<DOCUMENT>
<TYPE>10QSB
<SEQUENCE>1
<FILENAME>form_10-qsb.txt
<TEXT>
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 March 31, 2004
[ ] 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
(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.)
9595 WILSHIRE BOULEVARD, SUITE 700
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,
39,750,632 shares issued and outstanding as of May 13, 2004.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
<PAGE>
UNIVERSAL DETECTION TECHNOLOGY
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION........................................................3
Item 1. Financial Statements.........................................................3
Consolidated Balance Sheet as of March 31, 2004 (unaudited)..................3
Consolidated Statements of Operations for the three months
ended March 31, 2004 and March 31, 2003 (unaudited)..........................4
Consolidated Statement of Changes in Stockholders' (Deficit)
Equity for the three months ended March 31, 2004 (unaudited)............5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and March 31, 2003 (unaudited).....................6
Notes to Consolidated Financial Statements...................................7
Item 2. Management's Discussion and Analysis or Plan of Operation....................9
Item 3. Controls and Procedures.....................................................20
PART II OTHER INFORMATION...........................................................21
Item 1. Legal Proceeding............................................................21
Item 2. Changes in Securities and Small Business Issuer
Purchases of Equity Securities..............................................21
Item 3. Defaults Upon Senior Securities.............................................22
Item 4. Submission of Matters to a Vote of Security Holders.........................22
Item 5. Other Information...........................................................22
Item 6. Exhibits and Reports on Form 8-K............................................22
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash $ 186,686
Restricted cash 100,605
Due from related party 46,980
Inventories 20,000
Prepaid expenses 639,239
--------------
Total Current Assets 993,510
EQUIPMENT, NET 53,099
--------------
$ 1,046,609
==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable, trade $ 152,653
Accrued liabilities 704,000
Notes payable, related party 40,000
Notes payable 1,257,526
Accrued interest expense 484,471
--------------
Total current liabilities 2,638,650
--------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 20,000,000 shares ---
Authorized, -0- issued and outstanding
Common stock, no par value, 480,000,000 shares
Authorized, 38,814,922 issued and outstanding 17,221,632
Additional paid-in-capital 3,606,891
Accumulated (deficit) (22,420,564)
--------------
Total stockholders' equity (deficit) (1,592,041)
--------------
Total liabilities and stockholders' equity (deficit) $ 1,046,609
==============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
3
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UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
--------------- --------------
<S> <C> <C>
REVENUE $ --- $ ---
COST OF GOODS SOLD --- ---
--------------- --------------
GROSS PROFIT --- ---
--------------- --------------
OPERATING EXPENSES:
Selling, general and administrative 654,253 99,914
Marketing 806,211 ---
--------------- --------------
Total expenses 1,460,464 99,914
--------------- --------------
(LOSS) FROM OPERATIONS (1,460,464) (99,914)
OTHER INCOME (EXPENSE):
Interest income 1,097 48
Interest expense (42,363) (49,783)
Amortization of loan fees (43,260) (30,000)
--------------- --------------
Net other income (expense) (84,526) (79,735)
--------------- --------------
NET (LOSS) $(1,544,990) $ (179,649)
=============== ==============
NET (LOSS) PER SHARE - BASIC AND DILUTED $ (0.04) $ (0.01)
=============== ==============
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 37,375,750 12,657,459
=============== ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
<TABLE>
<CAPTION>
Total
Common Stock Additional Accumulated Stockholders'
Equity
Shares Amount Paid-in-Capital Deficit (Deficit)
------------- ------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 2003 35,002,197 $ 15,705,055 $ 3,606,891 $ (20,875,574) $ (1,563,628)
Stock issued in private
placements net of offering costs of
$181,098 3,812,725 1,516,577 --- --- 1,516,577
Net (loss) for the period --- --- --- (1,544,990) (1,544,990)
------------- ------------- ----------------- --------------- ----------------
BALANCE, MARCH 31, 2004 38,814,922 $ 17,221,632 $ 3,606,891 $ (22,420,564) $ (1,592,041)
