-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qb3rltKmmBG1DeFc2pFupomZ5yeh1ASCrlGoJSXX/8WFbhfeRx/AWqzSpcFQoO7q WmCZi4nOMoZSrzoBBeOZhA== 0001096906-08-000469.txt : 20080319 0001096906-08-000469.hdr.sgml : 20080319 20080319172739 ACCESSION NUMBER: 0001096906-08-000469 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080319 DATE AS OF CHANGE: 20080319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIATECT INTERNATIONAL CORP CENTRAL INDEX KEY: 0000319124 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 820513109 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10147 FILM NUMBER: 08700181 BUSINESS ADDRESS: STREET 1: 875 SOUTH INDUSTRIAL PARKWAY CITY: HEBER STATE: UT ZIP: 84032 BUSINESS PHONE: 435-654-4370 MAIL ADDRESS: STREET 1: 875 SOUTH INDUSTRIAL PARKWAY CITY: HEBER STATE: UT ZIP: 84032 FORMER COMPANY: FORMER CONFORMED NAME: SAN DIEGO BANCORP DATE OF NAME CHANGE: 19931124 10KSB 1 diatect10ksb123107.htm DIATECT INTERNATIONAL CORPORATION FORM 10-KSB DECEMBER 31, 2007 diatect10ksb123107.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-KSB
 
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
 
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM ______________ TO ________________
 
Commission File Number: 0-10147
 
DIATECT INTERNATIONAL CORPORATION
(Name of small business issuer in its charter)
 
California
82-0513109
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
875 South Industrial Parkway, Heber City, Utah 84032
(Address of principal executive offices)

(435) 654-4370
(Issuer’s telephone number)
 
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.  o
 
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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o   No x

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B not contained in this form, and no disclosure will be contained, to the best of the issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o    No x

For the fiscal year ended December 31, 2007 the issuer’s revenues were $2,015,484.  

 
 
 
 

As of March 18, 2008 the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average of the bid and asked price of such stock on that date of $13,345,380 as reported on the Pink Sheets.

On March 18, 2008 there were 191,452,583 shares of Registrant’s common stock, no par value, issued and outstanding.

Documents included by reference: None

Transitional Small Business Disclosure Format: Yes x No  o








 
 
 
 
 
 

 
 
 
 

TABLE OF CONTENTS
 

     
Page  
PART I
    
Number
Item 1.
Our Business
  
 2    
Item 2.
Properties
  
 4    
Item 3.
Legal Proceedings
  
 5    
Item 4.
Submission of Matters to a Vote of Security Holders
  
 6    
       
PART II
      
Item 5.
Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
  
 7    
Item 6.
Management’s Discussion and Analysis or Plan of Operation
  
 8    
Item 7.
Financial Statements
  
 9    
Item 8.
Changes in and Disagreements with the Accountants on Accounting and Financial Disclosure
  
 9    
Item 8A.
Controls and Procedures
  
10    
Item 8B.
Other Information
  
10    
       
PART III
      
Item 9.
Directors, Executive Officers, Promoters and Control Persons and Corporate Governance; Compliance With Section 16(a) of the Exchange Act
  
11    
Item 10.
Executive Compensation
  
12    
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
14    
Item 12.
Certain Relationships and Related Transactions
  
14    
Item 13.
Exhibits
  
15    
Item 14.
Principal Accountant Fees and Services
  
15    
       
Signatures
    
16    




 
 
 

FORWARD LOOKING STATEMENTS
 
We are including the following cautionary statement in this Annual Report on Form 10-KSB to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements. All statements other than statements of historical fact, including statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions, future results of operations or financial position, made in this Annual Report on Form 10-KSB are forward looking. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking.
 
The forward-looking statements contained herein involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Our expectations, beliefs and projections are expressed in good faith and are believed by management to have a reasonable basis, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that management’s expectation, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements: our losses from period to period; our current dependence on a limited number of key suppliers and investors; our ability to successfully market and sell our products in view of changing trends, acceptance of products and other factors affecting market conditions; technological advances by our competitors; capital needs to fund operations and development programs; delays in the manufacture of new and existing products by us or third party contractors; the loss of any key employee; the outcome of any litigation; changes in governmental regulations; and availability of capital on terms satisfactory to us. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date hereof.
 
For a discussion of some of the factors that may affect our business, results and prospects, see “ITEM 1.– OUR BUSINESS”.  Readers are urged to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission, and those described from time to time in our press releases and other communications, which attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.




 
1
 

PART I

ITEM 1.  Our Business

Diatect International Corporation (“Company”) was incorporated under the laws of the State of California in 1979 as San Diego Bancorp. In 1998 we changed our name to Diatect International Corporation. During 2002, we moved our administrative offices from Idaho and our manufacturing facilities from Kansas and consolidated our operations in Utah.

The Pesticide Market

Our relative position in the market place for insecticides is very small. Major companies with sales significantly greater than ours represent our major competitors. These competitors have extensive resources that allow them to conduct research and development efforts that may lead to the introduction of new products. Any advantage that we may have over our competitors is based on the non-toxic nature of our products and we believe this may give our products retail appeal.

Manufacturing Process

We have nine different insecticide products that utilize so called "natural-killing agents" which are non-toxic to the environment as well as humans and other warm-blooded animals. The active ingredients used in our products are diatomaceous earth (“DE”), pyrethrin (a natural extract chemical) and pypernyl butoxide (“PBO” a chemical agent). These raw materials are readily available and we do not depend on a single source to obtain them.

In our manufacturing process we combine the DE, pyrethrin and PBO by using surfactants to ensure a proper mix and resulting in an increased effectiveness and persistence of their insecticide properties over the natural state of the ingredients. In combination, these active ingredients substantially increase their effectiveness compared to their use individually. In our manufacturing process we blend the active ingredients resulting in a breakdown of the chitin from the DE, which allows the pyrethrin to act directly on an insect’s nerve cells. Our blended process prevents the pyrethrin from evaporating quickly and therefore its potency is released for hours rather than minutes. We believe the use of PBO acts as a synergist and increases effectiveness of the pyrethrin by as much as ten times over the non-blended state.

The ingredients in our products have been used separately for years as adequate alternatives to hazardous chemical insecticides and therefore represent an alternative to synthetic products that often utilize hazardous chemical compounds. Synthetic insecticides were first used in the 1940's and most insect species have developed a resistance to many of these products. Unlike the synthetic insecticides that have resulted in a constant search for new formulations, our products have not changed since we first started production and commercial marketing in 2001.


Our Intellectual Property, Patents and Proprietary Rights

We rely on five registrations (42850-1 through 5) that we obtained from the Environmental Protection Agency (EPA) that allowed us to formulate nine labels for retail sales. These registrations are required for the production and marketing of our insect control products. Pursuant to the Federal Insecticide, Fungicide and Rodenticide Act, all insecticides must be "registered" with the EPA, and specific conditions for their use must be stated on an approved label. These labels provide an extensive amount of information and indicate that the insecticide has been tested and evaluated, provide instructions for the proper handling, use, storage and disposal; and state that the EPA regulates the use thereof. The process of submitting a pesticide product to the EPA and obtaining approval through registration to label one or more products for retail sale may take a considerable amount of time and require substantial expenditures.
 

 

 
2
 

Obtaining EPA registrations and approval of our labels represents an essential asset of the Company and is the result of lengthy and costly effort. During 2003 we reevaluated the estimated useful life of our EPA labels and determined that competitive business conditions and the continued introduction of new products into the marketplace has resulted in a shortening of their estimated useful life. Consequently, in 2003 we elected to amortize the approximate $1.7 million carrying value of the EPA labels over a 7-year period using the straight-line method.  During 2005 the useful life of the labels was reviewed for impairment in light of the growing concern with synthetic insecticides and it was concluded that the life of the labels would exceed 10 years.  Further it has been estimated by the American Crop Protection Society that replacing EPA labels in today’s environment would cost between $160 million and $250 million. Based on this analysis we concluded that the label should not be amortized further.  No impairment was required from our reviews in 2007 or 2006.

Marketing and Sales

We market our products under two different product brand names - Diatect and Results.

Diatect

Diatect II Multi-Purpose Insect Control is sold in the agriculture market and is used in a wide variety of areas, primarily in conjunction with edible growing crops, animal quarters, livestock, and ornamentals.

Diatect III Insect Control is sold in the commercial, industrial, and government markets and is also used in a wide variety of areas, primarily in conjunction with schools, parks, rest stops, roadways, childcare facilities, rest homes, eating establishments, and other public places.

Diatect V: is a product designed and formulated to meet the needs of the organic food industry, which requires insecticides with no synthetic ingredients. Our primary market for Diatect V is commercial organic food growers, homeowners, and gardeners.

Results

Results Ant & Insect is sold primarily to the domestic homeowner for the control of ants, aphids, caterpillars, leafhoppers, lice, mites, mosquitoes, ticks, and other insects.

Results Fire Ant represents a specialized product that is directed towards the control of fire ants, found largely in the southern United States. This product is applied to fire ant mounds to eliminate the fire ant population.  
 
Results Indoor this product is designed for indoor use under sinks, behind furniture, in air vents, under tile, and in stairwells and basements for the control of roaches, fleas, ants, silverfish, crickets, bedbugs, box elder bugs, and other insects.

Results Garden & Floral is designed for outdoor use by protecting garden plants from many varieties of worms, beetles, leafhoppers, stink bugs, squash vine borers, and other insects.

Results Pet Powder is specifically designed for use on domestic pets. This product is targeted to provide homeowners and veterinarians with a powder that is effective in kennels and other animal boarding facilities to control insects that become lodged in the skin and fur of animals.

 

 
 
3
 

Results Wasp & Hornet is insect control for wasps and hornets that build unwanted nests in and on homes, fences, bushes apartments, signs, doorjambs, electrical boxes and any other place that they may build.

A substantial part of our advertising and marketing efforts have been directed toward direct marketing and trade shows. We believe that one-on-one contact with our wholesale buyers allow us to explain the difference’s between our non-toxic products and competitive products whose active ingredients may contain toxins or synthetics. We have a variety of wholesale customers and we are not dependent on any one or on a small group of customers for our product sales. Primarily our customers are comprised of small to medium retail outlets that serve agriculture and gardening customers in the United States, where the insect population is prevalent. We do not have any agreements with our customers for their purchase of our products over any period of time.

In 2004 we started to sell our product in a single Big Box retail outlet and by the end of the year we had a retail vendor number allowing us to sell our products to 76 retail outlets in the southeast region. These sales do not constitute a major customer. Furthermore, having a retail vendor number is not an agreement to purchase our product, but it allows us the opportunity to sell our product to their retail outlets.

We use the internet to make the retail market aware of our products. We also employ customer representatives at our office in Utah who periodically contact our commercial customers.   We supply to our commercial customers sales literature, banners, booths, and other materials to encourage active promotion of our products. We produce substantially all of our sales and promotional materials at our offices in Utah.

Employees

As of December 31, 2007, the Company had 12 full time employees.


Diatect International Corporation is located in an eleven-year-old 20,254 square foot class B masonry office/warehouse building at 875 South Industrial Parkway, Heber City, Utah. Heber City is located approximately 45 miles East of Salt Lake City, Utah, and is easily accessible by connecting freeways and highways. The building is located on a 1.928-acre parcel of ground that is part of the Utah   Industrial Park and adequately serves as our corporate office, manufacturing and distribution facility. The occupancy capacity of the business office portion of the building is 23 people. We are the sole occupant of the building.

