-----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, U2z82Rn4cnDdmsXHAbkX6rrFX8kL4g9XBnOHq80RJZJdt9w+FFLHhvsTEUO2sDKm jMEk61Ywh105YNuVoG+z5w== 0001019687-09-001408.txt : 20090416 0001019687-09-001408.hdr.sgml : 20090416 20090416170256 ACCESSION NUMBER: 0001019687-09-001408 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20081231 FILED AS OF DATE: 20090416 DATE AS OF CHANGE: 20090416 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09327 FILM NUMBER: 09754215 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-K 1 udt_10k-123108.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: DECEMBER 31, 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 0-14266 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 90212 BEVERLY HILLS, CALIFORNIA (Zip Code) (Address of principal executive offices) - ------------------------------------------- ------------------------------------ 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 is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ] 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-K or any amendment to this Form 10-K. [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: $109,649. 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: $389,500 as of April 15, 2009. The number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 95,695,053 common shares, no par value, outstanding as of April 15, 2009. Documents Incorporated By Reference: None. Transitional Small Business Disclosure Format (check one): Yes [ ] No |X| PART 1 FORWARD-LOOKING STATEMENTS This annual report on Form 10-K 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. These statements may use words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project" 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. 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 compliment our core counter bioterrorism expertise. These products and services include anthrax detection kits, first responder training courses and reference videos, radiation detection systems, and research & development. 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. 2 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, surveillance cameras, and training references. In 2008 we stopped marketing anti-microbial chemicals and products used for cleaning surfaces of antibiotic resistant bacteria such as MRSA. We had supplied such products in the past by partnering with third party suppliers and have terminated such partnerships due to various reasons including lack of marketability of some such products. In 2008 we have realized revenues of $109,649 from sales. We have incurred losses for the fiscal years ended December 31, 2008 and 2007 in the approximate amounts of $2.3 and $3.6 million, respectively, and have an accumulated deficit of $38.6 million as of December 31, 2008. At December 31, 2008, we were in default on certain debt obligations totaling approximately $311,000, in addition to accumulated interest of approximately $463,000. We require approximately $1.6 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, 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. In 2008 we stopped marketing anti-microbial chemicals and products used for cleaning surfaces of antibiotic resistant bacteria such as MRSA. We had supplied such products in the past by partnering with third party suppliers and have terminated such partnerships due to various reasons including lack of marketability of some such products. 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. 3 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 two OEMs for manufacturing of our units. We may decide to use services of other manufacturers in the future. 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. 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. 4 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. 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. 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. These products and services include rapid anthrax detection handheld assays, training courses for first responders, event security, threat evaluation & consulting, radiation detection systems, 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. In 2008 we stopped marketing anti-microbial chemicals and products used for cleaning surfaces of antibiotic resistant bacteria such as MRSA. We had supplied such products in the past by partnering with third party suppliers and have terminated such partnerships due to various reasons including lack of marketability of some such products. 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, and training material and references DVDs. 5 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. 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 2008 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. 6 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 2009. In 2008 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 2009. 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. In the past we have used 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, 2006, 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. We are in default of the August 1, 2008 annual royalty of $10,000. 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. 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, 2008 minimum annual royalty due of $10,000 and we are in negotiations on new payment terms. Furthermore, we 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 are not up to date with the monthly installments called for in the second amendment to our license agreement with Caltech. We are in negotiations with Caltech on new payment terms. We spent $-0- and $19,000 research and development for the years ended December 31, 2008 and 2007, respectively. We also spent an aggregate of 262,125 on research and development for the years ended December 31, 2003 to December 31, 2006. We paid the substantial majority of these amounts ($169,000 in fiscal 2003) to JPL under the Technology Affiliates Agreement. 7 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. 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. 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, 2008, we had a total of five 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. Some of these advisors are 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. In August 2003, we began paying Dr. Makowka a monthly consulting fee of $5,000. We also issued 475,000 shares of our common stock to Dr. Makowka as compensation for his services. These shares were valued at $85,000, the market value of our common stock on the date issued. We stopped paying Dr. Makowka as of June 2005. However, we maintain close relationships with Dr. Makowka and he is available for help and consultation upon request and he maintains his seat on the scientific advisory board. Dr. Makowka has also recently become a member of our Board. 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. 8 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. 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 April 10, 2009, 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, 2008. 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 TIMELY TO 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, 2008 we are in default on a portion of our debt totaling approximately $331,000 excluding accumulated interest of approximately $463,000. In the aggregate, as of December 31, 2008, we have approximately $2.3 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. 9 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. In July 2004, we completed a private placement resulting in net proceeds to us of approximately $2.5 million, all of which have been used. As a condition to this financing however, we agreed that we would not use the net proceeds to repay any of our debt outstanding as of the closing of the financing. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. WE HAVE A HISTORY OF LOSSES AND WE DO NOT ANTICIPATE THAT WE WILL BE PROFITABLE IN FISCAL 2009. 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 $38.6 million at December 31, 2008. 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, 2008 and 2007, we had losses of $2.3 and $3.6 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 2009. 