-----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, V5xS2z0zpCY3VBmvfT7FwxtYokCY2txZwgxoc8FMIq9O7UGUt2aZNBYlJHFdDvI7 zBB7SJUsQW2tLoZAaN8BJA== 0001011438-03-000323.txt : 20031119 0001011438-03-000323.hdr.sgml : 20031119 20031118175728 ACCESSION NUMBER: 0001011438-03-000323 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL DETECTION TECHNOLOGY CENTRAL INDEX KEY: 0000763950 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 952746949 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-09327 FILM NUMBER: 031011321 BUSINESS ADDRESS: STREET 1: 9300 WILSHIRE BOULEVARD, SUITE 308 CITY: BEVERLY HILLS STATE: CA ZIP: 90212 BUSINESS PHONE: 3102483655 MAIL ADDRESS: STREET 1: 9300 WILSHIRE BOULEVARD, SUITE 308 CITY: BEVERLY HILLS STATE: CA ZIP: 90212 FORMER COMPANY: FORMER CONFORMED NAME: POLLUTION RESEARCH & CONTROL CORP /CA/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DASIBI ENVIRONMENTAL CORP DATE OF NAME CHANGE: 19900529 10QSB 1 form_10qsb.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2003 [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to _____________. COMMISSION FILE NUMBER 0-14266 UNIVERSAL DETECTION TECHNOLOGY (F/K/A POLLUTION RESEARCH AND CONTROL CORP.) (Exact Name of Small Business Issuer as Specified in its Charter) CALIFORNIA 95-2746949 - ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 9300 WILSHIRE BOULEVARD, SUITE 308 BEVERLY HILLS, CALIFORNIA 90212 (Address of Principal Executive Offices) (310) 248-3655 (Issuer's Telephone Number, Including Area Code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock, no par value, 29,315,428 shares issued and outstanding as of November 12, 2003. Transitional Small Business Disclosure Format (check one): Yes[ ] No [X] UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) INDEX PAGE PART I FINANCIAL INFORMATION...............................................3 Item 1. Financial Statements................................................3 Consolidated Balance Sheet as of September 30, 2003 (unaudited).....3 Consolidated Statements of Operations for the three months ended September 30, 2003 and 2002 (unaudited)........4 Consolidated Statements of Operations for the nine months ended September 30, 2003 and 2002 (unaudited)........5 Consolidated Statement of Changes in Stockholders' (Deficit) Equity for the nine months ended September 30, 2003 (unaudited)..6 Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (unaudited)........7 Notes to Consolidated Financial Statements (unaudited)..............8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................12 Item 3. Controls and Procedures............................................22 PART II OTHER INFORMATION..................................................23 Item 1. Legal Proceedings..................................................23 Item 3. Defaults Upon Senior Securities....................................23 Item 4. Submission of Matters to a Vote of Security Holders................23 Item 6. Exhibits and Reports on Form 8-K...................................24 2 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2003 (UNAUDITED)
ASSETS CURRENT ASSETS: Cash and cash equivalents $ 41,345 Bridge note, related party 20,000 Inventories 20,000 Prepaid expenses 1,041,357 -------------- TOTAL CURRENT ASSETS $ 1,122,702 ============== LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES: Accounts payable, trade $ 162,390 Accrued liabilities 749,197 Notes payable and convertible debt 1,787,526 Accrued interest expense 451,821 -------------- TOTAL CURRENT LIABILITIES 3,150,934 -------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' (DEFICIT) EQUITY: Preferred stock, no par value, 20,000,000 shares authorized, -0- issued and outstanding --- Common stock, no par value, 480,000,000 shares authorized , 26,864,365 issued and outstanding 13,917,317 Additional paid-in-capital 2,926,186 Accumulated (deficit) (18,871,735) -------------- Total stockholders' (deficit) equity (2,028,232) -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,122,702 ============== See accompanying notes to consolidated financial statements.
3 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, --------------- -------------- 2003 2002 --------------- -------------- REVENUES: $ --- $ --- COST OF GOODS SOLD --- --- --------------- -------------- GROSS PROFIT --- --- --------------- -------------- OPERATING EXPENSES: Selling, general and administrative 1,584,022 162,852 Research and development 30,000 --- --------------- -------------- Total expenses 1,614,022 162,852 --------------- -------------- (LOSS) FROM OPERATIONS (1,614,022) (162,852) OTHER EXPENSE: Interest expense (55,676) (62,882) Amortization of loan fees (41,500) --- --------------- -------------- Net other income (expense) (97,176) (62,882) --------------- -------------- NET (LOSS) $ (1,711,198) $ (225,734) =============== ============== NET (LOSS) PER SHARE - BASIC AND DILUTED: $ (0.08) $ (0.03) =============== ============== Weighted average number of shares outstanding 21,058,963 8,603,046 =============== ============== See accompanying notes to consolidated financial statements.
4 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------- -- -------------- 2003 2002 --------------- -------------- REVENUES: $ --- $ 30,000 COST OF GOODS SOLD --- 8,600 --------------- -------------- GROSS PROFIT --- 21,400 --------------- -------------- OPERATING EXPENSES: Selling, general and administrative 2,263,408 541,327 Research and development 199,000 --- Loss on write-down of inventory --- 1,914,342 --------------- -------------- Total expenses 2,462,408 2,455,669 --------------- -------------- (LOSS) FROM OPERATIONS (2,462,408) (2,434,269) OTHER EXPENSE: Interest income 48 --- Interest expense (158,303) (188,567) Interest expense, related party (651) --- Beneficial conversion feature of convertible debt --- (113,000) Amortization of loan fees (100,000) --- --------------- -------------- Net other income (expense) (258,906) (301,567) --------------- -------------- (LOSS) FROM CONTINUING OPERATIONS (2,721,314) (2,735,836) --------------- -------------- DISCONTINUED OPERATIONS: (Loss) from operations of discontinued --- (149,745) subsidiaries Gain on disposal of subsidiary --- 1,490,553 --------------- -------------- Total income from discontinued operations --- 1,340,808 --------------- -------------- NET LOSS $ (2,721,314) $(1,395,028) =============== ============== NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: Continuing operations $ (0.17) $ (0.37) Discontinued operations: Loss from operations --- (0.02) Gain on disposal --- .20 --------------- -------------- $ (0.17) $ (0.19) =============== ============== Weighted average number of shares outstanding 16,445,533 7,374,633 =============== ============== See accompanying notes to consolidated financial statements.
5 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED)
Total Common Stock Additional Accumulated Stockholders' (Deficit) Shares Amount Paid-in-Capital Deficit Equity ----------- ----------- --------------- --------------- --------------- Balance, December 31, 2002 10,873,392 $ 10,813,330 $ 2,870,167 $ (16,150,421) $ (2,466,924) Common stock issued for services 3,057,000 1,121,280 --- --- 1,121,280 Common stock issued for loan fees 175,000 45,000 --- --- 45,000 Conversion of convertible debt and accrued interest 587,122 78,500 --- --- 78,500 Stock issued in private placements net of offering costs of $277,714 11,611,663 1,797,189 --- --- 1,797,189 Fair market value of repriced warrants --- --- 56,019 --- 56,019 Exercise of warrants 560,188 62,018 --- --- 62,018 Net loss for the period --- --- --- (2,721,314) (2,721,314) ----------- ----------- --------------- --------------- --------------- Balance, September 30, 2003 26,864,365 $ 13,917,317 $ 2,926,186 (18,871,735) (2,028,232) =========== =========== =============== =============== ===============
See accompanying notes to consolidated financial statements. 6 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 --------------- --------------- CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net loss from continuing operations $ (2,721,314) $ (2,735,836) Adjustments to reconcile net loss to net cash (used in) operations: Beneficial conversion feature of convertible debt --- 113,000 Stock issued for services 1,121,280 43,250 Stock issued for loan fees 45,000 --- Fair market value of repriced warrants 56,019 --- Changes in operating assets and liabilities: Accounts receivable 30,000 (30,000) Inventories --- 1,914,342 Prepaid expenses (995,419) --- Accounts payable and accrued expenses 522,254 390,398 --------------- --------------- Net cash (used in) operating activities (1,942,180) (304,846) --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net cash used in investing activities --- --- --------------- --------------- CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Proceeds from issuance of common stock 2,074,903 150,0000 Payment of offering costs (277,714) (5,000) Proceeds from exercise of warrants 62,018 --- Proceeds on notes payable 230,000 57,526 Bridge note to related party (20,000) --- Payments on notes payable (95,000) --- --------------- --------------- Net cash provided by financing activities 1,974,207 202,526 --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,027 (102,320) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,318 142,754 --------------- --------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 41,345 $ 40,434 =============== ===============
See accompanying notes to consolidated financial statements. 7 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 1. BASIS OF PRESENTATION On August 8, 2003, the stockholders approved the change of the name of Pollution Research and Control Corp. to Universal Detection Technology. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of management, are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of Universal Detection Technology, formerly Pollution Research and Control Corp., included in our Form 10-KSB for the fiscal year ended December 31, 2002. 2. STOCKHOLDERS' EQUITY During the nine months ended September 30, 2003, the Company sold 11,611,663 shares of common stock for $2,074,903, $50,000 of which had been received prior to December 31, 2002, and had been recorded as a liability. The Company paid $97,202 in placement fees to another company in which its President and CEO has an equity interest. The Company also paid a $180,512 placement fee to an unrelated company. Certain investors received warrants to purchase 214,300 shares of common stock at prices ranging from $0.27 to $0.65 per share. In addition, the Company issued 3,057,000 shares of its common stock for services and 175,000 shares of its common stock for loan fees, valued at $1,121,280 and $45,000, respectively, the fair market value of the common stock on the dates issuable. Of the shares issued for services, 3,000,000 shares valued at $1,110,000 were issued during the three months ended September 30, 2003. On August 8, 2003, the stockholders approved an increase in the number of shares of common stock authorized to 480,000,000 from 30,000,000. 8 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 (CONTINUED) 2. STOCKHOLDERS' EQUITY (CONTINUED) Effective August 18, 2003, the board of directors of the Company granted an option to the President and CEO to purchase 6,800,000 shares of the Company's common stock at $0.33 per share, the closing price on the date of the grant. The option expires in ten years. The fair value of the option is estimated at $1,995,000 based on the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 4.49%, volatility was estimated at 93.5% and the expected life was ten years. During the three months ended March 31, 2003, the Company agreed to reprice warrants to purchase 300,000 shares of common stock related to outstanding debt from $2.25 and $4.50 per share to $0.12 per share. The repriced warrants were valued at $30,000, the fair market value using the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 1.19%, volatility was estimated at 93% and the expected life was one day. The value of the repriced warrants was expensed as loan fees. The warrants to purchase 300,000 shares of common stock were immediately exercised for proceeds of $36,000. During the three months ended June 30, 2003, the Company agreed to reprice warrants to purchase 260,188 shares of common stock issued as incentive to exercise warrants from $4.00 per share to $0.10 per share. The repriced warrants were valued at $26,018, the fair market value using the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 1.12%, volatility was estimated at 91% and the expected life was one day. The value of the repriced warrants was expensed as stock based compensation. The warrants to purchase 260,188 shares of common stock were exercised for proceeds of $26,018. During August 2003, the Company entered into two agreements for strategic business planning, financial advisory, investor relations and public relations services. As compensation, the Company issued a total of 3,000,000 shares of its common stock to the consultants, valued at $1,110,000, the fair market value of the stock on the effective date of the agreements, which amount is being amortized over the one-year term of the agreements. 9 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 (CONTINUED) 3. CONVERTIBLE DEBT During the six months ended June 30, 2003, certain convertible debt holders converted debt of $35,000 into 258,997 shares of the Company's common stock. In addition, certain convertible debt holders converted $43,500 of accrued interest on the convertible debt to 328,125 shares of the Company's common stock. 4. BRIDGE NOTES During April 2003, the Company borrowed $20,000 from a related party entity, controlled by its Chairman and CEO. The note was due the earlier of July 10, 2003, or upon the Company raising additional funds of more than $100,000 and bears interest at 5% per year. The note was repaid in September 2003. During April 2003, the Company borrowed $75,000, due the earlier of May 10, 2003, or upon the Company raising additional funds in excess of $75,000. The loan bears interest at 18% per year and has been extended by mutual consent. As additional consideration, the Company paid the lender a closing fee of $5,000 and issued 75,000 shares of the Company's common stock to the lender, valued at $16,500, the fair market value of the common stock on the date of funding of the bridge note. The Company paid a $7,500 loan fee to another company in which its President and CEO has an equity interest. The terms of the note specify that this note must be paid before any other creditor. During June 2003, the Company borrowed $50,000 from a related party entity in which a company controlled by our President and CEO has an equity interest. The note was due the earlier of July 10, 2003, or upon the Company raising additional funds of more than $100,000. As of September 30, 2003, the note had been repaid. During July 2003, the Company borrowed from a company in which its President and CEO has an equity interest, $25,000 under two separate agreements. The Company paid loan fees of $2,500 and repaid the loans in July 2003. 