ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the following management’s discussion and analysis, and other reports filed by the registrant from time to time with the Securities and Exchange Commission (collectively the “filings”) contain forward-looking statements which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through words and phrases such as “seek”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “budget”, “project”, “may be”, “may continue”, “may likely result”, and similar expressions. When reading any forward-looking statement you should remain mindful that all forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and are subject to risks, uncertainties, assumptions and other factors relating to our industry and results of operations.
Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made in our filings. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law.
OVERVIEW
Universal Detection Technology (the "Company," “UDT” or "We") is engaged in the marketing and resale of detection devices for chemical, biological, radiological, nuclear, and explosive (CBRNE) threats. Through agreements with various third parties we supply bioterrorism detection kits capable of detecting anthrax, ricin, botulinum, plague, and SEBs, mold detection kits, chemical detection equipment, radiation detection systems, and counter-terrorism training references.
We have entered into supply and distribution agreements with various parties enabling us to supply a host of products and services for detection of hazardous materials and training references. 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, and training courses to our services. We sell and market security and counter-terrorism products including bioterrorism detection kits, chemical detectors, radiation detection systems, and training references. Some of the products and services we offer have not been sold to date and there is no guarantee that any of them will be demanded and sold in the market in the future. We plan to continue expanding our product base and intend to sell products to more users inside and outside the U.S. Our strategy is to generate sales by enhancing our web presence and marketing the Company as a supplier of complete CBRNE detection equipment. We plan to attend various industry trade shows and to offer products in certain training scenarios so that first responders can become more familiar with our products. Our target customer markets primarily consist of first responders with some emphasis on the bioterror and military defense market. Our geographical customer focus is on the U.S., Europe, and Asia. There is no guarantee that we will succeed in implementing this strategy or if implemented, that this strategy will be successful.
Subsequent to the March 11, 2011 earthquake and tsunami in Japan, we saw an increased demand in our radiation detection equipment. In response we formed new alliances with manufacturers of dosimeters and survey meters to supply the Japanese market. We witnessed increased sales of these systems and have shipped several units to Japanese customers since the disaster.
In late 2011 we started research and development on a new line of radiation detectors that can monitor the environment and surfaces for radiation and communicate the results with a smartphone enabling the user to save and share the test results instantaneously. In December 2011 we announced entering into an agreement with Honeywell India (a unit of Honeywell International) to develop a radiation detector which would display radiation data collected via Bluetooth to a smartphone. The product is designed to detect radiation levels on surfaces and food and to automatically send the collected data to a smartphone. According to the agreement with Honeywell, any and all intellectual property including any patents which may be filed will be the sole property of Universal Detection Technology.
We named this product RadSmart and we expect to bring it to the market in 2012. In March 2012, we applied for a Federal Trademark for RadSmart with the US Patent and Trademark Office (USPTO). We have received confirmation that the USPTO has received our application and has subsequently assigned a serial number to our submission. In March 2012, the USPTO has informed us that in approximately 3 months, an examining attorney will review our application to determine if all legal requirements are met. Currently our mark is not registered and is considered a “pending” application. The overall process from the time of initial filing to registration or final refusal can take 13-18 months or even longer.
RadSmart utilizes a Hamamatsu Cesium Iodide (CsI) scintillator for the detection of Gamma rays. Cs(I) scintillators are the most sensitive detection mechanisms for detecting Gamma radiation. The instrument will be sensitive enough to measure normal radiation levels to 100 to 200 times that intensity. With the planned detection range of 0.001 to 9.999 uSv/h the device is expected to be capable of detecting traces of radiation on surfaces, clothing and in particular food contamination, which has become an increasing concern globally after the Fukushima disaster in Japan.
