10KSB/A 1 udt_10ksba-123107.txt UNIVERSAL DETECTION TECHNOLOGY ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: DECEMBER 31, 2007 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: ___ to ____ Commission File Number 0-14266 UNIVERSAL DETECTION TECHNOLOGY (Name of Small Business Issuer in Its Charter) CALIFORNIA 95-2746949 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9595 WILSHIRE BLVD., SUITE 700 BEVERLY HILLS, CALIFORNIA 90212 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (310) 248-3655 Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value. Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] State issuer's revenues for its most recent fiscal year: $8,011. The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days: $1,281,234 as of April 07, 2008. The number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 1,653,206,274 common shares, no par value, outstanding as of April 7, 2008. Documents Incorporated By Reference: See Exhibit List. Transitional Small Business Disclosure Format: Yes [ ] No [X] ================================================================================ TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-KSB FOR YEAR ENDED DECEMBER 31, 2007 -------------------------------------------------------------------------------- PAGE PART I ---- Item 1. Description of Business 4 Item 1A. Risk Factors 11 Item 2. Description of Property 16 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to Vote of Security Holders 17 -------------------------------------------------------------------------------- PART II Item 5. Market for Common Equity and Related Stockholder Matters 18 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 7. Financial Statements 27 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28 Item 8A. Controls and Procedures 28 Item 8B. Other Information 29 -------------------------------------------------------------------------------- PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 30 Item 10. Executive Compensation 31 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 33 Item 12. Certain Relationships and Related Transactions 34 Item 13. Exhibits 34 Item 14. Principal Accountant Fees and Services 36 -------------------------------------------------------------------------------- SIGNATURES 37 -------------------------------------------------------------------------------- (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 2 EXPLANATORY NOTE This Amendment to the Annual Report on Form 10-KSB of the Registrant is made solely to correct and amend the disclosure under Item 8A. Controls and Procedures. Accordingly, this Amendment to the Annual Report on Form 10-KSB of the Registrant has not been updated or modified in any other way and speaks only as of the date of the original filing, April 14, 2008. FORWARD-LOOKING STATEMENTS This annual report on Form 10-KSB includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to in this annual report as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to in this annual report as the Exchange Act. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. In some cases, you can identify forward-looking statements by terminology such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project," "may," "will," "should," "expect," "plan," "potential," or "continue" or the negative of these terms or other comparable terminology and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on our management's beliefs and assumptions, using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to, risks, uncertainties and assumptions discussed in this annual report. Factors that can cause or contribute to these differences include those described under the headings "Risk Factors" and "Management Discussion and Analysis and Plan of Operation." If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statement you read in this annual report reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider the factors identified in this annual report which would cause actual results to differ before making an investment decision. We are under no duty to update any of the forward-looking statements after the date of this annual report or to conform these statements to actual results. 3 PART I ITEM 1. DESCRIPTION OF BUSINESS CORPORATE HISTORY Universal Detection Technology (the "Company" or "We") is engaged in the research and development of bioterrorism detection devices. We were incorporated on December 24, 1971, under the laws of California. Our core business for over twenty years was the design, manufacture, marketing and sale of automated continuous air monitoring instruments used to detect and measure various types of air pollution, such as acid rain, ozone depletion and smog episodes. We also supplied computer-controlled calibration systems that verified the accuracy of our instruments, data loggers to collect and manage pollutant information, and our reporting software for remote centralized applications. In September 2001, we retained a new management team. At that same time, the members of the Board of Directors resigned and new members were appointed. In the first quarter of 2002, management recommended to the Board, and the Board approved, a change to our strategic direction. In March 2002, we sold our sole operating subsidiary and reconfigured one of our existing air monitoring instruments in order to develop the Anthrax Detector, later renamed BSM-2000. In 2006 we expanded our business activities and included new products and services that would complement our core counter bioterrorism expertise. These products and services include anthrax detection kits, first responder training courses and reference videos, radiation detection systems, anti-microbial products, and research & development. Our principal offices are at 9595 Wilshire Blvd., Suite 700, Beverly Hills, CA 90212. Our telephone number is (310) 248-3655. OVERVIEW We are engaged in the research, development, and marketing of bioterrorism detection devices. Our strategy is to identify qualified strategic partners with whom to collaborate in order to develop commercially viable bioterrorism detection devices. Consistent with this strategy, in August 2002, we entered into a Technology Affiliates Agreement with NASA's Jet Propulsion Laboratory, commonly referred to as JPL, to develop technology for our bioterrorism detection equipment. Under the Technology Affiliates Agreement, JPL developed its proprietary bacterial spore detection technology and integrated it into our existing aerosol monitoring system, resulting in a product named BSM-2000. BSM-2000 is designed to provide continuous unattended monitoring of airborne bacterial spores in large public places, with real-time automated alert functionality. The device is designed to detect an increase in the concentration of bacterial spores, which is indicative of a potential presence of Anthrax. Our management continues to gain expertise in anti-terrorism techniques and solutions. Through our partnership with Security Solutions International, we have begun providing training seminars on terrorism detection and response methods. The seminars are designed for security officials, building safety managers, and law enforcement personnel. Through partnerships with various third parties, we have commenced sales and marketing of bioterrorism detection kits, radiation detection systems, anti-microbial products, surveillance cameras, and training references. In 2007 we have realized revenues of $8,011 from sales. We have incurred losses for the fiscal years ended December 31, 2007 and 2006 in the approximate amounts of $3.6 million and $2.7 million, respectively, and have an accumulated deficit of $36 million as of December 31, 2007. At December 31, 2007, we were in default on certain debt obligations totaling approximately $331,300, in addition to accumulated interest of approximately $392,000. We require approximately $1.4 million in the next 12 months to repay debt obligations. We do not anticipate that our cash on hand is adequate to meet our operating expenses over the next 12 months. In addition, we do not have adequate capital to repay all of our debt currently due and becoming due in the next 12 months. We principally expect to raise funds through the sale of equity or debt securities. In addition, the recent price and volume volatility in the common stock has made it more difficult for management to negotiate sales of its securities at a fair price. We actively continue to pursue additional equity or debt financing, but cannot provide any assurances that we will be successful. If we are unable to pay our debts as they becomes due and are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider other alternatives. 4 In May 2004, we unveiled the first functional prototype of BSM-2000. The prototype operated on external software. In July 2004, we commenced simulated tests with benign bacterial spores having anthrax-like properties in order to fine tune our product. The use of benign spores is as effective as testing with anthrax spores because our device is designed to detect an increase in bacterial spore concentration levels. Based on results we obtained, we were able to enhance the sensitivity of BSM-2000 by improving the sample collection efficiency of the device, and made certain other modifications to improve efficiency. While more testing and development is needed to enhance the performance of our BSM-2000 and to make it more user-friendly, the device is a functional product, available for sale. Starting in 2006, we followed a diversification strategy pursuant to which we have added various other services to our BSM-2000, biological detection system. By combining our in-house experience and knowledge and outside expertise offered by various consultants and third parties, we have added threat evaluation and consulting services, training courses, and event security to our services. We have also started sales and marketing of security and counter-terrorism products including bioterrorism detection kits, surveillance cameras, radiation detection systems, anti-microbial products, and training references, all of which are manufactured or supplied by third parties and for which we act as authorized resellers. Some of our products and services have not been sold to date and there is no guarantee that any of them will be demanded and sold in the market in the future. We plan to seek and find third parties interested in collaborating on further research and development on BSM-2000. Such research shall be aimed at making BSM-2000 more user-friendly, developing a less complicated interface and software, designing a lighter casing, and some cosmetics. The ideal third party collaborator would also assist us in marketing BSM-2000 more aggressively. There is no guarantee that any such collaborators will be found and, if found, that this strategy will be successful. The current version of BSM-2000 is fully functional and available for sale. To date, we have sold two units to the Government of the United Kingdom and we intend to develop a more wide-spread use for BSM-2000 through our planned collaborative research, development, sales, and marketing efforts. Our list price for BSM-2000 is $109,000. The manufacturing of BSM-2000 is outsourced to Original Equipment Manufacturers (OEM). We do not have any in-house manufacturing capabilities and do not intend to develop any until we reach high volumes of sales for BSM-2000 that would justify such facilities. To date we have used services of 2 OEMs for manufacturing of our units. We may decide to use services of other manufacturers in the future. In March 2006, we received a firm order from the government of the United Kingdom for two units of UDTT's BSM-2000 Anthrax Detection Systems. We have shipped both units and payment for both has been received. Due to confidentiality of the purchase order, we are unable to release the specific use and the name of the branch of government that has made the purchase. While we initially planned to secure and lease a testing facility close to the JPL laboratories where we would be able to implement a quality assurance program and test our products against the required specifications before shipping them to customers, that plan was never materialized and we do not anticipate to open such facilities in the foreseeable future and unless we receive a substantial order for our BSM-2000. In February 2006, the Company expanded its relationship with Caltech by licensing additional technologies in the field of microbial monitoring and sterility verification. While the Company plans to commercialize the microbial monitoring technology for use in hospitals, it has not yet started any such activities and there is no guarantee that it will in the near future. The Company also commenced work on developing smart ticket assay for detection of anthrax spores. Smart ticket assays are rapid field tests that are similar to common home pregnancy tests. Further research and development is needed to fully commercialize these smart ticket assays and presently there is no guarantee that the Company will have necessary funding and resources to conduct such research and development. Through parallel efforts for development of its proprietary smart ticket assays, the Company entered an agreement with a third party, whereby it markets and sells lateral flow assays capable of rapid on-site detection of five bioterrorism agents. 5 INDUSTRY BACKGROUND The attacks of September 11, 2001, and the subsequent spread of and potential future threat of anthrax spores have created a new sense of urgency in the public health systems across the world, and especially in the United States. During the 2001 anthrax attacks in the United States, emergency response personnel, clinicians, laboratories, and public health officials were overwhelmed by requests for evaluation of suspicious powders and by calls from patients concerned about exposures to bioterrorism agents. Systems designed to detect bioterrorism agents in clinical and environmental samples have become essential components of responses to both hoaxes and actual bioterrorism events. First responders and public health officials require sensitive and specific detection systems that can identify bioterrorism agents early enough to take actions that limit their spread. The United States government has responded to this urgent need for preparedness against terrorism by establishing the Department of Homeland Security ("DHS"). The Department of Homeland Security is intended to consolidate the federal government's efforts to secure the homeland, with the primary goal being an America that is stronger, safer, and more secure. The private sector also has responded to the need for preparedness against bioterrorism. A number of companies have developed or are in the process of developing various methods to detect harmful pathogens in the air, on surfaces, and in food and water through genetic analysis, including DNA or RNA analysis. In recent years, significant advances in molecular biology have led to the development of increasingly efficient and sensitive techniques for detecting and measuring the presence of a particular genetic sequence in a biological sample. Genetic testing involves highly technical procedures, including: o Sample preparation - procedures that must be performed to isolate the target cells and to separate and purify their nucleic acids; o Amplification - a chemical process to make large quantities of DNA from the nucleic acids isolated from the sample; and o Detection - the method of determining the presence or absence of the target DNA or RNA, typically through the use of fluorescent dyes. Existing technologies for determining the genetic composition of a cell or organism generally face the following limitations: o Require skilled technicians and special laboratories. Currently available methods and systems for genetic analysis require skilled technicians in a controlled laboratory setting, including, in many cases, separate rooms to prevent contamination of one sample by another. Some progress has been made to automate this process; o Large and inflexible equipment. Most currently available genetic analysis equipment is large and inflexible and requires a technically complex operating environment. New designs are attempting to address miniaturization of equipment; o Timeliness of result. Current sample preparation, amplification and detection technologies rely on processes that often require hours to complete, rendering results that may not be timely enough to be medically useful. Some new instruments are attempting to reduce analysis times; o Sensitivity constraints. Some existing technologies accept and process only very small sample volumes, forcing laboratory technicians to spend significant effort in concentrating larger samples in order to obtain the required level of sensitivity for detecting and measuring the presence of a genetic sequence; o Lack of integration. We believe that current amplification and detection systems do not fully automate and integrate sample preparation into their processes in a manner that can be useful in a non-laboratory setting in a cost effective fashion; o Operational Cost. The operating costs for existing technologies can be extremely high, making the implementation of the device cost-prohibitive; and o False Positives. Most existing technologies are susceptible to false positive results, which can have significant social and economic consequences. Currently, the two most commonly used methods for genetic testing are microbial culture and Polymerase Chain Reaction, commonly referred to as PCR. With microbial culture, a sample from the environment is placed into a small laboratory dish containing a nutrient rich media. The microbial culture is allowed to grow for a specified period of time, usually between 24-48 hours. The sample is then examined and a determination is made as to whether an organism is present in the sample. Although highly accurate, the disadvantages of microbial cultures are the time required to determine the presence of an organism and the need for a laboratory and an expertise in culture preparation and analysis. 6 PCR has been one of the most promising methods for an automated anthrax detection system. PCR amplifies DNA targets of choice, such as gene sequences encoded for the anthrax toxins to detectable levels. PCR is very sensitive and is able to detect very small amounts of DNA. But, the PCR process typically requires about three to eight hours to complete, plus an additional three hours for sample preparation time, which must usually be performed by a trained technician. Some developments have been made to automate the PCR process and reduce the analysis time. Nonetheless, the process is very expensive. We believe that the principal desired characteristics of an anthrax detection system are sustained, online operation with minimal maintenance, minimal susceptibility to false alarms, and low operating costs. These attributes require that we address the limitations inherent in most current technologies with a product that can operate as a stand-alone detection device. OUR SOLUTION Universal Detection Technology's BSM-2000 combines a bio-aerosol capture device with a chemical test for bacterial spores that is designed to accurately detect a potential anthrax attack in a timely fashion. Our system is designed to function as a first line of defense to detect a potential anthrax attack, on a fully automated basis and at a low cost compared to existing technologies. Only upon actual detection of a possible attack would first responders implement the more expensive tests such as immunoassay or DNA testing techniques to verify the identity of the detected spores. The BSM-2000 device, coupled with a testing device to be used only in the event of actual detection, is designed to be significantly less expensive than the existing competing technologies that are used to detect and test for a possible anthrax attack. This is true in large part because our device does not require the constant presence of experts or any continuous testing mechanism for anthrax, both of which substantially increase costs. Universal Detection Technology has also situated itself to provide various counter-terrorism products services that can be complimentary to BSM-2000. The Company is a reseller of these products, which include rapid anthrax detection test kits, training courses for first responders, event security, threat evaluation & consulting, radiation detection systems, anti-microbial products, and DVDs aimed at providing information and training regarding combating terrorism and managing emergency situations. The Company's bioterrorism detection kits can be used by emergency personnel to determine whether a suspicious substance is actually anthrax, botulinum toxin, ricin toxin, plague, or SEBs. So far the company has sold these kits to both the US Army and private customers. In 2007 the Company sold its bioterrorism detection kits to the Washington DC, Fire and Safety Management and other users. COMPANY PRODUCTS The Company has situated itself to serve as a provider of counter terrorism products, consulting, and solutions with a focus on bioterrorism detection. The Company's flagship product is an automated real-time bacterial spore detector, called BSM-2000, used for detection of abnormal levels of airborne endospores such as anthrax. In 2007, we expanded our product base to include small anthrax detection test kits, newer kits capable of detecting up to five bioterrorism agents, radiation detection systems, surveillance cameras, anti-microbial products and training material and references DVDs. Our BSM-2000, consists of the following four components: o an air sampler for aerosol capture, which collects aerosolized particles on a fiber tape; o thermal lysis for releasing the dipicolinic acid from the spores; o reagent delivery via syringe pump; and o a lifetime gated luminescence detection of the terbium-dipicolinate complex. The BSM-2000 is designed to continuously monitor the air and measure the concentration of airborne bacterial spores. The testing intervals are adjustable to respond to varying client needs and can be as short as 15 minutes. Bacterial spores are captured on the glass fiber tape. Next, thermal lysis "pops" the endospores, releasing a chemical from inside the endospore called dipicolinic acid, which is unique to bacterial spores. Then, a syringe pump adds a drop of terbium containing solution to the tape on the location where the endospores were lysed. Finally, a lifetime gated photometer measures the resultant terbium dipicolinate luminescence intensity, which is proportional to the bacterial spore concentration on the tape. A large change in endospore concentration is a strong indication of an anthrax attack, because endospores are the means by which anthrax travels. 