10 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 (CONTINUED) 4. BRIDGE NOTES (CONTINUED) During July 2003, the Company borrowed $60,000 under two separate agreements with the same entity, each due the earlier of August 10, 2003 or upon the Company raising additional funds in excess of $75,000. The loan bears interest at 18% per year and has been extended by mutual consent. As additional consideration, the Company paid the lender a closing fee of $2,000 and issued 100,000 shares of our common stock to the lender, valued at $28,500, the fair market value of the stock on the dates of funding of the bridge notes. The Company paid a $6,000 loan fee to a company in which our President and CEO has an equity interest. The terms of the note specify that this note must be paid before any other creditor. 5. RELATED PARTY TRANSACTIONS Effective June 1, 2003, the Company entered into an agreement with a company in which its President and CEO has an equity interest. The agreement requires the Company to pay $25,000 per month for investment banking and strategic advisory services as well as a 10% fee for all debt and equity financing raised by the Company. The Company paid the related party a total of $211,702 under the agreement during the nine months ended September 30, 2003. In September 2003, the Company loaned $20,000 to a related party entity in which a company controlled by our President and CEO has an equity interest. The bridge note is due upon the sooner of October 15, 2003, or upon the Company raising additional funds of more than $50,000, and bears interest at the rate of 6%. The note has been extended by mutual consent and must be repaid from financing before any other creditor. 6. SUBSEQUENT EVENTS Subsequent to September 30, 2003, the Company issued 2,860,276 shares of common stock for net proceeds of $304,904 less a $30,490 placement fee paid to a related party entity in which the Company's President and CEO has an equity interest. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements provided under Part I, Item 1 of this quarterly report on Form 10-QSB. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein. The forward-looking information set forth in this quarterly report on Form 10-QSB is as of November 18, 2003, and we undertake no duty to update this information. If events occur subsequent to November 18, 2003, that make it necessary to update the forward-looking information contained in this Form 10-QSB, the updated forward-looking information will be filed with the Securities and Exchange Commission in a quarterly report on Form 10-QSB or a current report on Form 8-K. More information about potential factors that could affect our business and financial results is included in the section entitled "Cautionary Statements and Risk Factors." OVERVIEW AND RECENT DEVELOPMENTS Historically, our core business had been the design, manufacture and marketing of automated continuous monitoring instruments used to detect and measure various types of air pollution, such as "acid rain," "ozone depletion" and "smog episodes," primarily through our then wholly-owned subsidiary, Dasibi. We also supplied computer-controlled calibration systems that verify the accuracy of our instruments, data loggers to collect and manage pollutant information and our final reporting software for remote centralized applications. We did not recognize material revenues from these products. Beginning in the fourth quarter of fiscal 2001, we began to shift our business focus and strategy to the bio-terrorism detection device and medical diagnostic equipment markets. On March 19, 2002, upon approval by our board of directors, we entered into a binding letter of intent to sell all of the outstanding shares of Dasibi to an individual. Effective March 25, 2002, we consummated the sale pursuant to the terms and conditions of the binding letter of intent. The consideration we received in exchange for the stock of Dasibi included, among other things, cancellation of $1.5 million of indebtedness, a perpetual, nonexclusive license to exploit all of Dasibi's intellectual property rights outside of mainland China, and an assignment by Dasibi of its inventory to us. Currently, we do not plan to pursue any business in the air pollution monitoring market; however, we may determine to engage in that business at a later date. In August 2002, we entered into a technology affiliates agreement with Jet Propulsion Laboratory, commonly referred to as JPL, to develop technology for our bio-terrorism detection equipment, which we will refer to as the "Technology Agreement" throughout this report. The Technology Agreement provides that JPL will develop its proprietary bacterial spore detection technology for integration into our existing aerosol monitoring system. We anticipate to complete this project during the first quarter of 2004. The cost of the project to us was $249,000. On September 30, 2003, we entered into a licensing agreement with the California Institute of Technology, who we refer to throughout this report as Caltech, whereby we obtained an exclusive, royalty-bearing license to make, have made, import, use, sell and offer for sale specified licensed products developed under the terms of the agreement as well as a nonexclusive, royalty-bearing license to make, import, use, sell, offer for sale, reproduce, distribute, display, perform, create derivative works of, and otherwise exploit the technology developed under the terms of the agreement. The specified licensed products include any product or device used to detect pathogens, spores, and biological warfare agents developed under the terms of the agreement. Caltech reserves the right to make, have made, import, use, sell, and offer for sale the licensed products for noncommercial educational and research purposes, but not for commercial purposes. Under this licensing agreement, we also have a right to sublicense to third parties, but the sublicensees do not have a right to grant further sublicenses. 12 BIO-TERRORISM DETECTION DEVICE MARKET The attacks of September 11, 2001, and the subsequent spread of anthrax spores have created a new sense of urgency in the public health systems across the world, and especially in the United States. The United States government has responded to this urgent need for preparedness against bio-terrorism by approving federal legislation to spend over $3 billion in 2002 to prepare the country against future bio-terrorist attacks. The objective is to accelerate development of technologies that lead to cost effective and timely detection of biological and chemical warfare agents as well as effective treatments. Spending, as well as additional research and development support, has been allocated to both the private and public sectors. We have retained an outside consultant specialized in government grants, to consistently screen the applicable grants for us. At this time, we have not received any portion of these grants, and cannot assure you that we will receive any portion in the future. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Universal Detection Technology (f/k/a Pollution Research and Control Corp.) and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION Revenue is recognized upon shipment of products. Title of goods is transferred when the products are shipped from our facility. Income not earned is recorded as deferred revenue. INVENTORIES Inventories are stated at the lower of cost (first-in first-out) basis or market. ADVERTISING EXPENSES We expense advertising costs as incurred. During the nine-month periods ended September 30, 2003 and 2002, we did not have significant advertising costs. STOCK-BASED COMPENSATION We account for stock based compensation in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." This standard requires us to adopt the "fair value" method with respect to stock-based compensation of consultants and other non-employees. We did not change our method of accounting with respect to employee stock options; we continue to account for these under the "intrinsic value" method and to furnish the pro-forma disclosures required by SFAS 123. VALUATION OF THE COMPANY'S COMMON STOCK Unless otherwise disclosed, all stock based transactions entered into by us have been valued at the market value of our common stock on the date the transaction was entered into or have been valued using the Black-Scholes Model to estimate the fair market value. EARNINGS PER SHARE The Company computes earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128). Basic earnings (loss) per common share is computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share consists of the weighted average number of common shares outstanding plus the dilutive effects of options and warrants calculated using the treasury stock method. In loss periods, dilutive common equivalent shares are excluded since the effect would be anti-dilutive. 13 CASH EQUIVALENTS For purposes of reporting cash flows, we consider all short term, interest bearing deposits with original maturities of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable, accounts payable, accrued expenses, notes payable and convertible debt approximate fair value because of the short maturity of these items. IMPAIRMENT OF LONG-LIVED ASSETS We evaluate our long-lived assets by measuring the carrying amounts of assets against the estimated undiscounted future cash flows associated with them. At the time the carrying value of such assets exceeds the fair value of such assets, impairment is recognized. During the year ended December 31, 2002, the Company recognized a $1,914,342 loss on the write-down of inventory. RESEARCH AND SOFTWARE DEVELOPMENT COSTS In 2002, we entered into a technology affiliates agreement with NASA's Jet Propulsion Laboratory to develop technology for our planned bio-terrorism detection equipment. These costs are charged to expense as incurred. Research and development expense was $199,000 and $-0- during the nine months ended September 30, 2003 and 2002, respectively. INCOME TAXES Deferred income taxes are recorded to reflect the tax consequences in future years of temporary differences between the tax basis of the assets and liabilities and their financial statement amounts at the end of each reporting period. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the current period and the change during the period in deferred tax assets and liabilities. The deferred tax assets and liabilities have been netted to reflect the tax impact of temporary differences. At September 30, 2003, a full valuation allowance has been established for the deferred tax asset as management believes that it is more likely than not that a tax benefit will not be realized. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain amounts reported in our financial statements for the nine months ended September 30, 2002, have been reclassified to conform to the current year presentation. NEW ACCOUNTING PRONOUNCEMENTS In May 2003, the FASB issued SFAS No. 150 ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, which is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption of this standard is not expected to have a material impact on the Company's financial statements. 14 In April 2003, the FASB issued SFAS No. 149, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This instrument amends and clarifies financial accounting and reporting for derivative instruments including certain instruments embedded in other contracts and for hedging activities under SFAS NO. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The adoption of this standard did not have a material impact on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation from the intrinsic value based method of accounting. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Under the provisions of SFAS No. 148, companies that choose to adopt the accounting provisions of SFAS No. 123 will be permitted to select from three transition methods: Prospective method, Modified Prospective method and Retroactive Restatement method. The transition and annual disclosure provisions of SFAS No. 148 are effective for the fiscal years ending after December 15, 2002. We are currently evaluating SFAS No. 148 to determine if we will adopt SFAS No. 123 to account for employee stock options using the fair value method. In July 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities ("SFAS No. 146"). SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. SFAS 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), and requires liabilities associated with exit and disposal activities to be expensed as incurred and can be measured at fair value. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. We have reviewed SFAS 146 and our adoption did not have a material effect on our consolidated financial statements. RESULTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 The following discussion does not include the discontinued operations of Dasibi, which are discussed later in this section. REVENUES. Revenues were $-0- for the three months ended September 30, 2003 and 2002. Revenues were $-0- for the nine months ended September 30, 2003 compared to $30,000 for the nine months ended September 30, 2002. This decrease during the nine-month period was due to no sales during the nine months ended September 30, 2003, as compared to the sale of one Model 7001 during the nine months ended September 30, 2002. COST OF SALES. Cost of sales were $-0- for the three months ended September 30, 2003 and 2002. Cost of sales was $-0-during the nine months ended September 30, 2003 compared to $8,600 or 29% of sales for the nine months ended September 30, 2002. GROSS MARGIN. Gross margin was 71% of net revenues for the nine months ended September 30, 2002. