Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K /A
x ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008
o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE TRANSITION PERIOD FROM ______________ TO ________________
Commission
File Number: 0-10147
DIATECT
INTERNATIONAL CORPORATION
(Name of
small business issuer in its charter)
California
|
82-0513109
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
875 South Industrial
Parkway, Heber City, Utah 84032
(Address
of principal executive offices)
(435)
654-4370
(Issuer’s
telephone number)
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.o
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 issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes oNo x
Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-K not contained in
this form, and no disclosure will be contained, to the best of the issuer’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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
||
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). o
No x
For the
fiscal year ended December 31, 2008 the issuer’s revenues were
$1,931,660.
The
aggregate market value of the issuer’s voting stock held by non-affiliates on
June 30, 2008, the last business day of the registrant’s most recently completed
second fiscal quarter was $14,613,944 based on the average of the bid and ask
prices of such stock on that date of $0..075, as reported on the OTC Bulletin
Board.
On May
18, 2009 there were 215,350,959 shares of Registrant’s common stock, no par
value, issued and outstanding.
Documents
included by reference: None
Transitional Small Business Disclosure
Format: Yes x No o
Reason For This
Amendment. This Form 10-K/A was prepared and is being filed as
a result of the Registrant’s decision to make clarifying changes in Notes 1, and
4 to the consolidated financial statements of the Registrant after receiving a
letter dated November 21, 2008 from the staff of the Division of Corporation
Finance of the U.S. Securities and Exchange Commission (the
“SEC”). These clarifying changes are discussed further in a response
letter from the Registrant to the SEC, dated Novermber19, 2009, which was
provided to the SEC on that date and has been signed by both Patrick Carr, the
Principal Executive Officer, and Robert Rudman, the Principal Financial
Officer. This letter was verbally responded to in late December by
the SEC.
Neither
Mr. Carr nor Mr. Rudman were employed by or otherwise working for the Registrant
during the period of time for which the changes to Notes 1 and 4
apply. Mr. Carr assumed his current position at the same time he was
hired by the Registrant on July 15, 2008. Mr. Rudman assumed his
current position on March 24, 2008, after his employer Aspen Capital Partners,
LLC was hired by the Registrant to provide such services. None of the
present directors of the Registrant were directors during
2007.
TABLE OF
CONTENTS
Page
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PART
I
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Number
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Item
1.
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Our
Business
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1
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Item
2.
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Properties
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3
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Item
3.
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Legal
Proceedings
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4
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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4
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PART
II
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|||
Item
5.
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Market
for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
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5 | |
Item
6.
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Management’s
Discussion and Analysis or Plan of Operation
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6 | |
Item
7.
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Financial
Statements
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7 | |
Item
8.
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Changes
in and Disagreements with the Accountants on Accounting and Financial
Disclosure
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8 | |
Item
8A.
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Controls
and Procedures
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8 | |
Item
8B.
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Other
Information
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8 | |
PART
III
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|||
Item
9.
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Directors,
Executive Officers, Promoters and Control Persons and Corporate
Governance; Compliance With Section 16(a) of the Exchange
Act
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9 | |
Item
10.
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Executive
Compensation
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10 | |
Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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12 | |
Item
12.
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Certain
Relationships and Related Transactions
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13 | |
Item
13.
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Exhibits
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14 | |
Item
14.
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Principal
Accountant Fees and Services
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15 | |
Signatures
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16 |
FORWARD
LOOKING STATEMENTS
We are
including the following cautionary statement in this Annual Report on Form 10-K
to make applicable and take advantage of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements. All statements other than statements of historical fact, including
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions, future results of operations or
financial position, made in this Annual Report on Form 10-K are forward looking.
In particular, the words “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “may,” “will,” variations of such words, and similar expressions
identify forward-looking statements, but are not the exclusive means of
identifying such statements and their absence does not mean that the statement
is not forward-looking.
The
forward-looking statements contained herein involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. Our expectations, beliefs and
projections are expressed in good faith and are believed by management to have a
reasonable basis, including without limitation, management’s examination of
historical operating trends, data contained in our records and other data
available from third parties, but there can be no assurance that management’s
expectation, beliefs or projections will result or be achieved or accomplished.
In addition to other factors and matters discussed elsewhere herein, the
following are important factors that, in our view, could cause actual results to
differ materially from those discussed in the forward-looking statements: our
losses from period to period; our current dependence on a limited number of key
suppliers and investors; our ability to successfully market and sell our
products in view of changing trends, acceptance of products and other factors
affecting market conditions; technological advances by our competitors; capital
needs to fund operations and development programs; delays in the manufacture of
new and existing products by us or third party contractors; the loss of any key
employee; the outcome of any litigation; changes in governmental regulations;
and availability of capital on terms satisfactory to us. We disclaim any
obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.
For a
discussion of some of the factors that may affect our business, results and
prospects, see “ITEM 1.– OUR BUSINESS”. Readers are urged to
carefully review and consider the various disclosures made by us in this Report
and in our other reports filed with the Securities and Exchange Commission, and
those described from time to time in our press releases and other
communications, which attempt to advise interested parties of the risks and
factors that may affect our business, prospects and results of
operations.
PART
I
ITEM
1. Our Business
Diatect
International Corporation (“Company”) was incorporated under the laws of the
State of California in 1979 as San Diego Bancorp. In 1998, we changed our name
to Diatect International Corporation. During 2002, we moved our administrative
offices from Idaho and our manufacturing facilities from Kansas and consolidated
our operations in Utah.
The
Pesticide Market
Our
relative position in the market place for insecticides is very small. Major
companies with sales significantly greater than ours represent our major
competitors. These competitors have extensive resources that allow them to
conduct research and development efforts that may lead to the introduction of
new products. Any advantage that we may have over our competitors is based on
the non-toxic nature of our products and we believe this may give our products
retail appeal.
Manufacturing
Process
We have
nine different insecticide products that utilize so called "natural-killing
agents" which are non-toxic to the environment as well as humans and other
warm-blooded animals. The active ingredients used in our products are
diatomaceous earth (“DE”), pyrethrin (a natural extract chemical) and pypernyl
butoxide (“PBO” a chemical agent). These raw materials are readily available and
we do not depend on a single source to obtain them.
In our
manufacturing process we combine the DE, pyrethrin and PBO by using surfactants
to ensure a proper mix and resulting in an increased effectiveness and
persistence of their insecticide properties over the natural state of the
ingredients. In combination, these active ingredients substantially increase
their effectiveness compared to their use individually. In our manufacturing
process we blend the active ingredients resulting in a breakdown of the chitin
from the DE, which allows the pyrethrin to act directly on an insect’s nerve
cells. Our blended process prevents the pyrethrin from evaporating quickly and
therefore its potency is released for hours rather than minutes. We believe the
use of PBO acts as a synergist and increases effectiveness of the pyrethrin by
as much as ten times over the non-blended state.