7 Pursuant to our development plan, if an increase in spore concentration is detected, an alarm can sound notifying both a building's internal security as well as local emergency services through the device's landline or wireless networking capability. The system can be adjusted to ensure that the maximum time it takes to detect, and generate an alarm in response to a release of bacterial spores is approximately 15 minutes, which is designed to be adequate to substantially reduce the likelihood of widespread contamination. This response time also provides adequate time to begin antibiotic treatment prior to the onset of symptoms which can arise within two to three days if left untreated. The system is designed for constant and unattended monitoring of spaces such as public facilities and commercial buildings. JPL's detection technology is designed to sound an alarm only when it detects a significant increase in spore count. Natural background fluctuation of airborne endospores are very low, approximately 0.1 to 1 spore per liter of air, compared to an anthrax attack which would result in a concentration swing many orders of magnitude greater than background levels. Also, our device does not detect spores from other microorganisms, such as fungi and molds, and discriminates against detecting aerosol components such as dust. In addition, upon installation of the device, we expect to operate it for seven to ten days to measure the natural concentrations of bacterial spores in the area in which the device operates, so that the triggering threshold of that device will be set at an appropriate level for that environment. It is only upon detection of a significant increase in spore count, that our device is triggered and the sample collected is tested. In contrast, existing competing technologies require testing of ambient air samples continuously, which is very expensive, either because of the expert personnel required or the costs of the continuous immunoassay or DNA testing. In addition, these competing technologies may be more likely to result in false positives due to the volume of tests performed. In contrast, BSM-2000 is designed so that testing occurs only following an actual detection of substantially increased spore count, which significantly reduces the number of overall tests performed. Also, generally an increase in spore count, whether anthrax or benign, is unusual, and arises as a result of intentional conduct, which may be important to investigate even if the spores released ultimately were not harmful. False positive results are problematic not only for the obvious reason relating to their level of accuracy, but also because of the cost and consequences of a false alarm. On one occasion, a false anthrax alarm shut down 11 postal facilities in the Washington D.C. area. BSM-2000 is designed to function as a stand-alone product to detect a likely Anthrax threat, but does not provide a testing mechanism for samples collected that trigger the device. The BSM-2000 device is designed to function as a complement to an existing bioterrorism detection device in places such as public buildings and stadiums. For example, BSM-2000 is designed to serve as a front-end monitor to a PCR-based device. In the case that our device detects a substantial increase in spore count, the PCR-based device would be employed to test the sample collected. MARKETING AND SALES Our sales and marketing plan includes strategic partnership agreements and retention of our in-house staff and outside consultants. The Company has retained the services of consultants to market BSM-2000 in the United States and internationally. In 2007 we continued to work closely with our international distributors to market our automatic detection systems to government and private entities outside of the U.S. In January 2008, we assigned a representative in China and started working with a new group in Italy both of which are expected to work on marketing of our various products in their respective territories. In the United States, we plan to continue presenting our technology at industry events and trade shows. We also retain domestic distributors and consultants to arrange meetings with and presentations to building owners and operators, government officials in charge of decisions for safety and security of government and private venues and buildings, homeland security officials, and security companies. The United States Army, Washington DC Fire and Safety Management, and the Burbank Police Department have all purchased our detection test kits and we plan to try and sell more in 2008. In 2007 we continued to aggressively use the internet for spreading the word about Universal Detection Technology and its products and services to the public. This strategy includes creation of an interactive and informational presence through our website and use of various third parties to bring traffic to our website. We have been successful in generating interest and traffic in Universal Detection and its services. We intend to do more internet marketing and search engine optimization activities in 2008. 8 We also plan to develop brand recognition for our company and for our product through attendance at national and international defense related exhibitions, use of print and video promotional materials, and by granting interviews to national and international news media. MANUFACTURING Currently, we do not have any manufacturing capabilities. We have been in discussions with two third-party contractors, Met One Instruments and Horiba Jobin Yvon, regarding the manufacturing of our BSM-2000. Met One and Horiba Jobin Yvon have each manufactured three units for us to date. We have no agreements and are not obligated to continue to work with any of our Original Equipment Manufacturers (OEM). As such, we may choose to work with other OEMs in the future. RESEARCH AND DEVELOPMENT Under the Technology Affiliates Agreement, JPL developed its proprietary bacterial spore detection technology and integrated it into our existing aerosol monitoring system, resulting in a product which initially we referred to as the Anthrax Smoke Detector, and which we renamed BSM-2000 on April 21, 2005. BSM-2000 is designed to provide continuous unattended monitoring of airborne bacterial spores in large public places, with real-time automated alert functionality. The device operates to detect an increase in the concentration of bacterial spores, which is indicative of a potential presence of Anthrax. Under our agreement with JPL, we paid it approximately $250,000 for its services and we received an option to license all technology developed under the Technology Affiliates Agreement from Caltech. On September 30, 2003, we exercised our option and Caltech granted to us a worldwide exclusive license to the patent rights referenced in the Technology Affiliates Agreement and a worldwide nonexclusive license to rights in related proprietary technology. To maintain our license with Caltech, a minimum annual royalty of $10,000 was due to Caltech on August 1, 2005, and is due on each anniversary thereof, regardless of any product sales. Any royalties paid from product sales for the 12-month period preceding the date of payment of the minimum annual royalty will be credited against the annual minimum. Pursuant to the terms of the license, we must pay four percent royalties on product sales in countries where a patent is issued and two percent royalties on product sales in countries where a patent is not issued, as well as 35 percent of net revenues received from sub-licensees. As of the date of this report we have not paid the $10,000 royalty due Cal Tech on August 1, 2007. According to our license agreement with Caltech, Caltech shall have the right to terminate our license agreement and the rights and licenses granted to us if we fail to make any payment due including patent expense or minimum annual royalties for a period of fifteen days after receiving a second written notice from Caltech specifying our failure. To date we have not received any notices from Caltech with regards to our August 1, 2007 minimum annual royalty due of $10,000. Furthermore, we have reached an agreement with Caltech with regards to the payment of patent fees. This agreement is signed in the form of a second amendment to our license agreement, dated December 5, 2006 with Caltech. Accordingly, we have agreed that we owe the amount of $86,318.48 for patent costs incurred by Caltech prior to December 1, 2006 and that this amount shall be paid to Caltech in ten monthly installments of $8,631.85. To date, we have made four of the monthly installments called for in the second amendment to our license agreement with Cal Tech. We spent $19,000 and $31,000 on research and development for the years ended December 31, 2007and 2006 respectively. We also spent an aggregate amount of $231,125 on research and development for the years ended December 31, 2003, 2004, and 2005. We paid the substantial majority of these amounts ($169,000 in fiscal 2003) to JPL under the Technology Affiliates Agreement. TESTING In May 2004, we unveiled the first functional prototype of BSM-2000. The prototype operated on external software. In July 2004, we commenced simulated tests with benign bacterial spores having anthrax-like properties in order to fine tune our product. The use of benign spores is as effective as testing with anthrax spores because our device is designed to detect an increase in bacterial spore concentration levels. Based on results we obtained, we were able to enhance the sensitivity of BSM-2000 by improving the sample collection efficiency of the device, and made certain other modifications to improve efficiency. Our device is a functional viable product, available for sale. We are in discussions with third parties to conduct more research & development and testing on BSM-2000 aimed at performance enhancement, weight reduction, ruggedizing the device, and other cosmetic enhancements. 9 GOVERNMENTAL APPROVAL We are not presently aware of any governmental agency approval required for BSM-2000 before we can sell it in the United States. We cannot assure you that BSM-2000 is not subject to or will not become subject to governmental approval or governmental regulation. To the extent that any governmental approval is required in the future, we intend to obtain all required approvals consistent with applicable law. We cannot assure you that future governmental regulation will not adversely affect our ability to successfully commercialize a viable product. EMPLOYEES As of December 31, 2007, we had a total of five full-time employees. We also employ outside consultants from time to time to provide various services. None of our employees are represented by a labor union. We consider our employee relations to be good. SCIENTIFIC ADVISORY BOARD We are building a Scientific Advisory Board and to date have assembled two scientific advisors with demonstrated expertise in fields related to molecular, chemical and medical pharmacology and hepatic science. These advisors are not members of our Board of Directors. The role of our Scientific Advisory Board principally is to meet periodically with our Chief Executive Officer and certain of our consultants and members of JPL to discuss our present and long-term research and development activities, provide input and evaluation of our overall product line, assist and consult on our strategic direction, and introduce us to business relationships, industry contacts, and other strategic relationships that may be of value to us. Scientific Advisory Board members include: Leonard Makowka, M.D., Ph.D., a distinguished clinical surgeon, transplantation specialist and medical researcher, recognized as one of the world's leading authorities in hepatic science (study relating to the liver), and Louis Ignarro, Ph.D., Distinguished Professor of Pharmacology, University of California at Los Angeles School of Medicine. As medical doctors, both of these individuals are knowledgeable on the properties of bacterial spores, including Anthrax, how these spores operate in our environment, and their effect on the human body, which has been valuable in the overall development of BSM-2000. COMPETITION We face intense competition from a number of companies that offer products in our targeted application areas. Our competitors may offer or be developing products superior to ours. From time to time, we have been required to reduce our research efforts while we seek to raise additional funds. Our competitors may be significantly better financed than us. There are various technological approaches available to our competitors and us that may be applicable to the detection of pathogens in the air, and the feasibility and effectiveness of these techniques has yet to be fully evaluated or demonstrated. Several companies provide or are in the process of developing instruments for detection of bioterrorism agents. Cepheid, a publicly traded company, focuses on the detection and analysis of DNA in samples such as blood, urine, cell cultures, food and industrial air and water. According to public disclosures of Cepheid, Northrop Grumnan is developing a Biohazard Detection System that consists of a detection system (GeneXpert(R)) manufactured by Cepheid. This detection system offers rapid (about one hour) and sensitive detection of specific gene sequences present in Bacillus anthracis, the causative agent for anthrax. According to news releases of Cepheid, the Biohazard Detection System has been installed at over 35 U.S. Postal Service mail sorting facilities throughout the United States. We also expect to encounter intense competition from a number of established and development-stage companies that continually enter the bioterrorism detection device market. Our competitors may succeed in developing or marketing technologies and products that are more effective or commercially attractive than our potential products or that render our technologies and potential products obsolete. As these companies develop their technologies, they may develop proprietary positions that prevent us from successfully commercializing our products. 10 INTELLECTUAL PROPERTY On September 30, 2003, we entered into a license agreement with Caltech whereby we received licenses to produce, provide and sell proprietary products, processes and services for use in the detection of pathogens, spores, and biological warfare agents. These licenses include a worldwide exclusive license to the patent rights referenced in the Technology Affiliates Agreement with JPL and a worldwide nonexclusive license to rights in related proprietary technology. We also have a right under the agreement to grant sublicenses without rights to sublicense further. Caltech reserves the right to produce, provide and sell the licensed products, processes and services solely for noncommercial educational and research purposes. The United States government also has a worldwide, non-exclusive, non-transferable license to use or have used, for the performance of work for it or on its behalf, any inventions covered by the patent rights or the rights in the proprietary technology. The terms of the license further require that our licensed products are manufactured substantially in the United States, unless we can show that domestic manufacturing is not commercially feasible. As part of the sale of our wholly-owned subsidiary, Dasibi Environmental Corp. to a third party in March 2002, we obtained a perpetual nonexclusive license to exploit all of Dasibi's intellectual property rights outside of mainland China. Dasibi's core business had been the design, manufacture and marketing of automated continuous monitoring instruments used to detect and measure various types of air pollution, such as "acid rain," "ozone depletion" and "smog episodes." Dasibi also supplied computer-controlled calibration systems that verify the accuracy of our instruments, data loggers to collect and manage pollutant information, and final reporting software for remote centralized applications. ITEM 1A. RISK FACTORS YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. SOME OF THE INFORMATION CONTAINED IN THIS DISCUSSION AND ANALYSIS OR SET FORTH ELSEWHERE IN THIS ANNUAL REPORT, INCLUDING INFORMATION WITH RESPECT TO OUR PLANS AND STRATEGIES FOR OUR BUSINESS, INCLUDES FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. YOU SHOULD REVIEW THE "RISK FACTORS" SECTION OF THIS REPORT FOR A DISCUSSION OF IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE RESULTS DESCRIBED IN OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD SUFFER. OUR INDEPENDENT AUDITORS' REPORT EXPRESSES DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. Our independent auditors' report, dated March 25, 2008, includes an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern, due to our working capital deficit at December 31, 2007. We have experienced operating losses since the date of the auditors' report. Our auditor's opinion may impede our ability to raise additional capital on terms acceptable to us. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. If we are unable to continue as a going concern, your entire investment in us could be lost. WE ARE IN DEFAULT OF A SUBSTANTIAL PORTION OF OUR DEBT AND DO NOT HAVE ADEQUATE CASH TO FUND OUR WORKING CAPITAL NEEDS. OUR FAILURE TO TIMELY PAY OUR INDEBTEDNESS MAY REQUIRE US TO CONSIDER STEPS THAT WOULD PROTECT OUR ASSETS AGAINST OUR CREDITORS. If we cannot raise additional capital, we will not be able to repay our debt or pursue our business strategies as scheduled, or at all, and we may cease operations. We have been unable to pay all of our creditors and certain other obligations in accordance with their terms, and as a result, at December 31, 2007 we are in default on a portion of our debt totaling approximately $331,000, excluding accumulated interest of approximately $392,000. In the aggregate, as of December 31, 2007, we have approximately $1.9 million in debt obligations, including interest, owing within the next 12 months. We cannot assure you that any of these note-holders will agree to extend payment of these debt obligations or ultimately agree to revise the terms of this debt to allow us to make scheduled payments over an extended period of time. 11 We have nominal cash on hand and short-term investments and we do not expect to generate material cash from operations within the next 12 months. We have attempted to raise additional capital through debt or equity financings and to date have had limited success. The downtrend in the financial markets has made it extremely difficult for us to raise additional capital. In addition, our common stock trades on The Over the Counter Bulletin Board which makes it more difficult to raise capital than if we were trading on The NASDAQ Stock Market. Also, our default in repaying our debt restricts our ability to file registration statements, including those relating to capital-raising transactions, on Form S-3, which may make it more difficult for us to raise additional capital. WE HAVE A HISTORY OF LOSSES AND WE DO NOT ANTICIPATE THAT WE WILL BE PROFITABLE IN FISCAL 2008. We do not anticipate generating significant sales of the BSM-2000 until after we complete all testing and modifications, which is contingent principally upon receipt of adequate funding and our ability to continue to form collaborative arrangements with qualified third parties to engage in that testing at nominal cost to us. We have not been profitable in the past years and had an accumulated deficit of approximately $36 million at December 31, 2007. We have had little revenues from sales of our products since the beginning of fiscal 2002, the commencement of development of our BSM-2000. During the fiscal years ended December 31, 2007 and 2006, we had losses of $3.6 million and $2.7 million, respectively. Achieving profitability depends upon numerous factors, including our ability to develop, market and sell commercially accepted products timely and cost-efficiently. We do not anticipate that we will be profitable in fiscal 2008. IF WE OBTAIN FINANCING, EXISTING SHAREHOLDER INTERESTS MAY BE DILUTED. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our shareholders will be diluted. In addition, any convertible securities issued may not contain a minimum conversion price, which may make it more difficult for us to raise financing and may cause the market price of our common stock to decline because of the indeterminable overhang that is created by the discount to market conversion feature. In addition, any new securities could have rights, preferences and privileges senior to those of our common stock. Furthermore, we cannot assure you that additional financing will be available when and to the extent we require or that, if available, it will be on acceptable terms. IF WE CANNOT PARTNER WITH THIRD PARTIES TO ENGAGE IN RESEARCH AND DEVELOPMENT AND TESTING OF OUR DEVICE AT MINIMAL COST TO US, OUR PRODUCT DEVELOPMENT WILL BE DELAYED. We contract with third parties at minimal cost to us to conduct research and development activities and we expect to continue to do so in the future. Under our agreement with JPL, it will engage in limited testing of our device. Because we are unable to pay third parties to test our product and instead must rely on a qualified third party's willingness to partner with us to test our product, our research and development activities and the testing of our product may be delayed. In addition, since we contract with third parties for these services, we have less direct control over those activities and cannot assure you that the research or testing will be done properly or in a timely manner. MANAGEMENT HAS NO EXPERIENCE IN PRODUCT MANUFACTURING, MARKETING, SALES, OR DISTRIBUTION. WE MAY NOT BE ABLE TO MANUFACTURE OUR BACTERIAL SPORE DETECTOR IN SUFFICIENT QUANTITIES AT AN ACCEPTABLE COST, OR IN A TIMELY FASHION, AND MAY NOT BE ABLE TO MARKET AND DISTRIBUTE IT EFFECTIVELY, EACH OF WHICH COULD HARM OUR FUTURE PROSPECTS. If we are unable to establish an efficient manufacturing process for the BSM-2000, our costs of production will increase, our projected margins may decrease, and we may not be able to timely deliver our product to customers. When and if we complete all design and testing of our product, we will need to establish the capability to manufacture it. Management has no experience in establishing, supervising, or conducting commercial manufacturing. We plan to rely on third party contractors to manufacture our product, although to date we have not entered into any manufacturing arrangements with any third party. Relying on third parties may expose us to the risk of not being able to directly oversee the manufacturing process, which may adversely affect the production and quality of our BSM-2000. In addition, these third party contractors may experience regulatory compliance difficulty, mechanical shutdowns, employee strikes, or other unforeseeable acts that may increase the cost of production or delay or prevent production. 12 In addition, if we are unable to establish a successful sales, marketing, and distribution operation, we will not be able to generate sufficient revenue in order to maintain operations. We have no experience in marketing or distributing new products. We have not yet established marketing, sales, or distribution capabilities for our BSM-2000. We plan on entering into distribution agreements with third parties to sell our BSM-2000. If we are unable to enter into relationships with third parties to market, sell, and distribute our products, we will need to develop our own capabilities. We have no experience in developing, training, or managing a sales force. If we choose to establish a direct sales force, we will incur substantial additional expense. We may not be able to build a sales force on a cost effective basis or at all. Any direct marketing and sales efforts may prove to be unsuccessful. In addition, our marketing and sales efforts may be unable to compete with the extensive and well-funded marketing and sales operations of some of our competitors. We also may be unable to engage qualified distributors. Even if engaged, they may fail to satisfy financial or contractual obligations to us, or adequately market our products.. WE CANNOT GUARANTEE THAT OUR BIOTERRORISM DETECTION DEVICE WILL WORK OR BE COMMERCIALLY VIABLE. Our product in development requires testing, third party verification, potentially additional modifications and demonstration of commercial scale manufacturing before it can be proven to be commercially viable. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. These reasons include the possibilities that the product may be ineffective, unsafe, difficult or uneconomical to manufacture on a large scale, or precluded from commercialization by proprietary rights of third parties. We cannot predict with any degree of certainty when, or if, the testing, modification and validation process will be completed. If our product development efforts are unsuccessful or if we are unable to develop a commercially viable product timely, we would need to consider steps to protect our assets against our creditors. OUR PRODUCTS MAY NOT BE COMMERCIALLY ACCEPTED WHICH WILL ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY. Our ability to enter into the bioterrorism detection device market, establish brand recognition and compete effectively depends upon many factors, including broad commercial acceptance of our products. If our products are not commercially accepted, we will not recognize meaningful revenue and may not continue to operate. The success of our products will depend in large part on the breadth of information these products capture and the timeliness of delivery of that information. The commercial success of our products also depends upon the quality and acceptance of other competing products, general economic and political conditions and other factors, all of which can change and cannot be predicted with certainty. We cannot assure you that our new products will achieve market acceptance or will generate significant revenue. EXISTING AND DEVELOPING TECHNOLOGIES MAY ADVERSELY AFFECT THE DEMAND FOR OUR ONLY PRODUCT, THE BSM-2000. Our industry is subject to rapid and substantial technological change. Developments by others may render our technology and planned product noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Competition from other biotechnology companies, universities, governmental research organizations and others diversifying into our field is intense and is expected to increase. According to the public filings of Cepheid, one of our competitors, it has begun shipping its detection technology product, including for use by the U.S. Postal Service. Cepheid's entry into the market before us has made it more difficult for us to penetrate the market. In addition, our competitors offer technologies different than ours which potential customers may find more suitable to their needs. For example, Cepheid's technology specifically detects for Anthrax whereas our technology detects for an increase in the level of bacterial spores. Many of our competitors also have significantly greater research and development capabilities than we do, as well as substantially greater marketing, manufacturing, financial and managerial resources. SHARES ISSUED UPON THE EXERCISE OF OUR OUTSTANDING OPTIONS AND WARRANTS MAY DILUTE YOUR STOCK HOLDINGS AND ADVERSELY AFFECT OUR STOCK PRICE. 13 If exercised, our outstanding options and warrants will cause immediate and substantial dilution to our stockholders. We have issued options and warrants to acquire our common stock to our employees, consultants, and investors at various prices, some of which are or may in the future be below the market price of our stock. As of December 31, 2007, we had outstanding options and warrants to purchase a total of 123,000,000 shares of common stock. Of these options and warrants, all have exercise prices at or above the recent market price of $0.0008 per share (as of March 30, 2008) and none have exercise prices at or below this price. WE USE A SIGNIFICANT PORTION OF OUR CASH ON HAND AND STOCK TO PAY CONSULTING FEES. WE MAY NOT RECEIVE THE BENEFIT WE EXPECT FROM THESE CONSULTANTS. The consultants that we hire may not provide us with the level of services, and consequently, the operating results, we anticipate. We spent approximately $0.7 and $0.8 million in consulting fees during the years ended December 31, 2007 and 2006, respectively, and utilized approximately 10 consultants during this period. The consultants we engage provide us with a variety of services. THE LOSS OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER WOULD DISRUPT OUR BUSINESS. Our success depends in substantial part upon the services of Jacques Tizabi, our President, Chief Executive Officer and Chairman of the Board of Directors. The loss of or the failure to retain the services of Mr. Tizabi would adversely affect the development of our business and our ability to realize profitable operations. We do not maintain key-man life insurance on Mr. Tizabi and have no present plans to obtain this insurance. IF OUR INTERNATIONAL PATENTS FOR THE BACTERIAL SPORE DETECTION TECHNOLOGY ARE NOT ISSUED, COMPETITORS MAY BE ABLE TO COPY AND SELL PRODUCTS SIMILAR TO OURS WITHOUT PAYING A ROYALTY, WHICH WOULD HAVE A MATERIAL ADVERSE IMPACT ON OUR ABILITY TO COMPETE. If BSM-2000 is commercialized, the lack of foreign patent protection could allow competitors to copy and sell products similar to ours without paying a royalty. Caltech owns the bacterial spore detection technology that is integrated into BSM-2000. On January 31, 2003, Caltech filed a U.S. patent application covering the technology, which was granted by the U.S. Patent and Trademark Office in December 2007. Caltech also filed a patent application with the European Patent Office. We paid and filed on behalf of Caltech a patent application in Japan as well. No international patents have been issued and we cannot assure you that any international patents will be issued. WE MAY BE SUED BY THIRD PARTIES WHO CLAIM OUR PRODUCT INFRINGES ON THEIR INTELLECTUAL PROPERTY RIGHTS. DEFENDING AN INFRINGEMENT LAWSUIT IS COSTLY AND WE MAY NOT HAVE ADEQUATE RESOURCES TO DEFEND OURSELVES. We may be exposed to future litigation by third parties based on claims that our technology, product, or activity infringes on the intellectual property rights of others or that we have misappropriated the trade secrets of others. This risk is compounded by the fact that the validity and breadth of claims covered in technology patents in general and the breadth and scope of trade secret protection involves complex legal and factual questions for which important legal principles are unresolved. Any litigation or claims against us, whether or not valid, could result in substantial costs, could place a significant strain on our financial and managerial resources, and could harm our reputation. Our license agreement with Caltech requires that we pay the costs associated with initiating an infringement claim and defending claims by third parties for infringement, subject to certain offsets that may be allowed against amounts we may owe to Caltech under the licensing agreement. In addition, intellectual property litigation or claims could force us to do one or more of the following: o cease selling, incorporating, or using any of our technology and/or products that incorporate the challenged intellectual property, which could adversely affect our potential revenue; o obtain a license from the holder of the infringed intellectual property right, which license may be costly or may not be available on reasonable terms, if at all; or o redesign our products, which would be costly and time consuming. THE U.S. GOVERNMENT HAS RIGHTS TO THE TECHNOLOGY WE LICENSE FROM CALTECH. 14 Under the license rights provided to the U.S. government in our license agreement with Caltech, a U.S. government agency or the U.S. armed forces may, either produce the proprietary products or use the proprietary processes or contract with third parties to provide the proprietary products, processes, and services to one or more Federal agencies or the armed forces of the U.S. government, for use in activities carried out by the U.S. government, its agencies, and the armed forces, including, for instance, the war on terrorism or the national defense. Further, the Federal agency that provided funding to Caltech for the research that produced the inventions covered by the patent rights referenced in the Technology Affiliates Agreement and the related technology may require us to grant, or if we refuse, itself may grant a nonexclusive, partially exclusive, or exclusive license to these intellectual property rights to a third party if the agency determines that action is necessary: o because we have not taken, or are not expected to take within a reasonable time, effective steps to achieve practical application of the invention in the detection of pathogens, spores, and biological warfare agents; o to alleviate health or safety needs which are not reasonably satisfied by us or our sublicensees; o to meet requirements for public use specified by Federal regulations and those regulations are not reasonably satisfied by us; or o because we have not satisfied, or obtained a waiver of, our obligation to have the licensed products manufactured substantially in the United States. THE BACTERIAL SPORE DETECTION TECHNOLOGY IS LICENSED TO US BY CALTECH. IF OUR LICENSE TERMINATES, OUR FUTURE PROSPECTS WOULD BE HARMED. The loss of our technology license would require us to cease operations until we identify, license and integrate into our product another technology, if available. If we fail to fulfill any payment obligation under the terms of the license agreement or materially breach the agreement, Caltech may terminate the license. To maintain our license with Caltech, a minimum annual royalty of $10,000 was due to Caltech on August 1, 2005, and is due on each anniversary thereof, regardless of any product sales. Any royalties paid from product sales for the 12-month period preceding the date of payment of the minimum annual royalty will be credited against the annual minimum. Furthermore, we have reached an agreement with Caltech with regards to the payment of patent fees. This agreement is signed in the form of a second amendment to our license agreement with Caltech. Accordingly, we have agreed that we owe the amount of $86,318.48 for patent costs incurred by Caltech prior to December 1, 2006 and that this amount shall be paid to Caltech in ten monthly installments of $8,631.85. To date, have made four of the monthly installments called for in the second amendment to our license agreement with Cal Tech. To date we have not received any notices from Caltech with regards to our August 1, 2007 minimum annual royalty due of $10,000. Furthermore, we have reached an agreement with Caltech with regards to the payment of patent fees. This agreement is signed in the form of a second amendment to our license agreement with Caltech. Accordingly, we have agreed that we owe the amount of $86,318.48 for patent costs incurred by Caltech prior to December 1, 2006 and that this amount shall be paid to Caltech in ten monthly installments of $8,631.85. To date, we have made four of the monthly installments called for in the second amendment to our license agreement with Cal Tech. OUR STOCK PRICE IS VOLATILE. The trading price of our common stock fluctuates widely and in the future may be subject to similar fluctuations in response to quarter-to-quarter variations in our operating results, announcements of technological innovations or new products by us or our competitors, general conditions in the bioterrorism detection device industry in which we compete and other events or factors. In addition, in recent years, broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. These broad market fluctuations also may adversely affect the future trading price of our common stock. OUR STOCK HISTORICALLY HAS BEEN THINLY TRADED. THEREFORE, SHAREHOLDERS MAY NOT BE ABLE TO SELL THEIR SHARES FREELY. The volume of trading in our common stock historically has been low and a limited market presently exists for the shares. We have no analyst coverage of our securities. The lack of analyst reports about our stock may make it difficult for potential investors to make decisions about whether to purchase our stock and may make it less likely that investors will purchase our stock. We cannot assure you that our trading volume will increase, or that our historically light trading volume or any trading volume whatsoever will be sustained in the future. Therefore, we cannot assure you that our shareholders will be able to sell their shares of our common stock at the time or at the price that they desire, or at all. POTENTIAL ANTI-TAKEOVER TACTICS AND RIGHTS AND PREFERENCES GRANTED THROUGH THE ISSUANCE OF PREFERRED STOCK RIGHTS MAY BE DETRIMENTAL TO COMMON SHAREHOLDERS. We are authorized to issue up to 20,000,000 shares of preferred stock. The issuance of preferred stock does not require approval by the shareholders of our common stock. Our Board of Directors, in its sole discretion, has the power to issue preferred stock in one or more series and establish the dividend rates and preferences, liquidation preferences, voting rights, redemption and conversion terms and conditions and any other relative rights and preferences with respect 15 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. 150 shares of our preferred stock have been designated as Series A-1 Preferred Stock (the "Series A-1 Shares") and have been issued to Mr. Jacques Tizabi, our President, Chief Executive Officer, Acting Chief Financial Officer, and Chairman of the Board of Directors. The Series A-1 Shares entitled Mr. Tizabi to 1,000,000 votes per share, which shall vote together with the common stock of the Company for all purposes, except where a separate vote of the classes of capital stock is required by California law. The aggregate value of the 150 shares issued to Mr. Tizabi was $50,000. The shares had a liquidation value, as described in the Company's Articles of Incorporation, of $50,000. Mr. Tizabi was prohibited, by agreement with the Company, from transferring or selling such stock, or any interest in such stock for so long as the shares were outstanding. In the manners discussed above, the rights and preferences of the Series A-1 Shares may have operated to the detriment of our common shareholders. In July 2007, Mr. Tizabi surrendered the 150 shares of the Series A-1 preferred stock of the Company in the amount of $50,000 in return for a promissory note that bears no interest and is due on or before July 1, 2008. The shares were cancelled by the Company. WE ARE SUBJECT TO THE REQUIREMENTS OF SECTION 404 OF THE SARBANES-OXLEY ACT. IF WE ARE UNABLE TO TIMELY COMPLY WITH SECTION 404 OR IF THE COSTS RELATED TO COMPLIANCE ARE SIGNIFICANT, OUR PROFITABILITY, STOCK PRICE AND RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED. We are required to comply with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002, which require us to maintain an ongoing evaluation and integration of the internal controls of our business. We were required to document and test our internal controls and certify that we are responsible for maintaining an adequate system of internal control procedures for the year ended December 31, 2007. In subsequent years, our independent registered public accounting firm will be required to opine on those internal controls and management's assessment of those controls. In the process, we may identify areas requiring improvement, and we may have to design enhanced processes and controls to address issues identified through this review. We evaluated our existing controls for the year ended December 31, 2007. Our Chief Executive Officer and Chief Financial Officer identified material weaknesses in our internal control over financial reporting and determined that DCT did not maintain effective internal control over financial reporting as of December 31, 2007. The identified material weaknesses did not result in material audit adjustments to our 2007 financial statements; however, uncured material weaknesses could negatively impact our financial statements for subsequent years. We cannot be certain that we will be able to successfully complete the procedures, certification and attestation requirements of Section 404 or that our auditors will not have to report a material weakness in connection with the presentation of our financial statements. If we fail to comply with the requirements of Section 404 or if our auditors report such material weakness, the accuracy and timeliness of the filing of our annual report may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative affect on the trading price of our common stock. In addition, a material weakness in the effectiveness of our internal controls over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, results of operations and fin ancial condition. Further, we believe that the out-of-pocket costs, the diversion of management's attention from running the day-to-day operations and operational changes caused by the need to comply with the requirements of Section 404 of the Sarbanes-Oxley Act could be significant. If the time and costs associated with such compliance exceed our current expectations, our results of operations could be adversely affected. ITEM 2. DESCRIPTION OF PROPERTY We currently do not own any property. As of February 2004, we moved our corporate headquarters to 9595 Wilshire Blvd., Suite 700, Beverly Hills, California, an office space then leased by Astor Capital, Inc., a company owned 50% by our President and Chief Executive Officer and 50% by our Vice President of Global Strategy. In November 2004, we entered into an agreement pursuant to which we assumed the lease from Astor. This space, which is approximately 3,245 square feet, is adequate for our current needs. The lease requires $112,490 in minimum payments through October 2008. We plan to lease property for our testing facility as our business demands require in the future. ITEM 3. LEGAL PROCEEDINGS On or about April 16, 2004, Plaintiffs A. Sean Rose, Claire F. Rose, and Mark Rose commenced an action in the Los Angeles Superior Court against the Company (A. SEAN ROSE, CLAIRE F. ROSE AND MARK ROSE V. UNIVERSAL DETECTION TECHNOLOGY, FKA POLLUTION RESEARCH AND CONTROL CORPORATION) for amounts allegedly due pursuant to four unpaid promissory notes. On August 2, 2004, the parties executed a Confidential Settlement Agreement and Mutual Releases (the "Agreement"). On December 30, 2005, Plaintiffs commenced an action against the Company, alleging the Company breached the Agreement and sought approximately $205,000 in damages. A judgment was entered on April 11, 2006 for $209,277.58. The Company has previously accrued for this settlement. We entered into a settlement agreement in the third quarter of 2004 with each of these parties. Pursuant to this agreement, at June 30, 2005, we were required to pay an additional $80,000 as full payment of our obligations. We did not make this payment and are in default of these notes. As of December 31, 2007, we have $405,259 accrued for including interest relating to this matter. On April 19, 2006, Plaintiffs Steven P Sion and Sion Consulting, Inc., a Nevada corporation, instituted an action in the Los Angeles Superior Court (SION V. UNIVERSAL DETECTION TECHNOLOGY CORPORATION, ET. AL.; Central District Case No. BC350942) against Defendants Universal Detection Technology Corporation, Albert E. Gosselin, Jr., Roy Peterson, Greg Edwards, Bombay Consortium, Inc., Howard Sperling, Assisted Care, Inc. As to Universal Detection, Plaintiffs alleged claims for: (1) Breach of Contract; (2) Fraud, (3) Negligent Misrepresentation; and (4) Conspiracy in relation to the sale of Dasibi Environmental Corp. Plaintiffs seek an unspecified amount of compensatory, general and punitive damages against all Defendants. On July 17, 2006, Universal Detection timely filed an Answer to the Complaint. On or about June 13, 2007, Universal Detection 16 filed a Motion for Summary Judgment, or Alternative, Summary Adjudication of Claims. Shortly before the hearing on said Motion, a settlement and mutual release of all claims was signed between Plaintiffs and Universal Detection. On September 19, 2007, Plaintiffs dismissed Universal Detection with prejudice from the action. On June 2, 2006, Plaintiff Trilogy Capital Partners instituted an action in the Los Angeles Superior Court (TRILOGY CAPITAL PARTNERS V. UNIVERSAL DETECTION TECHNOLOGY, ET. AL., Case No. SC089929) against the Company. Plaintiff's Complaint alleged damages against UDT for breach of an engagement letter in the amount of $93,448.54. Also, Plaintiff alleged that UDT had failed to issue warrants to it pursuant to a written agreement. After completing the initial stages of litigation and conducting extensive mediation, Plaintiff and UDT reached a settlement wherein commencing December 15, 2006, UDT would make monthly payments to Plaintiff of $2,000 until a debt of $90,000 plus accrued interest at six percent per annum was fully paid. In exchange, Plaintiff would release all of its claims against UDT. UDT has been current on all of its agreed payments to Plaintiff. As of December 31, 2007, $68,757 was due under the agreement. On November 15, 2006, Plaintiff NBGI, Inc. instituted an action in the Los Angeles Superior Court (NBGI, Inc. v. Universal Detection Technology, et. al., Case No. BC361979) against the Company. NBGI, Inc.'s Complaint alleged breach of contract, and requested damages in the amount of $111,014.34 plus interest at the legal rate and for costs of suit. There is also a Motion for Summary Judgment set for September 11, 2007. The Summary Judgment was granted and Judgment has been entered. On May 4, 2007, Plaintiff Horiba Jobin Yvon Inc. fka Jobin Yvon Inc. instituted an action in the Los Angeles Superior (West District Case No. 07C01862) against Defendants Universal Detection Technology Horiba Jobin Yvon Inc.'s complaint for money alleged that Defendants became indebted to Plaintiff in the sum of $9,510.20 for goods and services. Defendants agreed to pay said sum, but no part of said sum has been paid. Plaintiff seeks the following: the sum of $9,510.20 plus accrued interest at ten percent per annum from July 18, 2006; the costs of suit incurred; and reasonable attorneys' fees of $1,000. During August 2007, the Company's bank account was garnished. The Plaintiff has been satisfied with the collection of the debt and has no further complaints. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE. 17 PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDERS MATTERS, AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the OTC Bulletin Board under the symbol "UDTT." The following table sets forth the high and low bid information of our common stock on the OTC Bulletin Board for each quarter during the last two fiscal years and the subsequent interim period, as reported by the OTC Bulletin Board. This information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Year Period High Bid Low Bid -------- ------- 2006 First Quarter 0.14 0.06 Second Quarter 0.08 0.02 Third Quarter 0.181 0.007 Fourth Quarter 0.0175 0.004 2007 First Quarter 0.011 0.0042 Second Quarter 0.0057 0.0016 Third Quarter 0.0031 0.0013 Fourth Quarter 0.0037 0.0006 2008 First Quarter 0.0018 0.0002 As of April 07, 2008 we had 1,321shareholders of record of our common stock. DIVIDEND POLICY We do not currently pay any dividends on our common stock, and we currently intend to retain any future earnings for use in our business. Any future determination as to the payment of dividends on our common stock will be at the discretion of our Board of Directors and will depend on our earnings, operating and financial condition, capital requirements and other factors deemed relevant by our Board of Directors including the General Corporation Law of the State of California, which provides that dividends are only payable out of retained earnings or if certain minimum ratios of assets to liabilities are satisfied. The declaration of dividends on our common stock also may be restricted by the provisions of credit agreements that we may enter into from time to time. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS Set forth in the table below is information regarding awards made through equity compensation plans, through December 31, 2007, for our last fiscal year. ----------------------------------------------------------------------------------------------------------- PLAN CATEGORY NUMBER OF WEIGHTED-AVERAGE SECURITIES TO BE EXERCISE NUMBER OF ISSUED UPON PRICE OF SECURITIES EXERCISES OF OUTSTANDING AVAILABLE FOR OUTSTANDING OPTIONS, OPTIONS WARRANTS, FUTURE PLAN WARRANTS, AND RIGHTS AND RIGHTS ISSUANCE ----------------------------------------------------------------------------------------------------------- EQUITY COMPENSATION PLANS APPROVED BY SECURITY HOLDERS N/A N/A N/A ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS ----------------------------------------------------------------------------------------------------------- 2006 STOCK COMPENSATION PLAN 7,500,000 (1) N/A 0 ----------------------------------------------------------------------------------------------------------- 2006 CONSULTANT STOCK PLAN 25,000,000 (1) N/A 0 ----------------------------------------------------------------------------------------------------------- 2006-II CONSULTANT STOCK PLAN 37,500,000 (1) N/A 0 ----------------------------------------------------------------------------------------------------------- 2007 EQUITY INCENTIVE PLAN 75,000,000 N/A 0 ----------------------------------------------------------------------------------------------------------- 2007 EQUITY INCENTIVE PLAN II & III 59,000,000 (1)(2) N/A 0 ----------------------------------------------------------------------------------------------------------- 2007 EQUITY INVENTIVE PLAN IV 90,000,000 N/A 6,166 ----------------------------------------------------------------------------------------------------------- 2007 EQUITY INCENTIVE PLAN V & VI 270,000,000 (1)(3) N/A 3,203,788 -----------------------------------------------------------------------------------------------------------