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $1,421,170, or 873%, to $1,584,022 for the three months ended September 30, 2003, from $162,852 for the three months ended September 30, 2002 and increased $1,722,081 or 318% to $2,263,408 for the nine months ended September 30, 2003 from $541,327 in the nine months ended September 30, 2002. The increase in selling, 15 general and administrative expense primarily is a result of increased marketing expenses and consulting fees. Selling, general and administrative costs consisted primarily of accounting fees, legal fees, bio-detection product consulting and marketing expenses. (LOSS) FROM CONTINUING OPERATIONS. Operating loss increased $1,451,170, or 891%, to ($1,614,022) for the three months ended September 30, 2003, as compared to ($162,852) for the three months ended September 30, 2002. Operating loss increased $28,139, or 1.2%, to ($2,462,408) for the nine months ended September 30, 2003, as compared to ($2,434,269) for the nine months ended September 30, 2002. The increase is primarily due to increased marketing expenses and consulting fees compared to a loss on write-down of inventory recorded during 2002. OPERATIONS OF DASIBI-DISCONTINUED OPERATIONS. We have reported the operations of Dasibi as discontinued operations. We entered into a plan to spin-off Dasibi effective October 1, 2001, but later determined that the spin-off was not in the best interests of the shareholders. We sold Dasibi effective March 25, 2002. Dasibi had assets of approximately $967,000 and liabilities of approximately $2,072,000 as of December 31, 2001, and a loss from operations from October 1, 2001, to December 31, 2001, of approximately $813,770. Dasibi had a loss from operations of approximately $150,000 during the three months ended March 31, 2002. We recognized a gain of approximately $1,491,000 on the sale of Dasibi. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by (used in) our operating activities during the nine months ended September 30, 2003, was ($1,942,180), and during the nine months ended September 30, 2002, was ($304,846). Net cash provided by (used in) our investing activities was $-0- during the nine months ended September 30, 2003 and 2002. Net cash provided by financing activities during the nine months ended September 30, 2003, was $1,974,207, and during the nine months ended September 30, 2002 was $202,526. Our total cash and cash equivalent balance at September 30, 2003, was $41,345, as compared to September 30, 2002, which was $40,434. Because of our limited cash balances, we may not be able to continue operations at our current levels. Our cash flow is dependent on development of products in a cost efficient manner that are commercially accepted on a timely basis, acceptance of our technology, the signing of contracts, collections, all of which are difficult to predict with accuracy. Historically, we have financed operations through private debt and the issuance of common stock. Since our financial position has deteriorated, financial institutions have been unwilling to lend to us and the cost of obtaining working capital from investors has been expensive. During the nine months ended September 30, 2003, and through the date of this report, we have debt financing under various terms, as follows: A. Three one-year loans from unaffiliated individuals evidenced by promissory notes with an aggregate face amount of $300,000, maturing June 1, 2001, with interest at the rates of 11% and 12% per annum. These loans were initially made in 1999 and restructured in 2000. These notes were due in June 2001 and are currently in default. B. One subordinated convertible debenture with a face amount of $500,000, due June 2002 and verbally extended to a date to be mutually agreed upon by the parties, with interest at the rate of 12% per annum, convertible at a conversion price of the lesser of $2.16 or 80% of the market price on the date of conversion. As of the date of this report $200,000 had been converted to common stock and the outstanding balance is $300,000. C. One convertible debenture with a face amount of $500,000 and interest at a rate of 12% per annum, originally due February 23, 2001, and convertible at a conversion price of the lesser of $2.00 or 80% of the market price on the date of conversion. During 2002 the maturity date of the debenture was extended to February 23, 2004, in exchange for a reduction in the conversion price to 70% of the market price on the date of conversion. As of the date of this report, $320,000 had been converted to common stock and the outstanding balance is $180,000. D. One loan to Dasibi China, Inc., a wholly-owned subsidiary of ours, evidenced by a promissory note with a face amount of $75,000, maturing on the extended due date of June 30, 2002, and further verbally extended to a date to 16 be mutually agreed upon by the parties, with interest at the rate of 10% per annum. E. One loan from Delta Capital evidenced by a promissory note with a face amount of $200,000, maturing on the extended due date of June 30, 2002, and further verbally extended to a date to be mutually agreed upon by the parties, with interest at the rate of 18% per annum. F. Eight convertible debentures with a total face amount of $365,000, due July 17, 2002, and verbally extended to a date to be mutually agreed upon by the parties, with interest at the rate of 9% per annum, convertible at a conversion price of the lesser of $2.34 or 80% of the market price on the date of conversion. As of the date of this report, the outstanding balance is $290,000. G. During April 2002, we borrowed $22,526, due the earlier of June 29, 2002, or upon us raising funds in excess of $30,000, bearing interest at 10% per annum. The lender has verbally agreed to extend the terms of the note to a date to be mutually agreed upon by the parties. H. During June 2002, we borrowed $35,000, due the earlier of September 10, 2002, or upon us raising funds in excess of $50,000, bearing interest at 10% per annum. If the loan was not repaid within 30 days after the due date, the holder was to receive 50,000 shares of our common stock. The note has not been repaid and the lender has verbally agreed to extend the terms of the note to a date to be mutually agreed upon by the parties. The 50,000 shares of our common stock have not been issued. I. Demand note for $250,000 with Ex-Im Bank authorized at Wall Street Journal Prime +3% per annum, maturing on an extended due date of June 30, 2002, and currently in default. J. During April 2003, we borrowed $75,000, due the earlier of May 10, 2003, or upon us raising additional funds in excess of $75,000. The loan bears interest at 18% per year and has been extended by mutual consent. As additional consideration, we paid the lender a closing fee of $5,000 and issued 75,000 shares of our common stock to the lender, valued at $16,500 the fair market value of the stock on the date of funding of the bridge note. We paid a $7,500 loan fee to a company in which our President and Chief Executive Officer has an equity interest. The terms of the note specify that this note must be paid before any other creditor. K. During April 2003, we borrowed $20,000 from a related party entity, controlled by our Chairman and CEO. The note was due the earlier of July 10, 2003, or upon us raising additional funds of more than $100,000 and bears interest at 5% per year. We repaid the loan in September 2003 and has an outstanding balance of $-0-. 17 L. During June 2003, we borrowed $50,000 from a related party entity, in which a company controlled by our Chairman and CEO has an equity interest. The note was due the earlier of July 10, 2003 or upon us raising additional funds of more than $100,000. As of September 30, 2003, the note had been repaid and the outstanding balance was $-0-. M. During July 2003, we borrowed $25,000 from a company in which our President and CEO has an equity interest, under two separate agreements. We paid loan fees of $2,500 to the same related party and repaid the loans approximately one week later. N. During July 2003, we borrowed $60,000 under two separate agreements with the same entity, each due the earlier of August 10, 2003, or upon us raising additional funds in excess of $75,000. The loan bears interest at 18% per year and has been extended by mutual consent. As additional consideration, we paid the lender a closing fee of $2,000 and issued 100,000 shares of our common stock to the lender, valued at $28,500 the fair market value of the stock on the dates of funding of the bridge notes. We paid a $6,000 loan fee to a company in which our President and Chief Executive Officer has an equity interest. The terms of the note specify that this note must be paid before any other creditor. Our working capital deficit at September 30, 2003, was $2,028,232. We require immediate financing to repay our indebtedness and continue operations. We require at least $1.5 million in the next six to twelve months to complete the re-engineering of our existing product, continue development of future products and continue to execute our business plan, which includes increasing our presence in the bio-terrorism detection and medical diagnostic equipment markets. We actively continue to pursue additional equity or debt financings but at the date hereof, do not have any funding commitments. Currently, our cash on hand, together with cash generated by operations, cannot sufficiently fund future operating losses and capital requirements. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. RELATED PARTY TRANSACTIONS During the nine months ended September 30, 2003, we sold 11,611,663 shares of our common stock for $2,074,903, $50,000 of which had been received prior to December 31, 2002, and had been recorded as a liability, less offering costs of $277,714, including a $97,202 placement fee to a company in which our President and CEO has an equity interest. During June 2003, we entered into a consulting agreement with a company in which our President and Chief Executive Officer has an equity interest. Pursuant to the terms of the agreement, we pay that company $25,000 per month for investment banking and strategic advisory services and pay a 10% placement fee for all debt and equity financing. Effective August 18, 2003, our board of directors granted an option to our President and CEO to purchase 6,800,000 shares of our common stock at $0.33 per share, the closing price on the date of the grant. The option expires in ten years. The fair value of the option is estimated at $1,995,000 based on the Modified Black-Scholes European pricing model CAUTIONARY STATEMENTS AND RISK FACTORS The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. In that event the trading price of our common stock could decline, and our shareholders may lose all or part of their investment in our common stock. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. 18 OUR INDEPENDENT AUDITORS' REPORT EXPRESSES DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. At December 31, 2002, our independent auditors' report, dated March 11, 2003, includes an explanatory paragraph relating to substantial doubt as to our ability to continue as a going concern, due to our working capital deficit at December 31, 2002, and the sale of our operating subsidiary. We have experienced operating losses since the date of the auditors' report and in prior years. We have been unable to pay all of our creditors and certain other obligations in accordance with their terms, and as a result, we are in default on certain debt obligations equaling approximately $697,273 as of September 30, 2003. These defaults currently restrict our ability to file registration statements in connection with capital raising transactions on Form S-3, which may make it more difficult for us to raise additional capital. We have limited cash on hand and short-term investments and we do not expect to generate material cash from operations. We have attempted to raise additional capital through debt or equity financing and to date have had limited success. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. WE NEED ADDITIONAL CAPITAL TO FUND OUR RESEARCH AND DEVELOPMENT ACTIVITIES. IF WE OBTAIN FINANCING, EXISTING SHAREHOLDER INTERESTS MAY BE DILUTED AND IF WE CANNOT OBTAIN ADEQUATE FINANCING, WE MAY CEASE OPERATIONS. The current down-trend in the financial markets have made it extremely difficult for us to raise additional capital for our research and development activities. If we cannot raise additional capital, we will not be able to pursue our business strategies as scheduled, or at all, and we may cease operations. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our shareholders will be diluted. In addition, any convertible securities issued may not contain a minimum conversion price, which may make it more difficult for us to raise financing and may cause the market price of our common stock to decline because of the indeterminable overhang that is created by the discount to market conversion feature. In addition, any new securities could have rights, preferences and privileges senior to those of our common stock. Furthermore, we cannot be certain that additional financing will be available when and to the extent we require or that, if available, it will be on acceptable terms. WE HAVE A HISTORY OF LOSSES AND WE DO NOT ANTICIPATE THAT WE WILL BE PROFITABLE IN FISCAL 2003. We have not been profitable in the past years and had an accumulated deficit of approximately $18.9 million as of September 30, 2003. During the nine months ended September 30, 2003, we incurred a net loss of approximately $2.7 million. Achieving profitability depends upon numerous factors, including out ability to develop, market and sell commercially accepted products timely and cost-efficiently. We do not anticipate that we will be profitable in fiscal 2003. WE CANNOT GUARANTEE THAT OUR BIOTERRORISM DETECTION DEVICE WILL WORK OR BE COMMERCIALLY VIABLE. Our product in development requires further research, development, laboratory testing, and demonstration of commercial scale manufacturing before it can be proven to be commercially viable. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. These reasons include the possibilities that the product may be ineffective, unsafe, difficult or uneconomical to manufacture on a large scale, fail to achieve market acceptance, or is precluded from commercialization by proprietary rights of third parties. Our product development efforts may be unsuccessful and the failure of our research and development activities to result in a commercially viable product would materially adversely affect our future prospects. OUR RELIANCE ON THIRD PARTIES FOR RESEARCH AND DEVELOPMENT MAY AFFECT OUR FUTURE PROSPECTS. We do not maintain our own laboratory and we do not employ our own researchers. We have contracted with third parties in the past to conduct research and development activities and we expect to continue to do so in the future. Because we rely on third parties for our research and development activities, we have less direct control over those activities and cannot assure you that the research will be done properly or in a timely manner. Our inability to conduct research and development may delay or impair our ability to commercialize our technology. The cost and time to establish or locate an alternative research and development facility to develop our technology could have a materially adverse affect on our future prospects. 19 OUR PRODUCTS MAY NOT BE COMMERCIALLY ACCEPTED WHICH WILL ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY. Our ability to enter into the bio-terrorism detection device market, establish brand recognition and compete effectively depend upon many factors, including broad commercial acceptance of our products. If our products are not commercially accepted, we will not recognize meaningful revenue and our results of operation will be materially adversely affected. The success of our products will depend in large part on the breadth of the information these products capture and the timeliness of delivery of that information. The commercial success of our products also depends upon the quality and acceptance of other competing products, general economic and political conditions and other tangible and intangible factors, all of which can change and cannot be predicted with certainty. We cannot assure you that our new products will achieve significant market acceptance or will generate significant revenue. If the marketplace does not broadly accept our products, our results of operations and financial condition could be materially and adversely affected. THE MARKET FOR OUR PLANNED PRODUCT IS RAPIDLY CHANGING AND COMPETITIVE. NEW PRODUCTS MAY BE DEVELOPED BY OTHERS, WHICH COULD IMPAIR OUR ABILITY TO DEVELOP, GROW OR MAINTAIN OUR BUSINESS AND BE COMPETITIVE. Our industry is subject to rapid and substantial technological change. Developments by others may render our technology and planned product noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Competition from other biotechnology companies, universities, government research organizations and others diversifying into the field is intense and is expected to increase. Many of these entities have significantly greater research and development capabilities and budgets than we do, as well as substantially greater marketing, manufacturing, financial, and managerial resources. These entities could represent significant competition for us. Our resources are limited and we may experience technical challenges inherent in developing our technology. Our competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competition. Our competitors may use different methods to detect biological pathogens in a manner that is more effective and less costly than our planned product and, therefore, represent a serious competitive threat to us. WE HAVE ISSUED DEBENTURES CONVERTIBLE AT A PRICE DISCOUNT TO MARKET AND CONVERSION OF THESE SECURITIES MAY DEPRESS THE MARKET VALUE OF OUR SHARES. As of September 30, 2003, we have outstanding an aggregate of $770,000 in convertible debentures which are convertible into our common stock at 70-80% of the market price on the date of conversion. It may be difficult to raise financing and the market price of our common stock may decline because of the indeterminable overhang that is created by the discount to market conversion feature of these debentures. If the holders of these debentures convert their debentures at the discounted price of 20-30% below the market price the existing shareholders will suffer substantial dilution and our stock price may substantially decline. The following table illustrates the range in number of shares that may be issued upon conversion of our debentures that do not contain minimum conversion prices based on various historical trading prices of our common stock as set forth in the table: ASSUMED CONVERSION PRICE $.10 $.15 $.20 ---- ---- ---- NO. OF SHARES ISSUABLE UPON CONVERSION 7,770,000 5,133,333 3,850,000 PERCENT OF OUTSTANDING COMMON STOCK PRIOR TO ISSUANCE 28.9% 19.1% 14.3% 20 In addition, large numbers of shares purchased at a discount could cause short sales to occur which would lower the bid price of the common stock. The term "short sale" means any sale of our common stock that the seller does not own or any sale that is consummated by the delivery of our common stock borrowed by, or for the account of, the seller. OUR COMMON SHARES HAVE BEEN DELISTED FROM THE NASDAQ STOCK MARKET. On June 11, 2002, we were notified by The Nasdaq Stock Market that we did not meet the continued listing requirements of The Nasdaq Small Capital Market and our common shares were delisted on the close of business on June 19, 2002. Our common stock currently is trading on the OTC Bulletin Board. It may be more difficult to raise additional debt or equity financing while trading on the OTC Bulletin Board. If we are unable to raise additional financing, we will not be able to accomplish our business objectives and may consider steps to protect our assets against creditors. OUR OUTSTANDING OPTIONS AND WARRANTS, AND CONVERTIBLE DEBENTURES MAY DILUTE OUR SHAREHOLDERS' INTERESTS. As of September 30, 2003, we have granted options and warrants to purchase a total of 11,109,560 shares of common stock that have not been exercised and an aggregate of $770,000 outstanding debentures that are convertible based upon a conversion price of 70-80% of the market price on the date of conversion. To the extent these outstanding options and warrants are exercised or the convertible debentures are converted, our shareholders' interests will be diluted. THE LOSS OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER MAY DISRUPT OUR BUSINESS. Our success depends in substantial part upon the services of Mr. Jacques Tizabi, our President, Chief Executive Officer and Chairman of the Board of Directors. The loss of or the failure to retain the services of Mr. Tizabi could adversely affect the development of our business and our ability to realize or sustain profitable operations. We do not maintain key-man life insurance on Mr. Tizabi and have no present plans to obtain such insurance. WE HAVE LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS OF OUR PRODUCTS. We regard all or portions of the designs and technologies incorporated into our products as proprietary and attempt to protect them under trade secret laws. It has generally been our policy to proceed without patent protection. It may be possible for unauthorized third parties to copy certain portions of our products or to "reverse engineer" or otherwise obtain and use to our detriment information that we regard as proprietary. We cannot assure you that any of our efforts to protect our proprietary technology will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies. OUR STOCK PRICE IS VOLATILE. The trading price of our common stock has from time to time fluctuated widely and in the future may be subject to similar fluctuations in response to quarter-to-quarter variations in our operating results, announcements of technological innovations or new products by us or our competitors, general conditions in the bio-terrorism detection device industry in which we compete and other events or factors. In addition, in recent years, broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations also may adversely affect the future trading price of our common stock. 21 POTENTIAL ANTI-TAKEOVER TACTICS THROUGH ISSUANCE OF PREFERRED STOCK RIGHTS MAY BE DETRIMENTAL TO COMMON SHAREHOLDERS. We are authorized to issue up to 20,000,000 shares of preferred stock, of which none are currently issued and outstanding. The issuance of preferred stock does not require approval by the shareholders of our common stock. Our Board of Directors, in its sole discretion, has the power to issue preferred stock in one or more series and establish the dividend rates and preferences, liquidation preferences, voting rights, redemption and conversion terms and conditions and any other relative rights and preferences with respect to any series of preferred stock. Holders of preferred stock may have the right to receive dividends, certain preferences in liquidation and conversion and other rights, any of which rights and preferences may operate to the detriment of the shareholders of our common stock. Further, the issuance of any preferred stock having rights superior to those of our common stock may result in a decrease in the value or market price of the common stock and, additionally, could be used by our Board of Directors as an anti-takeover measure or device to prevent a change in our control. ITEM 3. CONTROLS AND PROCEDURES. We carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our executive officer and financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. In accordance with SEC requirements, our chief executive officer and chief financial officer note that, since the date of the most recent evaluation of our disclosure controls and procedures to the filing date of our Quarterly Report on Form 10-QSB, there have been no significant changes in our internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. Our management, including the chief executive officer and our chief financial officer, does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 22 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. TAYLOR, TAYLOR & DREIFUS V POLLUTION RESEARCH AND CONTROL CORP. NO. 99-1100-CA01 CIRCUIT COURT ESCAMBIA, FLORIDA In June, 1999, a lawsuit was filed against us by Taylor, Taylor, & Dreifus, a Florida general partnership alleging default by our company under a promissory note and failure to make lease payments, all relating to a former subsidiary bankruptcy in 1998. The amount of claim is estimated at $300,000. We have filed a counterclaim against the partnership alleging that the note and lease payments are not due because of fraudulent representations made at the time of acquisition of the former subsidiary business. Plaintiff has failed to pursue this action. WALT DISNEY WORLD CO. V. POLLUTION RESEARCH AND CONTROL CORP. AND DASIBI ENVIRONMENTAL CORP. (CASE NO. BC 274013 LOS ANGELES SUPERIOR COURT) On May 15, 2002, the above plaintiff filed a lawsuit alleging a single cause of action for unlawful detainer against us and our former wholly-owned subsidiary, Dasibi Environmental Corp. The complaint alleges that pursuant to a lease agreement, we owe the plaintiff unpaid rent in the amount of $249,366.85, and damages at the rate of $1,272.50 for each day Dasibi continued possession of the premises commencing May 1, 2002. Plaintiff has obtained a default judgment against us and a writ of execution has been obtained. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. We obtained three one-year loans from unaffiliated individuals evidenced by promissory notes with an aggregate face amount of $300,000, maturing June 1, 2001, with interest at the rates of 11% and 12% per annum. These loans were initially made in 1999 and restructured in 2000. These notes were due in June 2001 and are currently in default. The aggregate amount due under these loans as of September 30, 2003, is $413,523, consisting of $300,000 of principal and $113,523 of interest. We executed a demand note for $250,000 with Ex-Im Bank accruing interest at Wall Street Journal Prime +3% per annum, which matured on an extended due date of June 30, 2002, and currently is in default. The aggregate amount due under this note as of September 30, 2003, is $283,750, consisting of $250,000 of principal and $33,750 of interest.. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On August 8, 2003, we held our annual meeting of the shareholders. At this meeting, our shareholders were asked to vote on four matters: o the election of three directors; o an amendment to our Articles of Incorporation to change our name to Universal Detection Technology; o an amendment to our Articles of Incorporation to increase the number of authorized shares of common stock; and o the approval of our 2003 Stock Incentive Plan. Of the total outstanding shares, 8,686,490 or 54.26%, were voted. The first item presented for a vote before our shareholders was the re-election of our three directors. Set forth below is information with respect to the nominees elected as directors at the annual meeting and the votes cast for, against and/or withheld with respect to each such nominee. There were no broker non-votes in connection with this proposal. 23 Individual For Against Withheld ------------------------------ --------------- --------------- -------------- Jacques Tizabi 8,623,355 781 62,354 Michael Collins 8,621,855 2,281 62,354 Matin Emouna 8,621,355 2,781 62,354 The second item presented for a vote before the shareholders was an amendment to our Articles of Incorporation to change our company name from Pollution Research and Control Corp. to Universal Detection Technology. Of the votes received, 8,640,969 were in favor of the proposal, 14,731 were against, 31,063 were withheld, and three was 0 broker non-votes. The third item presented for a vote before the shareholders was an amendment to our Articles of Incorporation to increase the aggregate number of shares of common stock authorized for issuance form 30,000,000 shares to 48,000,0000 shares. Of the votes received, 8,560,414 were in favor of the proposal, 123,771 were against, 2,305 were withheld, and there was 0 broker non-votes. The fourth item presented for a vote before the shareholders was the approval of our 2003 Stock Incentive Plan. Of the votes received, 8,546,635 were in favor of the proposal, 124,674 were against, 15,181 were withheld, and there was 0 broker non-votes. There were no other matters submitted for a vote of our shareholders during the period covered by this report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10.4 Licensing Agreement by and between Universal Detection Technology and California Institute of Technology, dated September 30, 2003. 