The
ingredients in our products have been used separately for years as adequate
alternatives to hazardous chemical insecticides and therefore represent an
alternative to synthetic products that often utilize hazardous chemical
compounds. Synthetic insecticides were first used in the 1940's and most insect
species have developed a resistance to many of these products. Unlike the
synthetic insecticides that have resulted in a constant search for new
formulations, our products have not changed since we first started production
and commercial marketing in 2001.
Our
Intellectual Property, Patents and Proprietary Rights
We rely
on five registrations (42850-1 through 5) that we obtained from the
Environmental Protection Agency (EPA) that allowed us to formulate eight labels
for retail sales. These registrations are required for the production and
marketing of our insect control products. Pursuant to the Federal Insecticide,
Fungicide and Rodenticide Act, all insecticides must be "registered" with the
EPA, and specific conditions for their use must be stated on an approved label.
These labels provide an extensive amount of information and indicate that the
insecticide has been tested and evaluated, provide instructions for the proper
handling, use, storage and disposal; and state that the EPA regulates the use
thereof. The process of submitting a pesticide product to the EPA and obtaining
approval through registration to label one or more products for retail sale may
take a considerable amount of time and require substantial
expenditures.
1
Obtaining
EPA registrations and approval of our labels represents an essential asset of
the Company and is the result of lengthy and costly effort. During 2003, we
reevaluated the estimated useful life of our EPA labels and determined that
competitive business conditions and the continued introduction of new products
into the marketplace has resulted in a shortening of their estimated useful
life. Consequently, in 2003 we elected to amortize the approximate $1.7 million
carrying value of the EPA labels over a 7-year period using the straight-line
method. During 2005, the useful life of the labels was reviewed for
impairment in light of the growing concern with synthetic insecticides and it
was concluded that the life of the labels would exceed 10
years. Further, it has been estimated by the American Crop Protection
Society that replacing EPA labels in today’s environment would cost between $160
million and $250 million. Based on this analysis, we concluded that the labels
have indefinite lives and should not be amortized further, but are subject to
periodic review for impairment. During 2008 we performed an
impairment analysis in light of the decrease in sales and our lack of funds for
operations and expansion. As a result of this analysis, we recognized
an impairment of the remaining value of the EPA labels in 2008 in the amount of
$1,116,322.
Marketing
and Sales
We market
our products under two different product brand names - Diatect™ and
Results™.
Diatect
Diatect II Multi-Purpose Insect
Control is sold in the agriculture market and is used in a wide variety
of areas, primarily in conjunction with edible growing crops, animal quarters,
livestock, and ornamentals.
Diatect III Insect Control is
sold in the commercial, industrial, and government markets and is also used in a
wide variety of areas, primarily in conjunction with schools, parks, rest stops,
roadways, childcare facilities, rest homes, eating establishments, and other
public places.
Diatect V: is a product
designed and formulated to meet the needs of the organic food industry, which
requires insecticides with no synthetic ingredients. Our primary market for
Diatect V is commercial organic food growers, homeowners, and
gardeners.
Results
Results Ant & Insect is
sold primarily to the domestic homeowner for the control of ants, aphids,
caterpillars, leafhoppers, lice, mites, mosquitoes, ticks, and other
insects.
Results Fire Ant represents a
specialized product that is directed towards the control of fire ants, found
largely in the southern United States. This product is applied to fire ant
mounds to eliminate the fire ant population.
Results Indoor this product is
designed for indoor use under sinks, behind furniture, in air vents, under tile,
and in stairwells and basements for the control of roaches, fleas, ants,
silverfish, crickets, bedbugs, box elder bugs, and other insects.
Results Garden & Floral is
designed for outdoor use by protecting garden plants from many varieties of
worms, beetles, leafhoppers, stink bugs, squash vine borers, and other
insects.
2
Results Pet Powder is
specifically designed for use on domestic pets. This product is targeted to
provide homeowners and veterinarians with a powder that is effective in kennels
and other animal boarding facilities to control insects that become lodged in
the skin and fur of animals.
A
substantial part of our advertising and marketing efforts have been directed
toward direct marketing and trade shows. We believe that one-on-one contact with
our wholesale buyers allow us to explain the differences between our non-toxic
products and competitive products whose active ingredients may contain toxins or
synthetics. We have a variety of wholesale customers and we are not dependent on
any one or on a small group of customers for our product sales. Primarily our
customers are comprised of small to medium retail outlets that serve agriculture
and gardening customers in the United States, where the insect population is
prevalent. We do not have any agreements with our customers for their purchase
of our products over any period of time.
In 2004,
we started to sell our product in a single Big Box retail outlet and by the end
of the year we had a retail vendor number allowing us to sell our products to 76
retail outlets in the southeast region. These sales do not constitute a
major customer. Furthermore, having a retail vendor number is not an agreement
to purchase our product, but it allows us the opportunity to sell our product to
their retail outlets.
We use
the internet to make the retail market aware of our products. We also employ
customer representatives at our office in Utah who periodically contact our
commercial customers. We supply to our commercial customers sales
literature, banners, booths, and other materials to encourage active promotion
of our products. We produce substantially all of our sales and promotional
materials at our offices in Utah.
Employees
As of
December 31, 2008, the Company had 13 full time employees.
Diatect
International Corporation is located in an eleven-year-old 20,254 square foot
class B masonry office/warehouse building at 875 South Industrial Parkway, Heber
City, Utah. Heber City is located approximately 45 miles East of Salt Lake City,
Utah, and is easily accessible by connecting freeways and highways. The building
is located on a 1.928-acre parcel of ground that is part of the Utah Industrial
Park and adequately serves as our corporate office, manufacturing and
distribution facility. The occupancy capacity of the business office portion of
the building is 23 people. We are the sole occupant of the
building.
On
January 1, 2007, the Company entered into a five year lease with Aspen Capital
Management, LLC, an entity controlled by our major shareholder requiring monthly
rental payments of $12,000 plus taxes and maintenance. The lease is renewable
for two additional 5 year terms with 10% increases of the rental payments to
$13,200 per month and $14,520 per month, respectively.
We have
insurance for the building and inventory for amounts which we believe are
adequate.
3
ITEM
3. LEGAL PROCEEDINGS
U.S. Securities
and Exchange Commission The U.S. Securities and Exchange Commission in
the U.S. District Court, District of Utah, Central Division having Case No.:
2:07cv00709. The caption on the Complaint is Securities and Exchange Commission
v. Diatect International Corporation et al. The four
defendants are the former president who was also a director, a former officer
and director, a former director, and the Company. The
allegations of the Complaint claim that the Defendants engaged in a transaction
in 2003 involving the sale of mining claims located in the State of Oregon which
transaction was improperly recorded on the Company’s financial statements
causing the overstatement of revenues and assets. The
allegations of the Complaint also claim that certain revenues were improperly
recorded in the Company’s 2002 financial statements because the sales were
consignment sales and not actual sales. The Complaint alleges
various violations of the federal securities laws and regulations promulgated
thereunder including violations of the anti-fraud provisions and violations of
regulations pertaining to periodic reports filed by the Company with the SEC in
2003 and 2004. On May 17, 2004 the Company issued restated
financial statements as of December 31, 2003. On April 14, 2005, the
Company issued restated financial statements as of December 31,
2004. These filings restated the sale of the mining claims and our
revenues for those years. The Complaint seeks injunctive action
against the defendants including the Company and seeks fines from the three
individual defendants, and from two individual defendant’s disgorgement of stock
sale proceeds and a bar as an officer and director. In February, 2008
a scheduling conference was held and a tentative trial date has been set for
January, 2010. The Company is seeking to constructively resolve this
issue by settlement with the SEC.
