-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DeQcPaIFlfOmkkuT+mjbC3iQ2dkP2tHsCOeQaLnPYMs9j0o8Bp39NYmpedjP785Z JIamW4QInVdNC9zORkzYLg== 0001019687-08-005118.txt : 20081118 0001019687-08-005118.hdr.sgml : 20081118 20081118160908 ACCESSION NUMBER: 0001019687-08-005118 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081118 DATE AS OF CHANGE: 20081118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL DETECTION TECHNOLOGY CENTRAL INDEX KEY: 0000763950 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 952746949 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09327 FILM NUMBER: 081198455 BUSINESS ADDRESS: STREET 1: 9595 WILSHIRE BOULEVARD, SUITE 700 CITY: BEVERLY HILLS STATE: CA ZIP: 90212 BUSINESS PHONE: 3102483655 MAIL ADDRESS: STREET 1: 9595 WILSHIRE BOULEVARD, SUITE 700 CITY: BEVERLY HILLS STATE: CA ZIP: 90212 FORMER COMPANY: FORMER CONFORMED NAME: POLLUTION RESEARCH & CONTROL CORP /CA/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DASIBI ENVIRONMENTAL CORP DATE OF NAME CHANGE: 19900529 10-Q 1 udt_10q-093008.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: SEPTEMBER 30, 2008 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to ____ Commission File Number 0-31012 UNIVERSAL DETECTION TECHNOLOGY (NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-2746949 ---------------------------------- --------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 9595 WILSHIRE BLVD., SUITE 700y,.l BEVERLY HILLS, CALIFORNIA 90212 - ----------------------------------------------------- ------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (310) 248-3655 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 [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer |_| Acceleratedfiler |_| Non-accelerated filer |_| Smaller reporting company |X| Check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] Number of shares outstanding as of November 11, 2008: 26,584,987 common shares. Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
FORM 10-Q INDEX PAGE NO. ---------- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited).................. Notes to Condensed Consolidated Financial Statements..................... Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ Item 3. Quantitative and Qualitative Disclosures About Market Risk............... Item 4T. Controls and Procedures.................................................. PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................ Item 1A Risk Factors............................................................. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.............. Item 3. Defaults Upon Senior Securities.......................................... Item 4. Submission of Matters to a Vote of Security Holders...................... Item 5. Other Information........................................................ Item 6. Exhibits................................................................. SIGNATURES...............................................................................................
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2008 DECEMBER 31, 2007 (UNAUDITED) (AUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,499 $ 9,555 Restricted cash 10,307 10,209 Accounts Receivable,net 1,427 4,282 Deposits 10,226 10,226 Prepaid expenses -- 10,827 ------------ ------------ Total current assets 23,459 45,099 Equipment, net 39,128 57,673 Patent, net 85,359 89,413 ------------ ------------ Total assets $ 147,946 $ 192,185 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable, trade $ 962,588 $ 1,000,478 Accrued liabilities 544,117 519,382 Accrued payroll - officers 729,292 522,573 Notes payable - related party 6,520 72,543 Notes payable 1,581,160 1,385,760 Accrued interest expense 607,733 514,773 ------------ ------------ Total current liabilities 4,431,410 4,015,509 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock, no par value, 20,000,000,000 shares authorized, 19,181,387 shares issued and outstanding in September 30, 2008 4,178,479 shares issued and outstanding in December 31, 2008 28,614,869 27,195,242 Additional paid-in-capital 5,313,089 5,313,089 Accumulated deficit (38,211,422) (36,331,655) ------------ ------------ Total stockholders' deficit (4,283,464) (3,823,324) ------------ ------------ Total liabilities and stockholders' deficit $ 147,946 $ 192,185 ============ ============ See accompanying notes to unaudited consolidated financial statements. 3 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 2008 2007 ------------ ------------ REVENUE, NET $ 108,230 $ 6,483 COST OF GOODS SOLD 76,560 5,283 ------------ ------------ GROSS PROFIT 31,670 1,200 ------------ ------------ OPERATING EXPENSES: Selling, general and administrative 1,183,223 2,406,157 Marketing 24,974 20,423 Research and development -- 9,632 Depreciation and amortization 22,599 18,545 ------------ ------------ Total expenses 1,230,796 2,454,757 ------------ ------------ LOSS FROM OPERATIONS (1,199,126) (2,453,557) OTHER INCOME (EXPENSE): Interest income 105 1,551 Interest expense (142,367) (136,722) Penalties (10) -- Loss on settlement of debt (538,370) (37,962) ------------ ------------ Total other expenses (680,642) (173,133) ------------ ------------ NET LOSS $ (1,879,768) $ (2,626,690) ============ ============ NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: $ (0.174) $ (1.249) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,808,354 2,103,223 ============ ============ Weighted average number of dilutive securities has not been calculated as the effect of dilutive securities would be anti-dilutive See accompanying notes to unaudited consolidated financial statements. 4 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 2008 2007 ------------ ------------- REVENUE, NET $ 45,660 $ 658 COST OF GOODS SOLD 58,355 2,444 ------------ ------------ GROSS PROFIT (12,695) (1,786) ------------ ------------ OPERATING EXPENSES: Selling, general and administrative 439,574 207,012 Marketing 17,038 3,673 Depreciation and amortization 7,533 6,182 ------------ ------------ Total expenses 464,144 216,867 ------------ ------------ LOSS FROM OPERATIONS (476,839) (218,653) OTHER INCOME (EXPENSE): Interest income 3 815 Interest expense (51,730) (48,849) Loss on settlement of debt (117,795) (37,962) ------------ ------------ Total other expenses (169,523) (85,996) ------------ ------------ NET LOSS $ (646,361) $ (304,649) ============ ============ NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: $ (0.040) $ (0.12) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 16,319,224 2,522,504 ============ ============ Weighted average number of dilutive securities has not been calculated as the effect of dilutive securities would be anti-dilutive See accompanying notes to unaudited consolidated financial statements. 