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Dated November 14, 2003. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Dated November 14, 2003. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Dated November 14, 2003. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Dated November 14, 2003 (b) Reports on Form 8 K None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNIVERSAL DETECTION TECHNOLOGY (F/K/A POLLUTION RESEARCH AND CONTROL CORP.) DATE NOVEMBER 18, 2003 /s/ JACQUES TIZABI ------------------------------------------- BY: JACQUES TIZABI ITS: PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD 24 EX-10 3 exhibit_10-4.txt EXHIBIT 10.4 LICENSE AGREEMENT THIS AGREEMENT is effective as of the 30th day of September, 2003 (the "EFFECTIVE Date"), between CALIFORNIA INSTITUTE OF TECHNOLOGY, 1200 East California Boulevard, Pasadena, CA 91125 ("CALTECH") and Universal Detection Technologies ("Licensee"), a corporation having a place of business at 9300 Wilshire Boulevard, Suite 308, Beverly Hills, CA 91012. WHEREAS, Licensee is desirous of obtaining, and Caltech wishes to grant to Licensee, an exclusive license to certain Exclusively Licensed Patent Rights and a nonexclusive license under the Technology, all relating to the aforementioned research and as further defined below; NOW, THEREFORE, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 "AFFILIATE" means any corporation, limited liability company or other legal entity which directly or indirectly controls, is controlled by, or is under common control with Licensee as of the Effective Date of this Agreement. For the purpose of this Agreement, "control" shall mean the direct or indirect ownership of at least fifty-one percent (51 %) of the outstanding shares on a fully diluted basis or other voting rights of the subject entity to elect directors, or if not meeting the preceding, any entity owned or controlled by or owning or controlling at the maximum control or ownership right permitted in the country where such entity exists. In addition, a party's status as an Affiliate of License shall terminate if and when such control ceases to exist. 1 1.2 "TECHNOLOGY" means any Technology, in the form existing as of the Effective Date, meeting any of the following criteria: (a) such Technology is specifically listed in Exhibit B; (b) such Technology is necessary for the development of Licensed Products; and (c) such Technology is not covered by any claim of the Exclusively Licensed Patent Rights or Technology includes all proprietary information, know-how, procedures, methods, prototypes, designs existing M of the Effective Date that is requested by Licensee and consented to by Caltech. 1.3 "CALTECH TECHNOLOGY" means the Exclusively Licensed Patent Rights and the Technology. 1.4 "DEDUCTIBLE EXPENSES" means the following expenses incurred in connection with sales or licensing of Licensed Products to the extent actually paid by Licensee or an Affiliate in accordance with generally recognized principles of accounting: (a) sales, use or turnover taxes; (b) excise, value added or other, taxes or custom duties; (c) transportation, freight, and handling charges, and insurance on shipments to customers; (d) trade, cash or quantity discounts or rebates to the extent actually granted; (e) agent fees or commissions; and (f) rebates, refunds, and credits for any rejected or returned Licensed Products or because of retroactive price reductions, rebates or chargebacks. 1.5 "EFFECTIVE DATE" has the meaning set forth in the preamble. 1.6 "EXCLUSIVELY LICENSED PATENT RIGHTS" means Caltech's rights under: (a) all patents and patent applications listed in Exhibit A attached hereto as further defined in Exhibit I attached hereto; (b) any patents issuing therefrom, and (c) any patents or patent applications claiming a right of priority thereto (including reissues, reexaminations, renewals, extensions, divisionals, continuations, continued prosecution applications, continuations-in-part and foreign 2 counterparts of any of the foregoing). RIGHTS UNDER (A), (B) AND (C) OF THIS PARAGRAPH TO SUBJECT MATTER AND CLAIMS RELATED TO NPO-30444 ARE EXPRESSLY EXCLUDED. 1.7 "FIELD" means detection of pathogens, spores, and biological warfare agents. 1.8 "LICENSED PRODUCT" means any product, device, system, article of manufacture, composition of matter, or process or service in the Field that is covered by, or is made by a process covered by, any Valid Claim of the Exclusively Licensed Patent Right or that utilizes Technology in material part. 1.9 "NET REVENUES" means all amounts received by Licensees and/or its Affiliates from the sale, licensing, or other distribution (whether commercial or not) to other parties of Licensed Products, less Deductible Expenses. Net Revenues shall exclude sales to the United States Government. 1.10 "PRODUCT LIABILITY CLAIMS" has the meaning set forth in Section 13.1 1.11 "VALID CLAIM" means: (a) a claim of an issued patent within the Exclusively Licensee Patent Rights that has not (i) expired or been canceled, (ii) been finally adjudicated to be invalid or unenforceable by a decision of a court or other appropriate body of competent jurisdiction (and from which no appeal is or can be taken), (iii) been admitted to be invalid or unenforceable through reissue, disclaimer or otherwise, or (iv) been abandoned in accordance with or as permitted by the terms of this Agreement or by mutual written agreement; or (b) a claim included in a pending patent application within the Exclusively Licensed Patent Rights which claim is being actively prosecuted in accordance with this Agreement and which has not been (i) canceled, (ii) withdrawn from consideration, (iii) finally determined to be unallowable by the applicable governmental authority (and from which no appeal is or can be taken), or (iv) 3 abandoned in accordance with or as permitted by the terms of this Agreement or by mutual written agreement. ARTICLE 2 LICENSE GRANT 2.1 GRANT OF RIGHTS. Caltech hereby grants to Licensee the following licenses: (a) an exclusive, royalty-bearing license under the Exclusively licensed Patent Rights to make, have made, import, use, sell, and offer for sale, licensed Products in the Field throughout the world; and (b) a nonexclusive, royalty-bearing license under the Technology to make, have made, import, use, sell, offer for sale, reproduce, distribute, display, perform, create derivative works of, and otherwise exploit Licensed Products in the Field throughout the world. These licenses are personal to and nontransferable by Licensee, except as provided in Section 14.9. 2.2 RESERVATION OF RIGHTS; GOVERNMENT RIGHTS. These licenses are subject to: (a) the reservation of Caltech's right to make, have made, import, use, sell and offer for sale Licensed Products for noncommercial educational and research purposes, but not for commercial sale or other commercial distribution to third parties; and (b) any existing right of the U.S. Government under Title 35, United States Code, Section 200 et seq. and under 37 Code of Federal Regulations, Section 401 et seq., including but not limited to the grant to the U.S. Government of a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced any invention conceived or first actually reduced to practice in the performance of work for or on behalf of the U.S. Government throughout the world. Licensee agrees that all Licensed Products covered by an Exclusively Licensed Patent Right, and to be sold, licensed, distributed or used by or on behalf of Licensee or its Affiliates in 4 the United States, shall be manufactured substantially in the United States to the extent (if at all) required by 35 U.S.C, Section 204. Rights not explicitly granted herein are reserved by Licensor. 2.3 SUBLICENSING. Licensee has the right hereunder to grant sublicenses to third parties, out sublicensees shall not have the right to grant further sublicenses, and the sublicenses may be of no greater scope than the licenses under Sections 2.1 and 2.2. Licensee shall include all its sublicensing income in Licensee's reports to Caltech, as provided in Paragraph 5.11, and Licensee shall pay royalties thereon pursuant to Paragraph 5.1. Licensee shall not receive, or agree to receive, anything of value in lieu of cash or equity as Net Revenues from a third party under a sublicense granted pursuant to this Paragraph 2.3, without Caltech's express prior written permission which shall not be unreasonably withheld. In such cash, the non-cash Net Revenue received will be detained based on the fair market value or a value mutually agreed upon. Licensee shall furnish Caltech within thirty (30) days of the execution thereof a true and complete copy of each sublicense and any changes or additions thereto. Any sublicenses granted by Licensee shall survive termination of the licenses granted in Section 2.1, or of this Agreement, provided that the following conditions are met as of the date of such termination: (a) the written agreement between Licensee and sublicensee pursuant to which the sublicense was granted (i) obligates the sublicensee to thereafter render to Caltech all sublicense royalties or other sublicense-related consideration that the sublicensee would have owed to Licensee under the sublicense, (ii) names Caltech as a third party beneficiary, and (iii) affirms that Licensee shall remain responsible for all obligations to sublicensee (other than those requiring Licensee to hold a license under the Exclusively Licensed Patent Rights or Technology, 5 unless Caltech (at its discretion) elects to assume such obligations; and (b) Licensee informs the sublicensee in writing (with a copy to Caltech) that the sublicensee's obligations pursuant to (a) are in effect as a result of the termination. 2.4 NO OTHER RIGHTS GRANTED. The parties agree that neither this Agreement, nor any action of the parties related hereto, may be interpreted as conferring by implication, estoppel or otherwise, any license or rights under any intellectual property rights of Caltech other than as expressly and specifically set forth in this Agreement, regardless of whether such other intellectual property rights are dominant or subordinate to the Exclusively Licensed Patent Rights. 2.5 PREFERENTIAL PURCHASER STATUS. Caltech shall be entitled to purchase licensed products, from Licensee for educational, research or other noncommercial purposes on pricing terms that are at least as favorable as any commercial pricing made available by Licensee to any third party. ARTICLE 3 DISCLOSURE AND DELIVERY 3.1 EXCLUSIVELY LICENSED PATENT RIGHTS. On or before the one month anniversary of the Effective Date, Caltech shall promptly disclose and deliver to Licensee copies of all patent applications and/or issued patents within the) Exclusively Licensed Patent Rights, including all patent office correspondence related thereto. 3.2 TANGIBLE EMBODIMENT. On or before the one month anniversary of the Effective Date, Caltech shall promptly disclose and deliver to licensee any tangible embodiments as of the Effective Date of: (a) the inventions covered by the Exclusively Licensed Patent Nights; and (b) the Technology. Such disclosure and delivery may occur in writing, orally, and/or in other tangible or intangible form, as appropriate to the subject matter thereof. 6 ARTICLE 4 PROSECUTION OF PATENT APPLICATIONS AND PAYMENT OF PATENT COSTS 4.1 PROSECUTION BY CALTECH. Caltech shall use reasonable efforts, consistent with its normal practices, to: prosecute any and all patent application(s) in connection with the Exclusively Licensed Patent Rights. Licensee may recommend patent counsel for this purpose. Caltech shall permit licensee and its appointed counsel to review all patent applications and claims made therein, and Caltech shall make reasonable efforts to implement improvements thereto may be requested by Licensee prior to filing. 4.2 PROSECUTION BY LICENSEE. If Caltech declines to file, prosecute or maintain any patent application or patent referred to in Section 4.1, then Licensee may elect to assume responsibility for such filing, prosecution or maintenance at its expense in Caltech's name. Caltech agrees to fully cooperate with Licensee in filing, prosecuting, and maintaining any such patent applications and patents, and Caltech agrees to execute any documents as shall be necessary for such purpose, and not to impair in any way the patentability of any of the foregoing. 4.3 PATENT COSTS. Except as specified in the next paragraph, Licensee shall reimburse Caltech for all reasonable expenses (including attorneys' fees) incurred by Caltech for the filing, prosecution and maintenance, interference and/or reexamination proceedings, of patents pursuant to Sections 4.1 or 4.2, within thirty (60) days following receipt by Licensee from Caltech of an invoice covering such fees (including copies of invoices for legal fees describing the legal services performed in reasonable detail); If Licensee fails to pay such invoice, Caltech will notify Licensee and Licensee shall pay the invoice within thirty (30) days of receipt of Caltech's notification. One hundred percent (100%) of the amounts expended by Caltech in connection with foreign patent costs shall be creditable against earned royalties due Caltech in the respective 7 territory covered by the patent or patents that are foreign filed. ALL AMOUNTS OWED BY LICENSEE FOR THE REIMBURSEMENT OF PATENT EXPENSES INCURRED PRIOR TO THE EFFECTIVE DATE OF THIS AGREEMENT STALL BE DUE WITHIN SIXTY (120) DAYS OF THE EFFECTIVE DATE OF THIS AGREEMENT. Licensee may elect not to pay the foregoing patent costs and fees with respect to a Particular patent application or patent. In the event that Licensee elects not to pay any of the forgoing costs and fees with respect to a particular application or patent, Caltech, may, at its option, continue such prosecution or maintenance, although any patent or patent application resulting from such prosecution or maintenance will thereafter no longer be subject to license hereunder. ARTICLE 5 ROYALTIES 5.1 TIMING AND COMPUTATION. All royalties hereunder shall be computed on a quarterly basis with respect to the Effective Date. Royalties for each such quarter shall be due and payable within thirty (30) days after the end of such quarter. 