Administrative Proceeding – U.S.
Securities and Exchange Commission - On September 27, 2007, the
Commission entered an order instituting a proceeding under Section 12(j) of the
Securities Exchange Act of 1934 (“1934 Act”) naming the Company as a
respondent. This administrative proceeding has file no. 3-12843.
The administrative proceeding sought to revoke the Company’s
registration under the Securities Exchange Act of 1934 (“Exchange Act”) under
which the Company files quarterly and annual financial reports. The
Company had not filed nine quarterly and annual financial
reports. All of these reports have been filed as of January 2,
2008.
On
January 30, 2008, Administrative Law Judge James Kelly issued an Initial
Decision. This decision denied the Division of Enforcement’s Motion for
revocation and granted the Company’s motion for summary disposition. The
Judge found that the Company violated rules promulgated under the Exchange Act
which required the filing of annual and quarterly reports. In the
decision the Judge expressly stated that the sanctions of revocation or trading
suspension would not be imposed as such sanctions were not appropriate or
necessary and denied the Division’s motion for revocation. The
initial decision dismissed the administrative proceeding. The parties
had 21 days to appeal which has expired. Neither party appealed and on March 6,
2008 the Commission issued a notice to us making the Initial Decision the Final
Decision.
Litho-Flexo
Graphics, Inc. – On May 23, 2003, we were named as defendant in a
complaint filed by Litho-Flexo Graphics, Inc. in the Fourth District Court in
and for Wasatch County, State of Utah. Litho-Flexo claimed a trade payable of
$92,478. We contended that the packaging labels we received from Litho-Flexo
were defective and could not be used in the packaging of our products. We filed
a counterclaim claiming damages in excess of $100,000 caused by the defective
labels. We accrued a $72,625 settlement obligation liability at December 31,
2004. During 2005, the Company paid $9,342 to the vendor, which decreased the
recorded accrued settlement obligation liability to $63,283 at December 31,
2007. In March, 2008 the Company entered into a settlement agreement
by which all claims of both parties will be settled upon the payment by the
Company of an aggregate of $60,000 to Litho-Flexo. The Company made
all required payments on a timely basis.
Litigation Claim
- The Company has been threatened with litigation regarding a
loan agreement on which the statute of limitations was believed by management to
have expired. Although the Company has not received a complaint
regarding this claim, they have accrued an estimated loss from this threatened
litigation in the amount of $282,367.
Jack Stites-
On June 23, 2008 Jack Stites (“Stites”) filed a complaint in the Chancery
Court of Putnam County, Tennessee naming the Company as a
defendant. Stites contends that the Company failed to make payment on
an unsecured note payable in the amount of $40,000 plus accrued interest and
fees of $110,180. The Company did not respond to the suit, and a
default judgment was entered against the Company in the amount of $150,180.
Stites has also obtained a judgment in the state of Utah against the Company.
The Company has recorded this amount as loss contingency on the accompanying
statement of operations as of December 31, 2008.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
We did
not submit any matters to a vote of our securities holders in the fourth quarter
ended December 31, 2008.
4
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Our
shares of common stock are presently quoted on the OTC Bulletin Board under the
symbol DTCT. Listed below are the high and low sale prices for the shares of our
common stock during the years ended December 31, 2008 and 2007. These quotations
reflect inter-dealer prices, without mark-up, mark-down or commission and may
not represent actual transactions.
High
|
Low
|
|||||||
Fiscal
2008
|
||||||||
First
Quarter (ended March 31, 2008)
|
$
|
0.080
|
0.070
|
|||||
Second
Quarter (ended June 30, 2008)
|
0.080
|
0.070
|
||||||
Third
Quarter (ended September 30, 2008)
|
0.070
|
0.060
|
||||||
Fourth
Quarter (ended December 31, 2008)
|
0.030
|
0.020
|
||||||
Fiscal
2007
|
||||||||
First
Quarter (ended March 31, 2007)
|
$
|
0.055
|
$
|
0.030
|
||||
Second
Quarter (ended June 30, 2007)
|
0.043
|
0.024
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||||||
Third
Quarter (ended September 30, 2007)
|
0.065
|
0.035
|
||||||
Fourth
Quarter (ended December 31, 2007)
|
0.070
|
0.034
|
We
presently do not have any stock compensation plans.
As of
December 31, 2008 there were 215,350,959 shares issued and outstanding and
approximately 1,235 holders of record of our common stock. We believe that a
significant number of beneficial owners of our common stock hold shares in
street name. No dividends have ever been paid to holders of our common stock,
and we do not anticipate paying dividends in the future.
Sales
of Unregistered Securities
The
following provides information regarding sales of equity securities by us during
the fiscal year ended December 31, 2008 which were not registered under the
Securities Act. All issuances were of the Company’s no par common
stock.
We issued
1,000,000 shares valued at $75,000 or $0.075 per share as compensation to a
vendor and we issued an additional 640,000 shares valued at $48,000 or $0.075
per share to employees. The value represents the market price of our common
stock on the dates of issuance.
We issued
1,153,845 shares of common stock and two-year warrants to purchase 1,153,845
shares of common stock at an exercise price of $0.13 per share for gross
proceeds of $75,000 in a private placement.
We issued
1,194,531 shares and a two-year warrant to purchase 1,194,531 shares of common
stock at an exercise price of $0.75 per share upon the conversion of a note
payable in the amount of $50,000 and related interest of $9,728.
We issued
1,600,000 shares valued at $115,200 or $0.072 per share and a three-year warrant
to purchase 1,000,000 shares of common stock at an exercise price of $0.10 per
share as compensation to a vendor for services.
5
We issued
9,250,000 shares of common stock upon the exercise of warrants for proceeds of
$172,500.
We issued
9,800,000 shares of common stock and two year warrants to purchase 9,800,000
shares of common stock at an exercise price of $0.05 per share for gross
proceeds of $490,000.
We issued
150,000 shares valued at $6,750 or $0.045 per share, as compensation to a
vendor.
We issued
three-year warrants to purchase 2,000,000 shares of common stock at an exercise
price of $0.075 per share to three vendors for services.
We issued
a three-year warrant to purchase 1,575,000 shares of common stock at an exercise
price of $0.05 per share to six vendors for services.