=== ============= ============= ================= ============== ================
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
5
<PAGE>
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
2004 2003
---------------- ---------------
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) $ (1,544,990) $ (179,649)
Adjustments to reconcile net (loss) to net cash (used in)
operations:
Stock issued for services --- 11,280
Fair market value of repriced warrants --- 30,000
Depreciation 1,165 ---
Changes in operating assets and liabilities:
Prepaid expenses 405,916 (10,938)
Accounts payable and accrued expenses 72,129 (59,452)
---------------- ---------------
Net cash (used in) operating activities (1,065,780) (208,759)
---------------- ---------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of equipment (50,757) ---
Payments received on bridge note to related party 50,000 ---
Advances to related party (17,881) ---
(Increase) in restricted cash (372) ---
---------------- ---------------
Net cash (used in) investing activities (19,010) ---
---------------- ---------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,697,675 195,131
Payment of offering costs (181,098) (19,491)
Proceeds from exercise of warrants --- 36,000
Payments on notes payable (260,000) ---
---------------- ---------------
Net cash provided by financing activities 1,256,577 211,640
---------------- ---------------
NET INCREASE IN CASH 171,787 2,881
CASH, BEGINNING OF PERIOD 14,899 9,318
---------------- ---------------
CASH, END OF PERIOD $ 186,686 $ 12,319
================ ===============
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
6
<PAGE>
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted 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 Form 10-KSB for the fiscal
year ended December 31, 2003.
On August 8, 2003, the shareholders approved the change of the name of Pollution
Research and Control Corp. to Universal Detection Technology.
NOTE 2. 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). This
Statement simplifies the standards for computing earnings per share (EPS)
previously found in Accounting Principles Board Opinion No. 15, Earnings Per
Share, and makes them more comparable to international EPS standards. SFAS No.
128 replaces the presentation of primary EPS with a presentation of basic EPS.
In addition, the Statement requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. However, such presentation is not required if the effect is
antidilutive. Accordingly, no such presentation has been made.
NOTE 3. STOCKHOLDERS' EQUITY
During the three months ended March 31, 2004, the Company sold 3,812,725 shares
of common stock for a total of $1,697,675. The Company paid placement fees
totaling $181,098 which includes $96,184 in placement fees to a company in which
its President and CEO has an equity interest and $84,914 in placement fees to an
unrelated entity. Certain investors received warrants to purchase 166,668 shares
of the Company's common stock at $0.90 per share in connection with the sale of
stock.
7
<PAGE>
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2004
NOTE 4. 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. For the three months ended March 31, 2004, the Company paid a total of
$171,184 under this agreement.
Restricted cash consists of a certificate of deposit, which guarantees an
irrevocable letter of credit. The letter of credit has been provided for the
benefit of a related party company in which the Company's president and CEO has
an equity interest.
The Company and the related entity intend to enter into a sub-lease agreement
during 2004. The Company's restricted cash currently guaranteeing its letter of
credit for the benefit of the related party will be incorporated as a condition
of the sub-lease agreement when executed. The amounts currently due from the
related party will be applied to a lease deposit when the sub-lease is executed.
NOTE 5. SUBSEQUENT EVENTS
Subsequent to March 31, 2004, the Company issued 93,200 shares of its common
stock for proceeds of $59,560. The Company paid related placement fees of $2,547
to a related party entity in which its President and CEO has an equity interest.
On April 29, 2004, the Company commenced a private placement, offering for sale
a minimum of $250,000 of Units on a "best efforts all or none" basis and an
additional of $750,000 of Units on a "best efforts" basis. Upon mutual agreement
between the Company and the placement agent, the Company may offer an additional
$2,000,000 of Units. Each Unit will consist of one share of common stock and a
Class A Warrant and a Class B Warrant, each exercisable by the holder to
purchase one-half share of the Company's common stock.