5.2 VALID CLAIMS. For any country in which the Exclusively Licensed Patent Rights includes a Valid Claim, Licensee shall pay Caltech a royalty of FOUR PERCENT (4%) OF NET REVENUES attributable to each Licensed Product made, sold, licensed, distributed or used, by or on behalf of Licensee or its Affiliates, in such country. 5.3 TECHNOLOGY. For any country in which the Exclusively Licensed Patent Rights do not include a Valid Claim, Licensee shall pay Caltech a royalty of TWO PERCENT (2%) OF NET REVENUES for each Licensed Product made, sold, licensed, distributed or used, by or on behalf of Licensee or its Affiliates for a period of seven (7) years from a first commercial sale. 5.4 BUNDLED PRODUCTS AND SERVICES. In the event that Licensed Products are sold, licensed, distributed or used in combination with one or more other products or services which 8 are not Licensed Products, the Net Revenues for such combination products will be calculated on a country-by-country basis by multiplying actual net sales (calculated on the basis as if they were Net Revenues) of such combination products by the fraction A/(A+B) where A is the average invoice price, during the relevant quarterly period, of the Licensed Product when sold or licensed separately by Licensee or a Affiliate, and B is the average invoice price during such period of any other product(s) or services in the combination when sold or licensed separately by Licensee or an Affiliate. If the products or services in the combination that are not Licensed Products have not been sold or licensed separately by licensee or a Affiliate in the relevant quarterly period, Net Revenues shall be calculated by multiplying actual net sales (calculated on a basis as if they were Net Revenues) of such combination products by the fraction A/C where A is the average invoice price, during the last quarterly period, of the Licensed Product when sold or licensed separately and C is the average invoice price of the combination product during such period. If the Licensed Product has not been sold or licensed separately by Licensee or a Affiliate in the last quarterly period, regardless whether the combination product without the Licensed Product is sold or licensed separately, Net Revenues shall be calculated as in the immediately preceding sentence except that A shall be the total manufacturing cost of Licensed Product and C shall be the total manufacturing cost of the combination. 5.5 SUBLICENSING ROYALTIES. Licensee shall pay Caltech THIRTY FIVE PERCENT (35%) OF THE NET REVENUES (including payments for technical assistance and the like) that Licensee receives from sublicensing with respect to Licensed Products Such Net Revenues specifically shall not include payments made by a sublicensee solely in consideration of: (a) equity or debt securities of Licensee; (b) to support research or development activities to be undertaken by Licensee; (c) upon the achievement by Licensee of specified milestones or, benchmarks relating, 9 to the development of Licensed Products; (d) pilot studies; (e) performance-based milestones (excluding milestones tied to sales or marketing performance, which shall be subject to the percentage-based payments to Caltech); (f) the license or sublicense of any intellectual property other than Caltech Technology; (g) products other than Licensed Products; or (h) reimbursement for patent or other expenses. 5.6 MINIMUM ANNUAL ROYALTIES. A minimum annual royalty of TEN THOUSAND DOLLARS ($10,000.00) IS DUE CALTECH ON AUGUST 1, 2005 AND EACH ANNIVERSARY thereof. Any royalties paid under Sections 5.2, 5.3, 5.4 and 5.5 for the one-year period preceding the date of payment of the minimum annual royalty shall be creditable against the annual minimum. Caltech shall have the right to terminate this Agreement pursuant to Section 10.2 for failure to pay such minimum annual royalty. 5.7 THIRD PARTY ROYALTY OFFSET. If Licensee or an Affiliate is required to make any payment (including, but not limited to, royalties or other license fees) to one or more third parties to obtain a patent license in the absence of which it could not legally make, import, use, sell, or offer for sale Licensed Products in any country, and Licensee provides Caltech with reasonably satisfactory evidence of such third-party payments, such third-party payments shall be fully creditable against royalties owed to Caltech hereunder, provided that in no one year shall the aggregate of all such expenses be credited against more than twenty-five percent (25%) of royalty payments to Caltech. Any greater amount of such expenses may be carried over and credited against royalties owed in future years, subject in every case to the 25% annual cap for that year. 5.8 CURRENCY CONVERSION. For the purpose of determining royalties payable under this Agreement, any royalties or other revenues Licensee receives from sublicensees in 10 currencies other than U.S. dollars and any Net Revenues denominated in currencies other than U.S. dollars shall be converted into U.S. dollars according to the noon buying rate of the Federal Reserve Bank of New York on the last business day of the quarterly period for which such royalties are calculated. 5.9 CONVENIENCE OF THE PARTIES. Caltech and Licensee acknowledge that each of the royalties set forth in this Article 5 represents an integrated royalty established for the convenience of the parties in order to avoid the technical, legal and accounting complexities of analyzing and apportioning the relative contributions of the various forms of patent, copyright, and/or trade secret rights licensed to, and the various forms of technical assistance (if any) provided to, Licensee in connection with the Licensed Products. 5.10 RECORDKEEPING AND AUDITS. Licensee shall keep complete and accurate production and accounting records relating to commercialization (including via sublicensing) of Licensed Products. Caltech shall be entitled to have an independent CPA periodically audit such records, during Licensee's normal business hours, to determine Licensee's compliance with the provisions of this Article 5. Licensee shall reimburse Caltech 100% of any unpaid royalties resulting from any noncompliance discovered as a result of any such audit; and Licensee shall also pay Caltech an additional 150% of the entire amount of any underpayment exceeding 10% of the corresponding amount previously paid. Such audits shall be at Caltech's expense, and shall occur no more than once annually, except that in the case of any underpayment exceeding 20% of the amount actually paid, Licensee, shall reimburse Caltech for the cost of such audit. 5.11 Royalties due under this Article 5 shall be payable on a country-by-country and Licensed Product-by-Licensed Product basis until the expiration of the last-to-expire issued Valid Claim covering such Licensed Product in such country, or if no such patent has previously issued 11 in a country, until the fifth anniversary of the first commercial sale of Licensed Product in any country. 5.12 Notwithstanding the provisions of this Article 5, no royalty shall be payable to Caltech with respect to any sales of Licensed Products on sales made solely to permit the U.S. Government to practice or have practiced on its behalf any invention or process covered by Caltech Technology. 5.13 NO MORE THAN ONE ROYALTY PAYMENT SHALL BE DUE WITH RESPECT TO A SALE OF A PARTICULAR LICENSED PRODUCT. NO MULTIPLE ROYALTIES SHALL BE PAYABLE BECAUSE ANY LICENSED PRODUCT, OR ITS MANUFACTURE, SALE OR USE IS COVERED BY MORE THAN ONE VALID CLAIM IN A GIVEN COUNTRY. NO ROYALTY SHALL BE PAYABLE UNDER THIS ARTICLE 5 WITH RESPECT TO LICENSED PRODUCTS DISTRIBUTED FOR USE IN RESEARCH AND/OR DEVELOPMENT OR AS PROMOTIONAL SAMPLES OR OTHERWISE DISTRIBUTED WITHOUT CHARGE TO THIRD PARTIES. ARTICLE 6 LICENSEE EQUITY INTEREST 6.1 COMMON STOCK GRANT. Licensee agrees to irrevocably issue to Caltech, in Partial Consideration of Licensee's receipt of the licenses granted under this Agreement, two hundred thousand (200,000) shares of common stock of Licensee pursuant to are agreed upon stock purchase agreement between Licensee and Caltech. The shares will be restricted according to the following table and all sales will be subject to applicable securities laws: on the 2nd year anniversary of the Effective Date, 100,000 become unrestricted; on the 3rd year anniversary of the Effective Date, 150,000 become unrestricted; and on the 4th year anniversary of the Effective Date, 200,000 become unrestricted. 12 ARTICLE 7 DUE DILIGENCE 7.1 COMMERCIALIZATION. Licensee agrees to use its best efforts to commercially introduce Licensed Product(s) in the Field as soon as practicable. Licensee shall be deemed to have satisfied its obligations under this Section 7.1 if Licensee has an ongoing and active research, development or marketing program (as appropriate to the stage of development of the technology in question), directed primarily toward commercial production and use of one or more Licensed Products in a manner consistent with the normal business practices of other commercial entities (if any) who are active in the Field. Any efforts of Licensee's Affiliates or sublicensees shall be considered efforts of Licensee for the sole purpose of determining Licensee's compliance with its obligation under this Section 7.1. 7.2 REPORTING. On each yearly anniversary of the Effective Date, Licensee shall issue to Caltech a detailed written report on its progress in introducing commercial Licensed Product(s). Such report shall be considered confidential information of licensee subject to Article 11. 7.3 FAILURE TO COMMERCIALIZE. If Licensee is not fulfilling its obligations under Section 7.1 with respect to the Field in any country, and Caltech so notifies Licensee in writing, Caltech and Licensee shall negotiate in good faith any additional efforts to be taken by Licensee. If the parties do not reach agreement within thirty (30) days of Caltech's written notice, the parties shall submit the issue to arbitration as provided in Article 12. ARTICLE 8 LITIGATION 8.1 ENFORCEMENT. Both Caltech and Licensee agree to promptly notify the other in writing should either party become aware of possible infringement by a third party of the Exclusively Licensed Patent Rights in any part of the Field. If Licensee has supplied Caltech 13 with evidence of infringement of Exclusively Licensed Patent Rights, Licensee may by notice request Caltech to take steps to enforce the Exclusively Licensed Patent Rights. If Caltech does not, within sixty (60) days of the receipt of such notice, initiate an action against the alleged infringer in the Field, Licensee may upon notice to Caltech initiate such an action at Licensee's expense, either in Licensee's name or in Caltech's name if so required by law. Licensee shall be entitled to control any such action initiated by it. 8.2 OTHER DEFENSIVE LITIGATION. If a declaratory judgment action alleging invalidity, unenforceability or noninfringement of any of the Exclusively Licensed Patent Rights is brought against Licensee and/or Caltech, Licensee may elect to control the defense of such action, and if Licensee so elects it shall bear all the costs of the action. If mutually agreed between the parties, Licensee may also undertake the defense of any interference, opposition or similar procedure with respect to the Exclusively Licensed Patent Rights, providing that Licensee bears all the costs thereof. 8.3 COOPERATION. In the event either party takes control of a legal action or defense pursuant to this Sections 8.1 or 8.2, (thus becoming the Controlling Party) the other party shall fully cooperate with and supply all assistance reasonably requested by the Controlling Party instituting or carrying on such action or defense, including by: (a) using commercially reasonable efforts to have its employees consult and testify when requested; (b) making available relevant records, papers, information, samples, specimens, and the like; and (c) joining any such action in which it is an indispensable party. The Controlling Party shall bear the reasonable expenses (including salary and travel costs) incurred by the other party in providing, such assistance and cooperation. Each party shall keep the other party reasonably informed of the progress of the action or defense, and the other patty shall be entitled to participate in such action 14 or defense at its own expense and using counsel of its choice. As a condition of controlling any action or defense involving the Exclusively Licensed Patent Rights pursuant to Sections 8.1 or 8.2, Licensee shall use its best efforts to preserve the validity and enforceability thereof. 8.4 SETTLEMENT. If licensee controls any action or defense under Section 8.1 or 8.2, then Licensee shall have the right to settle any claims thereunder, but only upon terms and conditions that are reasonably acceptable to Caltech. Should Licensee elect to abandon such an action or defense other than pursuant to a settlement with the alleged infringer that is reasonably acceptable to Caltech, Licensee shall give timely advance notice to Caltech who, if it so desires, may continue the action or defense. 8.5 RECOVERIES. Any amounts paid to licensee by third parties as the result of an action or defense pursuant to Sections 8.1 or 8.2 (including in satisfaction of a judgment or pursuant to a settlement) shall first be applied to reimbursement of the unreimbursed expenses (including attorneys' fees and expert fees) incurred by each party. Any remainder shall be divided between the parties as follows: (a) To the extent the amount recovered reflects Licensee's lost profits or royalties, Licensee shall retain the remainder, less the amount of any royalties that would have been due Caltech under Article 5 on account of such lost profits or royalties, provided that (i) Licensee shall in any event retain at least seventy percent (70%) of the remainder; and (ii) Caltech shall receive an amount equal to the royalties it would have received if such sales had been made by Licensee, provided such an amount shall in no event exceed thirty percent (30%) of the remainder; and 15 (b) To the extent the amount recovered does not reflect Licensee's lost profits or royalties, seventy percent (70%) shall be paid to the party controlling the action at the time of recovery, and thirty percent (30%) to the other party. 