5 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 2008 2007 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,879,768) $(2,626,690) Adjustments to reconcile net loss to net cash used in operations: Stocks issued for services 570,274 1,504,140 Loss on settlement of debt 538,370 37,962 Depreciation and amortization 22,599 18,545 Changes in operating assets and liabilities: Accounts receivable 2,855 (3,858) Prepaid expenses 10,827 27,748 Accounts payable and accrued liabilities 334,418 495,563 ----------- ----------- Net cash used in operating activities (400,426) (546,590) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase)/Decrease in restricted cash (98) 52,155 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Bank overdraft -- -- Proceeds from sale of common stock -- 21,000 Proceeds from notes payable-related party 12,350 12,343 Proceeds from notes payable 501,500 515,000 Payments on notes payable - related party (78,373) -- Payments on notes payable (43,009) (68,449) ----------- ----------- Net cash provided by financing activities 392,468 479,894 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (8,056) (14,541) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,555 18,113 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,499 $ 3,572 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income tax $ -- $ -- =========== =========== Interest Paid $ 1,516 $ 37,383 =========== =========== SUPPLEMENTAL DISCLOSURES FOR NON CASH INVESTING AND FINANCING ACTIVITIES: Shares issued for settlement of debt & payment of accrued interest $ 812,353 $ 136,000 =========== =========== Compensation contribution $ -- $ 550,000 =========== =========== See accompanying notes to unaudited consolidated financial statements.
6 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2008 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared by Universal Detection Technology and Subsidiaries, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") Form 10-QSB and Item 310 of Regulation S-B, and generally accepted accounting principles for interim financial reporting. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-KSB. The results of the three and nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES STOCK SPLIT On July 25, 2008, the Company effected a reverse stock split of their common stock. The reverse split was effected on a one-for-two hundred basis, resulting in 14,211,953 shares outstanding immediately following the stock split. All common stock numbers in this Current Report on Form 10-Q, have been retroactively restated for the effect of the reverse split. GOING CONCERN As of September 30, 2008, the Company had a working capital deficit of $4,407,951 and an accumulated deficit of $38,211,422. The Company incurred a net loss of $1,879,768 for the nine month period ended September 30, 2008. These conditions raise substantial doubt about its ability to continue as a going concern. Its ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and ultimately achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is currently devoting its effort to raising capital, and to the development, field-testing and marketing of its counter-terrorism products and services including its bioterrorism detection device, known as BSM-2000, and to the expansion of its product line into other counterterrorism products and services in related fields including threat evaluation services, security and surveillance cameras, safety videos, and kits for rapid detection of up to five agents. During the first nine months of 2008, the Company sold detection kits 7 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2008 under various purchase agreements and had consulting revenue for $108,230. The Company cancelled sales of $600 related to products that were not accepted by Israeli customs and were subsequently returned to the Company. The Company continues to try and pursue sales leads for direct sale of BSM-2000 and also is seeking to establish relationships with resellers who can assist in selling BSM-2000, Company's bioterrorism detection kits, surveillance cameras, training material, and radiological detectors. The Company also plans 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, the Company has sold three units to the Government of the United Kingdom and intends to develop a more wide-spread use for BSM-2000 through their planned collaborative research, development, sales, and marketing efforts. During the nine months ended September 30, 2008, the Company entered into various agreements to sell 8,735,090 shares of its common stock to a third party in order to convert their debt to the respective parties. The value of the stock issued in consideration for the debt conversion was $812,353. RECLASSIFICATION Certain reclassifications have been made to the prior year balances to conform to the current year presentation. 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 collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. STOCK-BASED COMPENSATION The Company adopted SFAS No. 123 (Revised 2004), SHARE BASED PAYMENT ("SFAS No. 123R"), under the modified-prospective transition method on January 1, 2006. SFAS No. 123R requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Share-based compensation recognized under the modified-prospective transition method of SFAS No. 123R includes share-based compensation based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED 8 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2008 COMPENSATION, for all share-based payments granted prior to and not yet vested as of January 1, 2006, and share-based compensation based on the grant-date fair-value determined in accordance with SFAS No. 123R for all share-based payments granted after January 1, 2006. SFAS No. 123R eliminates the ability to account for the award of these instruments under the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and allowed under the original provisions of SFAS No. 123. The Company recognized $-0- and $661,484 in share-based compensation expense for the nine months ended September 30, 2008 and 2007, respectively. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make 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 collectibility of accounts receivable, accounts payable, sales returns and recoverability of long-term assets. RECENT ACCOUNTING PRONOUNCEMENTS In December 2007, the FASB issued SFAS No. 160, "NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS", which is an amendment of Accounting Research Bulletin ("ARB") No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "BUSINESS COMBINATIONS." This statement replaces FASB Statement No. 141, "BUSINESS COMBINATIONS." This statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 9 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2008 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. In May of 2008, FSAB issued SFASB No.162, "THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES." The pronouncement mandates that the GAAP hierarchy reside in the accounting literature as opposed to the audit literature. This has the practical impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will become effective 60 days following SEC approval. The Company does not believe this pronouncement will impact its financial statements. In May of 2008, FASB issued SFASB no. 163, "ACCOUNTING FOR FINANCIAL GUARANTEE INSURANCE CONTRACTS," - an interpretation of FASB Statement No. 60. The scope of the statement is limited to financial guarantee insurance (and reinsurance) contracts. The pronouncement is effective for fiscal years beginning after December 31, 2008. The Company does not believe this pronouncement will impact its financial statements. NOTE 3 - PATENTS As of September 30, 2008 and December 31, 2007, the patent value is as follows: September 30, 2008 December 31, 2007 (Unaudited) (Audited) Patent Costs $ 117,341 $ 117,341 Accumulated Amortization (31,982) (27,928) --------- --------- Patent, Net $ 85,359 $ 89,413 10 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2008 Total amortization expense was $4,054 and $-0- for the nine months ended September 30, 2008 and 2007 respectively. NOTE 4 - NOTES PAYABLE During the nine month period ended September 30, 2008, the Company borrowed an aggregate of $501,500 from third parties under various promissory note agreements. The promissory notes all bear interest at 12.0% to 13.0% per annum, and are due on or before August 28, 2009. No principal or interest payments have been made on these notes. As of September 30, 2008 and December 31, 2007, the Company had total notes payable of $1,581,160 and $1,385,760 respectively. NOTE 5 - COMMITMENTS AND CONTINGENCIES The Company was involved in the following litigation matters: 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. As of September 30, 2008 and December 31, 2007, the Company has accrued $443,769 and $405,259 respectively for this settlement including principal and interest. 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. Universal Detection strongly disputes and is 11 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2008 vigorously defending against the allegations of the Complaint. Universal Detection has filed a Motion for Summary Judgment, or Alternative, Summary Adjudication of Claims. Trial was scheduled to commence on October 9, 2007. On September 5, 2007, a settlement and mutual release of all claims was signed between Plaintiffs and Universal Detection Technology Corporation. Plaintiffs and Defendant agreed to a dismissal of action and mutual release of claims. A dismissal has been filed. 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 September 30, 2008 and December 31, 2007, $56,767 and $68,757 respectively 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. UDT strongly disputes and shall vigorously defend against the allegations of the Complaint. 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 in NBGI's favor and Judgment has been entered. From time to time, the Company is a party to a number of lawsuits arising in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's operations, cash flows or financial position. NOTE 6- STOCKHOLDERS' EQUITY During the nine month period ended September 30, 2008, the Company issued an aggregate of 3,577,202 shares of common stock to employees for services rendered to the Company. The Company recorded the expense at the fair market value of the shares of $344,434. 12 During the nine month period ended September 30, 2008, the Company issued 2,680,432 shares of common stock as payment for consulting or other professional fees for an aggregate amount of $262,840. During the nine month period ended September 30, 2008, the Company entered various agreements to convert $310,983 of indebtedness into 8,735,090 shares of common stock The fair market value of the stock on the date of agreement and issuance was $812,353. The Company recorded a loss on settlement of debt of 501,370. During the nine month period ended September 30, 2008, the Company cancelled an aggregate 18,854 shares of common stock. The holders of these shares have agreed with the cancellation for no consideration. COMMON STOCK PURCHASE WARRANTS AND OPTIONS From time to time, the Company issues options and warrants as incentives to employees, officers and directors, as well as to non-employees. STOCK OPTION PLAN On February 11, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan (the "Plan"). The Plan provides for the granting of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights (or SARs), Restricted Stock, Performance Units, and Performance Shares, to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. The Company reserved 1,500,000 shares of its common stock for awards to be made under the Plan. 1,499,955 shares reserved under this plan have been issued. On April 29, 2008, the Board of Directors adopted the 2008-2 Equity Incentive Plan (the "Plan"). The Plan provides for the granting of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights (or SARs), Restricted Stock, Performance Units, and Performance Shares, to our employees, officers, directors, consultants, independent contractors, advisors, or other service providers, provided that such services are not in connection with the offer and sale of securities in a capital-raising transaction. The Company initially reserved 1,650,000 shares of its common stock for awards to be made under the Plan. 1,634,270 of the shares reserved under this plan have been issued. On July 1, 2008, the Board of Directors adopted the 2008-3 Equity Incentive Plan (the"Plan"). The Plan provides for the granting of the nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights (or SARs), Restricted Stock, Performance Units, and Performance Shares, to their employees, 13 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2008 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 initially reserved 2,500,000 shares of its common stock for awards to be made under the Plan. 2,500,000 of the shares reserved under this plan have been issued. On September 2, 2008 the Board of Directors adopted the 2008-4 Equity Incentive Plan (the "Plan"). The Plan provides for the granting of the nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights (or SARs). Restricted Stock, Performance Units, and Performance Shares, to their employees, officers, directors, consultants, independent contractors, advisors, or other service provides, provided that such services are no it connection with the offer and sale of securities in a capital raising transactions. The company initially reserved 3,800,000 shares of its common stock for awards to be made under the Plan. No shares have yet been issued. Warrants: There were no warrants granted during the nine month period ended September 30, 2008. Common stock purchase options and warrants consisted of the following as of September 30, 2008.
Aggregated Exercise Intrinsic # shares Price Value ---------------------------------------- OPTIONS: Outstanding and exercisable, December 31, 2007 539,750 $2 to $66 $ -- Granted -- -- Exercised -- -- Expired -- -- ------- -------- Outstanding and exercisable, June 30, 2008 539,750 $2 to $66 $ -- WARRANTS: Outstanding and exercisable, December 31, 2007 75,250 $20 to $140 $ -- Granted -- -- Exercised -- -- Expired (19,250) -- ------- -------- Outstanding and exercisable, June 30, 2008 56,000 $20 to $140 $ --
14 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2008 Options: Prior to July 1, 2006, the Company measured stock compensation expense using the intrinsic value method of accounting in accordance with Accounting Principles Board (APB) Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related interpretations (APB No. 25). The Company adopted SFAS No. 123-R effective July 1, 2006 using the modified prospective method. Under this transition method, stock compensation expense recognized in the quarter ended September 30, 2006 includes compensation expense for all stock-based compensation awards vested during the quarter ended September 30, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123-R. As there were no options granted or vested since the implementation of SFAS 123-R, no expense has been recorded during the nine month period ended September 30, 2008. On March 28, 2007, the Company granted to Jacques Tizabi, its president and CEO, an option to purchase 500,000 shares of Common Stock at an exercise price of $2 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 $1.40. The Company recognized $661,484 as expense during the nine month period ended September 30, 2008. Methods of estimating fair value Under both SFAS No. 123-R and under the fair value method of accounting under SFAS No. 123 (i.e., SFAS No. 123 Pro Forma), the fair value of stock options is determined using the Black-Scholes model. Under SFAS No. 123-R, the Company's expected volatility assumption is based on the historical volatility of the Company's stock. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. SFAS No. 123-R requires forfeitures to be estimated at the time of grant and revised in subsequent periods, if necessary, if actual forfeitures differ from those estimates. NOTE 7 - RELATED PARTY TRANSACTIONS During the three months ended September 30, 2008, the Company borrowed an aggregate of $1,800 in principal with interest rates of 12.5% and repaid $39,237 in principal payments under various promissory note agreements. No interest has been paid under these agreements During the three months ended June 30, 2008, the Company borrowed an aggregate of $6,100 in principal with interest rates of 12.5% and repaid $8,818 in 15 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2008 principal payments under various promissory note agreements. No interest has been paid under these agreements. During the three months ended March 31, 2008, the Company repaid $26,900 in principal payments under various promissory note agreements to its president and CEO. The CEO has elected to forgo interest payments on the notes due to the short-term payback period. NOTE 8 - SUBSEQUENT EVENTS During November 2008, the Company issued an aggregate of 3,800,000 shares of common stock to three employees for services rendered valued at approximately $45,600. During October 2008, the Company borrowed an aggregate of $25,000 from third parties under three promissory notes. The notes carry interest at 12.5%. The notes are due on or before October 09, 2009. During October 2008, the Company entered in various agreements to convert $43,804 of indebtedness into 3,253,600 shares of common stock. The shares were issued in October 2008. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS THIS QUARTERLY REPORT OF FORM 10-Q, INCLUDING THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS, AND OTHER REPORTS FILED BY THE REGISTRANT FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION (COLLECTIVELY THE "FILINGS") CONTAIN FORWARD-LOOKING STATEMENTS WHICH ARE INTENDED TO CONVEY OUR EXPECTATIONS OR PREDICTIONS REGARDING THE OCCURRENCE OF POSSIBLE FUTURE EVENTS OR THE EXISTENCE OF TRENDS AND FACTORS THAT MAY IMPACT OUR FUTURE PLANS AND OPERATING RESULTS. THESE FORWARD-LOOKING STATEMENTS ARE DERIVED, IN PART, FROM VARIOUS ASSUMPTIONS AND ANALYSES WE HAVE MADE IN THE CONTEXT OF OUR CURRENT BUSINESS PLAN AND INFORMATION CURRENTLY AVAILABLE TO US AND IN LIGHT OF OUR EXPERIENCE AND PERCEPTIONS OF HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE DEVELOPMENTS AND OTHER FACTORS WE BELIEVE TO BE APPROPRIATE IN THE CIRCUMSTANCES. YOU CAN GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS THROUGH WORDS AND PHRASES SUCH AS "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT", "INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY RESULT", AND SIMILAR EXPRESSIONS. WHEN READING ANY FORWARD-LOOKING STATEMENT YOU SHOULD REMAIN MINDFUL THAT ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING FUTURE EVENTS OR FUTURE PERFORMANCE OF OUR COMPANY, AND ARE SUBJECT TO RISKS, UNCERTAINTIES, ASSUMPTIONS AND OTHER FACTORS RELATING TO OUR INDUSTRY AND RESULTS OF OPERATIONS. EACH FORWARD-LOOKING STATEMENT SHOULD BE READ IN CONTEXT WITH, AND WITH AN UNDERSTANDING OF, THE VARIOUS OTHER DISCLOSURES CONCERNING OUR COMPANY AND OUR BUSINESS MADE IN OUR FILINGS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENT AS A PREDICTION OF ACTUAL RESULTS OR DEVELOPMENTS. WE ARE NOT OBLIGATED TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT CONTAINED IN THIS REPORT TO REFLECT NEW EVENTS OR CIRCUMSTANCES UNLESS AND TO THE EXTENT REQUIRED BY APPLICABLE LAW. OVERVIEW We are engaged in the research, development, and marketing of bioterrorism detection devices, radiation detectors, counter terrorism training references, and anti-microbial products. 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 continue to provide 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 hand held assays, radiation detection systems, anti-microbial products, surveillance cameras, and training references. 17 During the nine months ended September 30, 2008 we spent an aggregate of $1,183,223 on selling, general and administrative expenses, research and development expenses and marketing expenses. This amount represents a 50.8% decrease over the comparable year-ago period. The decrease is principally attributable to a reduction in compensation expenses. Our working capital deficit at September 30, 2008, was $4,407,951. Our independent auditors' report, dated March 25, 2008 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 $2.1 million to repay indebtedness in the next 12 months. In 2007 we 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. 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, and designing a lighter casing. 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 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. On July 25, 2008, we effected a reverse stock split of our common stock. The reverse split was effected on a one-for-200 basis, resulting in 14,211,953 number of shares outstanding immediately following the stock split. All common stock numbers in this Current Report on Form 10-Q, reflect the implementation of the reverse split. Results of Operations The following discussion is included to describe our consolidated financial position and results of operations. The unaudited consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion. NINE MONTHS ENDED September 30, 2008 COMPARED TO THE NINE MONTHS ENDED September 30, 2007 REVENUE. Total revenue for the nine months ended September 30, 2008 was $108,230, as compared to revenue of $6,483 for the same period in the prior fiscal year, an increase of $101,747. The increase is primarily due to the increase in sales of the Company's test kits and for new consulting engagements. The Company cancelled sales of $600 related to products that were not accepted by Israeli customs and were subsequently returned to the Company. OPERATING EXPENSES. Total operating expenses for the nine months ended September 30, 2008 were $1,230,796 representing a decrease of $1,223,961. Total selling, general and administrative expenses for the nine months ended September 30, 2008 were $1,183,223 representing a decrease of $1,222,934 (50.8%) as compared to the 18 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2008 same period in the prior fiscal year. These decreases are principally attributable to a reduction in compensation expenses. OTHER INCOME(EXPENSE). Other income (expense) amounted to ($680,642) for the nine months ended September 30, 2008 as compared to ($173,133) for the corresponding period of the prior year. The change is principally related to loss recognized on stock issued for settlement of debt. NET LOSS. Net loss for the nine months ended September 30, 2008 was $1,879,768, as compared to a net loss of $2,626,690 for the same period in the prior fiscal year, representing a decrease of $746,922. The primary reason of this decreased loss in the current year is due to the decrease in operating expenses as explained above. LIQUITY AND CAPITAL RESOURCES We require approximately $2.1 million to repay debt and $400,000 to execute our business plan in the next twelve months. 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 uses of our available 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. Our working capital deficit at September 30, 2008 was $4,283,464. 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 September 30, 2008. We require approximately $2.0 million to repay indebtedness including interest in the next 12 months. The following provides principal terms of our outstanding debt as of September 30, 2008: o One loan from three family members, each of whom is an unaffiliated party, evidenced by four promissory notes in the aggregate principal amounts of $100,000, $50,000, $50,000, and $100,000, each due June 24, 2001 with interest rates ranging from 11% to 12%. We entered into a settlement agreement in the third quarter of 2004 with each of these parties. Pursuant to this agreement, at June 30, 2005, we were required to pay an additional $80,000 as full payment of our obligations. We did not make this payment and are in default of these notes. As of September 30, 2008, we have $443,769 accrued for including interest relating to this matter. o One loan from an unaffiliated party in the aggregate principal amount of $195,000 with interest at a rate of 12% per annum. Pursuant to a letter agreement dated as of August 10, 2004, we entered into a settlement with this party and agreed to pay a total of $261,000 pursuant to a scheduled payment plan through July 2005. Additionally, the Company, in September 2004, issued 206,250 shares of common stock upon the conversion of unpaid interest in the aggregate amount of $33,000. At September 30, 2008, there was $161,000 principal amount (and $63,501 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. 