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. 10 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 may make 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. 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, 2008, we had outstanding options and warrants to purchase a total of 592,750 shares of common stock. Of these options and warrants, all have exercise prices at or above the recent market price of $0.003 per share (as of March 31, 2009) and none have exercise prices at or below this price. 11 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 $0.3 and $0.7 million in consulting fees during the years ended December 31, 2008 and 2007 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 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. 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: 12 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. As of the date of this report, we have not yet paid the minimum annual royalty of $10,000 due on August 1, 2008. Under our license agreement, Caltech has the option to revoke our license if payment has not been made fifteen days after receipt of the second default notice from Caltech. To date, we have not yet received any default notices from Caltech in relation to the August 1, 2008 minimum annual royalty payment. 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 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. 13 150 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 sequent 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 improvements, and we may have to design enhanced processes and controls to address issued indentified through this review. We evaluated our existing controls for the year ended December 31, 2008. Our Chief Executive Officer and Chief Financial Officer identified material weaknesses in our internal control over financial reporting and determined that we did not maintain effective internal control over financial reporting as of December 31, 2008. The identified material weaknesses did not result in material audit adjustments to our 2008 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 effect 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, result of operations and financial 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 changed 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. Our offices are still at this address under a month to month lease arrangement with the landlord. 14 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. As of December 31, 2009, we have accrued $456,607 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 February 15, 2009, $40,000 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE 15 PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDERS MATTERS, AND 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 ---- ------ -------- ------- 2007 First Quarter 2.2 0.84 Second Quarter 1.14 0.32 Third Quarter 0.62 0.26 Fourth Quarter 0.74 0.12 2008 First Quarter 0.36 0.04 Second Quarter 0.26 0.04 Third Quarter 0.35 0.009 Fourth Quarter 0.05 0.0042 2009 First Quarter 0.01 0.0033 As of April 15, 2009, we had 2,574 shareholders 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, 2008, for our last fiscal year. PLAN CATEGORY NUMBER OF WEIGHTED- NUMBER OF SECURITIES TO BE AVERAGE EXERCISE SECURITIES ISSUED UPON PRICE OF AVAILABLE FOR EXERCISES OF OUTSTANDING FUTURE PLAN OUTSTANDING OPTIONS, OPTIONS, WARRANTS, ISSUANCE WARRANTS, AND RIGHTS AND RIGHTS 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 37,500 (1) N/A 0 2006 CONSULTANT STOCK PLAN 125,000 (1) N/A 0 2006-II CONSULTANT STOCK PLAN 187,500 (1) N/A 0 2007 EQUITY INCENTIVE PLAN 375,000 N/A 0 2007 EQUITY INCENTIVE PLAN II&III 295,000 (1)(2) N/A 0 2007 EQUITY INCENTIVE PLAN IV 450,000 N/A 31 2007 EQUITY INCENTIVE PLAN V & VI 1,350,000 N/A 16,109 2008 EQUITY INCENTIVE PLAN 1,500,000 N/A 45 2008 EQUITY INCENTIVE PLAN II 1,650,000 N/A 15,730 2008 EQUITY INCENTIVE PLAN III 2,500,000 N/A 0 2008 EQUITY INCENTIVE PLAN IV 3,800,000 N/A 0
(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 fourth and fifth plans 16 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, the 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 375,000 shares of our common stock for awards to be made under the 2007 Plan. The 2007 Plan is to be administered by a committee of two or more members of our Board of Directors. On June 5, 2007, the 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. The Company reserved 145,000 shares of its 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 members of the Board of Directors. On July 13, 2007, the 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. The Company reserved 450,000 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 the Board of Directors. On October 10, 2007, the 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. The Company reserved 600,000 shares of 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 1, 2007, the 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. The Company reserved 750,000 shares of 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. On February 11, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan (the "2008 Plan"). The 2008 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. The Company reserved 1,500,000 shares of common stock for awards to be made under the 2008 Plan. The 2008 Plan is to be administered by a committee of two or more members of our Board of Directors. 17 On April 29, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan (the "2008-II Plan"). The 2008-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. The Company reserved 1,650,000 shares of common stock for awards to be made under the 2008-III Plan. The 2008-II Plan is to be administered by a committee of two or more members of our Board of Directors. On July 1, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan (the "2008-III Plan"). The 2008-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. The Company reserved 2,500,000 shares of common stock for awards to be made under the 2008-III Plan. The 2008-III Plan is to be administered by a committee of two or more members of our Board of Directors. On September 2, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan (the "2008-IV Plan"). The 2008-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. The Company reserved 3,800,000 shares of common stock for awards to be made under the 2008-IV Plan. The 2008-IV 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 2008, we issued the following securities which were not registered under the 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 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 2008, we used 15,088,690 shares of common stock to various note holders to convert outstanding debt obligations valued at approximately $929,461. ITEM 6. SELECTED FINANCIAL DATA Please see the Financial Statements of the Company filed herewith. ITEM 7. 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-K. 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. 18 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, surveillance cameras, and training references. In 2008 we have realized revenues of $109,649 from sales. We have incurred losses for the fiscal years ended December 31, 2008 and 2007 in the approximate amounts of $2.3 and $3.6 million, respectively, and have an accumulated deficit of $38.6 million as of December 31, 2008. At December 31, 2008, we were in default on certain debt obligations totaling approximately $311,000, in addition to accumulated interest of approximately $463,000. We require approximately $1.6 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, 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. In 2008 we stopped marketing anti-microbial chemicals and products used for cleaning surfaces of antibiotic resistant bacteria such as MRSA. We had supplied such products in the past by partnering with third party suppliers and have terminated such partnerships due to various reasons including lack of marketability of some such products. 