In March 2005, we sold this real estate for $900,000 and entered into a verbal leaseback arrangement that was not finalized. Consequently, no lease payments were made subsequent to the sale. During the fourth quarter of 2006, the land and building where the Company maintains its offices and manufacturing facility was sold by a shareholder to an entity (“Landlord”) that is affiliated with a former director of the Company. In conjunction with this sale, $117,060 of unpaid rent was forgiven. Commencing on January 1, 2007, the Company entered into a five year lease with the Landlord, requiring monthly rental payments of $12,000 plus taxes and maintenance. The lease is renewable for two additional 5 year terms with 10% increases of the rental payments to $13,200 per month and $14,250 per month, respectively.

We have insurance for the building and inventory for amounts which we believe are adequate.

The Company owns association placer diatomaceous earth mining claims and placer diatomaceous earth mining claims, in the State of Oregon. We have not engaged in any mining operations and we do not anticipate undertaking mining operations in the near future. The mining claims are carried at no value.  Any future mining activities will be dependent on business and market conditions and resources available.

 
 
4
 

ITEM 3.  LEGAL PROCEEDINGS
 
Administrative Proceeding – U.S. Securities and Exchange Commission

On September 27, 2007, the Commission entered an order instituting a proceeding under Section 12(j) of the Securities Exchange Act of 1934 (“1934 Act”) naming the Company as a respondent.  This administrative proceeding has file no. 3-12843. The administrative proceeding sought to revoke the Company’s registration under the Securities Exchange Act of 1934 (“Exchange Act”) under which the Company files quarterly and annual financial reports.  The Company had not filed nine quarterly and annual financial reports.  All of these reports have been filed as of January 2, 2008.

On January 30, 2008, Administrative Law Judge James Kelly issued an Initial Decision. This decision denied the Division of Enforcement’s Motion for revocation and granted the Company’s motion for summary disposition. The Judge found that the Company violated rules promulgated under the Exchange Act which required the filing of annual and quarterly reports.  In the decision the Judge expressly stated that the sanctions of revocation or trading suspension would not be imposed as such sanctions were not appropriate or necessary and denied the Division’s motion for revocation.  The initial decision dismissed the administrative proceeding.  The parties had 21 days to appeal which has expired. Neither party appealed and on March 6, 2008 the Commission issued a notice to us making the Initial Decision the Final Decision.
 
U.S. Securities and Exchange Commission ,  The U.S. Securities and Exchange Commission in the U.S. District Court, District of Utah, Central Division having Case No.: 2:07cv00709.  The caption on the Complaint is Securities and Exchange Commission v. Diatect International Corporation et al.   The four defendants are the acting president who is also a director, a former officer and director, a former director, and the Company.   The allegations of the Complaint claim that the Defendants engaged in a transaction in 2003 involving the sale of mining claims located in the State of Oregon which transaction was improperly recorded on the Company’s financial statements causing the overstatement of revenues and assets.   The allegations of the Complaint also claim that certain revenues were improperly recorded in the Company’s 2002 financial statements because the sales were consignment sales and not actual sales.   The Complaint alleges various violations of the federal securities laws and regulations promulgated thereunder including violations of the anti-fraud provisions and violations of regulations pertaining to periodic reports filed by the Company with the SEC in 2003 and 2004.   On May 17, 2004 the Company issued restated financial statements as of December 31, 2003.  On April 14, 2005, the Company issued restated financial statements as of December 31, 2004.  These filings restated the sale of the mining claims and our revenues for those years.  The Complaint seeks injunctive action against the defendants including the Company and seeks fines from the three individual defendants, and from two individual defendant’s disgorgement of stock sale proceeds and a bar as an officer and director.  In February, 2008 a scheduling conference was held and a tentative trial date has been set for January, 2010.  We intend to vigorously defend the allegations of the Complaint.
 
Complete Packaging, LLC d.b.a. Compax – On October 17, 2003, Complete Packaging, LLC, doing business as Compax, filed a complaint in the Third   District   Court   of   Salt   Lake   County, State of Utah, naming the Company as the defendant. Compax claimed a trade payable, with interest and costs of $323,892. Compax obtained a judgment against the Company. During 2005, we entered into a settlement agreement with Compax that required us to make three monthly payments of $25,000 through May 2005 and a lump sum payment of $145,000 in June 2005. We accrued a $220,000 settlement obligation liability at December 31, 2004. The Company made two of the monthly payments but failed to make the remaining payments due under the terms of the settlement agreement. In July 2006, the Company and Compax reached a further agreement dated June 6, 2006 under which Compax agreed to accept payment of $150,000 as total satisfaction of our obligation.   We made the payments and received a judgment release on September 1, 2007.
 
 

 
 
5
 

Litho-Flexo Graphics, Inc. – On May 23, 2003, we were named as defendant in a complaint filed by Litho-Flexo Graphics, Inc. in the Fourth District Court in and for Wasatch County, State of Utah. Litho-Flexo claimed a trade payable of $92,478. We contended that the packaging labels we received from Litho-Flexo were defective and could not be used in the packaging of our products. We filed a counterclaim claiming damages in excess of $100,000 caused by the defective labels. We accrued a $72,625 settlement obligation liability at December 31, 2004. During the year ended December 31, 2005, we paid $9,342 to Litho-Flexo, which decreased the accrued settlement obligation liability to $63,283 at December 31, 2006 and 2005.   We intend to defend the complaint and pursue our counterclaim.

Alleged Bankruptcy - - In June 2005, three note holders, Bruce L. Shannon, Brent Larson and the Robinson Family LLC, filed suit in Federal Bankruptcy Court to force the Company into a Chapter 7 receivership. In February 2006, the Company filed a damage suit against those note holders. In April 2006, a settlement was reach whereby the note-holders’ bankruptcy suit was dismissed and the Company was awarded damages through the relief of $248,175 of notes payable and $121,681 of related accrued interest due to the note holders, the return of 207,275 shares of the Company’s common stock by the note holders, and the payment of $10,000 of legal fees for the Company.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

We did not submit any matters to a vote of our securities holders in the fourth quarter ended December 31, 2007.
 
 
 
 
 
 
 

 
 
6
 

PART II

 
ITEM 5.   MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Our shares of common stock are presently quoted on the Pink Sheets under the symbol DTCT. Listed below are the high and low sale prices for the shares of our common stock during the years ended December 31, 2007 and 2006. These quotations reflect inter-dealer prices, without mark-up, mark-down or commission and may not represent actual transactions.

   
High
    
Low
  
Fiscal 2007
            
First Quarter (ended March 31, 2007)
   $ 0.055     $ 0.030  
Second Quarter (ended June 30, 2007)
     0.043       0.024  
Third Quarter (ended September 30, 2007)
     0.065       0.035  
Fourth Quarter (ended December 31, 2007)
     0.070       0.034  
                 
Fiscal 2006
                
First Quarter (ended March 31, 2006)
   $ 0.034     $ 0.007  
Second Quarter (ended June 30, 2006)
     0.028       0.015  
Third Quarter (ended September 30, 2006)
     0.070       0.023  
Fourth Quarter (ended December 31, 2006)
     0.056       0.030  


We presently do not have any stock compensation plans.

As of December 31, 2007 there were 185,562,583 shares issued and outstanding and approximately 1,247 holders of record of our common stock. We believe that a significant number of beneficial owners of our common stock hold shares in street name. No dividends have ever been paid to holders of our common stock, and we do not anticipate paying dividends in the future.

Sales of Unregistered Securities

The following provides information regarding sales of equity securities by us during the fiscal year ended December 31, 2007 which were not registered under the Securities Act.  All issuances were of the Company’s no par common stock.

During 2007, we issued 500,000 shares valued at $20,000 or $0.04 per share, 250,000 shares of common stock valued at $7,500 or $0.03 per share as compensation to employees, 100,000 shares of common stock as compensation to an employee valued at $4,500 or $0.045 per share and 250,000 shares to a vendor for services valued at $11,250 or $0.045 per share. The value represents the market price of our common stock on the dates of issuance.  An aggregate of 22,920,000 shares of common stock were issued upon the conversion of $1,146,000 of 12% convertible notes and 2,490,443 shares of common stock valued at $99,618 or $0.04 per share based on the closing market price on the date of issuance.  In addition, 7,500,000 shares of common stock were issued upon the exercise of warrants for cash of $75,000 or $0.01 per share.  We sold 5,000,000 shares of common stock and three year warrants to purchase 5,000,000 shares of common stock for total proceeds of $250,000.




 
7
 

ITEM 6.   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Report. Excluding historical information, the following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See “Forward Looking Statements”

Overview:

Diatect International Corporation (the “Company”) is a California corporation operating in Utah as a developer and marketer of non-toxic pesticide products. We sell our products to wholesale distributors and retail customers in the United States.  We sell directly to the consumer via our website at www.diatect.com.  

In February 2006 the Company entered into a one year non exclusive Financial Advisory and Investment Banking Agreement (“Investment Banking Agreement”) with Pointe Capital L.L.C. (“Pointe”), and pursuant thereto, received $150,000. In addition, in June 2006 the Company, through Pointe, commenced a Convertible Promissory Note (“Convertible Note”) offering.  The terms of the Investment Banking Agreement, the Convertible Note, and other financial arrangements, we have entered into are described in Notes 4 and 6 in the financial statements.

Our ability to continue operations is dependent upon obtaining additional financing and being able to generate net profits in the future. Management believes that these events are likely to occur, even though no assurance thereof can be given.

Results of Operations for the Fiscal Years ended December 31, 2007 and 2006

Results of Operations:

Revenue: We had revenue of $2,015,484 for the year ended December 31, 2007 compared to $1,031,608 for the year ended December 31, 2006.   Total revenue increased in 2007 by $983,876 primarily due to increases in web based retail sales and additional sales into the commercial agriculture market.

Cost of revenue:   Our cost of revenue was $774,760 for the year ended December 31, 2007 as compared to $408,244 for the year ended December 31, 2006.  The increase of $366,516 is due increases in sales volumes and decreases in our costs of production.

Marketing and Selling Expenses: Marketing and selling expenses were $1,007,730 for the year ended December 31, 2007, as compared to $443,204 for the year ended December 31, 2006.  The increase of $564,526 is due primarily to increases in web based advertising and increases in compensation expenses for marketing staff.  Fiscal 2006 reflects a non-cash charge representing the fair value of a warrant to purchase 7,000,000 shares of common stock at an exercise price of $0.01 per share using the Black Scholes method of $116,935 issued to a marketing consultant for which there is no expense in the current year.

General and Administrative Expenses: For the year ended December 31, 2007 general and administrative expenses were $1,767,231 as compared to $2,360,688 for the year ended December 31, 2006.  The decrease of $593,457 is primarily due to decreases in the value of common stock issued in the year ended December 31, 2006 to our Chief Executive officer of $189,207, common stock issued for professional fees in the aggregate amount of $630,954 and common stock issued for employee bonuses in the amount if $70,000 for which no current year amounts exist.  These decreases are offset somewhat by increases in the amortization of loan costs, occupancy costs and general overheads.


 
8
 

Other Income and Expense: Other income and expense is comprised of interest expense and gain from termination of debt.   For the year ended December 31, 2007 interest expense was $676,249 as compared to $340,643 for the year ended December 31, 2006, an increase of $335,606. The increase is due to higher debt levels during the year and the amortization of loan discount. Interest expense for the years ended December 31, 2007 and 2006 reflects the amortization of loan discount in the amount of $313,536 and $48,801, respectively. Included in the interest expense for the year ended December 31, 2006 is the value of a non-cash charge representing the fair value of a warrant to purchase 4,500,000 shares of common stock at an exercise price of $0.01 per share with a fair value using the Black Scholes method of $76,410 issued in conjunction with a bridge loan for which no comparable prior year expense exists.

