreement also provides for salary increases of 5% per year
commencing January 1, 2006, and an extension of the term of the agreement until
December 31, 2010. In addition, automobile cost is limited to a maximum of
$2,500 per month and the Company will reimburse the officer for individual life
insurance premiums up to $1,000 per month and for health insurance premiums and
related expenses.
On October 1, 2004, the Company entered into an employment agreement with its
Vice President of Global Strategy. For the period from October 1 through
December 31, 2004, compensation was $35,000 per month. Thereafter, the agreement
provides for salary of $150,000 per year plus health care costs not to exceed
$400 per month. Employment is at will and may be terminated by either party at
any time.
The Company is obligated to make certain minimum salary payments as follows:
YEAR ENDING DECEMBER 31,
2009 $ 303,876
2010 319,070
-----------
$ 622,946
===========
LICENSE AGREEMENT
On September 30, 2003, the Company entered into a license agreement with CalTech
whereby CalTech granted the Company an exclusive, royalty-bearing license to
make, use, and sell all products that incorporate the technology that was
developed under the Technology Affiliates Agreement with JPL and is covered by
related patents. In addition, the grant includes a nonexclusive, royalty-bearing
license to make derivative works of the technology. The Company is required to
make quarterly royalty payments to CalTech, ranging from 2% to 4% of net
revenues for each licensed product made, sold, licensed, distributed, or used by
the Company and 35% of net revenues that the Company receives from sublicensing
the licensed products. A minimum annual royalty of $10,000 was due and paid to
CalTech on August 1, 2005 and each anniversary thereof. The minimum royalty will
be offsetby the abovementioned royalty payments, if any.
F-22
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
To maintain its license with Cal Tech, a minimum annual royalty of $10,000 was
due Caltech on August 1, 2005, and is due on each anniversary thereof,
regardless of product sales. Any royalties paid from product sales for the
12-month period preceding the date of payment of the minimum royalty will be
credited against the annual minimum. Pursuant to the terms of the license, the
Company must pay four percent royalties on product sales in countries where a
patent is issued and two percent royalties on product sales in countries where a
patent is not issued, as well as 35 percent of net revenues received from
sub-licensees. As of the date of this report the Company has not paid the
$10,000 royalty due Caltech on August 1, 2007. According to the Company's
license agreement with Caltech, Caltech shall have the right to terminate the
license agreement and the right and license granted to the Company if it fails
to make any payment due including patent expense or minimum annual royalties for
a period of fifteen days after receiving a second written notice from Caltech
specifying the Company's failure. To date the Company has not received any
notices from Caltech with regards o the payment of patent fees. This agreement
is signed in the form of a second amendment to the Company's license agreement,
dated December 1, 2006, and that this amount shall be paid to Caltech in ten
monthly installments of $8,631.85. To date, the Company has made four of the
monthly installments called for in the second amendment to its license agreement
with Caltech.
OPERATING LEASES
On October 14, 2004, the Company entered into an assignment of a lease agreement
(sublease) for office space with Astor Capital, a company owned 50% by the
Company's President and Chief Executive Officer and 50% by the Company's Vice
President of Global Strategy effective November 1, 2004. The agreement provides
for the sublease of office common areas to Astor for a monthly fee equal to $500
per month. The sublease assigns to the Company all right, title and interest in
and to any security deposit or other refundable amounts to which Astor may be
entitled. The Company has been assigned the rights to the related security
deposit of $10,226 and leasehold improvements of $25,445 and has recorded such
amounts, offsetting relating amounts due from Astor. The lease agreement is
month to month basic.
Rent expense was $133,897 and $132,637 for 2008 and 2007 respectively.
NOTE 11 SUBSEQUENT EVENTS
During the first quarter of 2009, the Company entered in several consulting and
advisory agreements. The Company issued 3,187,500 shares of its common stock as
partial payment to certain consultants and for payment of professional fees for
an aggregate price of $12,750.
During the first quarter of 2009, the Company issued 40,731,250 shares of its
common stock valued at $189,455 in order to covert $129,891 in principal and
accrued interest.