19 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 two OEMs for manufacturing of our units. We may decide to use services of other manufacturers in the future. In March 2006, we sold two units of UDTT's BSM-2000 Anthrax Detection Systems to the government of the United Kingdom. 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. PLAN OF OPERATION In 2008 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, surveillance cameras, radiation detection systems, and counter-terrorism training references. In 2008 we stopped marketing anti-microbial chemicals and products used for cleaning surfaces of antibiotic resistant bacteria such as MRSA. We had supplied such products in the past by partnering with third party suppliers and have terminated such partnerships due to various reasons including lack of marketability of some such products. 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. 20 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, 2009 was 4,463,803. 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, 2008. 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, 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 December 31, 2008, we have $456,607 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 December 31, 2008, there was $161,000 principal amount (and $67,128 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, 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 December 31, 2008 we owed $34,500 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 December 31, 2008 we owed $4,368 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, 2008 we owed $10,000 in principal and $654 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, 2008 we owed $62,998 in principal and $11,343 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. 21 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, 2008 we owed $4,500 in principal and $3,266 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, 2008 we owed $3,498 in principal and $7,401 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 $50,000 due on March 20, 2007 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $11,719 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, 2008 we owed $11,458 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, 2008 we owed $6,563 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 December 31, 2008 we owed $12,500 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, 2008 we owed $5,938 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, 2008 we owed $20,000 in principal and $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, 2008 we owed $6,875 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, 2008 we owed $4,115 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. 22 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, 2008 we owed $61,500 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, 2008 we owed $3,646 in interest. We did not make our scheduled payment on October 3, 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 April 11, 2008 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $5,833 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. 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, 2008 we owed $8,125 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 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 November 2, 2008 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $4,063 in interest. We did not make our scheduled payment on November 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 $20,000 due on January 11, 2008 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $1,875 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 $20,000 due on July 8, 2008 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $2,500 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 $17,000 due on August 4, 2008 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $1,650 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 $20,000 due on August 13, 2008 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $2,100 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 12.5% per annum. As of December 31, 2008 we owed $3,000 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. 23 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 12.5% per annum. As of December 31, 2008 we owed $1,300 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 December 31, 2008 we owed $1,328 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. 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 December 31, 2008 we owed $1,875 in interest. We did not make our scheduled payment on April 2, 2009. 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 $19,000 due on April 2, 2009 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $1,781in interest. We did not make our scheduled payment on April 2, 2009. 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 May 2, 2009 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $2,500 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $35,000 due on June 13, 2009 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $2,917 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 December 31, 2008 we owed $2,500 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $20,000 due on June 13, 2009 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $2,708 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, 2009 with an interest rate of 12.5% per annum. As of December 31, 2008 we owed $2,500 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $35,000 due on July 15, 2009 with an interest rate of 12% per annum. As of December 31, 2008 we owed $1,925 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 12% per annum. As of December 31, 2008 we owed $793 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% per annum. As of December 31, 2008 we owed $1,700 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 12% per annum. As of December 31, 2008 we owed $793 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% per annum. As of December 31, 2008 we owed $940 in interest. 24 o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $55,500 due on August 28, 2009 with an interest rate of 12% per annum. As of December 31, 2008 we owed $2,200 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $25,000 due on November 13, 2009 with an interest rate of 12% per annum. As of December 31, 2008 we owed $500 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $18,000 due on November 18, 2009 with an interest rate of 12% per annum. As of December 31, 2008 we owed $190 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $27,000 due on December 2, 2009 with an interest rate of 12% per annum. As of December 31, 2008 we owed $270 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on December 15, 2009 with an interest rate of 12% per annum. As of December 31, 2008 we owed $0 in interest. o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $25,000 due on October 9, 2009 with an interest rate of 12% per annum. As of December 31, 2008 we owed $750 in interest. 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 2008, the Company issued 15,088,690 shares of its common stock for an aggregate value of $929,461 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, 2008 and 2007, the Company received gross proceeds of approximately $0.0 million and $0.9 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for Smaller Reporting Companies. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements and related notes are set forth at pages ___ through ____ . 25 INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheet F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit) F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 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 sheets of Universal Detection Technology and Subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, consolidated shareholders' Deficit, and consolidated cash flows for the year ended December 31, 2008 and 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 audits. We conducted our audits 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 audits 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, 2008 and 2007, and the results of their operations and cash flows for the year ended December 31, 2008 and 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, 2008, the Company incurred net losses of $2,279,058 and has accumulated deficit of $38,610,712 as of December 31, 2008. 