For the six-month period ended June 30, 2016 our revenues of $ nil from sales. We have incurred losses for the six-months ended June 30, 2016 and 2015 in the approximate amounts of $74,684 and $90,380, respectively, and have an accumulated deficit of $51.1 million as of March 31, 2016. At March 31, 2016, we were in default on certain debt obligations totaling approximately $802,704 in addition to accumulated interest of approximately $2.1 million. We require up to approximately $5.0 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. During the past 12 months, management spent the substantial majority of its time on sales and marketing of the Company’s products and services. These activities diverted management from capital raising activities. We will actively continue to pursue additional equity or debt financing in the coming months, but cannot provide any assurances that it will be successful or on terms that are acceptable to us. If we are unable to pay our debts as they become 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 including suspending our business operations.
General and Administrative Expenses; Selling Expenses
During the six-months ended June 30, 2016 we spent an aggregate of $24,680 on general and administrative expenses. This amount represents a nominal decrease over the comparable prior year period. The decrease is principally attributable to a decrease in management and office expenses.
Working Capital Deficit
Our working deficit at June 30, 2016, was $5,847,155. This deficit and questions as to our ability to obtain capital raises substantial doubt as to our ability to continue as a going concern. We will require up to approximately $5.0 million to repay indebtedness in the next 12 months. We can make no assurances that such amount will be available to the Company.
Results of Operations
The following discussion is included to describe our consolidated financial position and results of operations. The unaudited consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion.
Three Months Ended June 30, 2016
Compared to the Three Months Ended June 30
,
2015
.
Revenue.
Total revenue for the three months ended June 30, 2016 was $nil, as compared to revenue of $nil for the same period in the prior fiscal year.
Operating Expenses.
Total operating expenses for the three months ended June 30, 2016 were $9,414, as compared to total operating expenses of $17,851 for the three months ended June 30, 2015, representing a decrease of $8,437. This decrease was due to a continuing decrease in office administrative expenses.
Other income (expense).
Total other expense amounted to $25,002 for the three months ended June 30, 2016 and for the corresponding period of the prior year, which consisted of interest expense for the periods.
Net loss.
Net loss for the three months ended June 30, 2016 was $34,416, as compared to a net loss of $47,860 for the same period in the prior fiscal year, representing aa decrease on office administrative expenses.
Six Months Ended June 30
, 2016
Compared to the Six Months Ended June 30
, 2015.
Revenue.
Total revenue for the six months ended June 30, 2016 was $nil, as compared to revenue of $nil for the same period in the prior fiscal year
Operating Expenses.
Total operating expenses for the six months ended June 30, 2016 were $34,176, as compared to total operating expenses of $40,376 for the six months ended June 30, 2015, representing a decrease of $5,960. These decreases are principally due to reduced staff, office expenses and professional fees.
Other income (expense).
Total other expense amounted to $50,004 for the six months ended June 30, 2016 as compared to $50,004 for the corresponding period of the prior year, representing a/no change in accrued interest expenses.
Net loss.
Net loss for the six months ended June 30, 2016 was $74,684, as compared to a net loss of $90,380 for the same period in the prior fiscal year, representing a decrease in loss of $15,696. The primary reason for this change is a reduction in staff and administrative costs.
LIQUIDITY AND CAPITAL RESOURCES
We require up to approximately $5.0 million to repay indebtedness including interest in the next 12 months. We do not anticipate that our cash on hand or anticipated revenues from operations will be 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 available capital during the next 12 months principally will be used for:
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administrative expenses, including salaries of officers and other employees we plan to hire;
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repayment of debt;
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sales and marketing;
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product development, testing and manufacturing; and
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expenses of professionals, including accountants and attorneys.
Our accumulated deficit at June 30, 2016 was $51,202,772. There is substantial doubt as to our ability to continue as a going concern, due to our working capital deficit at June 30, 2016.