We issued
three-year warrants to purchase 12,000,000 shares of common stock at an exercise
price of $0.07 per share as compensation to our officers and
directors. The exercise price exceeded the market price on the date
of grant.
We issued
a three-year warrant to purchase 500,000 shares of common stock at an exercise
price of $0.07 per share as compensation to a vendor.
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Report. Excluding historical information, the following discussion contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. See “Forward Looking Statements”
Overview:
Diatect
International Corporation (the “Company”) is a California corporation operating
in Utah as a developer and marketer of non-toxic pesticide products. We sell our
products to wholesale distributors and retail customers in the United
States. We sell directly to the consumer via our website at
www.diatect.com.
Our
ability to continue operations is dependent upon obtaining additional financing
and being able to generate net profits in the future. Management believes that
these events are likely to occur, even though no assurance thereof can be
given.
Results
of Operations for the Fiscal Years ended December 31, 2008 and 2007
Results of
Operations:
Revenue: We had
revenue of $1,931,660 for the year ended December 31, 2008 compared to
$2,015,484 for the year ended December 31, 2007. Total revenue decreased
in 2008 by $83,824 primarily due to decreases in web based retail sales and
reduced sales into the commercial agriculture market.
Cost of revenue:
Our cost of revenue was $550,046 for the year ended December 31,
2008 as compared to $600,424 for the year ended December 31,
2007. The decrease of $50,378 is due to reductions in labor costs
related to manufacturing.
Marketing and Selling
Expenses:
Marketing and selling expenses were $1,417,392 for the year ended December 31,
2008, as compared to $1,182,066 for the year ended December 31,
2007. The increase of $235,326 is due primarily to increases in web
based advertising and increases in compensation expenses for marketing
staff.
6
General and
Administrative Expenses: For the
year ended December 31, 2008 general and administrative expenses were $2,677,987
as compared to $1,767,231 for the year ended December 31, 2007. The
increase of $910,756 is primarily due to increases in director and officer
compensation, professional fees, investor relations fees and amortization of
loan costs.
Loss from Litigation Claims
and Judgments: Loss from Litigation Claims and Judgments was $432,547 and
is comprised of amounts of judgments obtained against the Company and estimated
amounts for claims anticipated from legal action. There was no
comparable amount for the year ended December 31, 2007.
Impairment of EPA
Labels: During the fourth quarter of 2008, the Company
performed an impairment analysis of our EPA labels in view of our reduced sales,
continued losses and our limited financial capabilities and determined that the
value of the EPA labels of $1,116,322 was fully impaired. There was
no comparable amount for the year ended December 31, 2007.
Other Income and
Expense: Other income and expense is comprised of interest expense and
gain from termination of debt. For the year ended December 31, 2008
interest expense was $443,150 as compared to $676,249 for the year ended
December 31, 2006, a decrease of $233,099. The decrease is primarily due to the
lower amortization of loan discount somewhat offset by higher borrowing levels.
Interest expense for the years ended December 31, 2008 and 2007 reflects the
amortization of loan discount in the amount of $135,855 and $313,536,
respectively.
Gain from
termination of debt was $1,046,547 for the year ended December 31, 2007. The
amount is comprised primarily of debt and related accrued interest in the amount
of $773,492 for which the statute of limitations has expired. Also included are
settlements of liabilities at less than their recorded amounts. There is no
comparable amount for the year ended December 31, 2008.
Liquidity and Capital
Resources
Our cash
and cash equivalents was $587 as of December 31, 2008 and we had a working
capital deficiency of $5,449,659. Accordingly, we are actively seeking
additional financing through debt and/or equity offerings.
From
March 1 to May 7, 2009 we issued short term Notes for proceeds totaling $700,000
at interest rates ranging from 12% to 24%. The proceeds from these
short term Notes were used for working capital purposes.
The
proceeds from these short term Notes are not considered sufficient to support
our operations, and we must raise working capital to fund our on-going
operations through one or more debt or equity financings. Our efforts to raise
capital may not be successful, and even if we are able to obtain additional
financing, the terms of any such financing may be unfavorable to us and may be
highly dilutive to existing stockholders. Any future debt or equity financings,
when and if made, may not be sufficient to sustain our required levels of
operations. Any inability to obtain additional cash as needed would have a
material adverse effect on our financial position and results of operations and
may result in our having to severely curtail or even cease our
operations.
Our
financial statements are set forth immediately following the signature page to
this Form 10-K.
7
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
NONE
Item
8A. Controls and Procedures
Disclosure
Control and Procedures
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our filings under the Securities Exchange Act of
1934 is (1) recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms
and (2) accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
As
required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal year
covered by this Annual Report on Form 10-K, we have carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. This evaluation was carried out under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective at December 31, 2008.
There
have been no changes in our internal controls over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during the fourth quarter of fiscal 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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 Exchange Act Rule
13a-15(f)). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of our internal control over financial reporting as
of December 31, 2008, based on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission. Based on our evaluation under the framework in
Internal Control – Integrated Framework, management concluded that our internal
control over financial reporting was effective as of December 31,
2008.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
This
Annual Report on Form 10-K does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by our independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this Annual Report on Form
10-K.
/s/ Patrick
Carr
|
|
Patrick
Carr
|
|
President
|
|
/s/ Robert
Rudman
|
|
Robert
Rudman
Chief
Financial Officer
|
THE
FOREGOING MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING SHALL
NOT BE DEEMED TO BE “FILED” WITH THE SEC, NOR SHALL SUCH INFORMATION BE
INCORPORATED BY REFERENCE INTO ANY PAST OR FUTURE FILING UNDER THE SECURITIES
ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT WE SPECIFICALLY INCORPORATE IT BY
REFERENCE INTO SUCH FILING.
Item
8B. Other Information
None
8
PART
III
Item
9. Directors, Executive Officers, Promoters, Control Persons And Corporate
Governance; Compliance With Section 16(a) of the Exchange Act
Directors
and Executive Officers
The
following table sets forth as of December 31, 2008 the name, age and position of
each of our executive officers and directors and their respective terms of
office.
Name
|
Age
|
Position
|
Director
and/or Officer
Since
|
Patrick
Carr
|
61
|
Chief
Executive Officer Chairman of the Board and Director
|
July
15, 2008
|
Robert
Rudman
|
61
|
Chief
Financial Officer
|
March
24, 2008
|
David
Carlile
|
53
|
Director
|
May
1, 2008
|
Philip
Ellett
|
55
|
Director
|
April
15, 2008
|
Timothy
White
|
60
|
Director
|
May
8, 2008
|
Frank
Sanchez*
|
49
|
Director
|
April
7, 2008
|
*
Resigned February 20, 2009
Audit
Committee Financial Expert
Timothy
White serves as the sole member of our Audit Committee. The Company
is presently seeking an additional member to serve on the Audit
Committee.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
and directors and persons who own more than 10% of a registered class of our
equity securities to file reports of ownership on Form 3 and changes in
ownership on Form 4 or 5 with the Securities and Exchange Commission (the
“SEC”). Such officers, directors, and 10% stockholders are also required by SEC
rules to furnish us with copies of all Section 16(a) reports they
file. The Company believes all necessary reports were made on a
timely basis for the period of this report on Form 10-K.