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 April 14, 2009 F-2 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007 ASSETS 2008 2007 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 1,910 $ 9,555 Restricted cash 10,477 10,209 Accounts Receivable,net 1,058 4,282 Prepaid expenses 3,666 10,827 ------------ ------------ Total current assets 17,111 34,873 Deposits 10,226 10,226 Equipment, net 32,946 57,673 Patent, net 84,008 89,413 ------------ ------------ Total assets $ 144,291 $ 192,185 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable, trade $ 1,030,865 $ 1,000,478 Accrued liabilities 480,126 519,382 Accrued payroll - officers 809,136 522,573 Notes payable - related party 10,325 72,543 Notes payable 1,630,711 1,385,760 Accrued interest expense 657,110 514,773 ------------ ------------ Total current liabilities 4,618,273 4,015,509 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Preferred stock, $.01 par value, 20,000,000 shares authorized, -0- issued and outstanding -- -- Common stock, no par value,100,000,000 shares authorized, 35,286,671 shares issued and outstanding as of December 31, 2008 and 4,178,479 shares issued and outstanding as of December 31, 2007 28,823,641 27,195,242 Additional paid-in-capital 5,313,089 5,313,089 Accumulated deficit (38,610,712) (36,331,655) ------------ ------------ Total stockholders' deficit (4,473,982) (3,823,324) ------------ ------------ Total liabilities and stockholders' deficit $ 144,291 $ 192,185 ============ ============ See accompanying notes to consolidated financial statements. F-3 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 2008 2007 ------------ ------------ REVENUE, NET $ 109,649 $ 8,011 COST OF GOODS SOLD 86,405 6,862 ------------ ------------ GROSS PROFIT 23,244 1,149 ------------ ------------ OPERATING EXPENSES: Selling, general and administrative 1,461,042 3,100,759 Marketing 34,175 25,410 Research and development -- 19,264 Depreciation and amortization 30,132 52,655 ------------ ------------ Total expenses 1,525,349 3,198,088 ------------ ------------ LOSS FROM OPERATIONS (1,502,105) (3,196,939) OTHER INCOME (EXPENSE): Interest income 268 1,612 Interest expense (191,046) (185,651) Loss on settlement of debt (586,175) (211,287) ------------ ------------ Total other expenses (776,953) (395,326) ------------ ------------ NET LOSS $ (2,279,058) $ (3,592,265) ============ ============ NET INCOME (LOSS) PER SHARE - BASIC AND DILUTED: $ (0.15) $ (1.49) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 14,793,963 2,417,936 ============ ============ 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-4 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 TOTAL PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT PAID-IN-CAPITAL DEFICIT DEFICIT ------ -------- ----------- ------------ --------------- ------------ ------------ BALANCE, DECEMBER 31, 2006 -- $ -- 887,045 $ 25,483,357 $ 4,101,605 $(32,739,390) $ (3,154,428) Preferred stock issued to a officer 150 50,000 -- -- -- -- -- Cancellation of preferred stock (150) (50,000) -- -- -- -- -- Stock issued under investment agreement -- -- 166,686 146,500 -- -- 146,500 Stock issued for conversion of debt -- -- 859,419 345,373 -- -- 345,373 Stock issued for services -- -- 2,265,329 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 -- -- 4,178,479 27,195,242 5,313,089 (36,331,655) (3,823,324) Adjustment -- -- 10,184 -- -- -- -- Stock issued for conversion of debt -- -- 15,088,690 929,461 -- -- 929,461 Stock issued for services -- -- 16,009,318 698,938 -- -- 698,938 Net loss for the year -- -- -- -- -- (2,279,057) (2,279,057) ------ -------- ----------- ------------ --------------- ------------ ------------ BALANCE, DECEMBER 31, 2008 -- -- 35,286,671 28,823,641 5,313,089 (38,610,712) (4,473,982) ====== ======== =========== ============ =============== ============ ============ See accompanying notes to consolidated financial statements. F-5 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 2008 2007 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,279,058) $ (3,592,265) Adjustments to reconcile net loss to net cash used in operations: Stocks issued for services 698,938 1,220,012 Stock option expenses -- 661,484 Loss on settlement of debt 586,175 211,287 Depreciation 24,727 24,727 Changes in operating assets and liabilities: Assets held for sale -- -- Patent costs 5,405 27,928 Accounts receivable 3,224 (4,282) Prepaid expenses 7,161 27,144 Accounts payable and accrued liabilities 430,922 655,234 -------------- -------------- Net cash used in operating activities (522,506) (768,731) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in restricted cash (269) 52,098 -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Bank overdraft -- -- Proceeds from sale of common stock -- 146,500 Proceeds from notes payable-related party 62,487 70,043 Proceeds from notes payable 607,347 690,000 Payments on notes payable - related party (124,704) -- Payments on notes payable (30,000) (198,468) -------------- -------------- Net cash provided by financing activities 515,130 708,075 -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,645) (8,558) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,555 18,113 -------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,910 $ 9,555 ============== ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income tax $ -- $ -- ============== ============== Interest Paid $ 818 $ 54,007 ============== ============== SUPPLEMENTAL DISCLOSURES FOR NON CASH INVESTING AND FINANCING ACTIVITIES: Shares issued for settlement of debt and accrued interest $ 929,461 $ 1,727 ============== ============== Compensation contribution $ -- $ 550,000.00 ============== ============== See accompanying notes to consolidated financial statements.
F-6 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 NOTE 1 - BUSINESS ACTIVITY Universal Detection Technology, a California corporation, primarily designs, manufacturs and marketsd 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 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. GOING CONCERN AND MANAGEMENT'S PLANS As of December 31, 2008, the Company had a working capital deficit of $4,590,936 and a capital deficit of $4,473,982. During the year ended December 31, 2008, the Company incurred net losses of $2,279,058 and has accumulated deficit of $38,610,712 as of December 31, 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. During 2007 and 2008, the Company entered into various agreements to sell shares of its common stock to third parties in order to covert their debts to the respective parties. In 2007, 859,419 shares were issued in the aggregate amount of $345,373. In 2008, 15,088,690 shares were issued in the aggregate amount of $929,461. 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 these consolidated financial statements have been retroactively restated for the effect of the reverse split. 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. F-7 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 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. 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. 2008 2007 --------- --------- Equipment $ 51,998 $ 51,998 Furniture 64,669 64,669 Leasehold Improvements 25,444 25,444 --------- --------- 142,111 142,111 Accumulated Depreciation (109,165) (84,438) --------- --------- Fixed Assets, Net of Depreciation $ 32,946 $ 57,673 --------- --------- Total depreciation expense was $24,727 and $24,727 for the years ended December 31, 2008 and 2007, 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 $0 and $661,484 in share based compensation expense for the years ended December 31, 2008 and 2007, respectively. RESTRICTED CASH Restricted cash is the balance required under the Company's office lease. 