Gain from termination of debt was $1,046,547 for the year ended December 31, 2007 compared to $734,030 for the year ended December 31, 2006, an increase of $312,517. The amount for the year ended December 31, 2007 is comprised primarily of debt and related accrued interest in the amount of $773,492 for which the statute of limitations has expired. Also included are settlements of liabilities at less than their recorded amounts. The amount for the year ended December 31, 2006 is comprised primarily of settlements of debt related to the attempted Chapter 7 action against us resulting in gains of approximately $395,000 and gains from the settlement of LaJolla Cove of $138,500 and gain from the settlement of rent of $117,060.

Liquidity and Capital Resources

Our cash and cash equivalents of $9,864 as of December 31, 2007 are not considered sufficient to support our current levels of operations for the next 12 months. 

In May 2007 we entered into a Master Lease Line with Gulf Pointe Capital, LLC.  The terms of the lease line are a credit limit of up to $500,000 that can be used for various new and used tier one production, material handling, computer, technology and fixture related equipment.  To date the company has drawn $209,000 of the available credit.  

In September 2007, we entered into an accounts receivable line of credit agreement with Aspen Opportunity Fund LP, with a credit line of up to $500,000, subject to the availability of eligible accounts receivable as defined in the agreement.  We can draw advances against accounts receivable, in $5,000 increments as needed.  We have a total of $185,000 drawn against this accounts receivable line as of December 31, 2007.

We believe that, with the Master Lease Line, the accounts receivable credit line and our working capital that we will have sufficient resources for the next 12 months from the date of this report on Form 10-KSB.

Item 7.  Financial Statements

Our financial statements are set forth immediately following the signature page to this Form 10-KSB.


Item 8.  Changes In and Disagreements With Accountants on Accounting and Financial Disclosures

NONE


 

 
9
 

Item 8A.  Controls and Procedures

Disclosure Control and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal year covered by this Annual Report on Form 10-K, we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at December 31, 2007.

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fourth quarter of fiscal 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 Exchange Act Rule 13a-15(f)).  Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our internal control over financial reporting as of December 31, 2007, based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.  Based on our evaluation under the framework in Internal Control – Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2007.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.

 
/s/ David H. Andrus
 
David H. Andrus
 
Chief Executive Officer
 
Chief Financial Officer


THE FOREGOING MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING SHALL NOT BE DEEMED TO BE “FILED” WITH THE SEC, NOR SHALL SUCH INFORMATION BE INCORPORATED BY REFERENCE INTO ANY PAST OR FUTURE FILING UNDER THE SECURITIES ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT WE SPECIFICALLY INCORPORATE IT BY REFERENCE INTO SUCH FILING.

Item 8B.  Other Information

None

 
10
 

PART III
 
Item 9.  Directors, Executive Officers, Promoters, Control Persons And Corporate Governance; Compliance With Section 16(a) of the Exchange Act

Directors and Executive Officers

The following table sets forth as of December 31, 2007 the name, age and position of each of our executive officers and directors and their respective terms of office.


Name
  
Age
  
Position
  
Director and/or Officer Since
Dave H. Andrus
  
42
  
Director
  
December 1997
       
President
  
December 2004
       
Chairman of the Board
  
December 2004
             
Javvis O. Jacobson
  
35
  
Director
  
March 2004


Our directors serve for a term of one year or until his or her successor is elected at the next shareholders meeting. All officers serve at the pleasure of the Board of Directors or until his or her successor is elected at the annual meeting of the Board of Directors. We have no arrangements or understandings written among any of our officers or directors.

The principal occupations and brief summary of the background of each of our directors and executive officers during the past five years is as follows:

David H. Andrus, CEO/President and CFO began an affiliation with Diatect International in 1992.  Dave served in the U.S. Marine Corps for 10 years in the logistics and intelligence field, and was medically retired in 1991.  He formed Venture Creations, which performed contract research and development for EnviroGuard (now Diatect).  As R&D Project Manager, Dave supervised extensive field trials of the Diatect Insect Control within the Poultry industry and for fire ant concerns in that region.  In 1998 Dave was appointed technical manager for Diatect.  Since then, Dave has been VP Operations and was elected president in December of 2004 to current.

Javvis O. Jacobson, director, audit committee chairman, is a certified public accountant and is the CFO of Beehive Credit Union in Salt Lake City, Utah.  He has held this position for the last two years.  Formerly he was with Deloitte and Touche, as audit manager for six years.  Javvis graduated from Weber State University with a Masters of Professional Accountancy.    

Michael O’Keefe resigned from the Board in April, 2007.

Audit Committee Financial Expert

The entire Board of Directors serves as our Audit Committee.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors and persons who own more than 10% of a registered class of our equity securities to file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the Securities and Exchange Commission (the “SEC”). Such officers, directors, and 10% stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) reports they file.  The Company believes all necessary reports were made on a timely basis for the period of this report on Form 10-KSB.

 
 
11
 

ITEM 10. EXECUTIVE COMPENSATION

The following table provides information about the compensation paid to, earned or received during the last two fiscal years ended December 31, 2007 and 2006 by our principal executive officer (the “Named Executive Officer”).

SUMMARY COMPENSATION TABLE

Name and
Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards ($)
Non-Equity
Incentive Plan Compensation
($)
Nonqualified Deferred Compensation Earnings
($)
All Other
Compensation
($)
Total
($)
David Andrus
2007
$75,000
-
-
-
-
-
-
$ 75,000
Chief Executive Officer, Principal Executive Officer, Chief Financial Officer
2006
$75,000
 -
$189,207
 - -  - -
  264,207
 
 
Narrative Disclosure to Summary Compensation Table

Employment Agreements

David Andrus signed an employment agreement effective December 1, 2004 for a term of two years at an annual salary of $150,000 per year, with a signing bonus of 3,000,000 shares of our restricted common stock.  The agreement includes provisions for reasonable allowances and a bonus based on 1% of gross sales receipts as determined on a quarterly basis.   Mr. Andrus received 50% of the salary and no bonus due to the Chapter 7 proceedings during 2006 and 2005. The employment agreement is presently expired and Mr. Andrus is being paid a salary of $75,000 per year. In 2006, Mr. Andrus was issued 9,460,350 shares of our common stock valued at $189,207 or $0.02 per share representing the closing price on the date of issuance.

Outstanding Equity Awards at Fiscal Year-End

   
Option Awards
    
Stock Awards
  
Name
  
Number of Securities Underlying Unexercised Options
(#)
Exercisable
    
Number of Securities Underlying Unexercised Options
(#)
Unexercisable
    
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
(#)
    
Option Exercise Price
($)
    
Option Expiration Date
    
Number of Shares or Units of Stock That Have Not Vested
(#)
    
Market Value of Shares or Units of Stock That Have Not Vested
($)
    
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#)
    
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($)
  
                                                       
David Andrus Chief Executive Officer, Principal Executive Officer, Chief Financial Officer
     --       --       --       --       --       --       --       --       --  
 
 
12

Compensation of Directors

The following table summarizes data concerning the compensation of our directors for the fiscal year ended December 31, 2007.


Name
Fees Earned or Paid in Cash
($)
  
Stock Awards
($)
  
Option
Awards ($)
  
Non-Equity Incentive Plan Compensation ($)
  
Nonqualified Deferred Compensation Earnings
($)
  
All Other Compensation
($)
  
Total
($)
David Andrus
-
  
-
  
-
  
-
  
-
  
-
  
-
Javvis O. Jacobson
-
  
-
  
-
  
-
  
-
  
-
  
-

 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
 

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
The table below sets forth certain information regarding the beneficial ownership of our common stock as of March 18, 2008, based on information available to us by the following persons or groups:

 
·
each person who is known by us to own more than 5% of the outstanding common stock;
 
·
each of our directors;
 
·
the Named Executive Officer; and
 
·
all of our executive officers and directors, as a group.

As of March 18, 2008, there were 191,452,627 shares of common stock issued and outstanding.


Name and Position
of Beneficial Owner
  
Number of
Shares
Beneficially
Owned
  
Percent
of Class
Aspen Capital Partners
  
15,000,000
  
7.83%
         
David H Andrus, Director/President, Chairman of the Board
  
  9,466,350
  
4.94%
         
Javvis Jacobson, Director
  
     169,000
  
0.00%


Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to the shares. A person is also deemed to be a beneficial owner of any securities of which the person has the right to acquire beneficial ownership within 60 days. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that the each of the stockholders named in this table has sole voting and investment power with respect to the shares shown as beneficially owned by him. To our knowledge, there are no voting arrangements among our stockholders.

Securities Authorized for Issuance Under Equity Compensations Plans

The Company does not have any Equity Compensation Plans.

Item 12.  Certain Relationships and Related Transactions

In February 2006, we entered into a one year Investment Banking Agreement with Pointe. The terms of the Investment Banking Agreement required that we pay $25,000 upon completion of $150,000 in bridge financing. The Company subsequently received $150,000 under the terms of a convertible promissory note that was arranged by Pointe and we made the $25,000 payment to Pointe. Additionally, we issued Pointe 8,000,000 warrants to purchase common stock at $0.01 per share for a period of 3 years. The warrants issued pursuant to this agreement were valued at $125,892. This amount was recorded as a prepaid expense and is being amortized over the one-year term of the agreement. We further agreed to pay Pointe a 7% commission and a 1% unaccountable expense allowance upon receipt of financing brought to us by Pointe, agreed to pay Pointe a fee equal to 5% of the value of the transaction as defined in the agreement in the event of a merger or acquisition of the Company.
 

 

 
14
 

In February 2006, we entered into a renewable two-year non-exclusive engagement letter ( the “Engagement Letter”) with Aspen Capital Partners, LLC, an entity that employs a person that was on our board of directors at that time for consulting services in a variety of areas relating to our financial, strategic and developmental growth. The financial terms of the Engagement Letter required a non-refundable retainer fee of $25,000, the issuance of 2,500,000 shares of common stock and payments of $15,000 per month for a two-year period. Additional provisions of the Engagement Letter provide that we issue 8,000,000 warrants to purchase common stock at $0.01 per share for a period of five years and, upon the completion of the $150,000 bridge financing, we issued 4,500,000 warrants to purchase common stock at $.01 per share for a period of five years. The 8,000,000 warrants issued pursuant to the Engagement Letter were valued at $125,892. This amount was recorded as a prepaid expense and will be amortized over the two year term of the agreement. The 4,500,000 warrants were valued at $76,410 and were recorded as interest expense. The agreement also provides for the issuance of 5,000,000 warrants to purchase common stock at $0.05 per share for a period of five years upon the completion of one million dollars of funding. These warrants were issued in May, 2007.  We intend to renew this agreement.

During 2006, we issued 500,000 shares of our common stock valued at $8,500 to one of our directors as compensation for the guarantee provided to us of our line of credit with a bank.

During 2006, we issued 9,460,350 shares of common stock valued at $189,207 to our Chief Executive Officer as compensation pursuant to his employment agreement.

During the fourth quarter of 2006, the land and building where we maintain our offices and manufacturing facility was sold by a shareholder to Aspen Capital Management, LLC (“Landlord”) an entity that is affiliated with a one of our directors. In conjunction with this sale, $117,060 of unpaid rent was forgiven. Commencing on January 1, 2007, we entered into a five year lease with the Landlord, requiring monthly rental payments of $12,000 plus taxes and maintenance. The lease is renewable for two additional 5 year terms with 10% increases of the rental payments to $13,200 per month and $14,250 per month, respectively.