9
ITEM
10. EXECUTIVE COMPENSATION
The
following table provides information about the compensation paid to, earned or
received during the last two fiscal years ended December 31, 2008 and 2007 by
our Principal Executive Officer and Principal Financial Officer (the “Named
Executive Officers”).
SUMMARY
COMPENSATION TABLE
Name and Principal
Position
|
Year
|
Salary ($)
|
Bonus
($)
|
Stock
Awards ($)
|
Warrant
or Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total ($)
|
|||||||||||||||||||||||||
Patrick
Carr
|
2008
|
114,583
|
-
|
80,500
|
-
|
-
|
-
|
195,083
|
||||||||||||||||||||||||||
Chief
Executive Officer
|
2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Robert
Rudman
|
2008
|
-
|
-
|
-
|
63,250
|
-
|
-
|
-
|
63,250
|
|||||||||||||||||||||||||
Chief
Financial Officer
|
2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Narrative
Disclosure to Summary Compensation Table
Employment
Agreements
Patrick
Carr signed an employment agreement effective July 15, 2008 for a term of two
years at an annual salary of $250,000 per year. The agreement also
provides for the granting of three-year warrants to purchase up to five million
shares of the Company at an exercise price of $0.07 per share. The warrants are
subject to time vesting with one million vested on the grant date of September
24, 2008, two million on the first anniversary and two million on the second
anniversary. A total of $76,920 of Mr. Carr’s salary was unpaid as of December
31, 2008.
10
Outstanding
Equity Awards at Fiscal Year-End
Warrant
Awards
|
Stock
Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Warrants (#)
Exciseable
|
Number of
Securities
Underlying
Unexercised
Warrants (#)
Unexerciseable
|
Equity Incentive Plan
Awards: Number of
Securities Underlying
Unexercised Unearned
Warrants (#)
|
Warrant
Exercise Price
($)
|
Warrant
Expiration Date
|
Number of
Shares or
Units of Stock
That Have Not
Vested (#)
|
Market Value
of Shares or
Units of Stock
That Have Not
Vested ($)
|
Equity Incentive Plan
Awards: Number of
Unearned Shares,
Units or Other Rights
That Have Not Vested
(#)
|
Equity Incentive Plan
Awards: Market or
Payout Value of
Unearned Shares, Units
or Other Rights That
Have Not Vested ($)
|
||||||||||||||||||||||||
Patrick
Carr
|
1,000,000
|
4,000,000
|
—
|
$
|
0.07
|
9/24/2011
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
Robert
Rudman
|
1,000,000
|
2,000,000
|
—
|
$
|
0.07
|
9/24/2011
|
—
|
—
|
—
|
—
|
Compensation
of Directors
The
following table summarizes data concerning the compensation of our directors for
the fiscal year ended December 31, 2008.
Name
|
Fees
Earned or
Paid
in Cash
($)
|
Stock
Awards
($)
|
Warrant
and
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||
Phillip
Ellett
|
-
|
-
|
46,000
|
-
|
-
|
-
|
46,000
|
|||||||||||||||||||||
David
Carlile
|
-
|
-
|
46,000
|
-
|
-
|
-
|
46,000
|
|||||||||||||||||||||
Timothy
White
|
-
|
-
|
46,000
|
-
|
-
|
-
|
46,000
|
|||||||||||||||||||||
Frank
Sanchez
|
-
|
-
|
46,000
|
-
|
-
|
-
|
46,000
|
On
September 25, 2008 each director was granted a three-year warrant to purchase
1,000,000 shares of Company common stock at an exercise price of $0.07 per
share. The warrants were fully vested upon issuance.
11
The table
below sets forth certain information regarding the beneficial ownership of our
common stock as of May 18, 2009, based on information available to us by the
following persons or groups:
·
|
each
person who is known by us to own more than 5% of the outstanding common
stock;
|
·
|
each
of our directors;
|
·
|
the
Named Executive Officers; and
|
·
|
all
of our executive officers and directors, as a
group.
|
As of May
18, 2009, there were 215,350,959 shares of common stock issued and
outstanding.
Name
and Position
of
Beneficial Owner
|
Number
of
Shares
Beneficially
Owned
|
Percent
of
Class
|
||
Aspen
Capital Partners
|
15,000,000
|
7.83%
|
||
Patrick
Carr,
Chief
Executive Officer, Chairman of the Board
|
5,000,000
|
2.32%
|
||
Robert
Rudman,
Chief
Financial Officer
|
3,000,000
|
1.39%
|
||
Philip
Ellett
Director
|
1,000,000
|
*
|
||
David
Carlile
Director
|
1,000,000
|
*
|
||
Timothy
White
Director
|
1,000,000
|
*
|
||
Total
officers and directors as a group (5 persons)
|
11,000,000
|
5.11%
|
* - Less
than 1%
Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to the shares. A person is also
deemed to be a beneficial owner of any securities of which the person has the
right to acquire beneficial ownership within 60 days. Unless otherwise indicated
in the footnotes to this table and subject to community property laws where
applicable, we believe that the each of the stockholders named in this table has
sole voting and investment power with respect to the shares shown as
beneficially owned by him. To our knowledge, there are no voting arrangements
among our stockholders.
Securities
Authorized for Issuance Under Equity Compensations Plans
The
Company does not have any Equity Compensation Plans.
12
Item
12. Certain Relationships and Related Transactions
During
the fourth quarter of 2006, the land and building where we maintain our offices
and manufacturing facility was sold by a shareholder to Aspen Capital
Management, LLC (“Landlord”) an entity that is controlled by our major
shareholder. Commencing on January 1, 2007, we entered into a five year lease
with the Landlord, requiring monthly rental payments of $12,000 plus taxes and
maintenance. The lease is renewable for two additional 5 year terms with 10%
increases of the rental payments to $13,200 per month and $14,250 per month,
respectively.
In
October 2008, we entered into a one year Investment Banking Agreement with
Pointe Atlantic, Inc. an entity that is owned by our major shareholder. The
terms of the Investment Banking Agreement required that we pay a monthly
retainer of $7,500. If a merger or acquisition transaction is consummated during
the term of this agreement, the Company shall pay a cash fee equal to the sum of
5% of the aggregate consideration and 2.5% if the aggregate consideration
exceeds $5 million. In the event that Pointe assists in the arranging of a debt
financing, the Company will pay Pointe a fee of 2.5% of the total debt facility.
As our exclusive placement agent, Pointe shall be paid 8% of the gross proceeds
of a securities transaction plus a 2% non-accountable expense allowance and
warrants equal to 20% of the offering at the offering price.
In
February 2006, we entered into a renewable two-year non-exclusive engagement
letter ( the “ Engagement Letter”) with Aspen Capital Partners, LLC, an entity
that is owned by our major shareholder to provide consulting services in a
variety of areas relating to our financial, strategic and developmental growth.