8.6 INFRINGEMENT DEFENSE. If Licensee, its Affiliate or sublicensee, distributor or other customer is sued by a third party charging infringement of patent rights that cover a Licensed Product, Licensee will promptly notify Caltech. Licensee will be responsible for the expenses of, and will be entitled to control the defense or settlement of, any such action(s). 8.7 MARKING. Licensee agrees to mark the Licensed Products with the numbers of applicable issued patents within the Exclusively Licensed Patent Rights, unless such marking is commercially infeasible in accordance with normal commercial practices in the Field, in which case the parties shall cooperate to devise a commercially reasonable alternative to such marking. 8.8 EXPIRATION OR ABANDONMENT. In a case where one or more patents or particular claims thereof within the Licensed Patent Rights expire, or are abandoned, or are declared invalid or unenforceable by a court of last resort or by a lower court from whose decree no appeal is taken, or certiorari is not granted within the period allowed therefore, then the effect thereof hereunder shall be. (a) that such patents or particular claims shall, as of the date of expiration or abandonment or final decision as the case may be, cease to be included within the Licensed Patent Flights for the purpose of this Agreement; and (b) that such construction so placed upon the Licensed Patent Rights by the court shall be followed from and after the date of entry of the decision, and royalties shall thereafter be payable by Licensee only in accordance with such construction. 16 In the event that licensee challenges the validity of Licensed Patent Rights, Licensee may not cease paying royalties as of the date validity of the claims in issue are challenged, but rather may cease paying royalties as to those claims only after a final adjudication of invalidity of those claims. 8.9 ADJUSTMENT. In the event that any of the contingencies provided for in Paragraph 8.8 occurs, Caltech agrees to renegotiate in good faith with Licensee a reasonable royalty rate under the remaining Licensed Patent Rights which are unexpired and in effect and under which Licensee desires to retain a License. 8.10 IN THE EVENT LICENSEE OR SUBLICENSEE BECOMES OBLIGATED TO PAY AMOUNTS TO A THIRD-PARTY WITH RESPECT TO A LICENSED PRODUCT FOR PATENT RIGHTS OR TECHNOLOGY UTILIZED IN OR WITH SUCH LICENSED PRODUCT LICENSEE MAY DEDUCT TWENTY-FIVE (25%) OF THE AMOUNTS OWING TO SUCH THIRD-PARTY (PRIOR TO REDUCTIONS) FROM THE AMOUNT OWING TO CALTECH FOR SUCH LICENSED PRODUCT; PROVIDED, HOWEVER, THE AMOUNTS OTHERWISE DUE TO CALTECH SHALL NOT BE SO REDUCED BY MORE THAN TWENTY-FIVE PERCENT (25%). 8.11 THE ALLOWED REDUCTIONS SET FORTH IN SECTION 8.10 AND SECTION 5.7 SHALL NOT EXCEED THIRTY-FIVE PERCENT (35%) OF THE SUMS OTHERWISE PAYABLE DURING ANY YEAR. ARTICLE 9 REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 9.1 REPRESENTATIONS AND WARRANTIES OF CALTECH. Caltech hereby represents and warrants to Licensee that as of the Effective Date: (a) there are no outstanding exclusive licenses, exclusive options or exclusive agreements of any kind relating to the Exclusively Licensed Patent Rights, other than pursuant to this Agreement herein; 17 (b) there are no liens, mortgages, or encumbrances of any kind or any nature whatsoever against the Exclusively Licensed Patent Rights; and (c) Caltech has the power to grant the rights, licenses and privileges granted herein and can perform as set forth in this Agreement without violating the terms of any agreement that Caltech has with any third party. 9.2 EXCLUSIONS. The parties agree that nothing in this Agreement shall be construed as, and, CALTECH HEREBY DISCLAIMS, ANY EXPRESS OR IMPLIED REPRESENTATION, WARRANTY, COVENANT, OR OTHER OBLIGATION: (a) THAT ANY PRACTICE BY OR ON BEHALF OF LICENSEE OF ANY INTELLECTUAL PROPERTY LICENSED HEREUNDER IS OR WILL BE FREE FROM INFRINGEMENT OF RIGHTS OF THIRD PARTIES; (b) AS TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON INFRINGEMENT OF THIRD PARTY RIGHTS, WITH RESPECT TO ANY TECHNOLOGY PROVIDED BY CALTECH TO LICENSEE HEREUNDER. 9.3 INDEMNIFICATION BY CALTECH. Caltech shall indemnify, defend and hold harmless Licensees from and against any and all losses, damages, costs and expenses (including attorneys' fees) arising out of a material breach by Caltech of its representations and warranties ("INDEMNIFICATION CLAIMS"), except to the extent involving or relating to a material breach by Licensee of its representations and warranties, provided that: (a) Caltech is notified promptly of any Indemnification Claims; (b) Caltech has the sole right to control and defend or settle any litigation within the scope of this indemnity; and (c) all indemnified parties cooperate to the 18 extent necessary in the defense of any Indemnification Claims. The foregoing shall be the sole and exclusive remedy of Licensee for breach of Section 9.1. 9.4 INDEMNIFICATION BY LICENSEE. Licensee shall indemnify, defend and hold harmless Caltech, its trustees, agents and employees from and against any and all losses, damages, costs and expenses (including reasonable attorneys' fees) arising out of third party claims brought against Caltech relating to the manufacture, sale, licensing, distribution or use of Licensed Products by or on behalf of Licensee or its Affiliates, except to the extent involving or relating to a material breach by Caltech of its representations and warranties. 9.5 CERTAIN DAMAGES. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES ARISING OUT OF THIS AGREEMENT, HOWEVER CAUSED, UNDER ANY THEORY OF LIABILITY. ARTICLE 10 TERM AND TERMINATION 10.1 TERM. This Agreement and the rights and licenses hereunder shall take effect on the Effective Date and continue until the expiration, revocation, invalidation, or unenforceability of any or all intellectual property rights (whether under patent, copyright, or trade secret) licensed to Licensee hereunder, unless earlier terminated pursuant to the terms of this Agreement. 10.2 TERMINATION FOR MONETARY BREACH. Caltech shall have the right to terminate this Agreement and the rights and licenses hereunder if Licensee fails to make any payment due including patent expenses, minimum annual royalties or royalties hereunder and Licensee continues to fail to make the payment, (either to Caltech directly or by placing any disputed amount into an interest-bearing escrow account to be released when the dispute is resolved) for a period of fifteen (15) days after receiving a second written notice from Caltech specifying Licensee's failure. Caltech's second notice to Licensee specifying 19 Licensee's failure will not occur less than thirty (30) days after Caltech's first notice specifying Licensee's failure. Upon any such termination, (a) Licensee shall have six (6) months to complete the manufacture of any Licensed Products that are then works in progress for sale and to sell its inventory of Licensed Products, provided that Licensee pays the applicable royalties, and (b) any sublicenses shall survive termination in accordance with Section 2.3. 10.3 NON-MONETARY TERMINATION OR BREACH. If this Agreement is materially breached by either party, the non-breaching party may elect to give the breaching party written notice describing the alleged breach. If the breaching party has not cured such breach within ninety (90) days after receipt of such notice, the notifying party will be entitled, in addition to any other rights it may have under this Agreement, to terminate this Agreement and the rights and licenses hereunder effective immediately; provided, however, that if either party receives notification from the other of a material breach and if the party alleged to be in default notifies the other party in writing within sixty (60) days of receipt of such default notice that it disputes the asserted default, the matter will be submitted to arbitration as provided in Article 12 of this Agreement. In such event, the non-breaching party shall not have the right to terminate this Agreement until it has been determined in such arbitration proceeding that the other party materially breached this Agreement, and the breaching party fails to cure such breach within sixty (60) days after the conclusion of such arbitration proceeding. Notwithstanding the foregoing, with regard to breach of Section 7.1 only, the provisions of Section 7.3 shall take precedence over any inconsistent provision in this Section 10.2. 10.4 OTHER TERMINATION. This Agreement may also be terminated, in whole or in part, as set forth in Sections 5.6 and 7.3. 20 10.5 ACCRUED LIABILITIES. Termination of this Agreement for any reason shall not release any party hereto from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such to nation, nor preclude either party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued or are based upon any event occurring prior to such termination. 10.6 SURVIVAL. The following shall survive any expiration or termination (in whole or in part) of this Agreement: (a) any provision plainly indicating that it should survive; (b) any royalty due and payable on account of activity prior to the termination; and (c) Sections or Articles 6.2, 9.2, 9.3, 9.4, 9.5, 10.4, 11, 12, 13.1 & 14. ARTICLE 11 CONFIDENTIALITY 11.1 NONDISCLOSURE AND NONUSE. Each party agrees not to directly or indirectly disclose any confidential information of the other party to any third party without the prior written consent of the other party, or to use any such confidential information for any purpose other than as contemplated by this Agreement. The Technology, and the specification of any unpublished patent application, shall be considered confidential information of Caltech, except to the extent (if at all) the foregoing is inherently disclosed in the normal course of use of a Licensed Product. The terms of this Agreement shall be considered confidential information of both parties. Notwithstanding anything to the contrary, confidential information of a party shall not include any information which: (a) is independently developed, without access to that party's confidential information, by the other party; (b) is acquired by the other party from a third party who has, the right to disclose such information; or (c) is or becomes part of the public domain (e.g., by publication of a patent or by any other means) except via an unauthorized act or omission by the other party. 21 11.2 PERMITTED DISCLOSURES. Notwithstanding the foregoing, each party may disclose: (a) confidential information as required by securities or other applicable laws or pursuant to governmental proceedings, provided that the disclosing party gives advance written notice to the other party and reasonably cooperates therewith in limiting the disclosure to only those third parties having a need to know; (b) confidential information to that party's actual or prospective investors or corporate partners, or to that party's accountants, attorneys, and other professional advisors; and (c) the fact that Licensee has been granted a license under the Exclusively Licensed Patent Rights. Except with respect to the above third parties, Licensee agrees not to disclose information described in paragraph 11.1 to any third party unless under an appropriate nondisclosure agreement. ARTICLE 12 DISPUTE RESOLUTION 12.1 No issue of the validity of any of the Licensed Patents, enforceability of any of the Licensed Patents, infringement of any of the Licensed Patents, the scope of any of the claims of the Licensed Patents and/or any dispute that includes any such issue, shall be subject to arbitration under this Agreement unless otherwise agreed by the Parties in writing. 12.2 Except for those issues and/or disputes described in Section 10.2, any dispute between the Parties concerning the interpretation, construction or application of any terms, covenants or conditions of this Agreement shall be resolved by arbitration. 12.3 Arbitration shall be in accordance with the CPR Institute For Dispute Resolution (CPR) Rules for Non-Administered Arbitration of Patent and Trade Secret Disputes or Rules for Non-Administered Arbitration, as appropriate, in effect on the Effective Date by a sole Arbitrator who shall be appointed in accordance with the applicable CPR rules. Any other choice of law 22 clause to the contrary in this Agreement notwithstanding, the arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. Section 1-16. 12.4 Any award made (i) shall be a bare award limited to a holding for or against a party and affording such remedy as is within the scope of the Agreement; (ii) shall be accompanied by a brief statement (not to exceed ten (10) pages) of the reasoning on which the award rests; (iii) shall be made within four (4) months of the appointment of the Arbitrator; (iv) may be entered in any court of competent jurisdiction; and (v) any award pertaining to a patent which is subsequently determined to be invalid or unenforceable or otherwise precluded from being enforced, in a judgment rendered by a court of competent jurisdiction from which no appeal can or has been taken, may be modified as it relates to such patent by any court of competent jurisdiction upon application by any party to the arbitration, however, under no circumstances shall Caltech be required to refund any monies paid, or forego any mounts accrued, under the terms of this Agreement. 12.5 The requirement for arbitration shall not be deemed a waiver of any right of termination under this Agreement and the Arbitrator is not empowered to actor make any award other than based solely on the rights and obligations of the Parties prior to any such termination. 12.6 Each party shall bear its own expenses incurred in connection with any attempt to resolve disputes hereunder, but the compensation and expenses of the Arbitrator shall be borne equally. 12.7 The Arbitrator shall not have authority to award punitive or other damages in excess of compensatory damages, and each party irrevocably waives any claim thereto. 23 ARTICLE 13 PRODUCT LIABILITY 13.1 INDEMNIFICATION. Licensee agrees that Caltech (including its trustees, officers, faculty and employees) shall have no liability to Licensee, its Affiliates, their customers or any third party, for any claims, demands, losses, costs, or other damages which may result from personal injury, death, or property damage related to the Licensed Products ("PRODUCT LIABILITY CLAIMS"). Licensee agrees to defend, indemnify, and hold harmless Caltech, its trustees, officers, faculty and employees from any such Product Liability Claims, provided that: (a) Licensee is notified promptly of any Product Liability Claims; (b) Licensee has the sole right to control and defend or settle any litigation within the scope of this indemnity; and (c) all indemnified parties cooperate to the extent necessary in the defense of any Claims. 