18 (1) Represents total number of shares of common stock originally authorized for stock grants. Stock option grants were not authorized. (2) Consists of the second and third plans (3) Consists of the forth and fifth plans On February 13, 2006, our Board of Directors adopted the 2006 Stock Compensation Plan (the "Plan"). The Plan authorizes common stock grants to our non-executive employees, professional advisors and consultants. We reserved 7,500,000 shares of our common stock for awards to be made under the Plan. The Plan is to be administered by our Board of Directors, or by any committee to which such duties are delegated by the Board. On June 29, 2006, our Board of Directors adopted the 2006 Consultant Stock Plan (the "2006 Plan"). The 2006 Plan authorizes common stock grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 25,000,000 shares of our common stock for awards to be made under the 2006 Plan. The 2006 Plan is to be administered by a committee of one or more members of our Board of Directors. On November 22, 2006, our Board of Directors adopted the 2006-II Consultant Stock Plan (the "2006-II Plan"). The 2006-II Plan authorizes common stock grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 37,500,000 shares of our common stock for awards to be made under the 2006-II Plan. The 2006-II Plan is to be administered by a committee of two or more members of our Board of Directors. On April 17, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007" Plan). The 2007 Plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 75,000,000 shares of our common stock for awards to be made under the 2007 Plan. The 2007 Plan is be administered by a committee of two or more members of our Board of Directors. On June 5, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007-II Plan"). The 2007-II Plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 30,000,000 shares of our common stock for awards to be made under the 2007-II Plan. The 2007-II Plan is to be administered by a committee of two or more members of our Board of Directors. On June 27, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007-III Plan). The 2007-III plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 29,000,000 shares of our common stock for awards to be made under the 2007-III Plan. The 2007-III Plan is to be administered by a committee of two or more members of our Board of Directors. On July 13, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007-IV Plan). The 2007-IV plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 90,000,000 shares of our common stock for awards to be made under the 2007-IV Plan. The 2007-IV Plan is to be administered by a committee of two or more members of our Board of Directors. On October 10, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007-V Plan). The 2007-V plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 120,000,000 shares of our common stock for awards to be made under the 2007-V Plan. The 2007-V Plan is to be administered by a committee of two or more members of our Board of Directors. 19 On November 01, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007-VI Plan). The 2007-VI plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 150,000,000 shares of our common stock for awards to be made under the 2007-VI Plan. The 2007-VI Plan is to be administered by a committee of two or more members of our Board of Directors. With respect to each of the above Plans, and subject to the provisions of each Plan, the Board and/or committee shall have authority to (a) grant, in its discretion, stock awards; (b) determine in good faith the fair market value of the stock covered by any grant; (c) determine which eligible persons shall receive grants and the number of shares, restrictions, terms and conditions to be included in such grants; (d) construe and interpret the Plans; (e) promulgate, amend and rescind rules and regulations relating to its administration, and correct defects, omissions and inconsistencies in the Plans or any grants; (f) consistent with the Plans and with the consent of the participant, amend any outstanding grant; and (g) make all other determinations necessary or advisable for the Plans' administration. The interpretation and construction by the Board of any provisions of the Plans shall be conclusive and final. SALES OF UNREGISTERED SECURITIES During fiscal 2007, 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 During 2007, we issued 171,883,805 shares of common stock to various notes holders to covert outstanding debt obligations valued at approximately $345,373. o During 2007, we issued 150 shares of our preferred stock designated as Series A-1 Preferred Stock to Mr. Jacques Tizabi. The aggregate value of the shares is $50,000. In addition, we granted Mr. Tizabi an option to purchase 100,000,000 shares of our common stock at an exercise price of $0.01 per share, for a term of five years. The option is fully vested and immediately exercisable. Previously, we had issued to Mr. Tizabi 100,000,000 shares of common stock in exchange for the cancellation of indebtedness owed to him. However, we subsequently determined to cancel such issuance, and issue in lieu thereof, the shares of Series A-1 Preferred Stock and the option described above. On July 31, 2007, Mr. Tizabi surrendered the 150 shares of the Series A-1 Preferred Stock of the Company in exchange for promissory note in the amount of $50,000. The promissory note bears no interest and is due on or before July 1, 2008. The shares were then cancelled by the Company. INVESTMENT AGREEMENT WITH EUROPEAN EQUITY GROUP On February 13, 2006 we entered into an Investment Agreement with European Equity Group ("European"), for the future issuance and purchase of shares of our common stock. This Investment Agreement establishes what is sometimes termed an equity line of credit or an equity drawdown facility. In general, the drawdown facility operates as follows: European, has committed to provide us up to $10,000,000 as we request it over a 36 month period, in return for common stock we issue to European. We, in our sole discretion, may during the Open Period deliver a "put notice" (the "Put Notice") to European which states the dollar amount which we intend to sell to European on the Closing Date. The Open Period is the period beginning on the trading after this Registration Statement is declared effective (the "Effective Date") and which ends on the earlier to occur of 36 months from the Effective Date or termination of the Investment Agreement in accordance with its terms. The Closing Date shall mean no more than 7 trading days following the Put Notice Date. The Put Notice Date shall mean the Trading Day immediately following the day on which European receives a Put Notice, however a Put Notice shall be deemed delivered on (a) the Trading Day it is received by facsimile or otherwise by European if such notice is received prior to 9:00 am EST, or (b) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 9:00 am EST on a Trading Day. 20 The amount that we shall be entitled to Put to European shall be equal to, at our election, either: (a) Two Hundred percent (200%) of the average daily volume (U.S. market only) of the Common Stock for the three (3) Trading Days prior to the applicable Put Notice Date, multiplied by the average of the three (3) daily closing bid prices immediately preceding the Put Date, or (b) $100,000. During the Open Period, we shall not be entitled to submit a Put Notice until after the previous Closing has been completed. The Purchase Price for the Common Stock identified in the Put Notice shall be equal to 93% of the lowest closing Best Bid price of the Common Stock during the Pricing Period. The Pricing Period is the period beginning on the Put Notice Date and ending on and including the date that is 5 trading days after such Put Notice Date. Upon the receipt by European of a validly delivered Put Notice, European shall be required to purchase from us, during the period beginning on the Put Notice Date and ending on and including the date that is 5 Trading days after such Put Notice, that number of shares having an aggregate purchase price equal to the lesser of (a) the Put Amount set forth in the Put Notice and (b) 20% of the aggregate trading volume of our common stock during the applicable Pricing Period times (X) the lowest closing bid price of our common stock during the specified Pricing period, but only if such said shares bear no restrictive legend and are not subject to stop transfer instructions, prior to the applicable Closing Date. The Investment Agreement expires (a) when European has purchased an aggregate of $10,000,000 of our Common Stock or (b) 36 months after the Effective Date of the registration statement (May 12, 2006), whichever occurs earlier. As of December 31, 2007, 98,789,919 shares have been issued under the agreements for an aggregate price of $681,491. We received proceeds of $213,629. The remaining $467,862 was used to pay off outstanding notes payable and accrued interest directly by European. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion should be read in conjunction with our consolidated financial statements provided in this annual report on Form 10-KSB. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein. The forward-looking information set forth in this annual report is as of the date of this filing, and we undertake no duty to update this information. More information about potential factors that could affect our business and financial results is included in the section entitled "Risk Factors" of this annual report. OVERVIEW We are engaged in the research, development, and marketing of bioterrorism detection devices. Our strategy is to identify qualified strategic partners with whom to collaborate in order to develop commercially viable bioterrorism detection devices. Consistent with this strategy, in August 2002, we entered into a Technology Affiliates Agreement with NASA's Jet Propulsion Laboratory, commonly referred to as JPL, to develop technology for our bioterrorism detection equipment. Under the Technology Affiliates Agreement, JPL developed its proprietary bacterial spore detection technology and integrated it into our existing aerosol monitoring system, resulting in a product named BSM-2000. BSM-2000 is designed to provide continuous unattended monitoring of airborne bacterial spores in large public places, with real-time automated alert functionality. The device is designed to detect an increase in the concentration of bacterial spores, which is indicative of a potential presence of Anthrax. Our management continues to gain expertise in anti-terrorism techniques and solutions. Through our partnership with Security Solutions International, we have begun providing training seminars on terrorism detection and response methods. The seminars are designed for security officials, building safety managers, and law enforcement personnel. Through partnerships with various third parties, we have commenced sales and marketing of bioterrorism detection kits, radiation detection systems, anti-microbial products, surveillance cameras, and training references. 21 In 2007 we have realized revenues of $8,011 from sales. We have incurred losses for the fiscal years ended December 31, 2007 and 2006 in the approximate amounts of $3.6 and $2.7 million, respectively, and have an accumulated deficit of $36 million as of December 31, 2007. At December 31, 2007, we were in default on certain debt obligations totaling approximately $331,000, in addition to accumulated interest of approximately $392,000. We require approximately $1.4 million in the next 12 months to repay debt obligations. We do not anticipate that our cash on hand is adequate to meet our operating expenses over the next 12 months. In addition, we do not have adequate capital to repay all of our debt currently due and becoming due in the next 12 months. We principally expect to raise funds through the sale of equity or debt securities. However, during the past 12 months, management spent the substantial majority of its time on sales and marketing of Company's products and services in target markets. These activities diverted management from the time it otherwise would spend negotiating sales of securities to raise capital. In addition, the recent price and volume volatility in the common stock has made it more difficult for management to negotiate sales of its securities at a fair price. We actively continue to pursue additional equity or debt financing, but cannot provide any assurances that it will be successful. If we are unable to pay our debts as they becomes due and are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider other alternatives. In May 2004, we unveiled the first functional prototype of BSM-2000. The prototype operated on external software. In July 2004, we commenced simulated tests with benign bacterial spores having anthrax-like properties in order to fine tune our product. The use of benign spores is as effective as testing with anthrax spores because our device is designed to detect an increase in bacterial spore concentration levels. Based on results we obtained, we were able to enhance the sensitivity of BSM-2000 by improving the sample collection efficiency of the device, and made certain other modifications to improve efficiency. While more testing and development is needed to enhance the performance of our BSM-2000 and to make it more user-friendly, the device is a functional product, available for sale. Starting in 2006, we followed a diversification strategy pursuant to which we have added various other services to our BSM-2000, biological detection system. By combining our in-house experience and knowledge and outside expertise offered by various consultants and third parties, we have added threat evaluation and consulting services, training courses, and event security to our services. We have also started sales and marketing of security and counter-terrorism products including bioterrorism detection kits, surveillance cameras, radiation detection systems, anti-microbial products, and training references. Some of our products and services have not been sold to date and there is no guarantee that any of them will be demanded and sold in the market in the future. We plan to seek and find third parties interested in collaborating on further research and development on BSM-2000. Such research shall be aimed at making BSM-2000 more user-friendly, developing a less complicated interface and software, designing a lighter casing, and some cosmetics. The ideal third party collaborator would also assist us in marketing BSM-2000 more aggressively. There is no guarantee that any such collaborators will be found and, if found, that this strategy will be successful. The current version of BSM-2000 is fully functional and available for sale. To date, we have sold two units to the Government of the United Kingdom and we intend to develop a more wide-spread use for BSM-2000 through our planned collaborative research, development, sales, and marketing efforts. Our list price for BSM-2000 is $109,000. The manufacturing of BSM-2000 is outsourced to Original Equipment Manufacturers (OEM). We do not have any in-house manufacturing capabilities and do not intend to develop any until we reach high volumes of sales for BSM-2000 that would justify such facilities. To date we have used services of 2 OEMs for manufacturing of our units. We may decide to use services of other manufacturers in the future. In March 2006, we received a firm order from the government of the United Kingdom for two units of UDTT's BSM-2000 Anthrax Detection Systems. We have shipped both units and payment for both has been received. Due to confidentiality of the purchase order, we are unable to release the specific use and the name of the branch of government that has made the purchase. While we initially planned to secure and lease a testing facility close to the JPL laboratories where we would be able to implement a quality assurance program and test our products against the required specifications before shipping them to customers, that plan was never materialized and we do not anticipate to open such facilities in the foreseeable future and unless we receive a substantial order for our BSM-2000. 22 In February 2006, the Company expanded its relationship with Caltech by licensing additional technologies in the field of microbial monitoring and sterility verification. While the Company plans to commercialize the microbial monitoring technology for use in hospitals, it has not yet started any such activities and there is no guarantee that it will in the near future. The Company also commenced work on developing smart ticket assay for detection of anthrax spores. Smart ticket assays are rapid field tests that are similar to common home pregnancy tests. Further research and development is needed to fully commercialize these smart ticket assays and presently there is no guarantee that the Company will have necessary funding and resources to conduct such research and development. Through parallel efforts for development of its proprietary smart ticket assays, the Company entered an agreement with a third party, whereby it markets and sells lateral flow assays capable of rapid on-site detection of five bioterrorism agents. PLAN OF OPERATION In 2007 we have continued to diversify our activities. We plan to engage more in value added services to complement our bioterrorism detection technologies. We now supply our proprietary bacterial spore detection system (BSM-2000), bioterrorism detection kits capable of detecting anthrax, ricin, botulinum, plague, and SEBs, anti microbial products, surveillance cameras, radiation detection systems, and counter-terrorism training references. We plan to continue expanding our product base and to sell our products to more users inside and outside the U.S. There is no guarantee that we will succeed in implementing this strategy or if implemented, that this strategy will be successful LIQUIDITY AND CAPITAL RESOURCES We require approximately $3.0 million in the next 12 months to repay debt obligations and execute our business plan. We do not anticipate that our cash on hand is adequate to meet our operating expenses over the next 12 months. Also, we do not believe we have adequate capital to repay all of our debt currently due and becoming due in the next 12 months. We anticipate that our uses of capital during the next 12 months principally will be for: o administrative expenses, including salaries of officers and other employees we plan to hire; o repayment of debt; o sales and marketing; o product testing and manufacturing; and o expenses of professionals, including accountants and attorneys. To maintain our license with Caltech, a minimum annual royalty of $10,000 is due to Caltech on each year on August 1, regardless of any product sales. Any royalties paid from product sales for the 12-month period preceding the date of payment of the minimum annual royalty will be credited against the annual minimum. Pursuant to the terms of the license, we must pay 4% royalties on product sales in countries where a patent is issued and 2% royalties on product sales in countries where a patent is not issued, as well as 35% of net revenues received from sublicensees. Our working capital deficit at December 31, 2007, was $3,970,410. Our independent auditors' report includes an explanatory paragraph relating to substantial doubt as to our ability to continue as a going concern, due to our working capital deficit at December 31, 2007. We require approximately $1.9 million to repay indebtedness including interest in the next 12 months. The following provides the principal terms of our outstanding debt as of December 31, 2007: o One loan from three family members, each of whom is an unaffiliated party, evidenced by four promissory notes in the aggregate principal amounts of $100,000, $50,000, $50,000, and $100,000, each due June 24, 2001 with interest rates ranging from 11% to 12%. We entered into a settlement agreement in the third quarter of 2004 with each of these parties. Pursuant to this agreement, at June 30, 2005, we were required to pay an additional $80,000 as full payment of our obligations. We did not make this payment and are in default of these notes. As of December 31, 2007, we have $405,259 accrued for including interest relating to this matter. 