The financial terms of the Engagement Letter required a non-refundable retainer
fee of $25,000, the issuance of 2,500,000 shares of common stock and payments of
$15,000 per month for a two-year period. Additional provisions of the Engagement
Letter provide that we issue 8,000,000 warrants to purchase common stock at
$0.01 per share for a period of five years and, upon the completion of the
$150,000 bridge financing, we issued 4,500,000 warrants to purchase common stock
at $.01 per share for a period of five years. The 8,000,000 warrants issued
pursuant to the Engagement Letter were valued at $125,892. This amount was
recorded as a prepaid expense and will be amortized over the two year term of
the agreement. The 4,500,000 warrants were valued at $76,410 and were recorded
as interest expense. The agreement also provides for the issuance of 5,000,000
warrants to purchase common stock at $0.05 per share for a period of five years
upon the completion of one million dollars of funding. These warrants were
issued in May, 2007.
In March
2008, we entered into a second renewable two-year non-exclusive engagement
letter (the “2008 Engagement Letter”) with Aspen Capital Partners, LLC. that
specifically supersedes the earlier Engagement Letter. In addition to
providing consulting services in a variety of areas relating to our financial,
strategic and developmental growth, Aspen agreed to provide one of its employees
to serve in the position of the Company’s Chief Financial Officer. The Company
agreed to pay Aspen a monthly consulting fee of $20,000 for the services
provided by both Aspen and the Chief Financial Officer. On July 15, 2008, Aspen
agreed to reduce its monthly retainer to $15,000 in conjunction with the
appointment of Patrick Carr as the Company’s new President.
On May
22, 2007 the Company entered into a Master Lease Line with Gulf Pointe Capital,
LLC (“Gulf Pointe”). Our major shareholder is a one-third beneficial
owner of Gulf Pointe. The terms of the lease line provide a credit
limit of $500,000 that can be used for various new and used tier-one production,
material handling, computer, technology and fixture related equipment. Upon
entering into the lease agreement, the Company sold certain manufacturing,
computer and office furniture and equipment to Gulf Pointe for $160,000 and
leased the assets back from Gulf Pointe under the terms of a three-year lease
agreement. The assets sold had a net book value of $51,152. The
resultant gain on sale of $108,848 was deferred and is being recognized over the
three-year term of the capital lease obligation. During the years ended December
31, 2008 and 2007, the Company recognized $36,283 and $22,043, respectively of
this gain. In connection with entering into the lease for the equipment, the
Company recognized a $160,000 capital lease obligation. The Company
has utilized an additional $15,067 and $45,599 of this lease financing facility
during 2008 and 2007, respectively.
13
In
conjunction with the Master Lease Line, the Company issued a five-year warrant
to purchase 10,000,000 shares of common stock at an exercise price of $0.05 per
share. A total of 2,500,000 of these warrants vested upon the
execution of the Master Lease Line. The remaining 7,500,000 warrants
vest pro-rata upon the funding of the credit limit of $500,000. Based
upon the estimated total funding that will take place under the Master Lease
Line, the Company has estimated that it is probable that 5,809,984 of the
warrants will vest and have been valued at $212,994. That amount has been
recorded as deferred loan costs and is being amortized to interest expense over
the term of the respective capital lease obligations. That amount has been
recorded as deferred loan costs and is being amortized to interest expense over
the term of the respective capital lease obligations. A total of $78,586 and
$72,665 was recorded as amortization expense during the years ended December 31,
2008 and 2007, respectively.
In
August, 2008, the Company executed an amendment to the Master Lease Line in
which Gulf Pointe agreed to exercise 2,000,000 warrants to purchase common stock
at a price of $0.05 per share in exchange for past due payments totaling $51,943
and cash of $48,057. In addition, the Company agreed to vest the
remaining 4,190,016 of the warrants to purchase common stock at an exercise
price of $0.05 per share issued in conjunction with the Master Lease Line. Upon
vesting, the Company expensed the remaining fair value at issuance of $153,630
as additional loan cost amortization.
On
September 20, 2007 the Company entered into an accounts receivable loan
agreement with Aspen Opportunity Fund, L.P., an entity that is owned one-third
by our major shareholder for advances up to $500,000 in $5,000 increments,
subject to maintaining a borrowing base of 80% of eligible accounts receivable
as defined in the agreement. The Note bears interest at a rate of 12.0%, is
secured by eligible accounts receivable as defined in the agreement, requires
monthly interest payments and is due on September 30, 2009. Mandatory
prepayments of principal are required in the event that the eligible borrowing
base falls below amounts advanced under the agreement. In conjunction
with the loan agreement, the Company issued a five-year warrant to purchase
4,000,000 shares of the Company’s common stock at an exercise price of $0.075
per share.
In
August, 2008 the Company executed an amendment to increase the currently
available amount of credit under the line to the greater of $185,000 or 80% of
eligible accounts receivable as defined in the agreement until January 1,
2009. The amendment also reduced the total available amount from
$500,000 to $250,000, subject to eligible accounts receivable
requirements.
Item
13. Exhibits
Index to
Exhibits:
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Patrick Carr, Principal Executive
Officer and Robert Rudman, Principal Financial
Officer
|
Certification
of Patrick Carr, Principal Executive Officer and Robert Rudman, Principal
Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002
|
14
Item
14. Principal Accountant Fees and Services
Audit
Fees:
The
following is a summary of the aggregate fees billed to us by Hansen, Barnett
& Maxwell, P.C. for the fiscal years ended December 31, 2008 and
2007:
Fiscal
2008
|
Fiscal
2007
|
|||||||
Audit
Fees
|
$
|
94,966
|
$
|
103,882
|
||||
Audit
Related Fees
|
—
|
—
|
||||||
Tax
Fees
|
—
|
—
|
||||||
All
Other Fees
|
—
|
—
|
||||||
TOTAL
Fees
|
$
|
94,966
|
$
|
75,347
|
Pre-Approval Policies and
Procedures:
Our Board
of Directors reviews and approves audit and permissible non-audit services
performed by our registered public accounting firm. In its review of non-audit
service fees and in its appointment of a registered public accounting firm, our
Board of Directors considered whether such services are compatible with
maintaining the authorized independence, objectivity and impartial judgment on
all issues encompassed within our public accountants’ engagement . As part of
their review, they have given due consideration to Rule 2-01 of Regulation S-X.
All fees for audit and non-audit services that may be charged by our registered
public accounting firm will be pre-approved by the board of
directors.