Pursuant to the agreement with the placement agent, if the Company consummates
an initial closing of the private placement offering, the Company will amend the
terms of its agreement for investment banking and strategic advisory services,
reducing the monthly payment to a sum no greater than $5,000 per month
commencing April 29, 2004 and the nine months thereafter. In addition, the
Company has agreed to defer payment of all accrued wages and future compensation
due to its President and Chief Executive Officer in excess of $150,000 per year
for nine months from April 29, 2004.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with our
consolidated financial statements, and the related notes included elsewhere in
this Quarterly Report on Form 10-QSB and the Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2003. 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 May 17, 2004, and we undertake no duty to update this
information. If events occur subsequent to May 17, 2004, 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
We primarily are engaged in the research and development of bio-terrorism
detection devices. After engaging in initial research and development efforts,
we determined to pursue a strategy to identify qualified strategic partners and
collaborate to develop commercially viable bio-terrorism detection devices.
Consistent with this strategy, in August 2002, we entered into a technology
affiliates agreement with NASA's Jet Propulsion Laboratory, commonly referred to
as JPL, to develop technology for our bio-terrorism detection equipment. JPL is
a federally funded research and development center sponsored by NASA and also is
an operating division of the California Institute of Technology, a private
non-profit educational institution. The agreement provides that JPL will develop
its proprietary bacterial spore detection technology for integration into our
existing aerosol monitoring system, resulting in a product which we refer to as
the Anthrax Smoke Detector. Our goal with JPL is to develop a product which
provides continuous unattended monitoring of airborne bacterial spores in large
public places, with real-time automated alert functionality. As announced on May
4, 2004, we held a press conference on May 6, 2004, during which time we
unveiled the first commercial prototype of our Anthrax Smoke Detector.
To a lesser extent, we also may engage in research and development relating
to our nitric oxide machine and applications in the medical diagnostics market.
We previously have participated in developing an asthma diagnostic instrument
with Logan Research of London England, a research institute, for these
applications, but the project was halted due to a lack of funding. From time to
time, we engage in discussions with potential research partners to pursue
further research and development efforts in this regard. Dr. Louis Ignarro, who
became a member of our Scientific Advisory Board in December 2002, is one of the
leading researchers on nitric oxide and its effects. To date, we have not
entered into any collaborative relationships with research partners in
connection with the development of the nitric oxide machine.
On April 29, 2004, we commenced a private offering of our securities under
Section 4(2) and/or Regulation D of the Securities Act of 1933. In this private
placement, which we refer to as the Offering throughout this Report, we will
offer for sale a minimum of $250,000 of Units on a "best efforts all or none"
basis and an additional $750,000 of Units on a "best efforts" basis. The
Offering is being made solely to accredited investors through a registered
broker dealer firm. Upon the mutual
9
<PAGE>
agreement of the placement agent and us, we may offer for sale an additional
$2,000,000 of Units. A Unit will consist of one share of common stock and a
Class A Warrant and a Class B Warrant. The offering price per Unit will be the
lower of the average closing bid price of our common stock for the five trading
days ending the trading day immediately prior to the initial closing date less
33% (rounded to the nearest whole cent) or $0.50 per Unit. The Class A Warrants
are exercisable by the holder thereof to purchase one-half share of common stock
at a per share price equal to the Unit offering price and the Class B Warrants
are exercisable by the holder thereof to purchase one-half share of common stock
at $0.70 per share. Both the Class A and Class B Warrants are exercisable by the
holder at any time up to the expiration date of the warrant, which is five years
from the date of issuance. We intend to use the proceeds of the Offering for
working capital and general corporate purposes.
The securities we are offering as part of this Offering have not been
registered under the Securities Act of 1933, and may not be offered or sold in
the United States absent registration or an applicable exemption from the
registration requirements. Neither the United States Securities and Exchange
Commission nor any other regulatory agency has passed upon the merits of, or
given its approval to, any securities offered or the terms of the Offering. Nor
has the Securities and Exchange Commission or any other regulatory authority
passed upon the accuracy or completeness of any Offering circular or other
selling literature. The securities offered are offered pursuant to an exemption
from registration under the federal securities laws and the laws of the various
states. Any representation to the contrary is a criminal offense.
10
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Universal
Detection Technology 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 three-month periods ended
March 31, 2004 and 2003, 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.
11
<PAGE>
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.
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.
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 $0 during the three months ended March 31, 2004 and
2003.