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 F-8 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 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 592,750 and 10,250,000 shares at December 31, 2008 and 2007, 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. PATENTS AND 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 $5,405 in amortization expenses 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 $-0- and $19,264 for the years ended December 31, 2008 and 2007, 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, 2008, a full valuation allowance has been established for the deferred tax asset as management believes that it is more likely than not that a tax benefit will not be realized. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include collectability of accounts receivable, accounts payable, sales returns and recoverability of long-term assets. F-9 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 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 o allocate resources and in assessing performances. In 2008 and 2007, the Company operated in one segment. RECENTLY ISSUED 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 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. F-10 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 In May 208, FASB issued SFASB No. 162, "THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES." The pronouncement mandates that the GAPP 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. On December 30, 2008 FASB issued FIN 48-3, "Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises". This FSP defers the effective date of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, for certain non-public enterprises as defined in paragraph 289, as amended, of FASB Statement No. 109, Accounting for Income Taxes, including non-public not-for-profit organizations. However, non-public consolidated entities of public enterprises that apply U. S. GAAP are not eligible for the deferral. Nonpublic enterprises that have applied the recognition, measurement, and disclosure provisions of Interpretation 48 in a full set of annual financial statements issued prior to the issuance of this FSP also are not eligible for the deferral. This FSP shall be effective upon issuance. The Company does not believe this pronouncement will impact its financial statements. On January 12, 2009 FASB issued FSP EITF 99-20-01, "Amendment to the Impairment Guidance of EITF Issue No. 99-20". This FSP amends the impairment guidance in EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets," to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other related guidance. The FSP is shall be effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The Company does not believe this pronouncement will impact its financial statements. NOTE 3 - PATENTS As of December 31, 2008, the patent value is as follows:- 2008 2007 --------------------------------- ------------------ ------------------ Patent Costs $117,341 $117,341 --------------------------------- ------------------ ------------------ Accumulated Amortization (33,333) (27,928) --------------------------------- ------------------ ------------------ Patent, Net $ 84,008 $ 89,413 --------------------------------- ------------------ ------------------ Total amortization expense was $5,405 and $27,928 for the years ended December 31, 2008 and 2007, respectively. Future amortization expense at December 31, 2008 consist of the following: 2008 5,405 2009 5,405 2010 5,405 2011 5,405 2012 5,405 After 56,983 Total $ 84,008 F-11 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 NOTE 4 - ACCRUED LIABILITIES The accrued liabilities consist of the following at December 31, 2008 and 2007: 2008 2007 - ------------------------------------------------------ ---------- ---------- Accrued Credit Card Payable $ -- $ 39,282 - ------------------------------------------------------ ---------- ---------- Loan Fees Payable 68,600 68,600 Sales tax payable 26 -- - ------------------------------------------------------ ---------- ---------- Accrued Settlement (Refer to Note 10) 411,500 411,500 - ------------------------------------------------------ ---------- ---------- TOTAL ACCRUED LIABILITIES $ 480,126 $ 519,382 - ------------------------------------------------------ ---------- ---------- The loan 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 Accrued payroll - officers as of December 31, 2008 and 2007 is comprised of accrued payroll to the officers of the company amounting to $809,136 and $522,573, respectively. This payable is interest free, unsecured and due on demand. NOTE 6 - NOTES PAYABLE, RELATED PARTY During the year ended December 31, 2008, the Company borrowed a total of $23,500 from its president and chief executive officer under promissory notes executed by the Company. The notes had interest rates ranging from 12% to 12.5%. The Company repaid notes totaling $90,555. No interest was paid on the notes. No principal or interest was due as of December 31, 2008. The Company has $1,500 in principal and $297 in accrued interest payable to its vice president of Global Strategy under a promissory note agreement. No payments were made on this note during 2008. NOTE 7 - NOTES PAYABLE Notes payable consisted of the following at December 31,2008: Notes payable to individuals, subject to contingent settlement agreement and summary judgement, $ interest at 11.67% per annum, princpal and interest due January 1, 2006, in default, unsecrured $ 95,740 Note payable, subject to settlement agreement, interest at 12% oer 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 71,500 Note payable, subject to settlement agreement, interest at 12% per annum, principal and interest due December 2005, unsecured 100,000 Note payable, interest at 12.5% per annum, due August 2006 and verbally extended, unsecured 14,975 Note payable, interest at 12.5% per annum, due August 2006 and verbally extended, unsecured 10,000 Note payable, interest at 12.5% per annum, due February 2007 and verbally extended, unsecured 62,998 Note payable, interest at 12.5% per annum, due February 2007 and verbally extended, unsecured 4,500 Note payable, interest at 12.5% per annum, due February 2007 and verbally extended, unsecured 3,498 F-12 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 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% per annum, due January 2008 and verbally extended, unsecured 20,000 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 and verbally extended, 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 and verbally extended, unsecured 60,000 Note payable, interest at 12.5% per annum, due November 2008 and verbally extended, unsecured 30,000 Note payable, interest at 12.5% per annum, due November 2008 and verbally extended, unsecured 20,000 Note payable, interest at 12.5% per annum, due July 2008 and verbally extended, unsecured 20,000 Note payable, interest at 12% per annum, due August 2008 and verbally extended, unsecured 15,000 Note payable, interest at 12% per annum, due August 2008 and verbally extended, unsecured 17,000 Note payable, interest at 12% per annum, due August 2008 and verbally extended, unsecured 20,000 Note payable, interest at 12% per annum, due August 2008 and verbally extended, unsecured 30,000 Note payable, interest at 12% per annum, due August 2008 and verbally extended, unsecured 13,000 Note payable, interest at 12.5% per annum, due September 2008 and verbally extended, unsecured 13,000 Note payable, interest at 12.5% per annum, due April 2009 and verbally extended, unsecured 20,000 Note payable, interest at 12.5% per annum, due April 2009 and verbally extended, unsecured 19,000 Note payable, interest at 12.5% per annum, due May 2009, unsecured 30,000 Note payable, interest at 12.5% per annum, due May 2009, unsecured 35,000 Note payable, interest at 12.5% per annum, due June 2009, unsecured 20,000 F-13 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 Note payable, interest at 12.5% per annum, due December 2009, unsecured 40,000 Note payable, interest at 12% per annum, due July 2009, unsecured 35,000 Note payable, interest at 13% per annum, due July 2009, unsecured 15,000 Note payable, interest at 12% per annum, due July 2009, unsecured 34,000 Note payable, interest at 12% per annum, due August 2009, unsecured 17,000 Note payable, interest at 12% per annum, due August 2009, unsecured 23,500 Note payable, interest