23 o One loan from an unaffiliated party in the aggregate principal amount of $195,000 with interest at a rate of 12% per annum. Pursuant to a letter agreement dated as of August 10, 2004, we entered into a settlement with this party and agreed to pay a total of $261,000 pursuant to a scheduled payment plan through July 2005. Additionally, the Company, in September 2004, issued 206,250 shares of common stock upon the conversion of unpaid interest in the aggregate amount of $33,000. At December 31, 2007, there was $161,000 principal amount (and $52,619 in interest) remaining on this note. We did not make our scheduled payment under this note in July 2005, and are in default of this note. o One loan from an unaffiliated party in the aggregate principal amount of $98,500, due July 31, 2005, with interest at the rate of 9% per annum. Pursuant to a letter agreement dated August 10, 2004, between us and this third party, we agreed to pay a total of $130,800 pursuant to a scheduled payment plan through July 2005. At December 31, 2007, there was $74,500 principal amount (and $30,181 in interest) remaining on this note. We did not make our scheduled payment under this note in July 2005, and are in default of this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on October 30, 2005 with an interest rate of 12% per annum. We agreed to issue 100,000 shares of common stock to the noteholder as additional consideration for extending credit to us. As of December 31, 2007 we owed $20,600 in principal and $2,266 in interest on this note. We did not make our scheduled payment on October 30, 2005. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $60,000 due on November 15, 2005 with an interest rate of 12% per annum. We agreed to issue 50,000 shares of common stock to the noteholder as additional consideration for extending credit to us. As of December 31, 2007 we owed $29,791 in principal and $2,681 in interest on this note and the shares have not yet been issued. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $90,000 due on November 13, 2005 with an interest rate of 12% per annum. We agreed to issue 200,000 shares of common stock to the noteholder as additional consideration for extending credit to us. This note has not been repaid and we are in default. As of December 31, 2007 we owed $22,950 in interest on this note and the shares have not yet been issued. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $15,000 due on December 28, 2005 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $3,825 in interest. We did not make our scheduled payment on December 28, 2005. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $100,000 due on March 31, 2006 with an interest rate of 12% per annum. As of December 31, 2007 we owed $22,500 in interest. We did not make our scheduled payment on March 31, 2006. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $20,000 due on May 17, 2006 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $4,154 in interest. We did not make our scheduled payment on May 17, 2006. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. 23 o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on May 26, 2006 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $6,094 in interest. We did not make our scheduled payment on May 26, 2006. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $14,975 due on August 31, 2006 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $2,496 in interest. We did not make our scheduled payment on August 31, 2006. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $25,000 due on August 21, 2006 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $4,166 in interest. We did not make our scheduled payment on August 21, 2006. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $100,000 due on February 14, 2007 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $11,458 in interest. We did not make our scheduled payment on February 14, 2007. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $15,000 due on February 20, 2007 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $1,719 in interest. We did not make our scheduled payment on February 20, 2007. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $35,000 due on February 23, 2007 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $4,010 in interest. We did not make our scheduled payment on February 23, 2007. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $20,000 due on March 15, 2007 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $2,188 in interest. We did not make our scheduled payment on March 15, 2007. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $50,000 due on March 20, 2007 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $5,489 in interest. We did not make our scheduled payment on March 20, 2007. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $50,000 due on April 5, 2007 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $5,208 in interest. We did not make our scheduled payment on April 5, 2007. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on April 13, 2007 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $2,813 in interest. We did not make our scheduled payment on April 13, 2007. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. 25 o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $60,000 due on November 1, 2007 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $5,000 in interest. We did not make our scheduled payment on November 1, 2007. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on December 7, 2007 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $2,188 in interest. We did not make our scheduled payment on December 7, 2007. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on January 11, 2008 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $3,000 in interest. We did not make our scheduled payment on January 11, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on February 13, 2008 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $3,125 in interest. We did not make our scheduled payment on February 13, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $25,000 due on March 6, 2008 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $990 in interest. We did not make our scheduled payment on March 6, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $40,000 due on March 12, 2008 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $1,500 in interest. We did not make our scheduled payment on March 12, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $25,000 due on October 3, 2008 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $521 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $40,000 due on April 11, 2008 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $833 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $60,000 due on May 30, 2008 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $625 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on November 2, 2008 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $312 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $20,000 due on January 11, 2008 with an interest rate of 12.5% per annum. As of December 31, 2007 we owed $0 in interest. We did not make our scheduled payment on January 11, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $44,256 due on October 17, 2008 with an interest rate of 16.75% per annum. As of December 31, 2007 we owed $19,153 in Principle amount on this note. 26 Management continues to take steps to address the Company's liquidity needs. Recently management concluded discussions with most of our note holders and amended the terms of these notes to provide for extended scheduled payment arrangements. Management continues to seek extensions with respect to debt past due. Management also may seek additional extensions with respect to these notes and the Company's debt as it becomes due. In addition, management may continue to convert some portion of the principal amount and interest on our debt into shares of common stock. During 2007, the Company issued 171,833,805 shares of its common stock for an aggregate value of $345,373 to satisfy outstanding debt and accrued interest. Historically, we have financed operations through private debt and equity financings. In recent years, financial institutions have been unwilling to lend to us and the cost of obtaining working capital from investors has been expensive. We principally expect to raise funds through the sale of equity or debt securities. During the years ended December 31, 2007 and 2006, the Company received gross proceeds of approximately $0.9 million and $0.8 million, respectively, from the sale of equity and debt securities. The Company actively continues to pursue additional equity or debt financings, but cannot provide any assurance that it will be successful. If we are unable to pay our debt as it becomes due and are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. OFF-BALANCE SHEET ARRANGEMENTS We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, and that would be considered material to investors. ITEM 7. FINANCIAL STATEMENTS Our financial statements and related notes are set forth at pages F-1 through F-22. 27 INDEX TO FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheet as of December 31, 2007 F-4 Consolidated Statements of Operations for the years ended December 31, 2007 and 2006 F-5 Consolidated Statements of Changes in Stockholders' Deficit for the years ended December 31, 2007 and 2006 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006 F-7 Notes to Consolidated Financial Statements F-8 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors Universal Detection Technology and Subsidiaries Beverly Hills, California We have audited the accompanying consolidated balance sheet of Universal Detection Technology and Subsidiaries as of December 31, 2007, and the related consolidated statement of operations, consolidated shareholders' Deficit, and consolidated cash flows for the year ended December 31, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit of these consolidated statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Universal Detection Technology and Subsidiaries as of December 31, 2007, and the results of their operations and cash flows for the year ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. During the year ended December 31, 2007, the Company incurred net losses of $3,592,265 and has accumulated deficit of $36,331,655 as of December 31, 2007. These factors, among others, as discussed in Note 1 to the consolidated financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Kabani & Company, Inc. Los Angeles, California March 25, 2008 F-2 AJ. ROBBINS, P.C. 216 SIXTEENTH STREET SUITE 600 DENVER, COLORADO 80202 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM [RF1] Audit Committee Universal Detection Technology Beverly Hills, California We have audited the accompanying consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows of Universal Detection Technology and Subsidiaries for the year ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of Universal Detection Technology and Subsidiaries consolidated operations and its cash flows for the year ended December 31, 2006 in conformity with generally accepted accounting principles in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, it has a net working capital deficiency, and has a net capital deficiency that raises substantial doubt about the entity's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. AJ. ROBBINS, PC CERTIFIED PUBLIC ACCOUNTANTS DENVER, COLORADO March 9, 2007 F-3 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 2007 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 9,555 Restricted cash 10,209 Accounts Receivable,net 4,282 Deposits 10,226 Prepaid expenses 10,827 ------------ Total current assets 45,099 Equipment, net 57,673 Patent, net 89,413 ------------ Total assets $ 192,185 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable, trade $ 1,000,478 Accrued liabilities 519,382 Accrued payroll - officers 522,573 Notes payable - related party 72,543 Notes payable 1,385,760 Accrued interest expense 514,773 ------------ Total current liabilities 4,015,509 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock, no par value, 20,000,000,000 shares authorized, 835,695,890 shares issued and outstanding 27,195,242 Additional paid-in-capital 5,313,089 Accumulated deficit (36,331,655) ------------ Total stockholders' deficit (3,823,324) ------------ Total liabilities and stockholders' deficit $ 192,185 ============ See accompanying notes to consolidated financial statements. F-4 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 2007 2006 ----------- ----------- REVENUE, NET $ 8,011 $ 111,515 COST OF GOODS SOLD 6,862 97,190 ----------- ----------- GROSS PROFIT 1,149 14,325 ----------- ----------- OPERATING EXPENSES: Selling, general and administrative 3,100,759 2,259,685 Marketing 25,410 174,143 Research and development 19,264 31,338 Depreciation and amortization 52,655 24,727 ----------- ----------- Total expenses 3,198,088 2,489,893 ----------- ----------- LOSS FROM OPERATIONS (3,196,939) (2,475,568) OTHER INCOME (EXPENSE): Interest income 1,612 973 Interest expense (185,651) (211,269) Amortization of loan fees -- (16,926) Loss on settlement of debt (211,287) -- ----------- ----------- Total other expenses (395,326) (227,222) ----------- ----------- NET LOSS $(3,592,265) $(2,702,790) =========== =========== NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: $ (0.01) $ (0.03) =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 483,587,261 86,650,120 =========== =========== Weighted average number of dilutive securities has no been calculated as the effect of dilutive securities would be anti-dilutive See accompanying notes to consolidated financial statements. F-5 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 ADDITIONAL TOTAL COMMON STOCK PAID-IN- ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT DEFICIT ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 2005 55,813,366 23,202,495 4,101,605 (30,036,600) (2,732,500) Stock issued under investment agreement 65,452,790 534,991 -- -- 534,991 Exercise of warrants 6,122,470 918,371 -- -- 918,371 Stock issued for services 49,970,473 823,000 -- -- 823,000 Stock issued in settlement 50,000 4,500 -- -- 4,500 Net loss for the year -- -- -- (2,702,790) (2,702,790) ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 2006 177,409,099 25,483,357 4,101,605 (32,739,390) (3,154,428) Stock issued under investment agreement 33,337,129 146,500 -- -- 146,500 Stock issued for conversion of debt 171,883,805 345,373 -- -- 345,373 Stock issued for services 453,065,857 1,220,012 -- -- 1,220,012 Forgiveness of Officer's accrued salary -- -- 550,000 -- 550,000 Stock Options granted -- -- 661,484 -- 661,484 Net loss for the year -- -- -- (3,592,265) (3,592,265) ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 2007 835,695,890 27,195,242 5,313,089 (36,331,655) (3,823,324) =========== =========== =========== =========== =========== See accompanying notes to consolidated financial statements. F-6 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 2007 2006 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(3,592,265) $(2,702,790) Adjustments to reconcile net loss to net cash used in operations: Stock issued for settlement -- 4,500 Stocks issued for services 1,220,012 813,000 Stock option expenses 661,484 -- Loss on settlement of debt 211,287 -- Depreciation and amortization 52,655 24,727 Changes in operating assets and liabilities: Assets held for sale -- 50,369 Patent costs -- (86,319) Accounts receivable (4,282) -- Prepaid expenses 27,144 490,002 Accounts payable and accrued liabilities 655,234 707,713 ----------- ----------- Net cash used in operating activities (768,731) (698,798) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in restricted cash 52,098 19,056 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Bank overdraft -- (1,113) Proceeds from sale of common stock 146,500 764,500 Proceeds from notes payable-related party 70,043 13,819 Proceeds from notes payable 690,000 89,975 Payments on notes payable - related party -- (136,872) Payments on notes payable (198,468) (45,702) ----------- ----------- Net cash provided by financing activities 708,075 684,607 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,558) 4,865 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,113 13,248 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,555 $ 18,113 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income tax $ -- $ -- =========== =========== Interest Paid $ 54,007 $ 20,648 =========== =========== SUPPLEMENTAL DISCLOSURES FOR NON CASH INVESTING AND FINANCING ACTIVITIES: Shares issued for settlement of debt and accrued interest $ 345,373 $ -- =========== =========== Compensation contribution $ 550,000 $ -- =========== =========== See accompanying notes to unaudited consolidated financial statements. F-7
NOTE 1 - BUSINESS ACTIVITY Universal Detection Technology (the "Company"), a California corporation, primarily designed, manufactured and marketed air pollution monitoring instruments. Beginning in 2002, the Company has focused its research and development efforts in developing a real time biological weapon detection device. To accelerate development of its initial biological weapon detection device, the Company has developed and is implementing a collaborative partnering strategy. Under this strategy, the Company identifies and partners with researchers and developers. The Company has entered into a technology affiliates agreement with NASA's Jet Propulsion Laboratory ("JPL") to develop technology for its bio-terrorism detection equipment. The Company has also entered a license agreement with the California Institute of Technology ("CalTech"), which grants the Company licensed patent rights to technology that was developed under the Technology Affiliates Agreement with JPL. The Company has expanded its services to include security related consulting, event security and counterterrorism training. The Company is a reseller of a range of products, which include rapid anthrax detection test kits, training courses for first responders, event security, threat evaluation & consulting, radiation detection systems, anti-microbial products, and DVDs aimed at providing information and training regarding combating terrorism and managing emergency situations. The Company's bioterrorism detection kits can be used by emergency personnel to determine whether a suspicious substance is actually anthrax, botulinum toxin, ricin toxin, plague, or SEBs. So far the company has sold these kits to both the US Army and private customers. In 2007 the Company sold its bioterrorism detection kits to the Washington DC, Fire and Safety Management and other users. GOING CONCERN AND MANAGEMENT'S PLANS As of December 31, 2007, the Company had a working capital deficit of $3,970,410 and a stockholders' deficit of $3,823,324 These conditions raise substantial doubt about its ability to continue as a going concern. Its ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and ultimately achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In an effort to raise capital for the execution of its business plan, in January 2006 the Company entered into an agreement with 66 on its warrant holders, holding a total of 6,122,470 Company warrants, to exchange their warrants with new ones with a new exercise price of $0.15. The exchanged warrants were subsequently re-priced and assigned to new investors. The new investors can exercise the warrants at a newly set price of $0.15. As of December 31, 2006 the company had received exercise notices for all 6,122,470 outstanding warrants from the new investors. All 6,122,470 shares have been issued for an aggregate price of $918,371. The Company received $346,500 of the proceeds during 2006. The remaining $571,871 was used to pay off outstanding notes payable and accrued interest during 2006. In February 2006, the Company entered into an Investment Agreement with a third party, for the future issuance and purchase of shares of its common stock. This Investment Agreement is an arrangement similar to an equity line of credit or an equity drawdown facility. The Company will be provided up to $10,000,000, as requested over a 36 month period. The Company may during the Open Period (36 months) deliver a "put notice" to the lender which states the dollar amount the Company intends to sell its stock. The amount that the Company is entitled to Put is subject to certain limitations and terms of the agreement. As of December 31, 2007 98,789,919 shares have been issued for an aggregate price of $681,491. The Company received proceeds of $213,629. The remaining $467,862 was used to pay off outstanding notes payable and accrued interest. The obligations were paid directly by the investor. During 2007 the Company negotiated to convert the debt held by various note holders to shares of Company's common stock. As of December 31, 2007, 171,883,805 shares were issued in the aggregate amount of $345,373. F-8 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Universal Detection Technology and its wholly-owned subsidiaries Nutek, Inc. ("Nutek) and Logan Medical Devices, Inc. ("Logan"). The two subsidiaries are currently inactive. All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. Service revenue is recognized when services are performed and amounts are due. INVENTORIES Inventories, consisting of finished goods, are stated at the lower of cost (first-in first-out) basis or market. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year's presentation, none of which had an impact on total assets, stockholders' equity (deficit), net loss, or net loss per share. ADVERTISING EXPENSES The Company expenses advertising costs as incurred. During the years ended December 31, 2007 and 2006, the Company did not have significant advertising costs. PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION Property and equipment, consist of office furniture and equipment, leasehold improvements and lab testing equipment, is recorded at cost less accumulated depreciation. Depreciation and amortization is provided for on the straight-line method over the estimated useful lives of the assets, generally three to five years or over the term of the lease. Equipment $ 51,998 Furniture 64,669 Leasehold Improvements 25,444 --------- 142,111 Accumulated Depreciation (84,438) --------- Fixed Assets, Net of Depreciation $ 57,673 --------- Total depreciation expense was $24,727 and $24,727 for the years ended December 31, 2007 and 2006, respectively. STOCK-BASED COMPENSATION In December 2004 the Financial Accounting Standards Board issued FAS 123-R. FAS 123-R is a revision of FAS No. 123, as amended, Accounting for Stock-Based Compensation ("FAS 123") and supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. FAS 123-R eliminates the alternative to use the intrinsic value method of accounting that was provided in FAS 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity awards to employees. FAS 123-R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. FAS 123-R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting for generally all share-based payment transactions with employees. The Company has adopted FAS 123-R. All previously granted stock options were fully vested prior to the adoption of FAS 123-R. The Company recognized $661,484 and $0 in share based compensation expense for the years ended December 31, 2007 and 2006, respectively. RESTRICTED CASH Restricted cash is the balance required under the Company's office lease. F-9 STOCK BASED COMPENSATION TO OTHER THAN EMPLOYEES The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with Statement of Financial Accounting Standards No. 123, "Accounting FOR STOCK-BASED COMPENSATION," and the conclusions reached by the Emerging Issues Task Force in Issue No. 96- 18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services" ("EITF 96-18"). Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. EARNINGS PER COMMON SHARE The Company computes earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). The Statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding. The computation of diluted loss per share is similar to the basic loss per share computation except the denominator is increased to include the number of additional shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversions of those potential shares. However, such presentation is not required if the effect is antidilutive. Accordingly, the diluted per share amounts do not reflect the impact of warrants and options or convertible debt outstanding for 123,000,000 and 23,276,568 shares at December 31, 2007 and 2006, respectively, because the effect of each is antidilutive. CASH EQUIVALENTS For purposes of reporting cash flows, the Company considers all short term, interest bearing deposits with original maturities of three months or less to be cash equivalents. IMPAIRMENT OF LONG-LIVED ASSETS Patents and other intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives. In accordance with Statement of Financial Accounting Standard (SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS 142"), the Company periodically evaluates its long-lived assets by measuring the carrying amounts of assets against the estimated undiscounted future cash flows associated with them. At the time the carrying value of such assets exceeds the fair value of such assets, impairment is recognized. To date, no adjustments to the carrying value of the assets have been made. The Company has recorded amortization expense in the amount of $ 27,928 related to its patent acquisition costs. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable, notes receivable, accounts payable, accrued expenses and notes payable approximate fair value because of the short maturity of these items. RESEARCH AND DEVELOPMENT COSTS In 2002, the Company entered into a technology affiliates agreement with NASA's Jet Propulsion Laboratory ("JPL") to develop technology for its bio-terrorism detection equipment. Research and development costs are charged to expense as incurred. Research and development expenses were $19,264 and $31,338 for the years ended December 31, 2007 and 2006, respectively. INCOME TAXES Deferred income taxes are recorded to reflect the tax consequences in future years of temporary differences between the tax basis of the assets and liabilities and their financial statement amounts at the end of each reporting period. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the current period and the change during the period in deferred tax assets and liabilities. The deferred tax assets and liabilities have been netted to reflect the tax impact of temporary differences. At December 31, 2007, 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. F-10 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include collectability of accounts receivable, accounts payable, sales returns and recoverability of long-term assets. CONCENTRATION OF CREDIT RISK Generally, the Company required no collateral when it extends credit to its customers. The Company's credit losses in the aggregate have not exceeded managements' expectations. The Company maintains all cash in bank accounts, which at times may exceed federally insured limits. The Company has not experienced a loss in such accounts. SEGMENT REPORTING SFAS No. 131, Disclosures about segments of an enterprise and related information, which superseded statement of financial accounting standards No. 14, Financial reporting for segments of a business enterprise, establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. In 2007 and 2006, the Company operated in one segment. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In September 2006, FASB issued SFAS 157 `Fair Value Measurements'. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on the consolidated financial statements. In September 2006, FASB issued SFAS 158 `Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements No. 87, 88, 106, and 132(R)' This Statement improves financial reporting by requiring an employer to recognize the over funded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157 "Fair Value Measurements" ("SFAS No. 157"). The Company is currently assessing the impact that SFAS No. 159 will have on its financial statements. F-11 In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements", which is an amendment of Accounting Research Bulletin ("ARB") No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations." This statement replaces FASB Statement No. 141, "Business Combinations." This statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position. In March, 2008, the FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities". The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The new standard also improves transparency about the location and amounts of derivative instruments in an entity's financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. FASB Statement No. 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity's liquidity by requiring disclosure of derivative features that are credit risk-related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important. Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position. NOTE 3 - PATENTS As of December 31, 2007, the patent value is as follows :- ------------------------------------- ------------------------------------------ Patent Costs $117,341 ------------------------------------- ------------------------------------------ Accumulated Amortization (27,928) ------------------------------------- ------------------------------------------ Patent, Net $89,413 ------------------------------------- ------------------------------------------ Total amortization expense was $27,928 and $0 for the years ended December 31, 2007 and 2006, respectively. Future amortization expense at December 31, 2007 consist of the following: 2008 $ 5,480 2009 5,480 2010 5,480 2011 5,480 2012 5,480 Total $ 27,400 F-12 NOTE 4 - ACCRUED LIABILITIES The accrued liabilities comprise of the following as at December 31, 2007 :- ----------------------------------------------------------------------- Accrued credit card payable $ 39,282 ----------------------------------------------------------------------- Loans fees payable 68,600 ----------------------------------------------------------------------- Accrued settlement (Refer to Note 10) 411,500 ----------------------------------------------------------------------- TOTAL ACCRUED LIABILITIES $ 519,382 ----------------------------------------------------------------------- The loans fees payable of $68,600 is the value of 300,000 shares payable to third parties in connection with certain loan fees. NOTE 5 - ACCRUED PAYROLL - OFFICERS Due to related parties as of December 31, 2007 comprise of accrued payroll to the officers of the company amounting to $522,573. This payable is interest free, unsecured and due on demand. NOTE 6 - NOTES PAYABLE, RELATED PARTY During the year ended December 31, 2007, the Company borrowed a total of $64,394 from its president and chief executive officer under promissory notes executed by the Company. The notes are unsecured, due on demand and had interest rates ranging from 0% to 12.5%. No payments of principal or interest were made on these notes as of December 31, 2007. The accrued and unpaid interest as of December 31, 2007 was $255. During the year ended December 31, 2007, the Company borrowed a total of $8,149 from its vice-president of Global Strategy under a promissory note executed by the company. The notes are unsecured, due on demand and had an interest rate of ranging from 0% to 12.5%. No payments of principal or interest were made on this note as of December 31, 2007. The accrued and unpaid interest as of December 31, 2007 was $109. NOTE 7 - NOTES PAYABLE Notes payable consisted of the following at December 31, 2007: Notes payable to individuals, subject to contingent settlement agreement and summary judgment, interest at 11.67% per annum, principal and interest due January 1, 2006, in default, unsecured $ 95,740 Note payable, subject to settlement agreement, interest at 12% per annum, principal and interest due July 2005, in default, unsecured 161,000 Note payable, subject to settlement agreement, interest at 9.17% per annum, principal and interest due July 2005, unsecured 74,500 Note payable, interest at 12% per annum, due October 2005 and verbally extended, unsecured 20,600 Note payable, interest at 12% per annum, due November 2005 and verbally extended, unsecured 29,791 Note payable, interest at 12% per annum, due November 2005 and verbally extended, unsecured 90,000 Note payable, interest at 12.5% per annum, due December 2005 and verbally extended, unsecured 15,000 Note payable, interest at 12% per annum, due March 2006 and verbally extended, unsecured 100,000 Note payable, interest at 12.5% per annum, due May 2006 and verbally extended, unsecured 20,000 Note payable, interest at 12.5% per annum, due May 2006 and verbally extended, unsecured 30,000 Note payable, interest at 12.5% per annum, due August 2006 and verbally extended, unsecured 14,975 F-13 Note payable, interest at 12.5% per annum, due August 2006 and verbally extended, unsecured 25,000 Note payable, interest at 12.5% per annum, due February 2007 and verbally extended, unsecured 100,000 Note payable, interest at 12.5% per annum, due February 2007 and verbally extended, unsecured 15,000 Note payable, interest at 12.5% per annum, due February 2007 and verbally extended, unsecured 35,000 Note payable, interest at 12.5% per annum, due March 2007 and verbally extended, unsecured 20,000 Note payable, interest at 12.5% per annum, due March 2007 and verbally extended, unsecured 50,000 Note payable, interest at 12.5% per annum, due April 2007 and verbally extended, unsecured 50,000 Note payable, interest at 12.5% per annum, due April 2007 and verbally extended, unsecured 30,000 Note payable, interest at 12.5% per annum, due November 2007 and verbally extended, unsecured 60,000 Note payable, interest at 12.5% per annum, due December 2007 and verbally extended, unsecured 30,000 Note payable, interest at 12.5% per annum, due January 2008 and verbally extended, unsecured 30,000 Note payable, interest at 12.5% per annum, due February 2008 and verbally extended, unsecured 30,000 Note payable, interest at 12.5% per annum, due March 2008 and verbally extended, unsecured 25,000 Note payable, interest at 12.5% per annum, due March 2008 and verbally extended, unsecured 40,000 Note payable, interest at 12.5% per annum, due October 2008 unsecured 25,000 Note payable, interest at 12.5% per annum, due April 2008 and verbally extended, unsecured 40,000 Note payable, interest at 12.5% per annum, due May 2008 unsecured 60,000 Note payable, interest at 12.5% per annum, due November 2008 unsecured 30,000 Note payable, interest at 12.5% per annum, due November 2008 unsecured 20,000 Note payable, interest at 16.75% per annum, due October 2008 19,153 Total notes payable $ 1,385,760 Less: Long-term portion -- Current Notes Payable $ 1,385,760
The interest expense for the years ended December 31, 2007 and 2006 is $185,651 and $211,269, respectively. The Company entered into a contingent settlement agreement on July 26, 2004 related to $440,765 of notes payable to individuals and related accrued interest. In July 2004, the Company paid a total of $73,333 towards the debt and agreed to pay a total of $298,667, including interest through January 2006 in full payment. The Settlement Agreement provides for an accelerated payment schedule at the Company's option, which would reduce the total payment made by the Company by approximately $12,000. The Company defaulted on the two remaining payments totaling $80,000 at which time the entire remaining balance became due, including default interest and legal fees. The Company currently has accrued $309,518 for interest and legal fees in addition to the $95,740 principal balance F-14 During August 2004, the Company entered into an agreement to settle a note payable in the amount of $200,000 plus accrued interest. The parties agreed to settle the debt for $261,000 payable as follows: Twelve consecutive payments of $12,500 payable monthly commencing August 31, 2004 and ending July 31, 2005; a lump-sum payment of $95,000 payable on July 31, 2005; and a one-time interest payment of $16,000 on July 31, 2005. This agreement includes an additional $7,500 as inducement to the note holder to enter into the extended agreement, which was amortized as a loan fee over the term of the agreement. Scheduled payments were not made on the note and the company is currently in default. The Company currently has accrued $52,619 for interest in addition to the $161,000 principal balance. During August 2004, the Company entered into an agreement to settle a note payable in the amount of $100,000 plus accrued interest. The parties agreed to settle the debt for $130,800 payable as follows: Twelve consecutive payments of $6,000 payable monthly commencing August 31, 2004 and ending July 31, 2005; a lump-sum payment of $50,500 payable on July 31, 2005; and a one-time interest payment of $8,300 on July 31, 2005. The Company has recognized a $38,610 gain on forgiveness of accrued interest related to this transaction. Scheduled payments were not made on the note and the company is currently in default. The Company currently has accrued $30,182 for interest in addition to the $74,500 principal balance. NOTE 8-STOCKHOLDERS' EQUITY PREFERRED STOCK The Company is authorized to issue up to 20,000,000 shares of preferred stock, $.01 par value per share in series to be designated by the Board of Directors. On March 28, 2007, the Board of Directors approved the issuance of the Series A-1 Preferred Stock of the Company and issued 150 shares of such stock to Jacques Tizabi for $50,000 against accrued compensation. The stock entitles the holder to 1,000,000 votes per share, which shall vote together with the Common Stock of the Company for all purposes, except where a separate vote of the classes of capital stock is required by California law. The aggregate value of the 150 shares issued to Mr. Tizabi is $50,000. The shares have a liquidation value, as described in the Company's Articles of Incorporation, of $50,000. Mr. Tizabi is prohibited, by agreement with the Company, from transferring or selling such stock, or any interest in such stock for so long as the shares are outstanding. On July 31, 2007, Mr. Tizabi surrendered the 150 shares of the Series A-1 Preferred Stock of the Company in exchange for promissory note in the amount of $50,000. The promissory note bears no interest and is due on or before July 1, 2008. The shares were then cancelled by the Company. COMMON STOCK EXERCISE OF WARRANTS During 2004, the Company completed a private placement of common stock and warrants. Included in the offering were warrants to purchase common stock at $0.50 and $0.70 per share. In January 2006, the investors returned their Class A and B warrants in exchange for new warrants exercisable at $.15 per share. The Class A and B warrants were repriced to be exercisable at $.15 per share and were reassigned to new investors. As of December 31, 2006 the company had received exercise notices for all 6,122,470 outstanding warrants from the new investors, with proceeds of $918,371. The Company received $366,500 in cash and the remaining $551,871 was used to pay off outstanding notes payable and accrued interest during 2006. CONVERSION OF DEBT During 2007, the Company entered in various agreements to convert $116,736 of principal and $19,031 of accrued interest into 171,883,805 shares of common stock. The fair market value of the stock on the dates of agreement and issuance was $345,373. The Company recorded a loss on settlement of debt of $209,607. During 2007 the Company issued 30,000,000 shares of common stock issued for debt cancellation of $50,000. The company subsequently cancelled the shares. The debt cancellation was also reversed. SALES OF COMMON STOCK In February 2006, the Company entered into an Investment Agreement with a third party, for the future issuance and purchase of shares of its common stock. This Investment Agreement is an arrangement similar to an equity line of credit or an equity drawdown facility. The Company will be provided up to $10,000,000, as requested over a 36 month period. The Company may during the Open Period (36 months) deliver a "put notice" to the lender which states the dollar amount the Company intends to sell its stock. The amount that the Company is entitled to Put is subject to certain limitations and terms of the agreement. The price at which the shares are sold is calculated at 93% of lowest closing bid price during the pricing period. F-15 As of December 31, 2007 98,789,919 shares have been issued for an aggregate price of $681,491. The Company received proceeds of $213,629. The remaining $467,862 was used to pay off outstanding notes payable and accrued interest. The obligations were paid directly by the investor. During the year ended December 31, 2007 the company issued 33,337,129 shares and received cash of $146,500. Out of this money received, $125,500 was used to pay off outstanding notes payable and accrued interest. The obligations were paid directly by the investor. STOCK ISSUED FOR SERVICES During the year ended December 31, 2007, the Company issued an aggregate of 171,755,033 shares of its common stock to various employees of the Company as compensation. The shares were valued at a total of $471,102. During the year ended December 31, 2007, of $550,000 of accrued compensation was contributed to capital. During the year ended December 31, 2007, the Company entered into various agreements for strategic business planning, financial advisory, investor relations, professional and public relations services. As compensation for the services rendered, the Company issued 281,310,824 shares of common stock, valued at $748,909, the fair value of the stock on the day of issuance. During the year ended December 31, 2006, the Company issued an aggregate of 32,442,091 shares of its common stock to various employees of the Company as compensation. The shares were valued at a total of $271,450. During the ended December 31, 2006, the Company entered into various agreements for strategic business planning, financial advisory, investor relations and public relations services. As compensation for the services to be rendered, the Company issued 17,528,382 shares of common stock, valued at $551,550, the fair value of the stock on the dates of issuance. The Company recorded $10,000 at December 31, 2006 as a prepaid expense to be amortized during January 2007, the remaining life of the contract. OTHER During 2007, the Company cancelled 60,000,000 shares issued to a vendor earlier in the year in exchange of inventory credits worth $1,800,000. The value of the stock on the day of issuance was $288,000. The inventory credits were also reversed with the cancellation of the agreement. During 2007, the Company cancelled an aggregate 29,000,000 shares of common stock. The holders of these shares have agreed with the cancellation for no consideration. ISSUANCE OF OPTIONS AND WARRANTS On March 28, 2007, the Company granted to Jacques Tizabi, its president and CEO, an option to purchase 100,000,000 shares of Common Stock at an exercise price of $0.01 per share, for a term of five years. The option is fully vested and immediately exercisable. The options were valued at $661,484 using the Black Scholes model for Options Valuation, with volatility of 174% and risk-free interest rate of 4.65%. The market price on the day of grant was $0.007. The Company recognized $661,484 as expense during the year ended 2007. STOCK OPTION PLAN During 2003, the Company adopted the 2003 Stock Incentive Plan ("the Plan"), which provides for the granting of stock and options to selected officers, directors, employees and consultants of the Company. 4,500,000 shares are reserved for issuance under the Plan for the granting of options. Unless terminated sooner, the Plan will terminate on June 22, 2013. The options issued under the Plan may be exercisable to purchase stock for a period of up to ten years from the date of grant. On February 13, 2006, the Board of Directors adopted the 2006 Stock Compensation Plan (the "Plan"), which provides for the granting of stock and options to selected officers, directors, employees and consultants of the Company. 