Item 13.  Exhibits

Index to Exhibits:

 
31.1
Rule 13a-14(a)/15d-14(a) Certification of David Andrus, Principal Executive Officer and Principal Financial Officer

32.1
Certification of David Andrus, Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Item 14.  Principal Accountant Fees and Services

Audit Fees:

The following is a summary of the aggregate fees billed to us by Hansen, Barnett & Maxwell, P.C. for the fiscal years ended December 31, 2007 and 2006:

   
Fiscal 2007
    
Fiscal 2006
  
             
Audit Fees
   $ 75,347     $ —  
Audit Related Fees
     —       —  
Tax Fees
     —       —  
All Other Fees
     —       —  
TOTAL Fees
   $ 75,347     $ —  

Pre-Approval Policies and Procedures:

Our Board of Directors reviews and approves audit and permissible non-audit services performed by our registered public accounting firm. In its review of non-audit service fees and in its appointment of a registered public accounting firm, our Board of Directors considered whether such services are compatible with maintaining the authorized independence, objectivity and impartial judgment on all issues encompassed within our public accountants ’ engagement . As part of their review, they have given due consideration to Rule 2-01 of Regulation S-X. All fees for audit and non-audit services that may be charged by our registered public accounting firm will be pre-approved by the board of directors.

 
15
 

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
 
Diatect International Corporation
   
    (Registrant)
     
 
 
 Dated: March 18, 2008
     
 
By:
/s/ David H. Andrus
   
David H. Andrus
   
Principal Executive Officer
   
Principal Financial Officer

In accordance with the Securities Exchange Act of 1934, this Report on Form 10-KSB has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.


Signature
Capacity
Date
     
/s/ David H. Andrus
Director
March 18, 2008
David H. Andrus
    
     
/s/ Javvis O. Jacobsen
Director
March 18, 2008
Javvis O. Jacobsen
    
     

 
 
 
 
 
 
 
 
 
 
 


 
16
 

DIATECT INTERNATIONAL CORPORATION
INDEX TO FINANCIAL STATEMENTS


 
Page
   
Report of Independent Registered Public Accounting Firm
F-1
   
Balance Sheets as of December 31, 2007 and  2006
F-2
   
Statements of Operations for the Years Ended December 31, 2007 and 2006
F-3
   
Statements of Stockholders’ Deficit for the Years Ended December 31, 2006 and 2007
F-4
   
Statements of Cash Flows for the Years Ended December 31, 2007 and 2006
F-5
   
Notes to Financial Statements
F-7


 
 
 

 
 
17
 
 
HANSEN, BARNETT & MAXWELL, P.C.
    
A Professional Corporation
    
CERTIFIED PUBLIC ACCOUNTANTS
  
Registered with the Public Company
   
Accounting Oversight Board
5 Triad Center, Suite 750
    
Salt Lake City, UT 84180-1128
    
Phone: (801) 532-2200
Fax: (801) 532-7944
  
 
www.hbmcpas.com
    
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and the Stockholders
Diatect International Corporation

We have audited the balance sheets of Diatect International Corporation as of December 31, 2007 and 2006, and the related statements of operations, stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits 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. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 provide 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 Diatect International Corporation as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 
 
HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
March 18, 2008
 

 
F-1
 

DIATECT INTERNATIONAL CORPORATION
BALANCE SHEETS

   
December 31,
  
   
2007
    
2006
  
ASSETS
            
Current Assets
            
Cash
   $ 9,864     $ 61,743  
Trade accounts receivable, net of allowance for doubtful accounts of $16,000 and $25,397, respectively
     242,406       26,502  
Inventory
     66,688       235,889  
Prepaid expenses and other current assets
     306,206       147,219  
Total Current Assets
     625,164       471,353  
Property and Equipment, net of accumulated depreciation of $140,673 and $268,275, respectively
     258,229       90,006  
Intangible Assets - EPA Labels
     1,116,322       1,116,322  
Total Assets
   $ 1,999,715     $ 1,677,681  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
                
Current Liabilities
                
Trade accounts payable
   $ 224,213     $ 267,840  
Accrued liabilities
     155,125       289,322  
Accrued interest payable
     456,626       723,545  
Accrued settlement obligations
     89,187       259,381  
Deferred gain on sale and leaseback of assets
     86,806       -  
Current portion of notes payable, net of unamortized discount of $135,855 and $191,094, respectively
     2,578,265       1,393,822  
Current portion of capital lease obligations
     60,021       -  
Total Current Liabilities
     3,650,243       2,933,910  
Long-Term Liabilities
                
Notes payable, net of current portion
     -       1,785,563  
Capital lease obligations, net of current portion
     120,212       -  
Total Long-Term Liabilities
     120,212       1,785,563  
Stockholders' Deficit
                
Common stock, no par value; 300,000,000 shares authorized;190,562,583 shares and 151,552,140 shares outstanding, respectively
     24,587,396       23,120,610  
Warrants outstanding
     1,561,367       593,162  
Accumulated deficit
     (27,919,503 )     (26,755,564 )
Total Stockholders' Deficit
     (1,770,740 )     (3,041,792 )
Total Liabilities and Stockholders' Deficit
   $ 1,999,715     $ 1,677,681  



The accompanying notes are an integral part of these financial statements.


 
F-2
 

DIATECT INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS

 
   
For the Years Ended
  
   
December 31,
  
   
2007
    
2006
  
             
Sales
   $ 2,015,484     $ 1,031,608  
Cost of Goods Sold
     774,760       408,244  
                 
Gross Profit
     1,240,724       623,364  
                 
Expenses
                
Marketing and selling
     1,007,730       443,204  
General and administrative
     1,767,231       2,360,688  
Total Expenses
     2,774,961       2,803,892  
                 
Loss from Operations
     (1,534,237 )     (2,180,528 )
                 
Other Income (Expense)
                
Interest expense
     (676,249 )     (340,643 )
Gain from termination of debt
     1,046,547       734,030  
Net Other Income
     370,298       393,387  
                 
Net Loss
   $ (1,163,939 )   $ (1,787,141 )
                 
Basic and Diluted Loss Per Share
   $ (0.01 )   $ (0.01 )
                 
Weighted-Average Basic and Diluted Common Shares Outstanding
     160,887,061       129,784,100  



The accompanying notes are an integral part of these financial statements.

 
F-3
 

DIATECT INTERNATIONAL CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2006 and 2007

                           
Total
  
   
Common Stock
    
Warrants
    
Accumulated
    
Stockholders'
  
   
Shares
    
Amount
    
Outstanding
    
Deficit
    
Deficit
  
Balance, December 31, 2005
     99,264,997     $ 21,836,822     $ 148,033     $ (24,968,423 )   $ (2,983,568 )
Issuance for services
     37,894,418       898,660       -       -       898,660  
Issuance upon conversion of note payable
     15,000,000       150,000       -       -       150,000  
Beneficial notes payable conversion option
     -       239,895       -       -       239,895  
Warrants issued for services
     -       -       445,129       -       445,129  
Cancellation of stock
     (607,275 )     (4,767 )     -       -       (4,767 )
Net loss for the year
     -       -       -       (1,787,141 )     (1,787,141 )
Balance, December 31, 2006
     151,552,140       23,120,610       593,162       (26,755,564 )     (3,041,792 )
Issuance to consultants for services
     1,100,000       43,250       -       -       43,250  
Issuance of 19,000,000 warrants to consultants for services
     -       -       501,373       -       501,373  
Issuance of 5,000,000 warrants with convertible notes payable for cash
     -       -       89,038       -       89,038  
Issuance of common stock and 5,000,000 warrants for cash
     5,000,000       126,617       123,383       -       250,000  
Beneficial notes payable conversion option
     -       169,258       -       -       169,258  
Issuance upon conversion of notes payable into common stock and 22,920,000 warrants
     22,920,000       687,260       458,740       -       1,146,000  
Issuance upon conversion of accrued interest into common stock and 2,490,443 warrants
     2,490,443       99,618       61,454       -       161,072  
Issuance upon exercise of warrants
     7,500,000       192,750       (117,750 )     -       75,000  
Expiration of 4,650,000 warrants
     -       148,033       (148,033 )     -       -  
Net loss for the year
     -       -       -       (1,163,939 )     (1,163,939 )
Balance, December 31, 2007
     190,562,583     $ 24,587,396     $ 1,561,367     $ (27,919,503 )   $ (1,770,740 )


 
 
 
 
The accompanying notes are an integral part of these financial statements.

 
F-4
 
 
DIATECT INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS

   
For the Years Ended
  
          
December 31,
  
   
2007
    
2006
  
Cash Flows from Operating Activities
            
Net loss
   $ (1,163,939 )   $ (1,787,141 )
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation
     63,106       53,068  
Amortization of discount on notes payable
     313,536       48,801  
Amortization of loan costs
     142,455       17,114  
Gain from debt termination
     (1,046,547 )     (734,030 )
Net (gain) loss on disposal of property and equipment
     (21,554 )     6,728  
Issuance of stock for services
     43,250       898,660  
Issuance of warrants for services
     208,409       354,762  
Issuance of stock and warrants for interest
     36,550       -  
Changes in operating assets and liabilities:
                
Accounts receivable
     (215,905 )     (9,471 )
Inventory
     169,201       129,299  
Prepaid expenses and other current assets
     (8,478 )     (5,748 )
Accounts payable
     65,724       336,267  
Accrued liabilities
     (32,687 )     (166,555 )
Accrued interest payable
     273,096       200,389  
Net Cash Used in Operating Activities
     (1,173,783 )     (657,857 )
Cash Flows from Investing Activities
                
Payments for purchases of property and equipment
     (77,372 )     (5,170 )
Proceeds from sale of property and equipment
     160,000       -  
Net Cash Used in Investing Activities
     82,628       (5,170 )
Cash Flow from Financing Activities
                
Proceeds from borrowings under notes payable
     958,871       1,055,628  
Proceeds from exercise of warrants
     75,000       -  
Proceeds from issuance of stock and warrants
     250,000       -  
Cash paid for loan costs
     -       (63,600 )
Principal payments on notes payable
     (111,230 )     (162,000 )
Principal payments on lease obligation
     (25,365 )     -  
Payments for accrued settlement obligations
     (108,000 )     (101,159 )
Payments on checks drawn in excess of cash in bank
     -       (10,481 )
Net Cash Provided by Financing Activities
     1,039,276       718,388  
Net Increase (Decrease) in Cash
     (51,879 )     55,361  
Cash at Beginning of Period
     61,743       6,382  
Cash at End of Period
   $ 9,864     $ 61,743  

 
 
 
 

 
The accompanying notes are an integral part of these financial statements.

 
F-5
 


DIATECT INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS (continued)

 
  For the Years Ended
 
  December 31,
   
2007
    
2006
  
Supplemental Disclosure of Cash Flow Information
            
Cash paid for interest
   $ 54,328     $ 9,113  
                 
Supplemental Schedule of Noncash Investing and Financing Activities
                
Conversion of notes payable into common stock
   $ -     $ 150,000  
Conversion of notes payable and interest into common stock and warrants
     1,307,072       -  
Purchase of equipment under capital lease obligations
     45,599       -  


 
 
 
 
 
 
 
 
 
 
 
 
 

 
The accompanying notes are an integral part of these financial statements.

 
F-6
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Description of Business – Diatect International Corporation (the “Company”) develops and markets non-toxic pesticide products. The Company is located in Heber, Utah and sells its products to both wholesale distributors and retail customers in the United States.