at 12% per annum, due August 2009, unsecured 55,000 Note payable, interest at 12% per annum, due November 2009, unsecured 25,000 Note payable, interest at 12% per annum, due November 2009, unsecured 18,000 Note payable, interest at 12% per annum, due December 2009, unsecured 27,000 Note payable, interest at 12% per annum, due December 2009, unsecured 30,000 Note payable, interest at 12% per annum, due October 2009, unsecured 25,000 Total notes payable $1,630,711 Less: Long-term portion - Current Notes Payable $1,630,711 Notes payable consisted of the following at December 31, 2007: Notes payable to individuals, subject to contingent settlement agreement and $ 95,740 summary judgment, interest at 11.67% per annum, principal and interest due January 1, 2006, in default, unsecured 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 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 F-14 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 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, 2008 and December 31, 2007 is $191,046 and $185,651, 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 $360,866 for interest and legal fees in addition to the $95,740 principal balance F-15 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 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 $67,128 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 $34,709 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 creation of the Series A-1 Preferred Stock of the Company and the issuance of 150 shares of such stock to Jacques Tizabi for $50,000 in 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 note has been paid in full. The shares were then cancelled by the Company. COMMON STOCK CONVERSION OF DEBT During 2008, the Company entered into various agreements to covert $332,395 of principal and $10,941 of accrued interest into 15,088,690 shares of common stock. The fair market value of the stock on the dates of agreement and issuance was $929,461. The Company recorded a loss on settlement of debt of $586,125. During 2007, the Company entered in various agreements to convert $116,736 of principal and $19,031 of accrued interest into 859,419 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 150,000 shares of common stock issued for debt cancellation of $50,000. The company subsequently cancelled the shares. The debt cancellation was also reversed. SALE 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. F-16 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 As of December 31, 2008 493,950 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, 2008, the Company issued no shares under this agreement. During the year ended December 31, 2007, the Company issued an aggregate of 858,775 shares and received cash of $146,500. Out of this money received, $125,000 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, 2008, the Company issued an aggregate of 11,878,886 shares of its common stock to various employees of the Company as compensation. The shares were valued at a total of $422,896. During the year ended December 31, 2008, 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 4,130,472 shares of common stock, valued at $276,042, the fair value of the stock on the day of issuance. During the year ended December 31, 2007, the Company issued an aggregate of 858,775 shares of its common stock to various employees of the Company as compensation. The shares were valued at a total of $471,103. 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 1,406,552 shares of common stock, valued at $748,909, the fair value of the stock on the day of issuance. OTHER During 2007, the Company cancelled 300,000 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 145,000 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 500,000 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. 22,500 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. 37,500 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-17 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 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 125,000 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 187,500 shares of common stock for awards to be made under the 2006-II Plan. On April 17, 2007, the 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 375,000 shares of our common stock for awards to be made under the 2007 Plan. The 2007 Plan is to be administered by a committee of two or more members of our Board of Directors. On June 5, 2007, the 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. The Company reserved 145,000 shares of its 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 members of the 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 serviceproviders, 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, the 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. The Company reserved 450,000 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 the Board of Directors. On October 10, 2007, the 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. The Company reserved 600,000 shares of 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 1, 2007, the 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. The Company reserved 750,000 shares of 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-18 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 On February 11, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan (the "2008 Plan"). The 2008 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. The Company reserved 1,500,000 shares of common stock for awards to be made under the 2008 Plan. The 2008 Plan is to be administered by a committee of two or more members of our Board of Directors. On April 29, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan (the "2008-II Plan"). The 2008-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. The Company reserved 1,650,000 shares of common stock for awards to be made under the 2008-III Plan. The 2008-II Plan is to be administered by a committee of two or more members of our Board of Directors. On July 1, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan (the "2008-III Plan"). The 2008-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. The Company reserved 2,500,000 shares of common stock for awards to be made under the 2008-III Plan. The 2008-III Plan is to be administered by a committee of two or more members of our Board of Directors. On September 2, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan (the "2008-IV Plan"). The 2008-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. The Company reserved 3,800,000 shares of common stock for awards to be made under the 2008-IV Plan. The 2008-IV Plan is to be administered by a committee of two or more members of our Board of Directors. WARRANTS There were no warrants granted during 2008 and 2007. The following table summarizes the activity of options and warrants under all agreements and plans for the two years ended December 31, 2007 and 2008: Weighted Number of Average Aggregate -------------------- Exercise Intrinsic Options Warrants Price Value -------- -------- -------- --------- Outstanding, December 31, 2006 40,300 76,083 68 -- Granted 500,000 -- 2 -- Exercised -- -- -- -- Expired/cancelled (550) (833) 166 -- -------- -------- -------- --------- Outstanding, December 31, 2007 539,750 75,250 16 -- Granted -- -- -- -- Exercised -- -- -- -- Expired/cancelled -- (22,250) 50 -- -------- -------- -------- --------- Outstanding, December 31, 2008 539,750 53,000 15 -- ======== ======== ======== =========