7,500,000 shares are reserved for issuance under the Plan for the granting of options. Unless terminated sooner, the Plan will terminate on June 22, 2013. The options issued under the Plan may be exercisable to purchase stock for a period of up to ten years from the date of grant. F-16 On June 29, 2006, the Company's Board of Directors adopted the 2006 Consultant Stock Plan ("the 2006 Plan"). The 2006 Plan authorizes common stock grants to its employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. The Company reserved 25,000,000 shares of common stock for awards to be made under the 2006 Plan. On November 22, 2006, the Company's Board of Directors adopted the 2006-II Consultant Stock Plan (the "2006-II Plan"). The 2006-II Plan authorizes common stock grants to our employees, officers, directors, consultants, independent contractors, advisors, and other service providers, provided that such services are not in connection with the offer and sale of securities in a capital raising-transaction. The Company reserved 37,500,000 shares of common stock for awards to be made under the 2006-II Plan. On April 17, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007" Plan). The 2007 Plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 75,000,000 shares of our common stock for awards to be made under the 2007 Plan. The 2007 Plan is be administered by a committee of two or more members of our Board of Directors. On June 5, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007-II Plan"). The 2007-II Plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 30,000,000 shares of our common stock for awards to be made under the 2007-II Plan. The 2007-II Plan is to be administered by a committee of two or more members of our Board of Directors. On June 27, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007-III Plan). The 2007-III plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 29,000,000 shares of our common stock for awards to be made under the 2007-III Plan. The 2007-III Plan is to be administered by a committee of two or more members of our Board of Directors. On July 13, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007-IV Plan). The 2007-IV plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 90,000,000 shares of our common stock for awards to be made under the 2007-IV Plan. The 2007-IV Plan is to be administered by a committee of two or more members of our Board of Directors. On October 10, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007-V Plan). The 2007-V plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 120,000,000 shares of our common stock for awards to be made under the 2007-V Plan. The 2007-V Plan is to be administered by a committee of two or more members of our Board of Directors. On November 01, 2007, our Board of Directors adopted the 2007 Equity Incentive Plan (the "2007-VI Plan). The 2007-VI plan grants to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. We reserved 150,000,000 shares of our common stock for awards to be made under the 2007-VI Plan. The 2007-VI Plan is to be administered by a committee of two or more members of our Board of Directors. F-17 The following table summarizes the activity of options and warrants under all agreements and plans for the two years ended December 31, 2006 and 2007: Weighted Number of Avergae Aggregate ------------------------ Exercise Intrinsic Options Warrants Price Value ----------- ----------- ------ ----- Outstanding, December 31, 2005 8,360,000 15,824,999 0.44 Granted - 6,122,470 0.15 Exercised - (6,122,470) 0.15 Expired/cancelled (300,000) (608,431) 1.28 ----------- ----------- ------ ----- Outstanding, December 31, 2006 8,060,000 15,216,568 0.34 Granted 100,000,000 - 0.01 Exercised - - 0 Expired/cancelled (110,000) (166,568) 0.83 ----------- ----------- ------ ----- Outstanding, December 31, 2007 107,950,000 15,050,000 0.08 - =========== =========== ====== ===== The following table summarizes information about stock options and warrants outstanding at December 31, 2007: OPTIONS AND WARRANTS -------------------------------------------------------------------------------- OUTSTANDING EXERCISABLE WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE -------------------------------------------------------------------------------- 0.01 to $0.33 112,550,000 3.30 0.038 112,550,000 0.038 0.35 to $0.50 6,600,000 1.44 0.50 6,600,000 0.5 0.53 to $0.80 3,850,000 1.27 0.67 3,850,000 0.67 --------------------------------------------------------------- - - 123,000,000 3.14 0.083 123,000,000 0.083 =============================================================== The weighted average exercise price of options at their grant date during the years ended December 31, 2007 and 2006 where the exercise price equaled the market price at the grant date, was $0.00 and $0.00 respectively. The weighted average exercise price of options and warrants at their grant date during the years ended December 31, 2007 and 2006, where the exercise price exceeded the market price was $0.01 and $0.00, respectively. The weighted average exercise price of options and warrants at their date of grant during the years December 31, 2007 and 2006, where the exercise price was less than the market price on the grant date, was $0.00 and $0.00, respectively. The weighted average fair values of options and warrants at their grant date during the years ended December 31, 2007 and 2006 where the exercise price equaled the market price on the day of grant, were $0.00 and $0.00, respectively. The weighted average fair values of options and warrants at their date of grant during the years ended December 31, 2007 and 2006, where the exercise price exceeded the market price on the grant date was $0.01 and $0.00 respectively. The weighted average fair value of the of options and warrants during the years December 31, 2007 and 2006, where the exercise price was less than the market price at the date of grant, was $0.00 and $0.00 respectively. The estimated fair value of each option granted is calculated using the Black-Sholes model for American options. The weighted average assumptions used in the model were as follows: 2007 2006 -------- ------ Risk-free interest rate 4.65% N/A Volatility 174% N/A Expected life 5 years N/A Dividend yield 0% 0% F-18 NOTE 9 - INCOME TAXES The income tax provision (benefit) for the years ended December 31, 2007 and 2006 differs from the computed expected provision (benefit) at the federal statutory rate for the following reasons: 2007 2006 ----------- ----------- Computed expected income tax provision ($1,221,370) ($ 918,949) (benefit) Net operating loss carryforward 1,145,102 773,305 increased Accrued liabilities (153,518) 77,173 Stock-based expenses 225,041 62,605 Non-deductible meals & entertainment 1,686 3,303 Depreciation 3,059 2,563 ----------- ----------- Income tax provision (benefit) $ -- $ -- =========== =========== The components of the deferred tax assets and (liabilities) as of December 31, 2007 were as follows: Deferred tax assets: Temporary differences: Depreciation $ (12,270) Accrued liabilities (180,610) Net operating loss carryforward 10,606,904 Valuation allowance (10,414,024) ------------ Net long-term deferred tax asset $ -- ============ The components of the deferred tax (expense) benefit were as follows for the years ended December 31, 2007 and 2006: December 31, 2007 2006 ----------- ----------- Deferred tax assets: Accrued expenses $ (271,401) 36,832 Depreciation 3,600 5,849 Increase in net operating loss carryforward 1,347,178 1,074,326 Change in valuation allowance (1,079,377) (1,117,007) ----------- ----------- $ -- $ -- =========== =========== As of December 31, 2007, the Company has net operating losses carryforwards of approximately $26,150,000 expiring in 2008 through 2022. NOTE 10 - COMMITMENTS AND CONTINGENCIES LITIGATION a) A. Sean Rose, Claire F. Rose and Mark Rose v. Universal Detection Technology, fka Pollution Research and Control Corporation (Superior Court of the State of California for the County of Los Angeles, North Central District, Case No. EC042040) On or about April 16, 2004, Plaintiffs commenced an action against the Company (Case No. EC 038824) for amounts allegedly due pursuant to four unpaid promissory notes. On August 2, 2004, the parties executed a Confidential Settlement Agreement and Mutual Releases (the "AGREEMENT"). On December 30, 2005, Plaintiffs commenced the above-referenced action against the Company, alleging the Company breached the Agreement and seeking approximately $205,000 in damages. A judgment was entered on April 11, 2006. The Company has accrued for this settlement. We entered into a settlement agreement in the third quarter of 2004 with each of these parties. Pursuant to this agreement, at June 30, 2005, we were required to pay an additional $80,000 as full payment of our obligations. We did not make this payment and are in default of these notes. As of December 31, 2007, we have $405,259 accrued for including interest relating to this matter. F-19 b) Steven P. Sion and Sion Consulting, Inc. v. Universal Detection Technology Corporation, et. Al. (Superior Court of the State of California for the County of Los Angeles, Case NO. BC350942) On April 19, 2006, Plaintiffs Steven P Sion and Sion Consulting, Inc., a Nevada corporation, instituted an action in the Los Angeles Superior Court (SION V. UNIVERSAL DETECTION TECHNOLOGY CORPORATION, ET. AL.; Central District Case No. BC350942) against Defendants Universal Detection Technology Corporation, Albert E. Gosselin, Jr., Roy Peterson, Greg Edwards, Bombay Consortium, Inc., Howard Sperling, Assisted Care, Inc. As to Universal Detection, Plaintiffs alleged claims for: (1) Breach of Contract; (2) Fraud, (3) Negligent Misrepresentation; and (4) Conspiracy in relation to the sale of Dasibi Environmental Corp. Plaintiffs seek an unspecified amount of compensatory, general and punitive damages against all Defendants. On July 17, 2006, Universal Detection timely filed an Answer to the Complaint. On or about June 13, 2007, Universal Detection filed a Motion for Summary Judgment, or Alternative, Summary Adjudication of Claims. Shortly before the hearing on said Motion, a settlement and mutual release of all claims was signed between Plaintiffs and Universal Detection. On September 19, 2007, Plaintiffs dismissed Universal Detection with prejudice from the action. c) On June 2, 2006, Plaintiff Trilogy Capital Partners instituted an action in the Los Angeles Superior Court (TRILOGY CAPITAL PARTNERS V. UNIVERSAL DETECTION TECHNOLOGY, ET. AL., Case No. SC089929) against the Company. Plaintiff's Complaint alleged damages against UDT for breach of an engagement letter in the amount of $93,449. Also, Plaintiff alleged that UDT had failed to issue warrants to it pursuant to a written agreement. After completing the initial stages of litigation and conducting extensive mediation, Plaintiff and UDT reached a settlement wherein commencing December 15, 2006, UDT would make monthly payments to Plaintiff of $2,000 until a debt of $90,000 plus accrued interest at six percent per annum was fully paid. In exchange, Plaintiff would release all of its claims against UDT. UDT has been current on all of its agreed payments to Plaintiff. As of December 31, 2007, $68,757 was due under the agreement. d) On November 15, 2006, Plaintiff NBGI, Inc. instituted an action in the Los Angeles Superior Court (NBGI, Inc. v. Universal Detection Technology, et. al., Case No. BC361979) against the Company. NBGI, Inc.'s Complaint alleged breach of contract, and requested damages in the amount of $111,014 plus interest at the legal rate and for costs of suit. To date, discovery has commenced, and trial has been set for October 29, 2007. There is also a Motion for Summary Judgment set for September 11, 2007. The Summary Judgment was granted and Judgment has been entered. e) On May 4, 2007, Plaintiff Horiba Jobin Yvon Inc. fka Jobin Yvon Inc. instituted an action in the Los Angeles Superior (West District Case No. 07C01862) against Defendants Universal Detection Technology Horiba Jobin Yvon Inc.'s complaint for money alleged that Defendants became indebted to Plaintiff in the sum of $9,510 for goods and services. Defendants agreed to pay said sum, but no part of said sum has been paid. Plaintiff seeks the following: the sum of $9,510 plus accrued interest at ten percent per annum from July 18, 2006; the costs of suit incurred; and reasonable attorneys' fees of $1,000. During August 2007, the Company's bank account was garnished. From time to time, the Company is a party to a number of lawsuits arising in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's operations, cash flows or financial position. EMPLOYMENT AGREEMENTS In September 2001, the Company entered into an employment agreement with its President and Chief Executive Officer. Under the agreement, base salary is $250,000 to be adjusted on an annual basis. The Company granted options to purchase 1,150,000 shares of its common stock exercisable at $0.30 per share. F-20 On August 23, 2004, the Company entered into an amendment of the employment agreement with its President and Chief Executive Officer. The amendment provides that $100,000 of the Officer's annual salary shall be accrued as payable until such time as the Company has the financial resources to pay any or all of the accrued amount. The agreement also provides for salary increases of 5% per year commencing January 1, 2006, and an extension of the term of the agreement until December 31, 2010. In addition, automobile cost is limited to a maximum of $2,500 per month and the Company will reimburse the officer for individual life insurance premiums up to $1,000 per month and for health insurance premiums and related expenses. On October 1, 2004, the Company entered into an employment agreement with its Vice President of Global Strategy. For the period from October 1 through December 31, 2004, compensation was $35,000 per month. Thereafter, the agreement provides for salary of $150,000 per year plus health care costs not to exceed $400 per month. Employment is at will and may be terminated by either party at any time. The Company is obligated to make certain minimum salary payments as follows: YEAR ENDING DECEMBER 31, 2008 $ 289,406 2009 303,876 2010 319,070 ---------- $ 912,352 ========== LICENSE AGREEMENT On September 30, 2003, the Company entered into a license agreement with CalTech whereby CalTech granted the Company an exclusive, royalty-bearing license to make, use, and sell all products that incorporate the technology that was developed under the Technology Affiliates Agreement with JPL and is covered by related patents. In addition, the grant includes a nonexclusive, royalty-bearing license to make derivative works of the technology. The Company is required to make quarterly royalty payments to CalTech, ranging from 2% to 4% of net revenues for each licensed product made, sold, licensed, distributed, or used by the Company and 35% of net revenues that the Company receives from sublicensing the licensed products. A minimum annual royalty of $10,000 was due and paid to CalTech on August 1, 2005 and each anniversary thereof. The minimum royalty will be offset by the abovementioned royalty payments, if any. To maintain its license with Caltech, a minimum annual royalty of $10,000 was due to Caltech on August 1, 2005, and is due on each anniversary thereof, regardless of any product sales. Any royalties paid from product sales for the 12-month period preceding the date of payment of the minimum annual royalty will be credited against the annual minimum. Pursuant to the terms of the license, the Company must pay four percent royalties on product sales in countries where a patent is issued and two percent royalties on product sales in countries where a patent is not issued, as well as 35 percent of net revenues received from sub-licensees. As of the date of this report the Company have not paid the $10,000 royalty due Cal Tech on August 1, 2007. According to the Company's license agreement with Caltech, Caltech shall have the right to terminate the license agreement and the rights and licenses granted to the Company if it fails to make any payment due including patent expense or minimum annual royalties for a period of fifteen days after receiving a second written notice from Caltech specifying the Company's failure. To date the Company has not received any notices from Caltech with regards to its August 1, 2007 minimum annual royalty due of $10,000. Furthermore, the Company has reached an agreement with Caltech with regards to the payment of patent fees. This agreement is signed in the form of a second amendment to the Company's license agreement, dated December 5, 2006 with Caltech. Accordingly, the Company has agreed that it owes the amount of $86,318.48 for patent costs incurred by Caltech prior to December 1, 2006 and that this amount shall be paid to Caltech in ten monthly installments of $8,631.85. To date, the Company has made four of the monthly installments called for in the second amendment to its license agreement with Cal Tech. OPERATING LEASES F-21 On October 14, 2004, the Company entered into an assignment of a lease agreement (sublease) for office space with Astor Capital, a company owned 50% by the Company's President and Chief Executive Officer and 50% by the Company's Vice President of Global Strategy effective November 1, 2004. The agreement provides for the sublease of office common areas to Astor for a monthly fee equal to $500 per month. The sublease assigns to the Company all right, title and interest in and to any security deposit or other refundable amounts to which Astor may be entitled. The Company has been assigned the rights to the related security deposit of $10,226 and leasehold improvements of $25,445 and has recorded such amounts, offsetting relating amounts due from Astor. Future minimum operating lease payments at December 31, 2007 consist of the following: 2008 $ 112,490 ---------- $ 112,490 ========== Rent expense was $132,637 and $117,109 for 2007 and 2006 respectively. NOTE 11 SUBSEQUENT EVENTS During the first quarter of 2008, the Company issued an aggregate of 170,586,309 shares of its common stock to employees as payment for current and past services valued at approximately $140,303. During the first quarter of 2008, the Company entered in several consulting and advisory agreements. The Company issued 204,086,311 shares of its common stock as partial payment to certain consultants and for payment of professional fees for an aggregate price of $199,269. During the first quarter of 2008, the Company issued 432,847,133 shares of its common stock valued at $273,233 in order to covert $144,303 in principal and accrued interest. F-22 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A. CONTROLS AND PROCEDURES Regulations under the Securities Exchange Act of 1934 (the "Exchange Act") require public companies to maintain "disclosure controls and procedures," which are defined to mean a company's controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Our Chief Executive Officer ("CEO"), President, and Acting Chief Financial Officer ("CFO") carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on those evaluations, as of the Evaluation Date, our CEO, President, and CFO believe that: (i) our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure; and (ii) our disclosure controls and procedures are not effective. Internal Control over Financial Reporting (a) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on an evaluation under the supervision and with the participation of the Company's management, including the CEO and the acting CFO have concluded that the Company's disclosure controls and procedures (as defined under the Securities Exchange Act of 1934, as amended (Exchange Act)) were not effective as of December 31, 2007 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Identified Material Weaknesses During the three and six months ended December 31, 2007 the Company identified the following material weaknesses as indicated below. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. Management identified the following internal control deficiencies during its assessment of our internal control over financial reporting as of December 31, 2007: o We did not have effective comprehensive entity-level internal controls specific to the structure of our board of directors; 28 o We did not have formal policies governing certain accounting transactions and financial reporting processes; o We did not obtain attestations by all employees regarding their understanding of and compliance with Universal Detection Technology, Inc. policies related to their employment; o We did not obtain attestations by all members of our board of directors, our executive officers and/or our senior financial officers regarding their compliance with our Code of Ethics and our Code of Ethics did not apply to our other employees; o We did not perform adequate oversight of certain accounting functions and maintained inadequate documentation of management review and approval of accounting transactions and financial reporting processes; and o We had not fully implemented certain control activities and capabilities included in the design of our financial system. Certain features of our financial system are designed to automate accounting procedures and transaction processing, or to enforce controls. Based on management's evaluation of our internal control over financial reporting, our current CFO and CEO have concluded that Universal Detection Technology, Inc. did not maintain effective internal control over financial reporting as of December 31, 2007. In light of this evaluation, the Company hired a regionally-recognized independent consulting firm to assist management with its continuing assessment of the effectiveness of our internal control over financial reporting, including scope determination, planning, staffing, documentation, testing, remediation and retesting and overall program management of the assessment project. This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. Management's Remediation Initiatives We are in the process of evaluating our material deficiencies. We have already begun to remediate many of the deficiencies. However, others will require additional people, including the addition of members to our board of directors, which will take longer to remediate. In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures: 1. Identify and retain potential new directors for our board of directors with a goal of having sufficient independent board oversight; 2. Establish comprehensive, formal, general accounting policies and procedures, and require employees to approve and execute such policies and procedures as documentation of their understanding of and compliance with internal policies; 3. Require all employees to be subject to our Code of Ethics and require all employees and directors to sign our Code of Ethics on an annual basis and retain the related documentation; 4. Implement appropriate management oversight and approval activities in certain areas of the Company's operations, including, but not limited to, employee expense reimbursements, customer invoicing, and period-end closing processes; and 5. Centralize our financial reporting system and move all decentralized off-line processes to our new centralized financial reporting system. We intend to implement the five initiatives above as soon as possible. Additionally, we plan to test our updated controls and remediate our deficiencies by December 31, 2008. Conclusion The above identified material weaknesses did not result in material audit adjustments to our 2007 financial statements. However, it is reasonably possible that, if not remediated, one or more of the identified material weaknesses noted above, could result in a material misstatement in our reported financial statements that might result in a material misstatement in a future annual or interim period. In light of the identified material weaknesses, management performed: (i) significant additional substantive review of those areas described above; and (ii) performed additional analyses, including but not limited to a detailed balance sheet and statement of operations analytical review that compared changes from the prior period's financial statements and analyzed all significant differences. These procedures were completed so management could gain assurance that the financial statements and schedules included in this Form 10-KSB fairly present in all material respects the Company's financial position, results of operations and cash flows for the periods presented. (b) CHANGES IN CONTROL OVER FINANCIAL REPORTING The changes noted above, are the only changes during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. ITEM 8B. OTHER INFORMATION None. 29 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT Set forth below are the names, ages, positions and business experience of our directors, executive officers, and key employees as of April 5, 2007. NAME AGE POSITION Jacques Tizabi 37 President, Chief Executive Officer, Acting Chief Financial Officer, and Director Matin Emouna (1) 39 Director Michael Collins (1) 38 Secretary and Director Ali Moussavi 37 Vice President of Global Strategy (1) Member of Audit and Compensation Committees. All directors hold office until the next annual meeting of our shareholders and until their successors have been elected and qualified. Officers serve at the pleasure of the board of directors. There are no family relationships among any of our directors, executive officers, or persons nominated or chosen as our directors or executive officers. BUSINESS EXPERIENCE JACQUES TIZABI has been the Chief Executive Officer, President and Chairman of the Board of Directors of our Company, and Acting Chief Financial Officer since October 2001. Mr. Tizabi spends on average 40-50 hours per week providing services to us, and also is involved with several other companies in industries unrelated to our business. He is the co-founder and managing partner of Astor Capital, Inc., which was founded in 1995 and specializes in investment banking and asset management, predominantly in the area of direct private investment in public companies. He is also a director of eCast Media, a subsidiary of NT Media Corp. of California, a publicly traded company, and President, Chief Executive Officer, and director of Riddle Records, Inc., a publicly traded company. Mr. Tizabi has substantial experience in evaluating, structuring and negotiating direct investments in public companies and later stage private companies. Mr. Tizabi holds a B.S. degree in Business from New York University and an M.B.A. from Pepperdine University. MICHAEL COLLINS has been the Secretary and a director of our Company since October 2001. He has been an independent business consultant since December 1998. Between 1993 and 1997, Mr. Collins worked for Twentieth Century Fox International, PolyGram Filmed Entertainment and Savoy Pictures in the field of media management. Mr. Collins received a B.A. in Political Science from Columbia University and an M.B.A. from The Anderson School at UCLA. MATIN EMOUNA has served as a director of our Company since October 2001. Since 1997, Mr. Emouna has maintained his own law practice in New York, where he represents foreign and domestic clients in a broad range of real estate transactions, with emphasis on new constructions, commercial real estate transactions, shopping center development, financing, and commercial leasing. Mr. Emouna also serves as a general counsel for Omni Abstract Title, Radio Sedayeh Iran and several non-profit religious organizations. He holds a B.S. degrees in Business Administration and Spanish from New York State University at Albany and a J.D. from Benjamin N. Cardozo School of Law. ALI MOUSSAVI has been the Vice President of Global Strategy of our Company since October 2004. Mr. Moussavi principally is responsible for identifying and structuring international opportunities and partnerships. Mr. Moussavi has substantial experience and knowledge in global expansion and for over the past five years, has acted as corporate advisor to several U.S. companies, structuring financial and business reorganization plans and assisting in the expansion of their consumer and/or investment base to the European and Asian continents. Mr. Moussavi is a co-founder of Astor Capital, Inc. He holds a B.S. degree in Mathematics from New York University. 