15
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Diatect
International Corporation
|
|||
Dated:
May 18, 2009
|
|||
By:
|
/s/
Patrick Carr
|
||
Patrick
Carr
|
|||
Principal
Executive Officer
|
|||
In
accordance with the Securities Exchange Act of 1934, this Report on Form 10-K
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature
|
Capacity
|
Date
|
/s/
David Carlile
|
Director
|
May
18, 2009
|
David
Carlile
|
||
/s/
Philip Ellett
|
Director
|
May
18, 2009
|
Philip
Ellett
|
||
/s/
Robert Rudman
|
Chief
Financial Officer
|
May
18, 2009
|
Robert
Rudman
|
||
/s/
Timothy White
|
Director
|
May
18, 2009
|
Timothy
White
|
||
Note that
none of the above Directors were Directors of the company at the time of this
amended filing. This amended filing was done on March 5,
2010.
16
DIATECT
INTERNATIONAL CORPORATION
INDEX
TO FINANCIAL STATEMENTS
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Balance
Sheets as of December 31, 2008 and 2007
|
F-2
|
Statements
of Operations for the Years Ended December 31, 2008 and
2007
|
F-3
|
Statements
of Stockholders’ Deficit for the Years Ended December 31, 2007 and
2008
|
F-4
|
Statements
of Cash Flows for the Years Ended December 31, 2008 and
2007
|
F-5
|
Notes
to Financial Statements
|
F-7
|
A
Professional Corporation
|
Registered
with the Public Company
|
|
CERTIFIED
PUBLIC ACCOUNTANTS
|
Accounting
Oversight Board
|
|
5
Triad Center, Suite 750
|
||
Salt
Lake City, UT 84180-1128
|
||
Phone:
(801) 532-2200
Fax:
(801) 532-7944
|
||
www.hbmcpas.com
|
A
Member of the Forum of Firms
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and the Stockholders
Diatect
International Corporation
We have
audited the accompanying balance sheets of Diatect International Corporation as
of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders’ deficit, and cash flows for each of the two years in
the period ended December 31, 2008. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 provide 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 Diatect International Corporation
as of December 31, 2008 and 2007, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant operating losses and
negative cash flows from operating activities during each of the two years in
the period ended December 31, 2008. As of December 31, 2008, the Company had an
accumulated deficit of $32,625,287, and negative working capital of $4,847,568.
These matters raise substantial doubt about the Company’s ability to continue as
a going concern. Management’s plans with respect to these matters are also
described in Note 1. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
HANSEN,
BARNETT & MAXWELL. P.C.
|
Salt Lake
City, Utah
May 16,
2009
F-1
DIATECT
INTERNATIONAL CORPORATION
|
||||||||
BALANCE
SHEETS
|
||||||||
December
31,
|
||||||||
2008
|
2007
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
|
$
|
587
|
$
|
9,864
|
||||
Trade
accounts receivable, net of allowance for doubtful accounts of
$16,000 and $16,000, respectively
|
51,814
|
242,406
|
||||||
Inventory
|
38,416
|
66,688
|
||||||
Deferred
loan costs and other current assets
|
135,719
|
306,206
|
||||||
Total
Current Assets
|
226,536
|
625,164
|
||||||
Property and Equipment,
net of accumulated depreciation of $189,894 and $140,673,
respectively
|
182,286
|
258,229
|
||||||
Intangible
Assets - EPA Labels
|
-
|
1,116,322
|
||||||
Total
Assets
|
$
|
408,822
|
$
|
1,999,715
|
||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
Current
Liabilities
|
||||||||
Trade
accounts payable
|
$
|
1,009,133
|
$
|
224,213
|
||||
Accrued
liabilities
|
75,833
|
155,125
|
||||||
Accrued
interest payable
|
606,556
|
456,626
|
||||||
Accrued
settlement obligations
|
502,251
|
89,187
|
||||||
Deferred
gain on sale and leaseback of assets
|
50,523
|
86,806
|
||||||
Notes
payable, net of unamortized discount of $0 and $135,855,
respectively
|
2,749,996
|
2,578,265
|
||||||
Current
portion of capital lease obligations
|
79,812
|
60,021
|
||||||
Total
Current Liabilities
|
5,074,104
|
3,650,243
|
||||||
Long-Term
Liabilities
|
||||||||
Capital
lease obligations, net of current portion
|
52,041
|
120,212
|
||||||
Total
Long-Term Liabilities
|
52,041
|
120,212
|
||||||
Stockholders'
Deficit
|
||||||||
Common
stock, no par value; 500,000,000 shares authorized; 215,350,959
shares and 190,562,583 shares outstanding, respectively
|
25,589,213
|
24,587,396
|
||||||
Warrants
outstanding
|
2,318,751
|
1,561,367
|
||||||
Accumulated
deficit
|
(32,625,287
|
)
|
(27,919,503
|
)
|
||||
Total
Stockholders' Deficit
|
(4,717,323
|
)
|
(1,770,740
|
)
|
||||
Total
Liabilities and Stockholders' Deficit
|
$
|
408,822
|
$
|
1,999,715
|
The
accompanying notes are an integral part of these financial
statements.
F-2
DIATECT
INTERNATIONAL CORPORATION
|
||||||||
STATEMENTS
OF OPERATIONS
|
||||||||
For
the Years Ended
|
||||||||
December
31,
|
||||||||
2008
|
2007
|
|||||||
Sales
|
$
|
1,931,660
|
$
|
2,015,484
|
||||
Cost
of Goods Sold
|
550,046
|
600,424
|
||||||
Gross
Profit
|
1,381,614
|
1,415,060
|
||||||
Expenses
|
||||||||
Marketing
and selling
|
1,417,392
|
1,182,066
|
||||||
General
and administrative
|
2,677,987
|
1,767,231
|
||||||
Loss
from litigation claims and judgements
|
432,547
|
-
|
||||||
Impairment
of EPA Labels
|
1,116,322
|
-
|
||||||
Total
Expenses
|
5,644,248
|
2,949,297
|
||||||
Loss
from Operations
|
(4,262,634
|
)
|
(1,534,237
|
)
|
||||
Other
Income (Expense)
|
||||||||
Interest
expense
|
(443,150
|
)
|
(676,249
|
)
|
||||
Gain
from termination of debt
|
-
|
1,046,547
|
||||||
Net
Other Income (Expense)
|
(443,150
|
)
|
370,298
|
|||||
Net
Loss
|
$
|
(4,705,784
|
)
|
$
|
(1,163,939
|
)
|
||
Basic
and Diluted Loss Per Share
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
||
Weighted-Average
Basic and Diluted Common Shares Outstanding
|
209,750,881
|
160,887,061
|
The
accompanying notes are an integral part of these financial
statements.