13.2 INSURANCE. Prior to such time as Licensee begins to manufacture, sell, license, distribute or use Licensed Products, Licensee shall at its sole expense, procure and maintain policies of comprehensive general liability insurance in amounts not less than $1,000,000 per incident and $3,000,000 in annual aggregate, and naming those indemnified under Section 13.1 as additional insureds. Such comprehensive general liability insurance shall provide: (a) product liability coverage; and (b) broad form contractual liability coverage for Licensee's indemnification of Caltech under Section 13.1. In the event the aforesaid product liability coverage does not provide for occurrence liability, Licensee shall maintain such comprehensive general liability insurance for a reasonable period of not less than five (5) years after it has ceased commercial distribution or use of any Licensed Product. Licensee shall provide Caltech with written evidence of such insurance upon request of Caltech. 13.3 LOSS OF COVERAGE. Licensee shall provide Caltech with notice at least fifteen (15) days prior to any cancellation, non-renewal or material change in such insurance, to the extent 24 Licensee receives advance notice of such matters from its insurer. If Licensee does not obtain replacement insurance providing comparable coverage within sixty (60) days following the date of such cancellation, non-renewal or material change, Caltech shall have the right to terminate this Agreement effective at the end of such sixty (60) day period without any additional waiting period; provided that if Licensee provides credible written evidence that is has used reasonable efforts, but is unable, to obtain the required insurance, Caltech shall not have the right to terminate this Agreement, and Caltech instead shall cooperate with Licensee to either (at Caltech's discretion) grant a limited waiver of Licensee's obligations under this Article or assist Licensee in identifying a carrier to provide such insurance or in developing a program for self-insurance or other alternative measures. ARTICLE 14 MISCELLANEOUS 14.1 NOTICES. All notice, requests, demands and other communications hereunder shall be in English and shall be given in writing and shall be: (a) personally delivered; (b) sent by telecopier, facsimile transmission or other electronic means of transmitting written documents with confirmation of receipt; or (c) sent to the parties at their respective addresses indicated herein by registered or certified mail, return receipt requested and postage prepaid, or by private overnight mail courier services with confirmation of receipt. The respective addresses to be used for all such notices, demands or requests are as follows: (a) If to CALTECH, to: California Institute of Technology 1200 East California Boulevard Mail Code 210-85 Pasadena, CA 91125 25 ATTN: Director, Technology Transfer Phone No.: (626) 395-3288 Fax No.: (626) 356-2486 Or to such other person or address as Caltech shall furnish to Licensee in writing. (b) If to LICENSEE, to: Universal Detection Technologies 9300 Wilshire Boulevard, Suite 308 Beverly Hills, CA 90212 ATTN: Jacques Tizabi, CEO Phone No.: (310) 273-2661 If personally delivered, such communication shall be deemed delivered upon actual receipt by the "attention" addressee or a person authorized to accept for such addressee; if transmitted by facsimile pursuant to this paragraph, such communication shall be deemed delivered the next business day after transmission, provided that sender has a transmission confirmation sheet indicating successful receipt at the receiving facsimile machine; if sent by overnight, courier pursuant to this paragraph, such communication shall be deemed delivered upon receipt by the "attention" addressee or a person authorized to accept for such addressee; and if sent by mail pursuant to this paragraph, such communication shall be deemed delivered as of the dates of delivery indicated on the receipt issued by the relevant postal service, or, if the addressee fails or refuses to accept delivery, as of the date of such failure or refusal. Any party to this Agreement may change its address for the purposes of this Agreement by giving notice thereof in accordance with this Section 14.1. 26 14.2 ENTIRE AGREEMENT. This Agreement sets forth the complete agreement of the parties concerning the subject matter hereof. No claimed oral agreement in respect thereto shall be considered as any part hereof. No amendment or change in any of the terms hereof subsequent to the execution hereof shall have any force or effect unless agreed to in writing by duly authorized representatives of the parties. 14.3 WAIVER. No waiver of any provision, of this Agreement shall be effective unless in writing. No waiver shall be deemed to be, or shall constitute, a waiver of a breach of any other provision of this Agreement, whether or not similar, nor shall such waiver constitute a continuing waiver of such breach unless otherwise expressly provided in such waiver. 14.4 SEVERABILITY. Each provision contained in this Agreement is declared to constitute a separate and distinct covenant and provision and to be severable from all other separate, distinct covenants and provisions. It is agreed that should any clause, condition or term, or any part thereof, contained in this Agreement be unenforceable or prohibited by law or by any present or future legislation then: (a) such clause, condition, term or part thereof, shall be amended, and is hereby amended, so as to be in compliance therewith the legislation or law; but (b) if such clause, condition or term, or part thereof, cannot be amended so as to be in compliance with the legislation or law, then such clause, condition, term or part thereof shall be severed from this Agreement all the rest of the clauses, terms and conditions or parts thereof contained in this Agreement shall remain unimpaired. 14.5 CONSTRUCTION. The headings in this Agreement are inserted for convenience only and shall not constitute a part hereof. Unless expressly noted, the term "include" (including all variations thereof) shall be construed as merely exemplary rather than as a term of limitation. 27 14.6 COUNTERPARTS/FACSIMILES. This Agreement may be executed in one or more counterparts, all of which taken together shall be deemed one original. Facsimile signatures shall be deemed original. 14.7 GOVERNING LAW. This Agreement, the legal relations between the parties and any action, whether contractual or non-contractual, instituted by any party with respect to matters arising under or growing out of or in connection with or in respect of this Agreement shall be governed by and construed in accordance with the internal laws of the State of California, excluding any conflict of law or choice of law rules that may direct the application of the laws of another jurisdiction. 14.8 NO ENDORSEMENT. Licensee agrees that it shall not make any form of representation or statement which would constitute an express or implied endorsement by Caltech of any Licensed product, and that it shall not authorize others to do so, without first having obtained written approval from Caltech, except as may be required by governmental law, rule or regulation. 14.9 TRANSFERABILITY. This Agreement shall be binding upon and inure to the benefit of any successor or assignee of Caltech. This Agreement is not transferable by Licensee without the prior written consent of Caltech, and any attempted transfer shall be void, except that Licensee may transfer this Agreement without the prior written consent of Caltech to any Affiliate or any successor of, or purchaser of substantially all of, the assets or operations of its business to which this Agreement pertains. Any permitted transferee shall succeed to all of the rights and obligations of Licensee under this Agreement. 14.10 EXPORT REGULATIONS. This Agreement is subject in all respects to the laws and regulations of the United States of America, including the Export Administration Act of 1979, as 28 amended, and any regulations thereunder. Licensee or its sublicensees will not in any form export, re-export, resell, ship, divert, or cause to be exported, re-exported, resold, shipped, or diverted, directly or indirectly, any product or technical data or software of the other party, or the direct product of such technical data or software, to any country for which the United States Government or any agency thereof requires an export license or other governmental approval without first obtaining such license or approval. 14.11 FORCE MAJEURE. Neither party shall lose any rights hereunder or be liable to the other party for damages or losses (except for payment obligations) on account of failure of performance by the defaulting party if the failure is occasioned by war, strike, fire, Act of God, earthquake, flood, lockout, embargo, governmental acts or orders or restrictions, failure of suppliers, or any other reason where failure to perform is beyond the reasonable control and not caused by the negligence or intentional conduct or misconduct of the nonperforming party, and such party has exerted all reasonable efforts to avoid or remedy such force majeure; provided, however, that in no event shall a party be required to settle any labor dispute or disturbance. 29 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed. CALIFORNIA INSTITUTE OF TECHNOLOGY (CALTECH) Date: 10-06-03 ---------------------- By: /s/ Lawrence Gilbert -------------------------------------- Name: Lawrence Gilbert Title: Director, Office of Technology Transfer (LICENSEE) Date: 10-10-03 ---------------------- By: /s/ Jacques Tizabi -------------------------------------- Name: Jacques Tizabi Title: CEO 30
EXHIBIT A Caltech I.D.# Appln Serial # Date Title - --------------------------------- --------------- --------------- ------------------------------- 3405 10/306,331 11/27/2002 BacterialEndospore Quantification using Lathanide Dipicolinate Inventors: Ponce, Adrian Venkateswaran, Kasthuri S 3405-PCT PCT/US02/38005 11/27/2002 BacterialEndospore Quantification using Lathanide Dipicolinate Inventors: Ponce, Adrian Venkateswaran, Kasthuri S 3596 10/355,462 1/31/2003 Live/Dead Assay for Bacterial (EXCLUDING SUBJECT Spores MATTER/CLAIMS RELATED TO NPO- Inventor 30444) Ponce, Adrian 3596-PCT PCT/US03/03036 1/31/2003 Live/Dead Assay for Bacterial (EXCLUDING SUBJECT Spores MATTER/CLAIMS RELATED TO NPO- Inventor 30444) Ponce, Adrian
31 EXHIBIT 1
INVENTIONS DESCRIBED IN CIT-3596 AND CIT-3596-PCT THAT ARE NOT SUBJECT TO THIS LICENSE --- AGREEMENT Tech. Disclosure #1 Date Title Caltech LD. # - --------------------------------- --------------- ------------------------------------ NPO 30444 117/2002 Live/Dead Assay for Bacterial Spores (Adrian Ponce) INVENTIONS DESCRIBED 1N CIT-3596 AND CIT-3596-PCT THAT ARE SUBJECT TO THIS LICENSE AGREEMENT Tech. Disclosure #1 Date Title Caltech LD. # - --------------------------------- --------------- ------------------------------------- NPO 30642 7/11/2002 Imaging Bacterial Spores Using Tb-DPA Luminescence Assay and APS Imaging (Adrian Ponce, Greg Bearman) NPO 30684 9127/2002 Unattended Monitoring of Aerosolized Bacterial Spores (Adrian Ponce) NPO 30469 11812002 Lateral Flow Immunoassay for Bacterial Spore Detection using Lanthanide Luminescence (Adrian Ponce).
32 EX-31 4 exhibit_31-1.txt EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF UNIVERSAL DETECTION TECHNOLOGY I, Jacques Tizabi, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Universal Detection Technology (f/k/a/ Pollution Research and Control Corp.); 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 registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant 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 registrant, 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 registrant'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 an evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 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 registrant'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 registrant's internal control over financial reporting. Date: November 14, 2003 BY: /s/ JACQUES TIZABI ---------------------------- JACQUES TIZABI CHIEF EXECUTIVE OFFICER 25 EX-31 5 exhibit_31-2.txt EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF UNIVERSAL DETECTION TECHNOLOGY I, Michael Collins, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Universal Detection Technology (f/k/a/ Pollution Research and Control Corp.); 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 registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant 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 registrant, 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 registrant'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 an evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 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 registrant'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 registrant's internal control over financial reporting. Date: November 18, 2003 BY: /s/ MICHAEL COLLINS --------------------------- MICHAEL COLLINS CHIEF FINANCIAL OFFICER 25 EX-32 6 exhibit_32-1.txt EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly annual report on Form 10-QSB (the "Form 10-QSB") for the quarter ended September 30, 2003, of Universal Detection Technology (f/k/a/ Pollution Research and Control Corp.) (the "Issuer"). I, Jacques Tizabi, the Chief Executive Officer of the Issuer certify that to the best of my knowledge: (i) the Form 10-QSB fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: November 18, 2003. /s/ JACQUES TIZABI ---------------------------- NAME: JACQUES TIZABI 26 EX-32 7 exhibit_32-2.txt EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly annual report on Form 10-QSB (the "Form 10-QSB") for the quarter ended September 30, 2003, of Universal Detection Technology (f/k/a/ Pollution Research and Control Corp.) (the "Issuer"). I, Michael Collins, the Chief Financial Officer of the Issuer certify that to the best of my knowledge: (i) the Form 10-QSB fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: November 18, 2003. /s/ MICHAEL COLLINS ---------------------------- NAME: MICHAEL COLLINS 27 -----END PRIVACY-ENHANCED MESSAGE-----