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 March 31, 2004, 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.
12
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RECLASSIFICATION
Certain amounts reported in our financial statements for the three months ended
March 31, 2003, 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.
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
13
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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 MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2003
REVENUES. Revenues were $0 for the three months ended March 31, 2004 and 2003.
COST OF SALES. Cost of sales were $-0- for the three months ended March 31, 2004
and 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $554,339, or 555%, to $654,253 for the three
months ended March 31, 2004, from $99,914 for the three months ended March 31,
2003. The increase in selling, general and administrative expenses primarily is
a result of a significant increase in our use of consultants and the payment of
our officer's salary which had been waived from September 2001 through June 1,
2003. Selling, general and administrative costs consisted primarily of
accounting fees, legal fees, and bio-detection product consulting expenses.
(LOSS) FROM CONTINUING OPERATIONS. Operating loss increased $1,360,550, or
1362%, to ($1,140,464) for the three months ended March 31, 2004, as compared to
($99,914) for the three months ended March 31, 2003. This increase is primarily
due to the increase in our selling, general and administrative expenses and
marketing expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) our operating activities during the three
months ended March 31, 2004, was ($1,065,780), and during the three months ended
March 31, 2003, was ($208,759). Net cash provided by (used in) our investing
activities was ($19,010) during the three months ended March 31, 2004 and $0
during the three months ended March 31, 2003. Net cash provided by financing
activities during the three months ended March 31, 2004, was $1,256,577, and
during the three months ended March 31, 2003 was $211,640.
Our total cash and cash equivalent balance at March 31, 2004, was $186,686,
as compared to March 31, 2003, which was $12,319. 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.
14
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During fiscal 2003 and 2002 and through the date of this report, we have
received debt financing that is upon various terms, as follows:
(a) 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.
(b) 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.
(c) From March 2003 to November 2003, we entered into 11 loans with
affiliates and non-affiliates evidenced by promissory notes with an aggregate
face amount of $450,000. The term of these loans ranges from 18 days to four
months. The interest rates for these loans range from 5% to 18% per annum, and
two of the loans bear no interest. We have repaid an aggregate of $355,000 in
principal amounts of these notes as of March 31, 2004. The lenders have verbally
agreed to extend the terms of the unpaid notes to a date to be mutually agreed
upon by the parties.
Our working capital deficit at March 31, 2004, was $1,645,140. Our
independent auditors' report, dated February 4, 2004, 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, 2003, and the sale
of our operating subsidiary. We require immediate financing to repay our
indebtedness and continue operations. We require approximately $1.7 million to
repay indebtedness in the next twelve months and at least $1.5 million in the
next six to twelve months to complete our existing prototype, engage in testing
of the device, and revise the technology or reengineer the device as may be
necessary or desirable and otherwise execute our business plan. We actively
continue to pursue additional equity or debt financings. 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 three months ended March 31, 2004, we sold 3,812,725 shares of
our common stock for $1,697,675, less offering costs of $181,098, including
$96,184 in placement fees paid to a company in which our President and CEO has
an equity interest.
Our Chief Executive Officer has agreed that, if we consummate an initial
closing of the Offering consisting of at least $250,000 in gross proceeds, he
will defer payment of all accrued but unpaid bonus or salary, as well as any
compensation payable to him in excess of $150,000 per year, for nine months from
April 29, 2004.
We have agreed that, if we consummate an initial closing of the Offering
consisting of at least $250,000 in gross proceeds, we will enter into an
agreement with Astor Capital, Inc., whereby the parties will agree that the
compensation payable to Astor Capital pursuant to that certain Agreement for
Investment Banking and Advisory Services date June 1, 2003, shall be reduced
during the period from April 29, 2004, and for nine months thereafter, to an
amount not to exceed the sum of $5,000 per month, excluding any fees for
placement of securities.
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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.
OUR INDEPENDENT AUDITORS' REPORT EXPRESSES DOUBT ABOUT OUR ABILITY TO CONTINUE
AS A GOING CONCERN.