F-23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Regulations under the Securities Exchange Act of 1934 (the "Exchange Act")
require public companies to maintain "disclosure controls and procedures," which
are defined to mean a company's controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Our Chief Executive Officer ("CEO"), President, and Acting
Chief Financial Officer ("CFO") carried out an evaluation of the effectiveness
of our disclosure controls and procedures as of the end of the period covered by
this report. Based on those evaluations, as of the Evaluation Date, our CEO,
President, and CFO believe that:
(i) our disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports we file under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms and that such
information is accumulated and communicated to our management, including the CEO
and CFO, as appropriate, to allow timely decisions regarding required
disclosure; and
(ii) our disclosure controls and procedures are not effective.
Internal Control over Financial Reporting
(a) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. GAAP, and
that our receipts and expenditures are being made only in accordance with the
authorization of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on an evaluation under the supervision and with the participation of the
Company's management, including the CEO and the acting CFO have concluded that
the Company's disclosure controls and procedures (as defined under the
Securities Exchange Act of 1934, as amended (Exchange Act)) were not effective
as of December 31, 2008 to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
26
Identified Material Weaknesses
During the three and six months ended December 31, 2008 the Company identified
the following material weaknesses as indicated below.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected.
Management identified the following internal control deficiencies during its
assessment of our internal control over financial reporting as of December 31,
2008:
o We did not have effective comprehensive entity-level internal controls
specific to the structure of our board of directors;
o We did not have formal policies governing certain accounting
transactions and financial reporting processes;
o We did not obtain attestations by all employees regarding their
understanding of and compliance with Universal Detection Technology,
Inc. policies related to their employment;
o We did not obtain attestations by all members of our board of
directors, our executive officers and/or our senior financial officers
regarding their compliance with our Code of Ethics and our Code of
Ethics did not apply to our other employees;
o We did not perform adequate oversight of certain accounting functions
and maintained inadequate documentation of management review and
approval of accounting transactions and financial reporting processes;
and
o We had not fully implemented certain control activities and
capabilities included in the design of our financial system. Certain
features of our financial system are designed to automate accounting
procedures and transaction processing, or to enforce controls.
Based on management's evaluation of our internal control over financial
reporting, our current CFO and CEO have concluded that Universal Detection
Technology, Inc. did not maintain effective internal control over financial
reporting as of December 31, 2008.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
Conclusion
The above identified material weaknesses did not result in material audit
adjustments to our 2008 financial statements. However, it is reasonably possible
that, if not remediated, one or more of the identified material weaknesses noted
above, could result in a material misstatement in our reported financial
statements that might result in a material misstatement in a future annual or
interim period.
In light of the identified material weaknesses, management performed: (i)
significant additional substantive review of those areas described above; and
(ii) performed additional analyses, including but not limited to a detailed
balance sheet and statement of operations analytical review that compared
changes from the prior period's financial statements and analyzed all
significant differences. These procedures were completed so management could
gain assurance that the financial statements and schedules included in this Form
10-KSB fairly present in all material respects the Company's financial position,
results of operations and cash flows for the periods presented.
(b) CHANGES IN CONTROL OVER FINANCIAL REPORTING
The changes noted above, are the only changes during our most recently completed
fiscal quarter that have materially affected or are reasonably likely to
materially affect, our internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
ITEM 9B. OTHER INFORMATION
None.
27
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
Set forth below are the names, ages, positions and business experience of our
directors, executive officers, and key employees as of April 14, 2008.
NAME AGE POSITION
- ---- --- --------
Jacques Tizabi 38 President, Chief Executive Officer, Acting
Chief Financial Officer, and Director
Matin Emouna (1) 39 Director
Tom Sepnzis 39 Director
Ali Moussavi 37 Vice President of Global Strategy
(1) Member of Audit and Compensation Committees.
All directors hold office until the next annual meeting of our shareholders and
until their successors have been elected and qualified. Officers serve at the
pleasure of the board of directors.
There are no family relationships among any of our directors, executive
officers, or persons nominated or chosen as our directors or executive officers.
On April 1, 2009, Dr. Leonard Makowka resigned from the Board of Directors of
the Company. Dr. Leonard Makowka is no longer a director of the Company. He was
a director for all of 2008 and 2009 through April 1.
On April 2, 2009, the Board of Directors voted to fill the vacancy created by
Dr. Makowka's resignation by electing Mr. Tom Sepnzis as a director.