F-19 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 The following table summarizes information about stock options and warrants outstanding at December 31, 2008: 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 ----------------- ----------- ----------- -------- ----------- -------- 2 to $30 544,750 2.39 6.6 544,750 6.6 50 to $100 33,000 0.43 100 33,000 100 106 to $140 15,000 0.43 140 15,000 140 ----------- ----------- -------- ----------- -------- 592,750 2.23 15 592,750 15 =========== =========== ======== =========== ======== The weighted average exercise price of options at their grant date during the years ended December 31, 2008 and 2007 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, 2008 and 2007, where the exercise price exceeded the market price was $0.00 and $0.01, respectively. The weighted average exercise price of options and warrants at their date of grant during the years December 31, 2008 and 2007, 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, 2008 and 2007 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, 2008 and 2007, where the exercise price exceeded the market price on the grant date was $0.00 and $0.01 respectively. The weighted average fair value of the of options and warrants during the years December 31, 2008 and 2007, 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: 2008 2007 -------- -------- Risk-free interest rate N/A 4.65% Volatility N/A 174% Expected life N/A 5 years Dividend yield 0% 0% NOTE 9 - INCOME TAXES The income tax provision (benefit) for the years ended December 31, 2008 and 2007 differs from the computed expected provision (benefit) at the federal statutory rate for the following reasons: 2008 2007 ----------- ----------- Computed expected income tax provision (benefit) $ (770,739) $(1,221,370) Increase in allowance for doubtful accounts 18,020 Net operating loss carryforward 846,494 1,145,102 Increased Accrued liabilities (97,431) (153,518) Stock-based expenses -0- 225,041 Non-deductible meals & entertainment 596 1,686 Depreciation 3,060 3,059 ----------- ----------- Income tax provision (benefit) $ -- $ -- =========== =========== F-20 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 The components of the deferred tax assets and (liabilities) as of December 31, 2008 and 2007 were as follows: 2008 2007 ------------ ------------ Deferred tax assets: Temporary differences: Depreciation $ (12,270) (12,270) Accrued liabilities (114,625) Allowance for bad debt (21,200) (180,610) Net operating loss carryforward 11,602,779 10,606,904 Valuation allowance (11,454,684) ((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, 2008 and 2007: December 31, 2008 2007 ----------- ----------- Deferred tax assets: Accrued expenses $ 65,985 (271,401) Allowance for bad debt (21,200) 3,600 Increase in net operating loss carryforward 995,875 1,347,178 Change in valuation allowance (1,040,660) (1,079,377) ----------- ----------- $ -- $ -- =========== =========== As of December 31, 2008, the Company has net operating losses carryforwards of approximately $ 28,650,000 expiring in 2009 through 2023. 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 three 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 nto make this payment and are in default of these notes. As of December 31, 2008, we have $456,607 accrued for including interest relating to this matter. F-21 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 b) 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, 2008, $50,457 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 plus interest at the legal rate and for costs of suit. A 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. 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 5,750 shares of its common stock exercisable at $60 per share. 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, 2009 $ 303,876 2010 319,070 ----------- $ 622,946 =========== 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 offsetby the abovementioned royalty payments, if any. F-22 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005 To maintain its license with Cal Tech, a minimum annual royalty of $10,000 was due Caltech on August 1, 2005, and is due on each anniversary thereof, regardless of product sales. Any royalties paid from product sales for the 12-month period preceding the date of payment of the minimum 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 has not paid the $10,000 royalty due Caltech 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 right and license 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 o the payment of patent fees. This agreement is signed in the form of a second amendment to the Company's license agreement, dated 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 Caltech. OPERATING LEASES 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. The lease agreement is month to month basic. Rent expense was $133,897 and $132,637 for 2008 and 2007 respectively. NOTE 11 SUBSEQUENT EVENTS During the first quarter of 2009, the Company entered in several consulting and advisory agreements. The Company issued 3,187,500 shares of its common stock as partial payment to certain consultants and for payment of professional fees for an aggregate price of $12,750. During the first quarter of 2009, the Company issued 40,731,250 shares of its common stock valued at $189,455 in order to covert $129,891 in principal and accrued interest. F-23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A(T). 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, 2008. 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, 2008 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. 26 Identified Material Weaknesses During the three and six months ended December 31, 2008 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, 2008: o We did not have effective comprehensive entity-level internal controls specific to the structure of our board of directors; 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, 2008. 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. Conclusion The above identified material weaknesses did not result in material audit adjustments to our 2008 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 9B. OTHER INFORMATION None. 27 PART III ITEM 10. 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 14, 2008. NAME AGE POSITION - ---- --- -------- Jacques Tizabi 38 President, Chief Executive Officer, Acting Chief Financial Officer, and Director Matin Emouna (1) 39 Director Tom Sepnzis 39 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. On April 1, 2009, Dr. Leonard Makowka resigned from the Board of Directors of the Company. Dr. Leonard Makowka is no longer a director of the Company. He was a director for all of 2008 and 2009 through April 1. On April 2, 2009, the Board of Directors voted to fill the vacancy created by Dr. Makowka's resignation by electing Mr. Tom Sepnzis as a director. 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. 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. TOM SEPNZIS became a director of our Company in April of 2009. Mr. Sepnzis worked for over a decade on Wall Street, becoming one of the most highly respected telecommunications analysts, earning the #1 ranking by Forbes magazine one week before his departure. Starting his career as an equities trader at Punk, Ziegel he later moved to the firms Piper Jaffrey Soundview Financial, Oppenheimer, and Think Equity as a telecommunications analyst. Switching careers to the entertainment business, he now is the CEO and founder of Ascension Pictures, in which capacity he produces and directs commercials, music videos, documentaries and full length feature films. 28 COMMITTEES Our Audit Committee currently consists of Mr. 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 Mr. 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. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who own more than ten percent of our common stock, to file with the Securities and Exchange Commission initial reports of ownership, and reports of changes in ownership, of our common stock and other equity securities of ours. Executive officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports that they file. To our knowledge, based solely on a review of the copies of the reports furnished to us, and representations from our executive officers and directors that no other reports were required during the fiscal year ended December 31, 2008, we believe our executive officers, directors and greater than ten percent shareholders of our common stock, complied with all Section 16(a) filing requirements applicable to them. ITEM 11. 