Our independent auditors' report, dated February 4, 2004, 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,
2003, 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 $550,000, excluding accumulated interest, as of March 31,
2004. These defaults currently restrict our ability to file registration
statements, including those relating to capital-raising transactions, on Form
S-3, which may make it more difficult for us to raise additional capital. We
have limited cash on hand and short-term investments and we do not expect to
generate material cash from operations this year. 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 assure you that additional financing will
be available when and to the extent we require or that, if available, it will be
on acceptable terms.
WE HAVE A HISTORY OF LOSSES AND WE DO NOT ANTICIPATE THAT WE WILL BE PROFITABLE
IN FISCAL 2004.
We do not anticipate having a product for sale until our Anthrax Smoke Detector
is commercialized, which could take several more years. We have not been
profitable in the past years and had an
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accumulated deficit of approximately $22.4 million as of March 31, 2004. During
the three months ended March 31, 2004, we incurred a net loss of approximately
$1.54 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
2004.
WE CANNOT GUARANTEE THAT OUR BIO-TERRORISM 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. We cannot predict with any degree of certainty when, or
if, the research, development, testing and regulatory approval process (if
required), will be completed. If our product development efforts are
unsuccessful or if we are unable to develop a commercially viable product
timely, we would need to consider steps to protect our assets against our
creditors.
OUR 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 contract with third parties 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.
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 depends upon many factors, including
broad commercial acceptance of our products. If our products are not
commercially accepted, we will not recognize meaningful revenue and may not
continue to operate. The success of our products will depend in large part on
the breadth of information these products capture and the timeliness of delivery
of that information. The commercial success of our products also depends upon
the quality and acceptance of other competing products, general economic and
political conditions and other 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 market acceptance or will generate significant revenue.
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.
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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 our 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.
OUR COMMON SHARES HAVE BEEN DELISTED FROM THE NASDAQ SMALLCAP 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 SmallCap Market and our
common shares were delisted on the close of business on June 19, 2002. Our
common stock currently is trading on The Over the Counter Bulletin Board. It is
more difficult to raise additional debt or equity financing while trading on The
Over the Counter 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 MAY DILUTE OUR SHAREHOLDERS' INTERESTS.
As of March 31, 2004, we have granted options and warrants to purchase a total
of 11,772,657 shares of common stock that have not been exercised. To the extent
these outstanding options and warrants are exercised, 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 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 this insurance.
WE HAVE LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS OF
OUR PRODUCTS.
We regard all portions of the designs and technologies incorporated into our
products as proprietary and attempt to protect them under trade secret laws. 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 we regard as proprietary. The technology for our Anthrax Smoke
Detector is being developed pursuant to our technology affiliates agreement with
JPL, which is federally funded. The U.S. government has the right to use
technologies that it has funded regardless of whether the technology has been
licensed to a third party, and thus, has a non-exclusive, non-transferable,
irrevocable, paid-up license to practice or have practiced any invention
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covered by our technology affiliates agreement with JPL. We cannot assure you
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technologies.
WE MAY BE SUED BY THIRD PARTIES WHO CLAIM OUR PRODUCT INFRINGES ON THEIR
INTELLECTUAL PROPERTY RIGHTS. DEFENDING AN INFRINGEMENT LAWSUIT IS COSTLY AND WE
MAY NOT HAVE ADEQUATE RESOURCES TO DEFEND OURSELVES.
We may be exposed to future litigation by third parties based on claims that our
technology, product, or activity infringes on the intellectual property rights
of others or that we have misappropriated the trade secrets of others. This risk
is compounded by the fact that the validity and breadth of claims covered in
technology patents in general and the breadth and scope of trade secret
protection involves complex legal and factual questions for which important
legal principles are unresolved. Any litigation or claims against us, whether or
not valid, could result in substantial costs, could place a significant strain
on our financial and managerial resources, and could harm our reputation. Our
license agreement with Caltech requires that we pay the costs associated with
initiating an infringement claim and defending claims by third parties for
infringement, subject to certain offsets that may be allowed against amount we
may owe to Caltech under the licensing agreement. In addition, intellectual
property litigation or claims could force us to do one or more of the following:
o cease selling, incorporating, or using any of our technology and/or
products that incorporate the challenged intellectual property, which
could adversely affect our potential revenue;
o obtain a license from the holder of the infringed intellectual
property right, which license may be costly or may not be available on
reasonable terms, if at all; or
o redesign our products, which would be costly and time consuming.