BUSINESS EXPERIENCE
JACQUES TIZABI has been the Chief Executive Officer, President and Chairman of
the Board of Directors of our Company, and Acting Chief Financial Officer since
October 2001. Mr. Tizabi spends on average 40-50 hours per week providing
services to us, and also is involved with several other companies in industries
unrelated to our business. He is the co-founder and managing partner of Astor
Capital, Inc., which was founded in 1995 and specializes in investment banking
and asset management, predominantly in the area of direct private investment in
public companies. He is also a director of eCast Media, a subsidiary of NT Media
Corp. of California, a publicly traded company, and President, Chief Executive
Officer, and director of Riddle Records, Inc., a publicly traded company. Mr.
Tizabi has substantial experience in evaluating, structuring and negotiating
direct investments in public companies and later stage private companies. Mr.
Tizabi holds a B.S. degree in Business from New York University and an M.B.A.
from Pepperdine University.
MATIN EMOUNA has served as a director of our Company since October 2001. Since
1997, Mr. Emouna has maintained his own law practice in New York, where he
represents foreign and domestic clients in a broad range of real estate
transactions, with emphasis on new constructions, commercial real estate
transactions, shopping center development, financing, and commercial leasing.
Mr. Emouna also serves as a general counsel for Omni Abstract Title, Radio
Sedayeh Iran and several non-profit religious organizations. He holds a B.S.
degrees in Business Administration and Spanish from New York State University at
Albany and a J.D. from Benjamin N. Cardozo School of Law.
ALI MOUSSAVI has been the Vice President of Global Strategy of our Company since
October 2004. Mr. Moussavi principally is responsible for identifying and
structuring international opportunities and partnerships. Mr. Moussavi has
substantial experience and knowledge in global expansion and for over the past
five years, has acted as corporate advisor to several U.S. companies,
structuring financial and business reorganization plans and assisting in the
expansion of their consumer and/or investment base to the European and Asian
continents. Mr. Moussavi is a co-founder of Astor Capital, Inc. He holds a B.S.
degree in Mathematics from New York University.
TOM SEPNZIS became a director of our Company in April of 2009. Mr. Sepnzis
worked for over a decade on Wall Street, becoming one of the most highly
respected telecommunications analysts, earning the #1 ranking by Forbes magazine
one week before his departure. Starting his career as an equities trader at
Punk, Ziegel he later moved to the firms Piper Jaffrey Soundview Financial,
Oppenheimer, and Think Equity as a telecommunications analyst. Switching careers
to the entertainment business, he now is the CEO and founder of Ascension
Pictures, in which capacity he produces and directs commercials, music videos,
documentaries and full length feature films.
28
COMMITTEES
Our Audit Committee currently consists of Mr. Matin Emouna. Each Audit Committee
member is independent within the meaning of the applicable NASDAQ listing
standards and applicable rules and regulations promulgated by the Securities and
Exchange Commission. Our Audit Committee currently does not have a financial
expert within the meaning of the applicable SEC rules as management does not
believe one is necessary in light of the Company's current stage of product
development.
Our Compensation Committee determines matters pertaining to the compensation and
expense reporting of certain of our executive officers, and administers our
stock option, incentive compensation, and employee stock purchase plans. Our
Compensation Committee currently consists of Mr. Matin Emouna.
CODE OF ETHICS
We have adopted a Code of Business Conduct and Ethics which is designed to set
the standards of business conduct and ethics and help directors and employees
resolve ethical issues. The Code applies to all directors and employees,
including the Chief Executive Officer and Chief Financial Officer and other
persons performing similar functions. The Code covers topics including, but not
limited to, conflicts of interest, confidentiality of information, fair dealing
with customers, supplies and competitors, and compliance with applicable laws,
rules and regulations. The purpose of the Code is to ensure to the greatest
possible extent that our business is conducted in a consistently legal and
ethical manner. Upon written request to the Company, we will provide a copy of
the Code free of charge.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
executive officers and directors, and persons who own more than ten percent of
our common stock, to file with the Securities and Exchange Commission initial
reports of ownership, and reports of changes in ownership, of our common stock
and other equity securities of ours. Executive officers, directors and greater
than ten percent shareholders are required by SEC regulations to furnish us with
copies of all Section 16(a) reports that they file. To our knowledge, based
solely on a review of the copies of the reports furnished to us, and
representations from our executive officers and directors that no other reports
were required during the fiscal year ended December 31, 2008, we believe our
executive officers, directors and greater than ten percent shareholders of our
common stock, complied with all Section 16(a) filing requirements applicable to
them.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following executive compensation disclosure reflects all compensation
awarded to, earned by, or paid to the executive officers below for the fiscal
year ended December 31, 2008. The following table summarizes all compensation
for fiscal year 2008 received by our Chief Executive Officer. No other executive
officer earned in excess of $100,000 in fiscal year 2008.