The following provides principal terms of our outstanding debt as of June 30, 2016:
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 September 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 June 30, 2016, we have $699,102 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 June 30, 2016, there was $161,000 principal amount remaining on this note. We did not make our scheduled payment under this note in July 2005, and are in default of this note and we owed $136,538 in interest on this note.
o One loan from an unaffiliated party in the aggregate principal amount of $98,500, due July 31, 2005, with interest at the rate of 9% per annum. Pursuant to a letter agreement dated August 10, 2004, between this third party and us, we agreed to pay a total of $130,800 pursuant to a scheduled payment plan through July 2005. At June 30, 2016, there was $71,500 and accrued interest of $62,594. 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 March 31, 2016, we owed $91,500 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 $1,500 due September 27, 2007 with an interest rate of 12.5% per annum. As of June 30, 2016, we owed $1,970 in interest. We did not make our scheduled payment on June 27, 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 $9,940 due on March 31, 2010 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $9,940 in principal and approximately $8,180 in interest. We did not make our scheduled payment on March 31, 2010. 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 $1,638 due on March 31, 2010 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $1,638 in principal and approximately $1,428 in interest. We did not make our scheduled payment on March 31, 2010. 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 $1,420 due on March 31, 2010 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $1,420 in principal and $1,249 in interest. We did not make our scheduled payment on March 31, 2010. 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 $776 due on September 3, 2010 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $951 in principal balance and approximately $613 in interest. We did not make our scheduled payment on September 3, 2010. 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 Scarborough Limited, an unaffiliated party evidenced by a promissory note dated June 6, 2012, in the aggregate principal amount of $30,000 due on July 15, 2012 with an interest rate of 5.0% per annum. As of June 30, 2016, we owed $30,000 in principal and approximately $5,991 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $50,000 due on July 25, 2014 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $36,500 in principal and approximately $15,768 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $40,000 due on August 8, 2014 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $40,000 in principal and $26,600 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $35,000 due on August 16, 2014 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $35,000 in principal and $20,265 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $60,000 due on November 11, 2014 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $60,000 in principal and 32,800 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $60,000 due on November 21, 2014 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $60,000 in principal and $32,800 in interest.
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One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $50,000 due on December 20, 2014 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $50,000 in principal and $27,000 in interest.
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o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $50,000 due on January 26, 2015 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $50,000 in principal and $ 20,500 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $50,000 due on January 31, 2015 with an interest rate of 12.0% per annum. As of June 30, 2016 we owed $50,000 in principal and $26,500 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $60,000 due on February 16, 2015 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $60,000 in principal and $31,500 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $40,000 due on February 21, 2015 with an interest rate of 12.0% per annum. As of June 30, 2016, we owed $40,000 in principal and $20,350 in interest.
o One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $30,000 due on July 15, 2012 with an interest rate of 5.0% per annum. As of March 31, 2016, we owed $30,000 in principal and $10,900 in interest.
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One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $27,500 due on April 24, 2013 with an interest rate of 8.0% per annum. As of June 30, 2016, we owed $27,500 in principal and $9,350 in interest.
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One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $41,623 due on August 14, 2013 with an interest rate of 8.0% per annum. As of June 30, 2016, we owed $41,623 in principal and $13,496 in interest.
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One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $41,848 due on August 21, 2013 with an interest rate of 8.0% per annum. As of June 30, 2016, we owed $41,848 in principal and $13,663 in interest.
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One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $32,500 due on May 27, 2013 with an interest rate of 8.0% per annum. As of June 30, 2016, we owed $32,500 in principal and $13,912 in interest.
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One loan from an unaffiliated party evidenced by a promissory note in the aggregate principal amount of $120,435 due on September 24, 2013 with an interest rate of 8.0% per annum. As of June 30, 2016, we owed $120,435 in principal and $36,131 in interest.
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Management continues to take steps to address the Company's liquidity needs. In the past, management has entered into agreements with some of our note holders to amend the terms of our notes to provide for extended scheduled payment arrangements. Management is engaged in discussions with each holder of debt that is in default and continues to seek extensions with respect to our debt that is past due. In addition, management may endeavor to convert some portion of the principal amount and interest on our debt into shares of common stock.
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 high. We principally intend to raise funds through the sale of equity or debt securities. The more recent price and volume volatility in our common stock has made it more difficult for management to negotiate sales of its securities at a price it believes to be fair to the Company. The Company actively continues to pursue additional equity or debt financings, but cannot provide any assurance that it will be successful. If we are unable to pay our debt as it becomes due and are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, and that would be considered material to investors.