30 COMMITTEES Our Audit Committee currently consists of Michael Collins and Matin Emouna. Each Audit Committee member is independent within the meaning of the applicable NASDAQ listing standards and applicable rules and regulations promulgated by the Securities and Exchange Commission. Our Audit Committee currently does not have a financial expert within the meaning of the applicable SEC rules as management does not believe one is necessary in light of the Company's current stage of product development. Our Compensation Committee determines matters pertaining to the compensation and expense reporting of certain of our executive officers, and administers our stock option, incentive compensation, and employee stock purchase plans. Our Compensation Committee currently consists of Michael Collins and Matin Emouna. CODE OF ETHICS We have adopted a Code of Business Conduct and Ethics which is designed to set the standards of business conduct and ethics and help directors and employees resolve ethical issues. The Code applies to all directors and employees, including the Chief Executive Officer and Chief Financial Officer and other persons performing similar functions. The Code covers topics including, but not limited to, conflicts of interest, confidentiality of information, fair dealing with customers, supplies and competitors, and compliance with applicable laws, rules and regulations. The purpose of the Code is to ensure to the greatest possible extent that our business is conducted in a consistently legal and ethical manner. Upon written request to the Company, we will provide a copy of the Code free of charge. ITEM 10. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following executive compensation disclosure reflects all compensation awarded to, earned by, or paid to the executive officers below for the fiscal year ended December 31, 2007. The following table summarizes all compensation for fiscal year 2007 received by our Chief Executive Officer. No other executive officer earned in excess of $100,000 in fiscal year 2007. SUMMARY COMPENSATION TABLE Nonqualified Non-Equity Deferred All Incentive Compen Other Stock Option Plan sation Compen Name and Salary Bonus Awards Awards Compensation Earnings sation Total principal position Year ($) ($) ($) ($) ($) ($) ($) ($) Jacques Tizabi, President, CEO, Acting CFO 2007 $275,625 -- -- $661,484 -- -- -- $937,109 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following reflects all outstanding equity awards for the executive officer named above. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END OPTION AWARDS STOCK AWARDS Number of Number of Equity Option Option Number of Market Equity Equity securities securities incentive exercise expiration shares or value incentive incentive underlying underlying plan awards: price date units of of plan plan Name unexercised unexercised number of ($) stock that shares awards: awards: options options (#) securities have not or number of market or (#) Unexercisable underlying vested (#) units unearned payout Exercisable unexercised of shares, value of earned stock units, or unearned options (#) that other shares, have rights that units, or not have not other vested vested (#) rights ($) that have not vested ($) Jacques Tizabi 107,950,000
31 DIRECTOR COMPENSATION The following reflects all compensation awarded to, earned by, or paid to the directors below for the fiscal year ended December 31, 2007 DIRECTOR COMPENSATION Change in Pension Non-Equity Value and Incentive Nonqualified Fees Earned Plan Deferred All or Paid Stock Option Compen Compensation Other in Cash Awards Awards sation Earnings Compensation Total Name ($) ($) ($) ($) ($) ($) ($) Jacques Tizabi $0 -- -- -- -- -- $0 Matin Emouna $0 -- -- -- -- -- $0 Michael Collins $0 -- -- -- -- -- $0
On October 18, 2004, the Board of Directors determined to compensate independent directors in the amount of $15,000 each for services rendered through December 31, 2004. The Board also determined to compensate the independent directors $5,000 each for services to be rendered for the period January 1, 2005 through December 31, 2005. No compensation was paid to directors for the period January 1, 2006 through December 31, 2006. When we request our Board members to attend meetings in person, it is our policy to reimburse directors for reasonable travel and lodging expenses incurred in attending those Board meetings. No compensation was paid to directors for the period January 1, 2006 through December 31, 2007. EMPLOYMENT AGREEMENTS We have an employment agreement with Jacques Tizabi. Mr. Tizabi's employment agreement, dated as of September 24, 2001, and amended August 23, 2004, provides for Mr. Tizabi to serve as our Chairman of the Board, Chief Executive Officer and President until December 31, 2010, unless otherwise extended. The employment agreement provides for Mr. Tizabi to receive an annual base salary of $250,000, subject to salary increases of 5% per year commencing January 1, 2006. Mr. Tizabi also is entitled to specified perquisites, including participation in any group life, medical, disability and other insurance plans provided by us, use of a luxury automobile approved by the compensation committee (with a maximum cost of $2,500 per month), monthly dues for club memberships not to exceed $1,500 per month, and reimbursement of entertainment expenses provided to our customers, vendors, and strategic partners. To date, Mr. Tizabi has not received any of these specified perquisites. If Mr. Tizabi's employment is terminated due to his death, the employment agreement provides that we will pay Mr. Tizabi's estate his remaining base salary during the remaining scheduled term of the employment agreement, accelerate the vesting of his options and continue to provide family medical benefits. If Mr. Tizabi's employment is terminated due to his disability, the employment agreement provides that we will pay Mr. Tizabi his remaining base salary during the remaining scheduled term of the employment agreement (reduced by any amounts paid under long-term disability insurance policy maintained by us for the benefit of Mr. Tizabi). If Mr. Tizabi terminates the employment agreement for cause, if we terminate the employment agreement without cause or in the event of a change of control, in which event the employment of Mr. Tizabi terminates automatically, we will pay Mr. Tizabi his remaining base salary during the remaining scheduled term of the employment agreement and an amount based on his past bonuses and continue to provide specified benefits and perquisites. If Mr. Tizabi terminates the employment agreement without cause or we terminate the employment agreement for cause, Mr. Tizabi is entitled to receive all accrued and unpaid salary and other compensation and all accrued and unused vacation and sick pay. If any of the payments due Mr. Tizabi upon termination qualifies as "excess parachute payments" under the Internal Revenue Code, Mr. Tizabi also is entitled to an additional payment to cover the tax consequences associated with these excess parachute payments. 32 Mr. Tizabi has agreed that he will defer payment of all accrued but unpaid bonus or salary, or other compensation payable to him in excess of $150,000 per year beginning in 2005 until future years. During 2007, Mr. Tizabi contributed $550,000 on accrued but unpaid salary to the capital of the Company. We also have an employment agreement with Ali Moussavi. Mr. Moussavi's employment agreement, dated as of October 1, 2004, provides for Mr. Moussavi to serve as our Vice President of Global Strategy. The employment agreement provides for Mr. Moussavi to receive an annual base salary of $150,000. Mr. Moussavi has agreed that his annual base salary for 2007 may be paid to him in either cash or shares of our stock. ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS BENEFICIAL OWNERSHIP The following table sets forth information as of April 2008, relating to the ownership of our common and preferred stock, by (i) each person known by us to be the beneficial owner of more than five percent of the outstanding shares of each class of our capital stock, (ii) each of our directors and nominees, (iii) each of our named executive officers and (iv) all of our executive officers and directors as a group. Except as may be indicated in the footnotes to the table and subject to applicable community property laws, each person has the sole voting and investment power with respect to the shares owned. The address of each person listed is in care of Universal Detection Technology, 9595 Wilshire Blvd., Suite 700, Beverly Hills, California 90212. Name of Beneficial Owner Number of Shares of Number of Shares of Common Stock Beneficially Percent of Preferred Stock Percent of Owned (1) Class (1) Beneficially Owned (1) Class (1) Jacques Tizabi, 107,979,700 (2) 24.4% 0 * President, CEO, Acting CFO, Director Ali Moussavi, 0 * 0 * Vice President of Global Strategy Matin Emouna, 0 * 0 * Director Michael Collins, 0 * 0 * Secretary and Director Directors and executive officers as a group (4 persons)...................... 107,979,700 (2) 24.4% 0 * * Less than 1%.
(1) Under Rule 13d-3 under the Exchange Act, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by that person (and only that person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person's actual ownership with respect to the number of shares of our common stock actually outstanding at April 07, 2008. As of April 07, 2008, we had 1,653,206,274 common shares, no par value, outstanding. (2) Includes 107,950,000 shares that may be acquired upon the exercise of fully vested options. CHANGE IN CONTROL We are not aware of any arrangement that might result in a change in control in the future. 33 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On June 21, 2007, the Company executed a promissory note in the aggregate principal amount of $1,000 payable to Jacques Tizabi, its President and Chief Executive Officer. The promissory note bears interest at 12.5% per annum and was due July 5, 2007. The note has been verbally extended. As of December 31, 2007, we owed $67 in interest on this note. On June 28, 2007, the Company executed a promissory note in the aggregate principal amount of $2,000 payable to Jacques Tizabi, its President and Chief Executive Officer. The promissory note bears interest at 12.5% per annum and was due July 12, 2007. The note has been verbally extended. As of December 31, 2007, we owed $126 in interest on this note. On June 13, 2007, the Company executed a promissory note in the aggregate principal amount of $1,000 payable to Ali Moussavi, Vice President of Global Strategy.. The promissory note bears interest at 12.5% per annum and was due July 17, 2007. The note has been verbally extended. As of December 31, 2007, we owed $63 in interest on this note. On July 3, 2007, the Company executed a promissory note in the aggregate principal amount of $1,000 payable to Jacques Tizabi, its President and Chief Executive Officer. The promissory note bears interest at 12.5% per annum and was due July 17, 2007. The note has been verbally extended. As of December 31, 2007, we owed $63 in interest on this note. On July 31, 2007, the Company executed a promissory note in the aggregate principal amount of $50,000 payable to Jacques Tizabi, its President and Chief Executive Officer. The promissory note bears interest at 0.0% per annum and is due July 1, 2008. As of December 31, 2007, we owed $63 in interest on this note. ITEM 13. EXHIBITS 3.1 Articles of Incorporation of A. E. Gosselin Engineering, Inc. (now the Company) (incorporated herein by reference to Exhibit 3(a) to Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.2 Certificate of Amendment of Articles of Incorporation of A. E. Gosselin Engineering, Inc. (now the Company) (incorporated herein by reference to Exhibit 3(a) to Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.3 Certificate of Amendment of Articles of Incorporation of Dasibi Environmental Corp. (now the Company) (incorporated herein by reference to Exhibit 3(a) to Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.4 Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.4 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001, filed on April 15, 2002). 3.5 Certificate of Determination of Preferences of Preferred Shares. 4.1 Amended and Restated 2003 Stock Incentive Plan (incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004, filed on March 31, 2005). 4.2 2006 Stock Compensation Plan (incorporated by reference to the Company's Form S-8 Registration Statement filed on February 13, 2006). 4.3 2006 Consultant Stock Plan (incorporated by reference to the Company's Form S-8 Registration Statement filed on June 30, 2006). 4.4 2006-II Consultant Stock Plan (incorporated by reference to the Company's Form S-8 Registration Statement filed on November 22, 2006). 10.1 Employment Agreement by and between the Company and Jacques Tizabi dated September 25, 2001 (incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the Quarter Ended March 31, 2002, filed on May 20, 2002). 10.2 Amendment to Employment Agreement of Jacques Tizabi, dated August 23, 2004. (incorporated by reference to Exhibit 10.1 to the Company 's Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 2004, filed on November 22, 2004). 34 10.3 Technology Affiliates Agreement by and between the Company and California Institute of Technology, dated August 6, 2002. (incorporated herein by reference to Exhibit 10.3 to the Company 's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002, filed on April 15, 2003). 10.4 Licensing Agreement by and between Universal Detection Technology and California Institute of Technology, dated September 30, 2003 (incorporated by reference to Exhibit 10.4 to the Company 's Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 2003, filed on November 19, 2003). 10.5 Agreement for Investment Banking and Advisory Services, by and between the Company and Astor Capital, Inc., dated June 1, 2003 (incorporated by reference to Exhibit 10.5 of the Company 's Annual Report on Form 10-KSB for the year ended December 31, 2003, filed on March 31, 2004). 10.6 Amendment to Agreement for Investment Banking and Advisory Services with Astor Capital, Inc. dated April 29, 2004 (incorporated by reference to Exhibit 10.1 to the Company 's Quarterly Report on Form 10-QSB for the Quarter Ended June 30, 2004, filed on August 23, 2004). 10.7 Amendment to Agreement for Investment Banking and Advisory Services with Astor Capital, Inc. dated September 22, 2004 (incorporated by reference to Exhibit 10.4 to the Company 's Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 2004, filed on November 22, 2004). 10.8 Standard Form Office Lease, dated September 2003, between Astor Capital, Inc. and CSDV, a Limited Partnership. (incorporated by reference to Exhibit 10.2 to the Company 's Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 2004, filed on November 22, 2004). 10.9 Assumption of Lease Agreement, dated October 14, 2004, between Universal Detection Technology and Astor Capital, Inc. (incorporated by reference to Exhibit 10.2 to the Company 's Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 2004, filed on November 22, 2004). 10.10 Letter Agreement, dated August 10, 2004, between the Company and IIG Equity Opportunities Fund Ltd. (incorporated by reference to the exhibit so described in Amendment No. 5 to the Company's Registration Statement on Form SB-2, File No. 333-117859, filed with the Securities and Exchange Commission on February 2, 2005). 10.11 Letter Agreement, dated August 10, 2004, between the Company and Target Growth Fund Ltd. (incorporated by reference to the exhibit so described in Amendment No. 5 to the Company's Registration Statement on Form SB-2, File No. 333-117859, filed with the Securities and Exchange Commission on February 2, 2005). 10.12 Letter Agreement, dated September 21, 2004 between the Company and JRT Holdings. (incorporated by reference to the exhibit so described in Amendment No. 5 to the Company's Registration Statement on Form SB-2, File No. 333-117859, filed with the Securities and Exchange Commission on February 2, 2005). 10.13 Letter Agreement, dated October 1, 2004, between the Company and Ali Moussavi. (incorporated by reference to the exhibit so described in Amendment No. 5 to the Company's Registration Statement on Form SB-2, File No. 333-117859, filed with the Securities and Exchange Commission on February 2, 2005). 10.14 Letter of Engagement dated August 19, 2005, between Trilogy Capital Partners, Inc. and Universal Detection Technology (incorporated by reference to the Company's Current Report on Form 8-K filed on September 28, 2005). 10.15 Form of Stock Purchase Warrant (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on February 14, 2006). 10.16 Stock Purchase Warrant issued to Trilogy Capital Partners (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on February 14, 2006). 10.17 Investment Agreement by and between Universal Detection Technology, a California corporation, and European Equity Group (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on February 14, 2006). 10.18 Form of Consulting Agreement (incorporated by reference to the Company's Registration Statement on Form SB-2 filed on February 14, 2006). 21.1 Subsidiaries of Registrant (incorporated by reference to Exhibit 21.1 of the Company 's Annual Report on Form 10-KSB for the year ended December 31, 2003, filed March 31, 2004). 35 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES The Audit Committee approved the engagement of AJ. Robbins, PC as our independent auditors through September 30, 2007. The Audit Committee approved the engagement of Committee also has approved the engagement of Kabani and Associates as our independent auditors for October 1 through December 31, 2007. The Committee also approved the engagement of Kabani and Associates as our independent auditors through the quarter ending September 30, 2008. AUDIT FEES The aggregate fees billed by AJ. Robbins, PC for the audit and review of our annual financial statements and services that are normally provided by an accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2007 and 2006, were approximately $39,000 and $90,867, respectively. The aggregate fees billed by Kabani and Associates for the audit and review of our annual financial statements and services that are normally provided by an accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2007 was $40,000. AUDIT-RELATED FEES The aggregate fees billed by AJ. Robbins, PC for assurance and related services rendered by AJ. Robbins that are reasonably related to the performance of the audit or review of our financial statements for the fiscal years ended December 31, 2007 and 2006 were approximately $0 and $0, respectively. The aggregate fees billed by Kabani and Associates for assurance and related services rendered by AJ. Robbins that are reasonably related to the performance of the audit or review of our financial statements for the fiscal years ended December 31, 2007 was approximately $0. TAX FEES The aggregate fees billed by AJ. Robbins, PC for professional services rendered for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2007 and 2006, were approximately $7,880 and $8,843 respectively. ALL OTHER FEES No other fees were billed by Kabani & Co and AJ. Robbins, PC for the fiscal years ended December 31, 2007 and 2006. AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES The audit committee is required to pre-approve the audit and non-audit services performed by the independent auditor in order to assure that the provision of such services do not impair the auditor's independence. 36 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: July 29,2008 UNIVERSAL DETECTION TECHNOLOGY By: /s/ Jacques Tizabi -------------------------------------------- Jacques Tizabi, President, Chief Executive Officer, Acting Chief Financial Officer, and Chairman of the Board of Directors POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jacques Tizabi, his attorney-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-KSB, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming said attorney-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: July 29, 2008 /s/ Jacques Tizabi -------------------------------------------- Jacques Tizabi, President, Chief Executive Officer, Acting Chief Financial Officer, and Chairman of the Board of Directors Date: July 29, 2008 /s/ Michael Collins -------------------------------------------- Michael Collins, Secretary and Director Date: July 29, 2008 /s/ Matin Emouna -------------------------------------------- Matin Emouna, Director 38