SUMMARY COMPENSATION TABLE
Nonquali-
fied
Non-Equity Deferred All
Incentive Compen- Other
Stock Option Plan sation Compen-
Name and Salary Bonus Awards Awards Compensation Earnings sation Total
principal position Year ($) ($) ($) ($) ($) ($) ($) ($)
Jacques Tizabi,
President, CEO, Acting CFO 2008 $275,625 -- -- -- -- -- -- $0
29
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following reflects all compensation awarded to, earned by, or paid to the
directors for the fiscal year ended December 31, 2008
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS STOCK AWARDS
Number of Number of Equity Option Option Number of Market Equity Equity
securities securities incentive exercise expiration shares or value incentive incentive
underlying underlying plan awards: price date units of of plan plan
Name unexercised unexercised number of ($) stock shares awards: awards:
options (#) options (#) securities that have or number of market or
Exercisable Unexercisable underlying not units unearned payout
unexercised vested (#) of shares, value of
earned stock units, or unearned
options (#) that other shares,
have rights units, or
not that have other
vested not vested rights
($) (#) that have
not vested
($)
DIRECTOR COMPENSATION
The following reflects all compensation awarded to, earned by, or paid to the
directors below for the fiscal year ended December 31, 2008.
DIRECTOR COMPENSATION
Change in
Pension
Non-Equity Value and
Incentive Nonqualified All
Plan Deferred Other
Fees Earned or Stock Option Compen- Compensation Compen-
Paid in Cash Awards Awards sation Earnings sation Total
Name ($) ($) ($) ($) ($) ($) ($)
Jacques Tizabi $0 -- -- -- -- -- $0
Matin Emouna $0 -- -- -- -- -- $0
Dr. Leonard Makowka $0 -- -- -- -- -- $0
On October 18, 2004, the Board of Directors determined to compensate independent
directors in the amount of $15,000 each for services rendered through December
31, 2004. The Board also determined to compensate the independent directors
$5,000 each for services to be rendered for the period January 1, 2005 through
December 31, 2005. No compensation was paid to directors for the period January
1, 2006 through December 31, 2008. When we request our Board members to attend
meetings in person, it is our policy to reimburse directors for reasonable
travel and lodging expenses incurred in attending those Board meetings. No
compensation was paid to directors
EMPLOYMENT AGREEMENTS
We have an employment agreement with Jacques Tizabi. Mr. Tizabi's employment
agreement, dated as of September 24, 2001, and amended August 23, 2004, provides
for Mr. Tizabi to serve as our Chairman of the Board, Chief Executive Officer
and President until December 31, 2010, unless otherwise extended. The employment
agreement provides for Mr. Tizabi to receive an annual base salary of $250,000,
subject to salary increases of 5% per year commencing January 1, 2006. Mr.
Tizabi also is entitled to specified perquisites, including participation in any
group life, medical, disability and other insurance plans provided by us, use of
a luxury automobile approved by the compensation committee (with a maximum cost
of $2,500 per month), monthly dues for club memberships not to exceed $1,500 per
month, and reimbursement of entertainment expenses provided to our customers,
vendors, and strategic partners. To date, Mr. Tizabi has not received any of
these specified perquisites.
30
If Mr. Tizabi's employment is terminated due to his death, the employment
agreement provides that we will pay Mr. Tizabi's estate his remaining base
salary during the remaining scheduled term of the employment agreement,
accelerate the vesting of his options and continue to provide family medical
benefits. If Mr. Tizabi's employment is terminated due to his disability, the
employment agreement provides that we will pay Mr. Tizabi his remaining base
salary during the remaining scheduled term of the employment agreement (reduced
by any amounts paid under long-term disability insurance policy maintained by us
for the benefit of Mr. Tizabi).
If Mr. Tizabi terminates the employment agreement for cause, if we terminate the
employment agreement without cause or in the event of a change of control, in
which event the employment of Mr. Tizabi terminates automatically, we will pay
Mr. Tizabi his remaining base salary during the remaining scheduled term of the
employment agreement and an amount based on his past bonuses and continue to
provide specified benefits and perquisites.