Use of Estimates – The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Estimates may also affect the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates upon subsequent resolution of identified matters.

Business Condition – The Company generated sales of $2,015,484 during the year ended December 31, 2007 compared to $1,031,608 during the year ended December 31, 2006, resulting in a gross profit of $1,240,724 and $623,364, respectively. For the years ended December 31, 2007 and 2006, the Company incurred net losses of $1,163,939 and $1,787,141, respectively, and used $1,173,783 and $657,857, respectively, of cash in its operating activities. At December 31, 2007, the Company had a stockholders’ deficit of $1,770,740 and its current liabilities exceeded current assets by $3,025,079.

The ability of the Company to continue operations is dependent upon obtaining additional financing and being able to generate net profits in the future. Management believes that these events are likely to occur in the near future, even though no assurance thereof can be given. Additional financing arrangements have been arranged and are discussed further in Notes 4 and 6.

Cash and Cash Equivalents - Cash and cash equivalents include all highly liquid investments with original maturities of three months or less.

Credit Risk - The carrying amounts of trade accounts receivable included in the balance sheets represent the Company’s exposure to credit risk in relation to its financial assets. The Company performs ongoing credit evaluations of each customer’s financial condition. The Company has not had any significant credit losses in the past and maintains allowances for doubtful accounts and such allowances in the aggregate did not exceed management’s estimations.

Trade Accounts Receivable and Allowance for Doubtful Accounts - Trade accounts receivable are carried at original invoiced amounts less an allowance for doubtful accounts.

Inventory – The Company’s current inventory consists primarily of raw materials and finished goods and is valued at the lower of cost or market, with cost being determined by the average cost method. Raw materials consist of the various active ingredients that comprise the Company’s products and shipping and packaging materials. When there is evidence that inventory values are less than original cost, the inventory is reduced to market value. The Company determines market value based on current prices and whether obsolescence exists.

Property and Equipment – Property and equipment are stated at cost. Expenditures for normal repairs and maintenance are charged to operations as incurred. The cost of an asset and related accumulated depreciation are also charged to operations when retired or otherwise disposed. Depreciation is computed based on the estimated useful life of the assets using straight-line and accelerated methods. Useful lives for equipment range from 3 to 15 years.  Leasehold improvements are depreciated over the lesser of the remaining term of the lease or the remaining useful life of the asset.


 
F-7
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS

Intangible Assets   – The Company’s intangible assets consist of the labels that are placed on its products and that have been registered as non-toxic insecticide products with the United States Environmental Protection Agency pursuant to the Federal Insecticide, Fungicide and Rodenticide Act. The Company recorded these labels at cost; however, it impaired the value thereof by $2,869,570 in 2003. During 2004 and for the first 6 months of 2005, the Company amortized the unimpaired value over an estimated useful life of 7 years using the straight-line method. In July 2005, the Company concluded that the estimated useful life of the labels was indefinite and will henceforth subject the labels to impairment if and when appropriate. The Company has not impaired the value of the labels since making this determination.

Long Lived Assets – Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Fair Value of Financial Instruments – Due to the short maturity of trade receivables and current liabilities, including trade payables, the carrying amount approximates fair value. The carrying amount reported for notes payable approximates fair value and interest rates on these notes approximate current interest rates given the current business condition of the Company.

Revenue Recognition – The Company manufactures and sells non-toxic pesticides to retailers, agricultural concerns and directly to the public through a Company website. Revenue from the sale of its products when (a) persuasive evidence of an arrangement exists, (b) delivery has occurred and no significant obligations remain, (c) the sales price is fixed and determinable and (d) collection is determined to be probable. Sales credits and price concessions are treated as a reduction of revenue. Product returns are permitted, but historically have occurred within a short period after the sale and are estimated and recognized as a reduction of revenue at the time of the sale.

Shipping and Handling Costs – Shipping and handling costs are billed to customers and are recorded as sales and the associated costs are included in cost of goods sold.

Marketing and Selling Expenses – Marketing and selling expenses include the salaries and wages of its in-house sales force, advertising, product samples and promotional expenses. The Company designs and prints literature and marketing materials for its products, as well as promotional materials used in trade shows.
 
Income Taxes – No income taxes have been paid or accrued for Federal income tax purposes because the Company has had no net taxable income since inception. In accordance with SFAS 109, the Company recognizes the amount of income taxes payable or refundable for the current year and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement amounts of certain assets and liabilities and their respective tax bases. Deferred tax assets and deferred liabilities are measured using enacted tax rates expected to apply to taxable income in the years those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance to the extent that uncertainty exists as to whether the deferred tax assets will ultimately be realized.

Basic and Diluted Loss Per Share   – Basic loss per share is computed by dividing the net loss by the weighted average number of shares outstanding during the period presented.  The potentially dilutive common shares in the following table were not included in the computation of diluted loss per share as their effect would have been anti-dilutive.

 
F-8
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS

   
December 31
  
   
2007
    
2006
  
Outstanding warrants
     74,410,444       32,150,000  
Convertible promissory notes convertible into:
                
Common stock
     6,500,000       15,900,000  
Warrants
     1,500,000       15,900,000  
Total potentially dilutive common shares
     82,410,444       63,950,000  


Share Based Payments – The Company accounts for stock-based compensation expense in accordance with Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment” (SFAS 123R). Under SFAS 123R, stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. As of December 31, 2007 and 2006, the Company has no unvested options and did not grant any options to employees during the years ended December 31, 2007 and 2006. For future stock awards, the Company intends to estimate the fair value of each stock-based award on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield.

Recently Enacted Accounting Standards – In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which extended the effective date for certain nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.  The Company does not expect the adoption of SFAS No. 157 to have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS No. 159 to have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141(R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements, consolidated net income shall be adjusted to include the net income attributed to the non-controlling interest and consolidated comprehensive income shall be adjusted to include the comprehensive income attributed to the non-controlling interest. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company has not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.




 
F-9
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 2 – INVENTORY

Inventory is comprised of the following:

   
December 31,
  
   
2007
    
2006
  
Raw materials
   $ 32,836     $ 202,291  
Finished goods
     33,852       33,598  
Total Inventory
   $ 66,688     $ 235,889  

 
NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Expenditures for normal repairs and maintenance are charged to operations as incurred. The cost of an asset and related accumulated depreciation are also charged to operations when retired or otherwise disposed. Depreciation is computed based on the estimated useful life of the assets using straight-line and accelerated methods. Depreciation expense for the years ended December 31, 2007 and 2006 was $63,071 and $53,068, respectively. The components of property and equipment are as follows:

   
Estimated
            
   
Useful Life
  
December 31,
  
   
in Years
  
2007
    
2006
  
Computer equipment
  
3 to 5
   $ 89,774     $ 81,239  
Office furniture and equipment
  
5
     48,024       31,432  
Manufacturing equipment
  
3 to 10
     256,169       245,610  
Leasehold improvements
  
15
     4,935       -  
Total Property and Equipment
         398,902       358,281  
Less: Accumulated depreciation
         (140,673 )     (268,275 )
Net Property and Equipment
       $ 258,229     $ 90,006  



The Company owns association placer diatomaceous earth mining claims and placer diatomaceous earth mining claims, in the State of Oregon. The Company has not engaged in any mining operations and does not anticipate undertaking mining operations in the near future. The mining claims are carried at no cost.





 
F-10
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 4 – NOTES PAYABLE
 
Notes payable are comprised of the following:
 
   
December 31,
  
   
2007
    
2006
  
Revolving line of credit with financial institution
   $ 49,807     $ 49,436  
Accounts receivable line of credit
     185,000       -  
Cash advances from shareholder, unsecured
     -       97,000  
Unsecured 10% notes payable to investors, in default
     292,250       306,980  
Unsecured 12% notes payable to investors, in default
     40,000       50,000  
Unsecured 15% notes payable to investors, in default
     36,500       286,500  
Unsecured 12% convertible promissory notes payable, net of unamortized discount of $135,855 and $191,094, respectively
     189,145       603,906  
Unsecured 5% notes payable to shareholders, due in 2008
     1,220,937       1,220,937  
Unsecured 5% notes payable to vendors, due in 2008
     564,626       564,626  
Total Notes Payable
     2,578,265       3,179,385  
Less: Current portion
     -       1,393,822  
Long-Term Notes Payable
   $ 2,578,265     $ 1,785,563  


Revolving Line of Credit –The Company currently has unsecured, revolving credit notes with a financial institution totaling $49,807. The line of credit bears interest at 9.0% per annum, is due on demand and requires monthly interest only payments. The line is unsecured and is personally guaranteed by a former director of the Company. In July 2006 in conjunction with the issuance of the guarantee, the Company issued the former director 500,000 shares of common stock valued at $8,500 or $0.017 per share, representing the closing market price on the date of issuance.

Accounts Receivable Line of Credit – On September 20, 2007 the Company entered into an accounts receivable loan agreement with Aspen Opportunity Fund, L.P. for advances up to $500,000 in $5,000 increments, subject to maintaining a borrowing base of 80% of eligible accounts receivable as defined in the agreement. The Note bears interest at a rate of 12.0%, is secured by eligible accounts receivable as defined in the agreement, requires monthly interest payments and is due on September 30, 2009.  Mandatory prepayments of principal are required in the event that the eligible borrowing base falls below amounts advanced under the agreement.  In conjunction with the loan agreement, the Company issued a five-year warrant to purchase 4,000,000 shares of the Company’s common stock at an exercise price of $0.075 per share. The warrant was valued at $169,294 and was recorded as prepaid expenses and other assets and amortized over the life of the loan.  A total of $23,304 and $0 was recorded as amortization expense for the years ended December 31, 2007 and 2006.

The estimated fair value of the above warrant was calculated using the Black Scholes method and the following assumptions.

 
F-11
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS

Closing price for the Company's common stock
   $ 0.05  
Estimated volatility
     135%  
Risk free interest rate
     4.35%  
Expected dividend rate
     0%  
Expected life, in years
     5.0  
 
The shares underlying the warrants have certain registration rights and the Company is required to file a registration statement no later than March 31, 2008.  Should the Company fail to file the registration statement by the required date, the registration rights agreement stipulates penalties of 1% of the purchase price per month as liquidated damages.  Should the Company be unable to have the registration statement declared effective within 120 days, a penalty of 1% per month of the total warrant exercise price of $300,000 will be assessed.

Cash Advances from Shareholder – A shareholder advanced $97,000 of cash to the Company. The cash advances are unsecured and have no stated maturity date.  During 2007, the Company was able to settle these advances with no payment from the Company. As a result, the Company recognized a gain from settlement of debt of $97,000 in the accompanying statement of operations for the year ended December 31, 2007.

Unsecured Notes Payable – The Company has borrowed money from several entities, including shareholders of the Company, with various terms including demand promissory notes. The notes are unsecured and bear interest at rates from 5% to 15% payable at different times.  During the year ended December 31, 2007, a total of $261,000 of these notes plus the related accrued interest of $415,492 were settled with no cash payments by the Company. As a result, the Company recognized a gain from settlement of debt of $676,492 related to these notes and the related accrued interest for the year ended December 31, 2007.