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, 2008. The following table summarizes all compensation for fiscal year 2008 received by our Chief Executive Officer. No other executive officer earned in excess of $100,000 in fiscal year 2008. SUMMARY COMPENSATION TABLE Nonquali- fied Non-Equity Deferred All Incentive Compen- Other Stock Option Plan sation Compen- Name and Salary Bonus Awards Awards Compensation Earnings sation Total principal position Year ($) ($) ($) ($) ($) ($) ($) ($) Jacques Tizabi, President, CEO, Acting CFO 2008 $275,625 -- -- -- -- -- -- $0 29 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following reflects all compensation awarded to, earned by, or paid to the directors for the fiscal year ended December 31, 2008 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END OPTION AWARDS STOCK AWARDS Number of Number of Equity Option Option Number of Market Equity Equity securities securities incentive exercise expiration shares or value incentive incentive underlying underlying plan awards: price date units of of plan plan Name unexercised unexercised number of ($) stock shares awards: awards: options (#) options (#) securities that have or number of market or Exercisable Unexercisable underlying not units unearned payout unexercised vested (#) of shares, value of earned stock units, or unearned options (#) that other shares, have rights units, or not that have other vested not vested rights ($) (#) that have not vested ($) DIRECTOR COMPENSATION The following reflects all compensation awarded to, earned by, or paid to the directors below for the fiscal year ended December 31, 2008. DIRECTOR COMPENSATION Change in Pension Non-Equity Value and Incentive Nonqualified All Plan Deferred Other Fees Earned or Stock Option Compen- Compensation Compen- Paid in Cash Awards Awards sation Earnings sation Total Name ($) ($) ($) ($) ($) ($) ($) Jacques Tizabi $0 -- -- -- -- -- $0 Matin Emouna $0 -- -- -- -- -- $0 Dr. Leonard Makowka $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, 2008. 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 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. 30 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. 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. 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 2008 may be paid to him in either cash or shares of our stock. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS BENEFICIAL OWNERSHIP The following table sets forth information as of April 1, 2009, 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 Number of Shares - ------------------------ of Common Stock Percent of of Preferred Stock Percent of Beneficially Owned (1) Class (1) Beneficially Owned (1) Class (1) Jacques Tizabi, 538,899 (2) 0.05% 150 100% President, CEO, Acting CFO, Director Ali Moussavi, 0 * 0 * Vice President of Global Strategy Matin Emouna, 0 * 0 * Director Dr. Leonard Makowka (3) 0 * 0 * Director Directors and executive officers as a group (4 persons) 538,899(2) 0.05% 150 100% * Less than 1%.
31 (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 6 2009. As of April 6, 2009, we had 83,196,053 common shares, no par value, outstanding. (2) Includes 539,750 shares that may be acquired upon the exercise of fully vested options. (3) Dr. Makowka resigned from the Board of Directors effective April 1, 2009. His replacement, Mr. Tom Sepznis was appointed effective April 2 and does not appear in this table. Mr. Sepznis owns no common stock or convertible securities of the Company. CHANGE IN CONTROL We are not aware of any arrangement that might result in a change in control in the future. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the year ended December 31, 2008, the Company borrowed a total of $23,500 from its president and chief executive officer under promissory notes executed by the Company. The notes had interest rates ranging from 12% to 12.5%. The Company repaid notes totaling $90,555. No interest was paid on the notes. No principal or interest was due as of December 31, 2008. ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES The Audit Committee approved the engagement of Kabani & Company as our independent auditors for $58,000. The Audit Committee approved the engagement of AJ. Robbins, PC as our independent auditors through September 30, 2007. AUDIT FEES 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, 2008 and 2007 was $58,000 and $40,000 respectively. 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 was approximately $39,000. AUDIT-RELATED FEES None 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 year ended December 31, 2007 was approximately $7,880. ALL OTHER FEES No other fees were billed by Kabani & Co and AJ. Robbins, PC for the fiscal years ended December 31, 2008 and 2007. 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. 32 ITEM 15. 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. 3.5 Amendment to Articles of Incorporation of the Company (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on August 14, 2008). 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). 4.5 2009 Equity Plan (incorporated by reference to the Company's Form S-8 Registration Statement filed on February 20, 2009). 4.6 2008 Equity Incentive Plan IV (incorporated by reference to the Company's Form S-8 Registration Statement filed on September 8, 2008). 4.7 2008 Equity Incentive Plan III (incorporated by reference to the Company's Form S-8 Registration Statement filed on July 11, 2008). 4.8 2008 Equity Incentive Plan II (incorporated by reference to the Company's Form S-8 Registration Statement filed on April 23, 2008). 4.9 2008 Equity Incentive Plan (incorporated by reference to the Company's Form S-8 Registration Statement filed on February 11, 2008). 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). 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). 33 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). 10.19 Form of Debt Conversion Agreement (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on July 25, 2008) 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). 23.1 Consent of Independent Registered Public Accounting Firm 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. 34 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: April 16, 2009 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 hereby signs this Report and hereby 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-K, 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: April 16, 2009 /s/ Jacques Tizabi ------------------------------------------- Jacques Tizabi, President, Chief Executive Officer, Acting Chief Financial Officer, and Chairman of the Board of Directors Date: April 16, 2009 /s/ Tom Sepnzis ------------------------------------------- Tom Sepnzis Director Date: April 16, 2009 /s/ Matin Emouna ------------------------------------------- Matin Emouna Director 35 EX-23.1 2 udt_10k-ex2301.txt CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement (No. 333-157431) on Form S-8 of Universal Detection Technology of our report dated April 14, 2009 relating to our audit of the consolidated financial statements, which appears in this Annual Report on Form 10-K of Universal Detection Technology for the year ended December 31, 2008. Kabani & Company, Inc. Los Angeles, California April 15, 2009 EX-31.1 3 udt_10k-ex3101.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jacques Tizabi, Chief Executive Officer and Acting Chief Financial Officer of Universal Detection Technology (the "registrant"), certify that: 1. I have reviewed this annual report on Form 10-K of the registrant; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 16, 2009 By: /s/ Jacques Tizabi ------------------ Jacques Tizabi, Chief Executive Officer and Acting Chief Financial Officer EX-32.1 4 udt_10k-ex3201.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Universal Detection Technology (the "Registrant") on Form 10-K for the year ending December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jacques Tizabi, Chief Executive Officer and Acting Chief Financial Officer of the Registrant, certify to the best of my knowledge, pursuant to 18 U.S.C. ss..1350, as adopted pursuant to ss.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. Date: April 16, 2009 By: /s/ Jacques Tizabi ------------------ Jacques Tizabi, Chief Executive Officer and Acting Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----