If Mr. Tizabi terminates the employment agreement without cause or we terminate
the employment agreement for cause, Mr. Tizabi is entitled to receive all
accrued and unpaid salary and other compensation and all accrued and unused
vacation and sick pay.
If any of the payments due Mr. Tizabi upon termination qualifies as "excess
parachute payments" under the Internal Revenue Code, Mr. Tizabi also is entitled
to an additional payment to cover the tax consequences associated with these
excess parachute payments.
Mr. Tizabi has agreed that he will defer payment of all accrued but unpaid bonus
or salary, or other compensation payable to him in excess of $150,000 per year,
beginning in 2005 until future years.
We also have an employment agreement with Ali Moussavi. Mr. Moussavi's
employment agreement, dated as of October 1, 2004, provides for Mr. Moussavi to
serve as our Vice President of Global Strategy. The employment agreement
provides for Mr. Moussavi to receive an annual base salary of $150,000. Mr.
Moussavi has agreed that his annual base salary for 2008 may be paid to him in
either cash or shares of our stock.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
BENEFICIAL OWNERSHIP
The following table sets forth information as of April 1, 2009, relating to the
ownership of our common and preferred stock, by (i) each person known by us to
be the beneficial owner of more than five percent of the outstanding shares of
each class of our capital stock, (ii) each of our directors and nominees, (iii)
each of our named executive officers and (iv) all of our executive officers and
directors as a group. Except as may be indicated in the footnotes to the table
and subject to applicable community property laws, each person has the sole
voting and investment power with respect to the shares owned. The address of
each person listed is in care of Universal Detection Technology, 9595 Wilshire
Blvd., Suite 700, Beverly Hills, California 90212.
Name of Beneficial Owner Number of Shares Number of Shares
- ------------------------ of Common Stock Percent of of Preferred Stock Percent of
Beneficially Owned (1) Class (1) Beneficially Owned (1) Class (1)
Jacques Tizabi, 538,899 (2) 0.05% 150 100%
President, CEO, Acting CFO, Director
Ali Moussavi, 0 * 0 *
Vice President of Global Strategy
Matin Emouna, 0 * 0 *
Director
Dr. Leonard Makowka (3) 0 * 0 *
Director
Directors and executive officers
as a group (4 persons) 538,899(2) 0.05% 150 100%
* Less than 1%.
31
(1) Under Rule 13d-3 under the Exchange Act, certain shares may be deemed
to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares).
In addition, shares are deemed to be beneficially owned by a person if
the person has the right to acquire the shares (for example, upon
exercise of an option) within 60 days of the date as of which the
information is provided. In computing the percentage ownership of any
person, the amount of shares outstanding is deemed to include the
amount of shares beneficially owned by that person (and only that
person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table
does not necessarily reflect the person's actual ownership with respect
to the number of shares of our common stock actually outstanding at
April 6 2009. As of April 6, 2009, we had 83,196,053 common shares, no
par value, outstanding.
(2) Includes 539,750 shares that may be acquired upon the exercise of fully
vested options.
(3) Dr. Makowka resigned from the Board of Directors effective April 1,
2009. His replacement, Mr. Tom Sepznis was appointed effective April 2
and does not appear in this table. Mr. Sepznis owns no common stock or
convertible securities of the Company.
CHANGE IN CONTROL
We are not aware of any arrangement that might result in a change in control in
the future.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 2008, the Company borrowed a total of $23,500
from its president and chief executive officer under promissory notes executed
by the Company. The notes had interest rates ranging from 12% to 12.5%. The
Company repaid notes totaling $90,555. No interest was paid on the notes. No
principal or interest was due as of December 31, 2008.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
The Audit Committee approved the engagement of Kabani & Company as our
independent auditors for $58,000.
The Audit Committee approved the engagement of AJ. Robbins, PC as our
independent auditors through September 30, 2007.
AUDIT FEES
The aggregate fees billed by Kabani and Associates for the audit and review of
our annual financial statements and services that are normally provided by an
accountant in connection with statutory and regulatory filings or engagements
for the fiscal years ended December 31, 2008 and 2007 was $58,000 and $40,000
respectively.
The aggregate fees billed by AJ. Robbins, PC for the audit and review of our
annual financial statements and services that are normally provided by an
accountant in connection with statutory and regulatory filings or engagements
for the fiscal years ended December 31, 2007 was approximately
$39,000.