Convertible Promissory Notes Payable – In June 2006, the Company commenced a private placement offering of convertible promissory notes and warrants through Pointe Capital, LLC (“Pointe”). From June through December 31, 2006, the Company issued $795,000 of convertible promissory notes that bear interest at 12% per annum, are unsecured and are due one year from the date of issuance. The effective interest rates of the notes including computed discounts issued in 2006 range from 12% to 39%. The notes are convertible into units at $0.05 per unit, each unit consisting of one share of common stock and one warrant to purchase one share of common stock at $0.075 per share for a period of three years from the date of issuance. Thus, the notes are convertible into an aggregate of 15,900,000 shares of common stock and warrants to purchase an additional 15,900,000 shares of common stock. The Company has the option to redeem the notes at their face value plus accrued interest if the average market price of the Company’s common stock is $0.10 per share for a period of twenty consecutive days. In conjunction with this offering, the Company paid Pointe loan fees of $63,600 that were capitalized and included in prepaid expenses and other assets. The loan costs are being amortized over the terms of the respective notes.  A total of $46,486 and $17,114 of amortization was recorded for the year ended December 31, 2007 and 2006, respectively.

In 2007, the Company issued an additional $533,500 of convertible promissory notes on the same terms. The notes are convertible into an aggregate of 10,670,000 shares of common stock and warrants to purchase an additional 10,670,000 shares of common stock. Based upon the fair value of the Company’s common stock on the dates the notes were issued, the investors received a beneficial conversion option of $239,895 during 2006 and $64,421 during 2007. The beneficial conversion option was computed as the difference between the fair value of the common stock issuable upon conversion of the promissory notes and the proceeds allocated to the common stock portion of the conversion option. The recognition of the beneficial conversion option resulted in a discount to the notes payable that is being amortized over the term of the convertible notes using the effective interest method, or through the date of conversion, and resulted in the recognition of $251,993 and $48,801 of interest expense during the years ended December 31, 2007 and 2006, respectively.


 
F-12
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS

During the second quarter of 2007, $107,500 of principal on the convertible notes was repaid in cash. During the fourth quarter of 2007, $1,146,000 of principal on the convertible notes was converted into 22,920,000 shares of common stock and 22,920,000 three-year warrants with an exercise price of $0.075. In addition, the holders of the notes converted $124,522 in accrued interest into 2,490,444 shares of common stock, with a fair value of $99,618 based on the closing market price of $0.04 as of the date of conversion, and 2,490,444 three-year warrants to purchase common stock at an exercise price of $0.075 per share with an aggregate fair value of $61,454. The estimated fair value of the warrants issued in conjunction with the conversion of accrued interest was calculated using the Black-Scholes option pricing model and the following weighted-average assumptions: market price of common stock – $0.04 per share; estimated volatility – 120%; risk-free interest rate – 3.35%, expected dividend rate – 0% and expected life – 3.0 years. The excess of the fair value of the common stock and the warrants over the accrued interest was recognized as additional interest expense in the amount of $36,550.

In July 2007, the Company issued 12% convertible promissory notes for $250,000 and warrants to purchase 5,000,000 shares of common stock at an exercise price of $0.075 for a period of three years to Aspen Opportunity Fund LP in exchange for proceeds of $250,000. The notes are convertible at $0.05 per share into 5,000,000 shares of common stock. The estimated fair value of the warrants issued with the promissory notes of $138,291 was calculated using the Black-Scholes option pricing model and the following assumptions: market price of common stock – $0.04 per share; estimated volatility – 135%; risk-free interest rate – 4.56%, expected dividend rate – 0% and expected life – 3.0 years. The beneficial conversion option was computed as the difference between the fair value of the common stock issuable upon conversion of the promissory notes and the proceeds allocated to the common stock portion of the conversion option.

The proceeds were allocated between the promissory note and the warrants based upon their relative fair values and resulted in allocating $56,124 to the promissory notes, $89,038 to the warrants and $104,838 to the beneficial conversion option. The resulting $193,876 discount to the note payable is being amortized over the term of the convertible notes using the effective interest method and resulted in the recognition of $61,544 of interest expense during the year ended December 31, 2007.

La Jolla Cove Investors – During December 2002, the Company entered into a convertible debenture agreement with La Jolla Cove Investors, Inc. (“La Jolla Cove”), who at the time was the named as an underwriter for a planned public offering of the Company’s common stock. La Jolla Cove advanced the Company $150,000 in 2002 and $100,000 in 2003, which advances were evidenced by a convertible debenture agreement that was to be repaid out of a portion of the proceeds from the public offering. On July 12, 2004, La Jolla Cove filed a complaint in the Superior Court of California, County of San Diego, naming the Company as the defendant. La Jolla Cove contended that the Company breached its contract with La Jolla Cove by failing to honor the convertible debenture agreement. La Jolla Cove claimed damages in the amount of $406,990 plus interest and penalties, which resulted in part from the $150,000 of advances to the Company in 2002 and $100,000 in 2003. The Company withdrew the registration statement for the public offering on November 18, 2004 and claimed that La Jolla Cove made unreasonable demands on the Company with respect to the registration statement. During 2005, the Company made principal payments on the convertible debenture of $7,763. The adjusted carrying amount of the convertible debenture was $278,500 at December 31, 2005.  In June 2006, the Company reached a settlement with La Jolla Cove under which the Company paid La Jolla Cove $140,000 through July 2006 in full satisfaction of all amounts due under the convertible debenture and related interest and penalties and recognized a gain from termination of debt in the amount of $138,500 in the accompanying statement of operations for the year ended December 31, 2006.

Bruce L. Shannon Attempted Bankruptcy Action – In June 2005, three note holders, Bruce L. Shannon, Brent Larson and the Robinson Family LLC, filed suit in Federal Bankruptcy Court to force the Company into a Chapter 7 receivership. In February 2006, the Company filed a damage suit against those note holders. In April 2006, a settlement was reach whereby the note-holders’ bankruptcy suit was dismissed and the Company was awarded damages through the relief of $248,175 of notes payable and $121,681 of related accrued interest due to the note holders, the return of 207,275 shares of the Company’s common stock by the note holders, and the payment of $10,000 of legal fees for the Company. In conjunction with the settlement, the Company recognized a gain from termination of debt in the amount of $384,623 in the accompanying statement of operations in the second quarter of 2006.


 
F-13
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS

Bridge Financing – In February 2006 the Company entered into a one year non-exclusive Financial Advisory and Investment Banking Agreement (“Investment Banking Agreement”) with Pointe as more fully described in Note 6. Pursuant to the Investment Banking Agreement, the Company received gross proceeds of $150,000 in the form of unsecured convertible notes.  These notes were convertible into the Company’s common stock at a price of $0.01 per share, representing the market price on the date of issuance. No beneficial conversion option was recognized on upon the issuance of these notes. In March and April, 2006, the $150,000 notes were converted into an aggregate of 15,000,000 shares of the Company’s common stock.


NOTE 5 – SETTLEMENT OBLIGATIONS AND LITIGATION CLAIMS

The Company has obligations due to creditors that arose from cash loans and the receipt of goods or services. The Company is in default in its payment of each of these obligations. The obligations are unsecured and are currently due. Certain of the obligations are in dispute as further described below. The obligations have not been reduced by any amounts that may be compromised by the creditors in the future, but include all amounts due and include default judgments obtained by the creditors. The accrued settlement obligations include the following:

   
December 31,
  
   
2007
    
2006
  
             
Complete Packaging, LLC d.b.a. Compax
   $ -     $ 69,622  
Litho-Flexo Graphics, Inc.
     63,283       63,283  
Williams & Webster
     -       54,564  
Xerox
     -       17,590  
National Bulk
     -       20,418  
Downs and Parkinson
     25,904       33,904  
Total
   $ 89,187     $ 259,381  


Complete Packaging, LLC d.b.a. Compax – On October 17, 2003, Complete Packaging, LLC, doing business as Compax, filed a complaint in the Third District Court of Salt Lake County, State of Utah, naming the Company as the defendant. Compax contended that the Company failed to make payment of a trade payable that, with interest and costs amounted to $323,892, which amount continued to accrue interest from November 30, 2004. The complaint concluded in Compax obtaining a judgment against the Company. During 2005, the Company entered into a settlement agreement with Compax that required the Company to make three monthly payments of $25,000 through May 2005 and a lump sum payment of $145,000 in June 2005. As a result, the Company accrued a $220,000 settlement obligation liability at December 31, 2004. The Company made two of the monthly payments but failed to make the remaining payments due under the terms of the settlement agreement. In July 2006, the Company and Compax reached a further agreement dated June 6, 2006 under which Compax agreed to accept payment of $150,000 in total satisfaction of the Company’s obligation. The Company paid $75,000 of this obligation during 2006.  The remaining amount was paid at prescribed intervals with the final payment made on September 1, 2007, which resulted in the Company being released from the judgment.


 
F-14
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS


Litho-Flexo Graphics, Inc. – On May 23, 2003, Litho-Flexo Graphics, Inc. filed a complaint in the Fourth District Court in and for Wasatch County, State of Utah, naming the Company as the defendant. Litho-Flexo contended that the Company failed to make payment of a trade payable that, with interest and costs amounted to $92,478. The Company contended that the packaging labels purchased from Litho-Flexo were defective and could not be used in the packaging of the Company’s products. The Company filed a counterclaim claiming in excess of $100,000 for damages resulting from the use of the defective labels. The Company accrued a $72,625 accrued settlement obligation liability at December 31, 2004. During the year ended December 31, 2005, the Company paid $9,342 to the vendor, which decreased the recorded accrued settlement obligation liability to $63,283 at December 31, 2007 and 2006. No resolution has been reached under the claims, which continue to be in litigation.

Williams and Webster – The Company reached a settlement on May 24, 2007 resulting in no amount being due from the Company and recognized a gain from termination of debt of $54,564 in the accompanying statement of operations.

Xerox – In December 2007, the Company negotiated a settlement for all amounts due, paid $10,000 and recognized a gain from termination of debt of $7,590 in the accompanying statement of operations.

National Bulk – On May 4, 2007 the Company negotiated a settlement for all amounts due, paid $15,000 and recognized a gain from termination of debt of $5,418 in the accompanying statement of operations.

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Administrative Proceeding – U.S. Securities and Exchange Commission

One September 27, 2007, the Commission entered an order instituting a proceeding under Section 12(j) of the Securities Exchange Act of 1934 (“1934 Act”) naming the Company as a respondent.  This administrative proceeding has file no. 3-12843. The administrative proceeding sought to revoke the Company’s registration under the Securities Exchange Act of 1934 (“Exchange Act”) under which the Company files quarterly and annual financial reports.  The Company had not filed nine quarterly and annual financial reports.  All of these reports have been filed as of January 2, 2008.

On January 30, 2008, Administrative Law Judge James Kelly issued an Initial Decision. This decision denied the Division of Enforcement’s Motion for revocation and granted the Company’s motion for summary disposition. The Judge found that the Company violated rules promulgated under the Exchange Act which required the filing of annual and quarterly reports.  In the decision the Judge expressly stated that the sanctions of revocation or trading suspension would not be imposed as such sanctions were not appropriate or necessary and denied the Division’s motion for revocation.  The initial decision dismissed the administrative proceeding. The parties had 21 days to appeal which has expired.  Neither party appealed and on March 6, 2008 the Commission issued a notice making the Initial Decision the Final Decision.