19 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 this third party and us, we agreed to pay a total of $130,800 pursuant to a scheduled payment plan through July 2005. At September 30, 2008, there was $71,500 principal amount (and $34,709 in interest) remaining on this note. We did not make our scheduled payment under this note in July 2005, and are in default of this note. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $100,000 due on March 31, 2006 with an interest rate of 12% per annum. As of September 30, 2008 we owed $31,500 in interest. We did not make our scheduled payment on March 31, 2006. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $14,975 due on August 31, 2006 with an interest rate of 12.5% per annum. As of September 30, 2008 we owed $3,900 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 September 30, 2008, we paid off the remaining principal, and we owed $342 in interest. 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 September 30, 2008 we owed $90,000 in principal and $9,375 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 September 30, 2008 we owed $4,500 in principal and $3,125 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 September 30, 2008 we owed $25,000 in principal and $7,291 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 September 30, 2008 we owed $10,800 in principal and $4,063 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 September 30, 2008 we owed $10,156 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. 20 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 September 30, 2008 we owed $9,896 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 September 30, 2008 we owed $5,625 in interest. We did not make our scheduled payment on April 13, 2007. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $60,000 due on November 1, 2007 with an interest rate of 12.5% per annum. As of September 30, 2008 we owed $10,625 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 September 30, 2008 we owed $5,000 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% per annum. As of September 30, 2008 we owed $5,700 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 September 30, 2008 we owed $5,938 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 September 30, 2008 we owed $3,333 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 September 30, 2008 we owed $5,250 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 September 30, 2008 we owed $2,865 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 September 30, 2008 we owed $4,583 in interest. We did not make our scheduled payment on April 11, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. 21 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 September 30, 2008 we owed $6,250 in interest. We did not make our scheduled payment on May 30, 2008. We have verbally extended the unpaid note and the due date and other terms are being negotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on November 2, 2008 with an interest rate of 12.5% per annum. As of September 30, 2008 we owed $3,125 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 September 30, 2008 we paid off the remaining principal balance, and we owed $1,250 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $20,000 due on July 8, 2008 with an interest rate of 12.5% per annum. As of September 30, 2008 we owed $1,875 in interest. We did not make our scheduled payment on July 8, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $15,000 due on August 4, 2008 with an interest rate of 12% per annum. As of September 30, 2008 we owed $1,200 in interest. We did not make our scheduled payment on August 4, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $17,000 due on August 11, 2008 with an interest rate of 12% per annum. As of September 30, 2008 we owed $1,360 in interest. We did not make our scheduled payment on August 11, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $20,000 due on August 13, 2008 with an interest rate of 12% per annum. As of September 30, 2008 we owed $1,500 in interest. We did not make our scheduled payment on August 13, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on August 27, 2008 with an interest rate of 12% per annum. As of September 30, 2008 we owed $2,100 in interest. We did not make our scheduled payment on August 27, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $13,000 due on August 28, 2008 with an interest rate of 12% per annum. As of September 30, 2008 we owed $910 in interest. We did not make our scheduled payment on August 28, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $13,000 due on September 6, 2008 with an interest rate of 12.5% per annum. As of September 30, 2008 we owed $922 in interest. We did not make our scheduled payment on September 6, 2008. We have verbally extended the unpaid note and the due date and other terms are being renegotiated so the note is not considered in default. 