AUDIT-RELATED FEES
None
TAX FEES
The aggregate fees billed by AJ. Robbins, PC for professional services rendered
for tax compliance, tax advice and tax planning for the fiscal year ended
December 31, 2007 was approximately $7,880.
ALL OTHER FEES
No other fees were billed by Kabani & Co and AJ. Robbins, PC for the fiscal
years ended December 31, 2008 and 2007.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The audit committee is required to pre-approve the audit and non-audit services
performed by the independent auditor in order to assure that the provision of
such services do not impair the auditor's independence.
32
ITEM 15. EXHIBITS
3.1 Articles of Incorporation of A. E. Gosselin Engineering, Inc. (now the
Company) (incorporated herein by reference to Exhibit 3(a) to Amendment
No. 1 to the Registration Statement on Form 10 of Dasibi Environmental
Corporation).
3.2 Certificate of Amendment of Articles of Incorporation of A. E. Gosselin
Engineering, Inc. (now the Company) (incorporated herein by reference
to Exhibit 3(a) to Amendment No. 1 to the Registration Statement on
Form 10 of Dasibi Environmental Corporation).
3.3 Certificate of Amendment of Articles of Incorporation of Dasibi
Environmental Corp. (now the Company) (incorporated herein by reference
to Exhibit 3(a) to Amendment No. 1 to the Registration Statement on
Form 10 of Dasibi Environmental Corporation).
3.4 Amended and Restated Bylaws of Registrant (incorporated by reference to
Exhibit 3.4 of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2001, filed on April 15, 2002).
3.5 Certificate of Determination of Preferences of Preferred Shares.
3.5 Amendment to Articles of Incorporation of the Company (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed on
August 14, 2008).
4.1 Amended and Restated 2003 Stock Incentive Plan (incorporated by
reference to Exhibit 4.2 of the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2004, filed on March 31, 2005).
4.2 2006 Stock Compensation Plan (incorporated by reference to the
Company's Form S-8 Registration Statement filed on February 13, 2006).
4.3 2006 Consultant Stock Plan (incorporated by reference to the Company's
Form S-8 Registration Statement filed on June 30, 2006).
4.4 2006-II Consultant Stock Plan (incorporated by reference to the
Company's Form S-8 Registration Statement filed on November 22, 2006).
4.5 2009 Equity Plan (incorporated by reference to the Company's Form S-8
Registration Statement filed on February 20, 2009).
4.6 2008 Equity Incentive Plan IV (incorporated by reference to the
Company's Form S-8 Registration Statement filed on September 8, 2008).
4.7 2008 Equity Incentive Plan III (incorporated by reference to the
Company's Form S-8 Registration Statement filed on July 11, 2008).
4.8 2008 Equity Incentive Plan II (incorporated by reference to the
Company's Form S-8 Registration Statement filed on April 23, 2008).
4.9 2008 Equity Incentive Plan (incorporated by reference to the Company's
Form S-8 Registration Statement filed on February 11, 2008).
10.1 Employment Agreement by and between the Company and Jacques Tizabi
dated September 25, 2001 (incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the Quarter Ended March 31, 2002,
filed on May 20, 2002).
10.2 Amendment to Employment Agreement of Jacques Tizabi, dated August 23,
2004. (incorporated by reference to Exhibit 10.1 to the Company 's
Quarterly Report on Form 10-QSB for the Quarter Ended September 30,
2004, filed on November 22, 2004).
10.3 Technology Affiliates Agreement by and between the Company and
California Institute of Technology, dated August 6, 2002. (incorporated
herein by reference to Exhibit 10.3 to the Company 's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2002, filed on April
15, 2003).
10.4 Licensing Agreement by and between Universal Detection Technology and
California Institute of Technology, dated September 30, 2003
(incorporated by reference to Exhibit 10.4 to the Company 's Quarterly
Report on Form 10-QSB for the Quarter Ended September 30, 2003, filed
on November 19, 2003).
10.5 Agreement for Investment Banking and Advisory Services, by and between
the Company and Astor Capital, Inc., dated June 1, 2003 (incorporated
by reference to Exhibit 10.5 of the Company 's Annual Report on Form
10-KSB for the year ended December 31, 2003, filed on March 31, 2004).
10.6 Amendment to Agreement for Investment Banking and Advisory Services
with Astor Capital, Inc. dated April 29, 2004 (incorporated by
reference to Exhibit 10.1 to the Company 's Quarterly Report on Form
10-QSB for the Quarter Ended June 30, 2004, filed on August 23, 2004).