 
F-15
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS


U.S. Securities and Exchange Commission ,  The U.S. Securities and Exchange Commission in the U.S. District Court, District of Utah, Central Division having Case No.: 2:07cv00709.  The caption on the Complaint is Securities and Exchange Commission v. Diatect International Corporation et al.   The four defendants are the acting president who is also a director, a former officer and director, a former director, and the Company.   The allegations of the Complaint claim that the Defendants engaged in a transaction in 2003 involving the sale of mining claims located in the State of Oregon which transaction was improperly recorded on the Company’s financial statements causing the overstatement of revenues and assets.   The allegations of the Complaint also claim that certain revenues were improperly recorded in the Company’s 2002 financial statements because the sales were consignment sales and not actual sales.   The Complaint alleges various violations of the federal securities laws and regulations promulgated thereunder including violations of the anti-fraud provisions and violations of regulations pertaining to periodic reports filed by the Company with the SEC in 2003 and 2004.   On May 17, 2004 the Company issued restated financial statements as of December 31, 2003.  On April 14, 2005, the Company issued restated financial statements as of December 31, 2004.  These filings restated the sale of the mining claims and revenues for those years. The Complaint seeks injunctive action against the defendants including the Company and seeks fines from the three individual defendants, and from two individual defendant’s disgorgement of stock sale proceeds and bars as an officer and director. In February, 2008 a scheduling conference was held and a tentative trial date has been set for January, 2010. The Company intends to vigorously defend the allegations of the Complaint.

The Company had a verbal lease agreement for its current office and production facilities based in Heber, Utah with annual rent payments due of $120,000. The Company has not made any payments related to this agreement in fiscal 2006. During the fourth quarter of 2006, the land and building where the Company maintains its offices and manufacturing facility was sold by a shareholder to Aspen Capital Management, LLC (“Landlord”) an entity that is affiliated with a former director of the Company. In conjunction with this sale, $117,060 of unpaid rent was forgiven. Commencing on January 1, 2007, the Company entered into a five year lease with the Landlord, requiring monthly rental payments of $12,000 plus taxes and maintenance. The lease is renewable for two additional 5 year terms with 10% increases of the rental payments to $13,200 per month and $14,520 per month, respectively.

Future minimum lease payments over the next five years ending December 31 are as follows:


2008
   $ 144,000  
2009
     144,000  
2010
     144,000  
2011
     144,000  
2012
     158,400  



In February 2006, the Company entered into a one year Investment Banking Agreement with Pointe. The terms of the Investment Banking Agreement required that the Company pay $25,000 upon completion of $150,000 in bridge financing. The Company subsequently received $150,000 under the terms of a convertible promissory note that was arranged by Pointe and the Company made the $25,000 payment to Pointe. Additionally, the Company issued Pointe 8,000,000 warrants to purchase common stock at $0.01 per share for a period of 3 years. The warrants issued pursuant to this agreement were valued at $125,892. This amount was recorded as a prepaid expense and is being amortized over the one-year term of the agreement. The Company further agreed to pay Pointe a 7% commission and a 1% unaccountable expense allowance upon receipt of financing brought to the Company by Pointe, agreed to pay Pointe a fee equal to 5% of the value of the transaction as defined in the agreement in the event of a merger or acquisition of the Company.



 
F-16
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS

In February 2006, the Company entered into a renewable two-year non-exclusive engagement letter ( the “Engagement Letter”) with Aspen Capital Partners, LLC, an entity that employs a person that was on the board of directors of the Company at that time for consulting services in a variety of areas relating to financial, strategic and developmental growth of the Company. The financial terms of the Engagement Letter required a non-refundable retainer fee of $25,000, the issuance of 2,500,000 shares of common stock and payments of $15,000 per month for a two-year period. Additional provisions of the Engagement Letter provide that the Company issue 8,000,000 warrants to purchase common stock at $0.01 per share for a period of five years and, upon the completion of the $150,000 bridge financing, the Company issued 4,500,000 warrants to purchase common stock at $.01 per share for a period of five years. The 8,000,000 warrants issued pursuant to the Engagement Letter were valued at $125,892. This amount was recorded as a prepaid expense and will be amortized over the two year term of the agreement. The 4,500,000 warrants were valued at $76,410 and were recorded as interest expense. The agreement also provides for the issuance of 5,000,000 warrants to purchase common stock at $0.05 per share for a period of five years upon the completion of one million dollars of funding. These warrants were issued in May 2007.  It is the intent of the Company to renew this agreement.

On May 22, 2007 the Company entered into a Master Lease Line with Gulf Pointe Capital, LLC (“Gulf Pointe”).  The terms of the lease line provide a credit limit of $500,000 that can be used for various new and used tier-one production, material handling, computer, technology and fixture related equipment. Upon entering into the lease agreement, the Company sold certain manufacturing, computer and office furniture and equipment to Gulf Pointe for $160,000 and leased the assets back from Gulf Pointe under the terms of a three-year lease agreement. The assets sold had a net book value of $51,152.  The resultant gain on sale of $108,848 was deferred and is being recognized over the three-year term of the capital lease obligation. During the year ended December 31, 2007, the Company recognized $22,043 of this gain. In connection with entering into the lease for the equipment, the Company recognized a $160,000 capital lease obligation.  The Company has utilized an additional $45,599 of this lease financing facility during 2007.

The capital lease obligations bear interest at a rates ranging from 21.5% to 26.5% and require payments of principal and interest over the 36-month term of the leases. The assets acquired under the capital lease obligation are being depreciated over the three-year term of the lease. The following is a schedule by years of future minimum lease payments under the capital leases together with the present value of the net minimum lease payments as of December 31, 2007:

Years Ending December 31:
      
2008
   $ 95,002  
2009
     95,002  
2010
     48,824  
Total minimum lease payments
     238,828  
Less:  Amount representing interest
     (58,595 )
Present value of minimum lease payments
     180,233  
Less: Current portion
     (60,021 )
Capital lease obligations, long-term
   $ 120,212  



In conjunction with the Master Lease Line, the Company issued a five-year warrant to purchase 10,000,000 shares of common stock at an exercise price of $0.05 per share.  A total of 2,500,000 of these warrants vested upon the execution of the Master Lease Line.  The remaining 7,500,000 warrants vest pro-rata upon the funding of the credit limit of $500,000.  Based upon the estimated total funding that will take place under the Master Lease Line, the Company has estimated that it is probable that 5,583,979 of the warrants will vest and have been valued at $204,722. That amount has been recorded as deferred loan costs and is being amortized to interest expense over the term of the respective capital lease obligations. A total of $72,665 was recorded as amortization expense during the year ended December 31, 2007.

The Company has agreements with three vendors to issue three year warrants to purchase of an aggregate of 4,500,000 shares of common stock at a price of $0.05 per share upon the achievement of certain performance milestones as defined in the respective agreements.  None of the contractually defined milestones has been achieved and no warrants have been issued pursuant to these agreements.


 
F-17
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS


The Company is party to certain litigation from time to time regarding trade accounts payable and certain notes payable.  The amount surrounding the litigation has in each case been properly recorded in the financial statements.

The production of pesticides is subject to complex environmental regulations. As of the date of these financial statements and the date of this report, the Company is unaware of any significant pending environmentally related litigation or of any specific past or prospective matters involving environmental concerns, which could impair the marketing of its products.


NOTE 7 - COMMON STOCK

During 2007, the Company issued 500,000 shares valued at $20,000 or $0.04 per share, 250,000 shares of common stock valued at $7,500 or $0.03 per share as compensation to employees, 100,000 shares of common stock as compensation to an employee valued at $4,500 or $0.045 per share and 250,000 shares to a vendor for services valued at $11,250 or $0.045 per share. The value represents the market price of the Company’s common stock on the dates of issuance.  An aggregate of 22,920,000 shares of common stock were issued upon the conversion of $1,146,000 of 12% convertible notes and 2,490,443 shares of common stock valued at $99,618 or $0.04 per share based on the closing market price on the date of issuance.  In addition, 7,500,000 shares of common stock were issued upon the exercise of warrants for cash of $75,000 or $0.01 per share.

The Company also issued 5,000,000 shares of common stock and three-year warrants to purchase 5,000,000 shares of common stock for proceeds of $250,000.  The proceeds were allocated to the warrants based upon their fair value of $123,383, and the balance of the proceeds of $126,617 was allocated to the shares of common stock. The fair value of the warrants, determined using the Black-Scholes Option Pricing Model, was calculated using the following assumptions: risk free interest rate of 3.35%, expected dividend yield of 0%, expected volatility of 120% and an expected life of 3 years.

During 2006, the Company issued 15,000,000 shares of its common stock at a conversion price of $0.01 per share for the conversion of the bridge financing of $150,000, 2,500,000 shares for employee bonuses valued at $70,000 or $0.028 per share, 9,460,350 shares issued as compensation to our chief executive officer valued at $189,207 or $0.02 per share and 6,000,000 shares valued at $156,000 or $0.026 per share as officer bonus, 500,000 shares to a director as compensation for his guarantee of a line of credit of the Company valued at $8,500 or $0.017 per share, 2,500,000 shares for professional services valued at $45,000 or $0.018 per share and 15,154,068 shares for professional fees valued at $394,006 or $0.026 per share and 1,780,000 shares valued at $35,948 to vendors in settlement of expenses and accrued liabilities.  All prices were the market price as of the date of issuance.


NOTE 8 - STOCK WARRANTS

In May 2007, the Company issued five-year warrants to purchase 5,000,000 shares of common stock at $0.05 per share upon the completion of one million dollars of funding pursuant to the Engagement Letter with Aspen Capital Partners, LLC.  The warrants were valued at $127,357.

In May 2007, and as further described in Note 6, the Company issued five-year warrants to purchase 10,000,000 shares of common stock at an exercise price of $0.05 per share to Gulf Pointe in connection with a lease line of credit.  The value of the 5,583,979 warrants that are expected to vest was $204,722.  A total of 4,416,021 warrants remain unvested as of December 31, 2007. Under the terms of the warrants, Gulf Pointe has the option to pay the exercise price to the Company indirectly repurchasing shares from Gulf Pointe at the market price of the Company’s common stock on the day prior to the exercise date.


 
F-18
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS


In July 2007 and as further described in Note 4, the Company issued three-year warrants to purchase 5,000,000 shares of common stock at an exercise price of $0.075 per share to Aspen Opportunity Fund, L.P. in connection with a 12% convertible note payable.

In September 2007, the Company issued five-year warrants to purchase 4,000,000 shares of the Company’s common stock at an exercise price of $0.075 per share pursuant to the accounts receivable loan agreement with Aspen Opportunity Fund, L.P. as discussed in Note 4. The warrants were valued at $169,294. Under the terms of the warrants, the holder of the warrants has the option to pay the exercise price to the Company indirectly repurchasing shares from the holder at the market price of the Company’s common stock on the day prior to the exercise date.

During 2007, the Company issued  three-year warrants to purchase 22,920,000 shares of common stock with an exercise price of $0.075 on the conversion of $1,146,000 of 12% notes payable and issued 2,490,444 three-year warrants with an exercise price of $0.075 per share on the conversion of $124,522 of accrued interest as discussed in Note 4.  The warrants were recorded at their fair value of $61,454.

In November 2007, the Company issued three-year warrants to purchase 5,000,000 shares of common stock at an exercise price of $0.075 in conjunction with an issuance of 5,000,000 shares of common stock for cash as discussed in Note 7.

During February, 2006, the Company issued five-year warrants to purchase 8,000,000 shares of its common stock at an exercise price of $0.01 per share pursuant to the Engagement Letter as discussed in Note 6. During the second quarter of 2007, Aspen Capital Management, LLC exercised warrants to purchase 7,500,000 shares of common stock with an exercise price of $0.01 per share resulting in proceeds of $75,000 to the Company pursuant to these warrants.