22 o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $20,000 due on April 2, 2009 with an interest rate of 12.5% per annum. As of September 30, 2008 we owed $1,250 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $19,000 due on April 2, 2009 with an interest rate of 12.5% per annum. As of September 30, 2008 we owed $1,188 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on May 2, 2009 with an interest rate of 12.5% per annum. As of September 30, 2008 we owed $1,563 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $35,000 due on May 6, 2009 with an interest rate of 12.5% per annum. As of September 30, 2008 we owed $1,823 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $50,000 due on June 13, 2009 with an interest rate of 12.5% per annum. As of September 30, 2008 we owed $2,083 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $40,000 due on December 24, 2008 with an interest rate of 12.5% per annum. As of September 30, 2008 we owed $1,250 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $35,000 due on January 15, 2009 with an interest rate of 12.0% per annum. As of September 30, 2008 we owed $875 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $15,000 due on July 17, 2009 with an interest rate of 13.0% per annum. As of September 30, 2008 we owed $406 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $34,000 due on July 22, 2009 with an interest rate of 12.0% per annum. As of September 30, 2008 we owed $680 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $17,000 due on August 5, 2009 with an interest rate of 10.0% per annum. As of September 30, 2008 we owed $283 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $23,500 due on August 27, 2009 with an interest rate of 12.0% per annum. As of September 30, 2008 we owed $235 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $55,000 due on August 28, 2009 with an interest rate of 12.0% per annum. As of September 30, 2008 we owed $550 in interest. 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 September 30, 2008 we owed $4,415 in principal amount on this note. 23 Management continues to take steps to address the Company's liquidity needs. In the past, management has entered into agreements with some of our note holders to amend the terms of our notes to provide for extended scheduled payment arrangements. Management is engaged in discussions with each holder of debt that is in default and continues to seek extensions with respect to our debt that is past due. In addition, management may endeavor to convert some portion of the principal amount and interest on our debt into shares of common stock. Since September 2008 we have converted $33,804 of debt to 2,253,600 shares of common stock. 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. The more recent price and volume volatility in the common stock has made it more difficult for management to negotiate sales of its securities at a price it believes to be fair to the Company. 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 3. QUANTITATIVE AND QUALITATIVE DISCLSOURES ABOUT MARKET RISK. Not Applicable ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are not effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is not (a) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (b) accumulated and communicated to our management, including our chief executive officer, as appropriate to allow timely decisions regarding disclosure. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. ADDITIONAL DISCLOSURE CONCERNING CONTROLS AND PROCEDURES. We currently believe that the Company has material weaknesses in its disclosure controls and procedures. We will continue to work in the coming weeks and months to address such weaknesses. 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 make changes in our internal control and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) could be significant and still we may not achieve significant improvements in our internal controls and procedures. If the time and costs associated with such compliance exceed our current expectations, our results of operations and the accuracy and timeliness of the 24 filing of our annual and periodic reports 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. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On or about April 16, 2004, Plaintiffs A. Sean Rose, Claire F. Rose, and Mark Rose commenced an action in the Los Angeles Superior Court against the Company (A. SEAN ROSE, CLAIRE F. ROSE AND MARK ROSE V. UNIVERSAL DETECTION TECHNOLOGY, FKA POLLUTION RESEARCH AND CONTROL CORPORATION) for amounts allegedly due pursuant to four unpaid promissory notes. On August 2, 2004, the parties executed a Confidential Settlement Agreement and Mutual Releases (the "Agreement"). On December 30, 2005, Plaintiffs commenced an action against the Company, alleging the Company breached the Agreement and sought approximately $205,000 in damages. A judgment was entered on April 11, 2006 for $209,277.58. The Company has previously accrued for this settlement. We entered into a settlement agreement in the third quarter of 2004 with each of these parties. As of September 30, 2008, we have accrued $443,769 for this settlement including principal and interest. On June 2, 2006, Plaintiff Trilogy Capital Partners instituted an action in the Los Angeles Superior Court (TRILOGY CAPITAL PARTNERS V. UNIVERSAL DETECTION TECHNOLOGY, ET. AL., Case No. SC089929) against the Company. Plaintiff's Complaint alleged damages against UDT for breach of an engagement letter in the amount of $93,448.54. Also, Plaintiff alleged that UDT had failed to issue warrants to it pursuant to a written agreement. After completing the initial stages of litigation and conducting extensive mediation, Plaintiff and UDT reached a settlement wherein commencing December 15, 2006, UDT would make monthly payments to Plaintiff of $2,000 until a debt of $90,000 plus accrued interest at six percent per annum was fully paid. In exchange, Plaintiff would release all of its claims against UDT. UDT has been current on all of its agreed payments to Plaintiff. As of September 30, 2008, $56,767 was due under the agreement. On November 15, 2006, Plaintiff NBGI, Inc. instituted an action in the Los Angeles Superior Court (NBGI, Inc. v. Universal Detection Technology, et. al., Case No. BC361979) against the Company. NBGI, Inc.'s Complaint alleged breach of contract, and requested damages in the amount of $111,014.34 plus interest at the legal rate and for costs of suit. There is also a Motion for Summary Judgment set for September 11, 2007. The Summary Judgment was granted in NBGI's favor and Judgment has been entered. ITEM 1A. RISK FACTORS Not Applicable. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. During the third quarter of 2008, 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 25 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 the three months ended September 30, 2008, we issued 3,787,605 shares of common stock to various notes holders to convert outstanding debt obligations valued at approximately $190,047. o During October 2008, we issued 2,253,600 shares of common stock to various note holders to covert outstanding debt obligations valued at approximately $67,608. ITEM 3. DEFAULTS UPON SENIOR SECURITIES We have defaulted upon the following senior securities 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 scheduled payments and are in default of these notes. o One loan from an unaffiliated party in the aggregate principal amount of $195,000 with interest at a rate of 9% 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 September 30, 2008, there was $161,000 principal amount remaining on this note. We did not make our scheduled payment under this note and are in default. As of September 30, 2008 we owed $63,501 in interest on 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 this third party and us, we agreed to pay a total of $130,800 pursuant to a scheduled payment plan through July 2005. At September 30, 2008 there was $71,500 principal amount remaining on this note. We did not make our scheduled payments under this note and are in default. As of September 30, 2008 we owed $34,709 in interest on this note. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. ITEM 5. OTHER INFORMATION. Not Applicable. 26 ITEM 6. EXHIBITS. EXHIBIT LIST EXHIBIT NUMBER DESCRIPTION 10.1 Form of Note Conversion Agreeent Exhibit 31 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. 27 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 18, 2008 UNIVERSAL DETECTION TECHNOLOGY /s/ Jacques Tizabi ---------------------------- Jacques Tizabi, President, Chief Executive Officer (Principal Executive Officer), and Acting Chief Financial Officer (Acting Principal Financial Officer) 28 EX-10.1 2 udt_10q-ex1001.txt NOTE EXHIBIT 10.1 UNIVERSAL DETECTION TECHNOLOGY -------------------- FORM DEBT CONVERSION AGREEMENT -------------------- NOTEHOLDER: NOTE AMOUNT: $_____ OUTSTANDING PRINCIPLE: $_____ INTEREST RATE: ____% DATE OF NOTE: _____ MATURITY: _____ ACCRUED INTEREST: $_____ ---------------------------------------- [Date] AGREEMENT This Agreement (the "Agreement") is entered into by and between Universal Detection Technology (the "Issuer") and [NAME](the "Noteholder") on the date first shown above. The Noteholder confirms that pursuant to the note dated _________ (the "Note") in the principle amount of $_______ with an interest rate of __% per annum and a maturity date of _______, the Issuer owes the Noteholder a balance of $____ including principle and accrued interest as of ----. The Noteholder further agrees to convert the following amount of principal and interest (the "Conversion Amount") due under the Note into shares of common stock of the Issuer ("Shares"), no par value, at the price stated below. The parties anticipate that the Shares will be eligible for resale pursuant to Rule 144. PRINCIPLE BEING CONVERTED: $_____ INTEREST BEING CONVERTED: $_____ CONVERSION PRICE: $_____ NUMBER OF SHARES TO BE ISSUED: _______ The Noteholder is surrendering for conversion that portion of the principle and interest due under the Note represented by the Conversion Amount and is not furnishing any other or additional consideration to the Issuer. The Noteholder hereby waives, releases, relinquishes and discharges the Issuer of any and all claims and causes of action it now has or that may hereafter arise with respect to the Conversion Amount and agrees to accept the Shares as full satisfaction thereof. No claims are reserved with respect to the Conversion Amount, and the Noteholder expressly waives any and all rights related thereto, except for those provided for herein, that it may have under the provisions of California Civil Code Section 1542, which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The Noteholder acknowledges and agrees that this Agreement and the waiver set forth herein are valid and binding on the Noteholder in accordance with the terms hereof. The Noteholder represents and warrants that: o It has the requisite authority to execute and deliver this Agreement and that the person executing and delivering this Agreement has been duly authorized by the Noteholder to do so; o It is not, and has not been for the three months preceding the date hereof, an affiliate of the Issuer and will not hold more than 10% of the issued and outstanding Shares upon consummation of the conversion contemplated hereby; and o It has not assigned or transferred, or purported to assign or transfer, the Note or any right or claim in connection therewith to any other person. This Agreement shall be governed by the laws of the State of California, without regard to the conflict of laws principles thereof. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. This Agreement may not be modified or amended except by a writing signed by both parties hereto. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. Agreed to and accepted by: UNIVERSAL DETECTION TECHNOLOGY NOTEHOLDER - ------------------------- ------------------------- By: Jacques Tizabi, CEO EX-31 3 udt_10q-ex31.txt CERTIFICATION EXHIBIT 31 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jacques Tizabi, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Universal Detection Technology; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) AND INTERNAL CONTROL OVER FINANCIAL REPORTING (AS DEFINED IN EXCHANGE ACT RULES 13A-15(F) AND 15D-15(F)) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Dated: November 18, 2008 /s/ Jacques Tizabi ------------------ Jacques Tizabi Principal Executive Officer and Acting Principal Financial Officer and Principal Accounting Officer EX-32 4 udt_10q-ex32.txt CERTIFICATIONS EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Universal Detection Technology (the "Registrant") on Form 10-Q for the period ending September 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jacques Tizabi, Principal Executive Officer and Acting Principal Financial Officer and Principal Accounting Officer of the Registrant, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Registrant. Dated: November 18, 2008 /s/ Jacques Tizabi ------------------ Jacques Tizabi Principal Executive Officer and Acting Principal Financial Officer and Principal Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----