33
10.7 Amendment to Agreement for Investment Banking and Advisory Services
with Astor Capital, Inc. dated September 22, 2004 (incorporated by
reference to Exhibit 10.4 to the Company 's Quarterly Report on Form
10-QSB for the Quarter Ended September 30, 2004, filed on November 22,
2004).
10.8 Standard Form Office Lease, dated September 2003, between Astor
Capital, Inc. and CSDV, a Limited Partnership. (incorporated by
reference to Exhibit 10.2 to the Company 's Quarterly Report on Form
10-QSB for the Quarter Ended September 30, 2004, filed on November 22,
2004).
10.9 Assumption of Lease Agreement, dated October 14, 2004, between
Universal Detection Technology and Astor Capital, Inc. (incorporated by
reference to Exhibit 10.2 to the Company 's Quarterly Report on Form
10-QSB for the Quarter Ended September 30, 2004, filed on November 22,
2004).
10.10 Letter Agreement, dated August 10, 2004, between the Company and IIG
Equity Opportunities Fund Ltd. (incorporated by reference to the
exhibit so described in Amendment No. 5 to the Company's Registration
Statement on Form SB-2, File No. 333-117859, filed with the Securities
and Exchange Commission on February 2, 2005).
10.11 Letter Agreement, dated August 10, 2004, between the Company and Target
Growth Fund Ltd. (incorporated by reference to the exhibit so described
in Amendment No. 5 to the Company's Registration Statement on Form
SB-2, File No. 333-117859, filed with the Securities and Exchange
Commission on February 2, 2005).
10.12 Letter Agreement, dated September 21, 2004 between the Company and JRT
Holdings. (incorporated by reference to the exhibit so described in
Amendment No. 5 to the Company's Registration Statement on Form SB-2,
File No. 333-117859, filed with the Securities and Exchange Commission
on February 2, 2005).
10.13 Letter Agreement, dated October 1, 2004, between the Company and Ali
Moussavi. (incorporated by reference to the exhibit so described in
Amendment No. 5 to the Company's Registration Statement on Form SB-2,
File No. 333-117859, filed with the Securities and Exchange Commission
on February 2, 2005).
10.14 Letter of Engagement dated August 19, 2005, between Trilogy Capital
Partners, Inc. and Universal Detection Technology (incorporated by
reference to The Company's Current Report on Form 8-K filed on
September 28, 2005).
10.15 Form of Stock Purchase Warrant (incorporated by reference to the
Company's Registration Statement on Form SB-2 filed on February 14,
2006).
10.16 Stock Purchase Warrant issued to Trilogy Capital Partners (incorporated
by reference to the Company's Registration Statement on Form SB-2 filed
on February 14, 2006).
10.17 Investment Agreement by and between Universal Detection Technology, a
California corporation, and European Equity Group (incorporated by
reference to the Company's Registration Statement on Form SB-2 filed on
February 14, 2006).
10.18 Form of Consulting Agreement (incorporated by reference to the
Company's Registration Statement on Form SB-2 filed on February 14,
2006).
10.19 Form of Debt Conversion Agreement (incorporated by reference to the
Company's Quarterly Report on Form 10-Q filed on July 25, 2008)
21.1 Subsidiaries of Registrant (incorporated by reference to Exhibit 21.1
of the Company 's Annual Report on Form 10-KSB for the year ended
December 31, 2003, filed March 31, 2004).
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
34
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: April 16, 2009 UNIVERSAL DETECTION TECHNOLOGY
By: /s/ Jacques Tizabi
-------------------------------------------
Jacques Tizabi, President, Chief Executive
Officer, Acting Chief Financial Officer,
and Chairman of the Board of Directors
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby signs this Report and hereby constitutes and appoints Jacques
Tizabi, his attorney-in-fact, each with the power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming said
attorney-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: April 16, 2009 /s/ Jacques Tizabi
-------------------------------------------
Jacques Tizabi, President, Chief Executive
Officer, Acting Chief Financial Officer,
and Chairman of the Board of Directors
Date: April 16, 2009 /s/ Tom Sepnzis
-------------------------------------------
Tom Sepnzis
Director
Date: April 16, 2009 /s/ Matin Emouna
-------------------------------------------
Matin Emouna
Director
35