In addition, the Company issued three-year warrants to purchase 8,000,000 shares of its common stock to Pointe pursuant to the investment banking agreement as discussed in Note 6. These warrants were each valued at $125,892 and were recorded as prepaid expenses.  The values are being amortized to general and administrative expenses over the terms of the respective agreements of 2 years and one year, respectively. Also, the Company pursuant to the Engagement Letter issued five year warrants to purchase an aggregate of 4,500,000 shares of its common stock at an exercise price of $0.01 per share valued at $76,410.

In March, 2006 the Company issued three-year warrants purchase 7,000,000 shares of its common stock at an exercise price of $0.01 per share a to a consultant to the Company for marketing services.  The warrant was valued at $116,935 and was charged to marketing and selling expense in the accompanying statement of operations for the year ended December 31, 2006.

The estimated fair values of the warrants issued under the Engagement Letter, the investment banking agreement and for marketing services as discussed above were calculated using the Black Scholes method and the following assumptions:


Closing price for the Company's common stock
 $0.018  to $0.02
Estimated volatility
 130% to 153%
Risk free interest rate
4.77%
Expected dividend rate
0%
Estimated life
3 to 5 years



 
F-19
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS


Prior to December 31, 2005, the Company issued warrants to purchase 4,650,000 shares of common stock at prices ranging from $0.20 to $0.50 per share.  These warrants expired unexercised in May, 2007.

The following summarizes the outstanding warrants as of December 31, 2007:

Exercise Price
  
Warrants Outstanding
  
Weighted-Average Remaining Contractual Life (Years)
  
Number Exercisable
$0.01
  
20,000,000
  
1.7
  
20,000,000
$0.05
  
15,000,000
  
4.4
  
10,583,979
$0.075
  
39,410,444
  
3.0
  
39,410,444
 
 
74,410,444
      
69,994,423

 
NOTE 9 – INCOME TAXES

Income taxes are provided based upon the liability method of accounting pursuant to SFAS No. 109, “Accounting for Income Taxes.”  Under this approach, deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the "more likely than not" standard imposed by SFAS No. 109. The tax effects of temporary differences and carry forwards which give rise to the deferred income tax assets as of December 31, 2007 and 2006 are as follows:

December 31,
  
2007
    
2006
  
Net Operating Loss Carryforwards:
            
Federal
   $ 8,852,470     $ 8,505,817  
State
     1,347,277       1,316,690  
Allowance for doubtful accounts
     6,198       9,473  
Deferred gain on capital lease
     32,379       -  
Total deferred income tax assets
     10,238,324       9,831,980  
Valuation allowance
     (9,902,544 )     (9,601,838 )
Deferred income tax liability - intangible assets
     (335,780 )     (230,142 )
Net Deferred Income Tax Assets
   $ -     $ -  
 

A reconciliation of the income tax expense from continuing operations and the amount that would be computed using statutory federal income tax rates is as follows:
 
Years Ended December 31,
  
2007
    
2006
  
Federal tax benefit at statutory rate (34%)
   $ (395,739 )   $ (607,628 )
State tax benefit, net of federal effect
     (38,410 )     (58,976 )
Non-deductible and other items
     133,443       20,233  
Change in valuation allowance
     300,706       646,371  
Provision for Income Taxes
   $ -     $ -  



 
F-20
 

DIATECT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS


NOTE 11 – SUBSEQUENT EVENTS

On January 4, 2008, the Company issued 500,000 shares of common stock valued at $37,500 or $0.075 per share to certain employees as compensation.  In addition, the Company issued 140,000 shares of common stock valued at $10,500 or $0.075 per share to a former director for reimbursement of certain expenses.  The price was based on the closing market price as of that date.

In January 2008, the Company issued 250,000 shares of common stock upon the exercise of warrants.  The Company received cash proceeds of $2,500 or $0.01 per share.

 
 
 
 
 
 
 
 
 
 
 
 
 

 
F-21
EX-31.1 2 diatect10ksb123107ex31-1.htm RULE 13A-14(A)/15D-14(A) CERTIFICATION OF DAVID ANDRUS, PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER Unassociated Document
EXHIBIT 31.1
 
CERTIFICATION
 
I, David Andrus, certify that:
 
1. I have reviewed this Form 10-KSB of Diatect International Corporation;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
 
4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) for the small business issuer and have:
 
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
 
5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
 
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
 
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

March 18, 2008
/s/ David H. Andrus          
 
David H. Andrus
 
Principal Executive Officer
 
Principal Financial Officer

 
 
 
 
 

 
 EX-32.1 3 diatect10ksb123107ex32-1.htm CERTIFICATION OF DAVID ANDRUS, PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER, PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Unassociated Document
EXHIBIT 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Diatect International Corporation (the "Company") on Form 10-KSB for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Andrus, Principal Executive Officer and Principal Accounting Officer, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



March 18, 2008
/s/ David Andrus                 
 
David S. Andrus
 
Principal Executive Officer
 
Principal Financial Officer
 
 
 
 
 
 
 
 
 
 

 
 GRAPHIC 4 bakertillylogo1.jpg begin 644 bakertillylogo1.jpg M_]C_X``02D9)1@`!`0```0`!``#_VP!#``$!`0$!`0$!`0$!`0$!`0$!`0$! M`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0'_ MVP!#`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0$! M`0$!`0$!`0$!`0$!`0$!`0$!`0$!`0'_P``1"``C`'$#`2(``A$!`Q$!_\0` M'0```00#`0$```````````````4&!P@$"0H#`O_$`"80``(#``,``00"`P$` M``````0%`P8'`0((``D4%182$PH1%R/_Q``4`0$````````````````````` M_\0`&1$!``(#``````````````````'P$5&1_]H`#`,!``(1`Q$`/P#OP++% M`%)..)'"""'F+,,+FC&%$%&C[3$$DD3=ND,`\$/3O+--+WZ1Q1].W?OVZ]>O M//'*/]6C_*F\M^+^'N.^->M4]=^D1>2ES%\O<3$^>%/*?MQ&OK7J+)1-60+(I(!5)MKO ME:#YAEGZ$]XC(J5::W^2CXFCX[Q]&/)76+^B>)K5IEL>K)Q:]G&5]_4VMZI9`8_QH48M-QW";')/TXC.@$'(T`JM+8U9C M.;O9KT`&;-+P')M3/\J/ZS>P6:O4>F6G/.^E-7LPN?TW.O.M7M/.J/+"0H!7 MYHRK)PUDN+)KQR+/QE_&C7Z,7J[ZY_K'>%S'U MMKV84O,%%WLI^D8AIN.YCEFLAT=17NP?>K4S-5@-:W<"Q<7ABOAF>Z"O65VF MJ$34DA[J4]G1+U/.S8/\=OW;[;]KZ!H?DKPY8?II^0FUX5&YIT]+:)W2V#-D MBA8HCE>?J_%BN.Q2V5^V`8W`!`G5'H*HU;#U*.Y#`*H7/SI]\A?3C^CS]%J_ M4ZE:W7'>T^N>V>0[8\]/ZQD3S48:W7);W5\J.O-45UI1<4>'5<#2;W7JMV=< M@3?,-ES?"W5<[4SIZ,6W)!7>W7NV[U&=+B]RW+M:[4P=_: M4I/4:V?<;80Y>%J@B^A,JT(X]ER"JX"=>_I#S]Q&DGCVK+S!+%W?<*3UMXKK M1;-#5D;NR64\ADN8%`+E"%/7'!+=TR)$4KY1>@)1L3`L(4A=CVO&Y3F"N+6L MRD9J3ZBJ:KH[Y5>YRQI?UH[FAK6`G5KR0$?=DY8K6HADQQD61:2.:)] M4-N:C7:-GI&5YW2%5'Z-1K)78'51S)]T.)($+57OI(9+<'3A<[K8DH7H)](8 M`+)6(^VS9I/Q=`P8K1#%7KNN+ROTM5&U?/3K)8FM?2)T2VW(F30QI;*<]T&J"\A`&DSC M]K32*R]L]:E+Z00/TZV8M3*9T[1?V5DR/,_$?JO.DVRY8@XM]$LJI]0.I7## M5Z3-QVH56<8WZ6@V.8-];J8-6<5WZQ&W>N>6$@V+-+A66:Z,V.[U:JUO3%]? MZG_VL0K>MN`#/O$^E*B.C"_\^]88,790"=HR<*O(^ MB^@M+\DNZ$V8ZO'CJ;<+JMZSVA2M-S#4=FK(:X62U7R+ZKS*^VJA9O93ZITTS>L[LL,[*XT9XUT2H:X3Q=JF&T5-20V<<[ MH;K&))_63S!1NI>F_%=!\SM/J,4ZOW@/$K8?>KA8=`%K5U;-5RRZW=4=L!3;3>\ZRVMN9+K6* M^'HMQM`L]B?TU:-M_5'&O2CVUJZ9IHF[A-D%6+!S]/VZS4^DI*@P&2UZI6>L MS/0M9\/A\/@'P^'P^`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`WPNSYT'5R]&!S&XD M]5F9@`65OSJ;W/3CKC5*MQ/%\G4W6O=\QQSSEZS MR:[\&-YA;+TL6V6CSI8*:0C3]%Q`[1;#%D%@'>33LETH,ARKN+"PZR%<"MC4 M/8=JSC=_/-+X4JC\@M951S#=M%(5MIH,^V'>TQ,OGCCNW`[15Q9`;^9^E_.Z"ZXCJV1HQ*^U]*^Q-P&UZO:+7V];85K?O1FG[ MC3D0-5_\KH/:1!]&"4/H62L9$OE3MNP3UMU[+96&`F]);#JEXLN9CZ/4O/QU M(\+>?_522]6&IJ7B/1;9JO?6P+TQ>@6!@)#VQ'&2Z!4^VA***]C-H\?^;MS].*:O"^:ZYYCLF_<:#))>N] M/.7\-K=C6?D41@MTT?JCBO\`3%TP=SX1.%:.XK00=GTU,,V_$O)5#\:>D\.K MHU?H=$T6L6FVQ7NI7VB:3%<+_8&<*!;6H8HWTJ5I4[2PBL7%M2)XHYAN5<(K M0RKN$ MF90@9Q6?2R?C.,BM*PD:?DI9_=]D1S-+S-!WYD[_`.SX?`S04*-7$M@6 M)E2Z!,)*`HA!7!B1*@9^8.9PEL8\,?0$2;D8;F487B*&3D>#^?3M_5'_`!0O M^: M"&7M+SWBZ=NI\/@>*K,A?W97]_63[B7^?NCSO/ZR.<)6Z+3J\(S!B6,A4=92*1V"V M"'N/`O.A`!'C+!A'DD@B$GZR#QP]^\72/CIV[=>3X?`&&=Y^W7O5#6BTYFJM M!H#.S+&%82&K[$R52@SJV#T(D&49N:MF6+9@"V$1$X2/N(/S'D_I%+ MX[63OQ4*OQVN7,7:W]OP"G^5J[01]X8.;)S]I_MYS##+)%%RSY*YCCD[Q]/] M=>_;CD^'QF=VQ'`FM,NS-X%5UKK.J*W74@D8RE@-*C7V`50,"ZQ]`RJN*6OF M@0$B=(8N@TZF,26#K%'UB[]..G7CAQQU]#$\(LT211%9"U\*@NPQK0NCPE4/ M-V)@6$-NL/!\R^`CMVGA"D([#13=NTO2+KWYY[?#X?`1"W@51"':.ZN3M'WD6]K`.!&V[+Y.\47;N'R7R-W[1 3Q]NT?//3KSP?#X#W^'P^'P/_V3\_ ` end -----END PRIVACY-ENHANCED MESSAGE-----