OUR STOCK PRICE IS VOLATILE.
The trading price of our common stock fluctuates widely and in the future may be
subject to similar fluctuations in response to quarter-to-quarter variations in
our operating results, announcements of technological innovations or new
products by us or our competitors, general conditions in the 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. These broad market fluctuations also may adversely affect
the future trading price of our common stock.
OUR STOCK HISTORICALLY HAS BEEN THINLY TRADED. THEREFORE, SHAREHOLDERS MAY NOT
BE ABLE TO SELL THEIR SHARES FREELY.
The volume of trading in our common stock historically has been relatively light
and a limited market presently exists for the shares. We have no analyst
coverage of our securities. The lack of analyst reports about our stock may make
it difficult for potential investors to make decisions about whether to purchase
our stock and may make it less likely that investors will purchase our stock. We
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cannot assure you that our trading volume will increase, or that our
historically light trading volume or any trading volume whatsoever will be
sustained in the future. Therefore, we cannot assure you that our shareholders
will be able to sell their shares of our common stock at the time or at the
price that they desire, or at all.
POTENTIAL ANTI-TAKEOVER TACTICS 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 currently are 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 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 acting 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 acting 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 reports filed with
the SEC.
In accordance with SEC requirements, our chief executive officer and acting
chief financial officer notes 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 our chief executive officer and acting 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
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the inherent limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
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. On March 15, 2004, the court dismissed this lawsuit for lack of
prosecution.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES.
During the first quarter of fiscal 2004, we issued the following securities
which were not registered under the Securities Act of 1933, as amended. We did
not employ any form of general solicitation or advertising in connection with
the offer and sale of the securities described below. In addition, we believe
the purchasers of the securities are "accredited investors" for the purpose of
Rule 501 of the Securities Act. For these reasons, among others, the offer and
sale of the following securities were made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act or Regulation D
promulgated by the SEC under the Securities Act:
o In February 2004, we engaged in an offering of an aggregate of 125,000
shares of common stock for a total purchase price of $91,500. We
incurred $9,148 in placement fees, and our net proceeds were $82,352.
o In February 2004, we issued an aggregate of 100 units, consisting of a
total of 333,334 shares of common stock and warrants to purchase
166,668 shares of common stock at
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$0.90 per share, for a total purchase price of $100,000. We incurred
$10,000 in placement fees, and our net proceeds were $90,000.
During the first quarter of fiscal 2004, we issued the following securities
which were not registered under the Securities Act of 1933, as amended. No offer
or sale of the securities was made to a person in the United States. We believe
that each purchaser of securities was not a U.S. person as defined in Rule
902(k) of Regulation S and did not acquire the securities for the account or
benefit of any U.S. person. We did not engage in any directed selling efforts in
the United States. For these reasons, among others, the offer and sale of the
following securities were not subject to Section 5 of the Securities Act by
virtue of Regulation S promulgated by the SEC under the Securities Act:
o In the first quarter of fiscal 2004, we issued 3,354,391 shares of
common stock to non-U.S. persons, as such term is defined in
Regulation S, for an aggregate offering price of $1,506,175. We
incurred $161,950 in placement fees, and our net proceeds were
$1,344,225.
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 March 31, 2004, is $431,023, consisting of $300,000 of principal and $131,023
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 March 31, 2004, is approximately $295,000, consisting of
$250,000 of principal and $45,000 of interest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
31.1 Certification of Chief Executive Officer and Acting Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Dated May 17, 2004.
32.1 Certification of Chief Executive Officer and Acting 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 May 17, 2004.
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(b) Reports on Form 8-K.
None.
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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
Date: May 17, 2004 /s/ By: Jacques Tizabi
-------------------------------------------
By: Jacques Tizabi
Its: President, Chief Executive Officer and
Chairman of the Board
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