F-3
DIATECT
INTERNATIONAL CORPORATION
|
||||||||||||||||||||
STATEMENTS
OF STOCKHOLDERS' DEFICIT
|
||||||||||||||||||||
For
the Years Ended December 31, 2007 and 2008
|
||||||||||||||||||||
Total
|
||||||||||||||||||||
Common
Stock
|
Warrants
|
Accumulated
|
Stockholders'
|
|||||||||||||||||
Shares
|
Amount
|
Outstanding
|
Deficit
|
Deficit
|
||||||||||||||||
Balance,
December 31, 2006
|
151,552,140
|
23,120,610
|
593,162
|
(26,755,564
|
)
|
(3,041,792
|
)
|
|||||||||||||
Issuance
to consultants for services
|
1,100,000
|
43,250
|
-
|
-
|
43,250
|
|||||||||||||||
Issuance
of 19,000,000 warrants to consultants
|
||||||||||||||||||||
for
services
|
-
|
-
|
501,373
|
-
|
501,373
|
|||||||||||||||
Issuance
of 5,000,000 warrants with convertible
|
||||||||||||||||||||
notes
payable for cash
|
-
|
-
|
89,038
|
-
|
89,038
|
|||||||||||||||
Issuance
of common stock and 5,000,000
|
||||||||||||||||||||
warrants
for cash
|
5,000,000
|
126,617
|
123,383
|
-
|
250,000
|
|||||||||||||||
Beneficial
notes payable conversion option
|
-
|
169,258
|
-
|
-
|
169,258
|
|||||||||||||||
Issuance
upon conversion of notes payable into
|
||||||||||||||||||||
common
stock and 22,920,000 warrants
|
22,920,000
|
687,260
|
458,740
|
-
|
1,146,000
|
|||||||||||||||
Issuance
upon conversion of accrued interest into
|
||||||||||||||||||||
common
stock and 2,490,443 warrants
|
2,490,443
|
99,618
|
61,454
|
-
|
161,072
|
|||||||||||||||
Issuance
upon exercise of warrants
|
7,500,000
|
192,750
|
(117,750
|
)
|
-
|
75,000
|
||||||||||||||
Expiration
of 4,650,000 warrants
|
-
|
148,033
|
(148,033
|
)
|
-
|
-
|
||||||||||||||
Net
loss for the year
|
-
|
-
|
-
|
(1,163,939
|
)
|
(1,163,939
|
)
|
|||||||||||||
Balance,
December 31, 2007
|
190,562,583
|
$
|
24,587,396
|
$
|
1,561,367
|
$
|
(27,919,503
|
)
|
$
|
(1,770,740
|
)
|
|||||||||
Issuance
of stock and warrants for cash - $.05
|
9,800,000
|
299,718
|
190,282
|
-
|
490,000
|
|||||||||||||||
Issuance
of stock and warrants for cash - $.065
|
1,153,845
|
52,410
|
22,590
|
-
|
75,000
|
|||||||||||||||
Issuance
of warrants for services
|
-
|
-
|
711,577
|
-
|
711,577
|
|||||||||||||||
Issuance
of stock for services
|
3,390,000
|
244,950
|
-
|
-
|
244,950
|
|||||||||||||||
Issuance
upon exercise of warrants
|
9,250,000
|
366,830
|
(194,330
|
)
|
-
|
172,500
|
||||||||||||||
Issuance
of stock and warrants on conversion of note
|
1,194,531
|
28,181
|
21,819
|
-
|
50,000
|
|||||||||||||||
Issuance
of stock and warrants for interest
|
-
|
9,728
|
5,446
|
-
|
15,174
|
|||||||||||||||
Net
loss for the year
|
-
|
-
|
-
|
(4,705,784
|
)
|
(4,705,784
|
)
|
|||||||||||||
Balance
December 31, 2008
|
215,350,959
|
25,589,213
|
2,318,751
|
(32,625,287
|
)
|
(4,717,323
|
)
|
The
accompanying notes are an integral part of these financial
statements.
F-4
DIATECT
INTERNATIONAL CORPORATION
|
||||||||
STATEMENTS
OF CASH FLOWS
|
||||||||
For
the Years Ended
|
||||||||
December
31,
|
||||||||
2008
|
2007
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
loss
|
$
|
(4,705,784
|
)
|
$
|
(1,163,939
|
)
|
||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
|
92,904
|
63,106
|
||||||
Amortization
of discount on notes payable
|
135,855
|
313,536
|
||||||
Amortization
of loan costs
|
162,203
|
142,455
|
||||||
Impairment
of EPA Labels
|
1,116,322
|
-
|
||||||
Gain
from debt termination
|
(4,283
|
)
|
(1,046,547
|
)
|
||||
Net
gain on disposal of property and equipment
|
(36,283
|
)
|
(21,554
|
)
|
||||
Issuance
of stock for services
|
244,950
|
43,250
|
||||||
Issuance
of warrants for services
|
703,305
|
208,409
|
||||||
Issuance
of stock and warrants for interest
|
5,446
|
36,550
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
190,592
|
(215,905
|
)
|
|||||
Inventory
|
28,272
|
169,201
|
||||||
Deferred
loan costs and other current assets
|
16,556
|
(8,478
|
)
|
|||||
Accounts
payable
|
784,919
|
65,724
|
||||||
Accrued
liabilities
|
(79,290
|
)
|
(32,687
|
)
|
||||
Accrued
interest payable
|
159,656
|
273,096
|
||||||
Net
Cash Used in Operating Activities
|
(1,184,660
|
)
|
(1,173,783
|
)
|
||||
Cash
Flows from Investing Activities
|
||||||||
Payments
for purchases of property and equipment
|
(1,894
|
)
|
(77,372
|
)
|
||||
Proceeds
from sale of property and equipment
|
-
|
160,000
|
||||||
Net
Cash Provided by (Used in) Investing Activities
|
(1,894
|
)
|
82,628
|
|||||
Cash
Flow from Financing Activities
|
||||||||
Proceeds
from borrowings under notes payable
|
100,000
|
958,871
|
||||||
Proceeds
from exercise of warrants
|
172,500
|
75,000
|
||||||
Proceeds
from issuance of stock and warrants
|
565,001
|
250,000
|
||||||
Principal
payments on notes payable
|
(14,124
|
)
|
(111,230
|
)
|
||||
Principal
payments on lease obligation
|
(63,447
|
)
|
(25,365
|
)
|
||||
Accrued
settlement obligation changes
|
417,347
|
(108,000
|
)
|
|||||
Net
Cash Provided by Financing Activities
|
1,177,277
|
1,039,276
|
||||||
Net
Increase (Decrease) in Cash
|
(9,277
|
)
|
(51,879
|
)
|
||||
Cash
at Beginning of Period
|
9,864
|
61,743
|
||||||
Cash
at End of Period
|
$
|
587
|
$
|
9,864
|
The
accompanying notes are an integral part of these financial
statements.
F-5
DIATECT
INTERNATIONAL CORPORATION
|
||||||||
STATEMENTS
OF CASH FLOWS (continued)
|
||||||||
For
the Years Ended
|
||||||||
December
31,
|
||||||||
2008
|
2007
|
|||||||
Supplemental
Disclosure of Cash Flow Information
|
||||||||
Cash
paid for interest
|
$
|
22,127
|
$
|
54,328
|
||||
Supplemental
Schedule of Noncash Investing and
|
||||||||
Financing
Activities
|
||||||||
Conversion
of notes payable and interest into common stock and
warrants
|
$
|
65,174
|
$
|
1,307,072
|
||||
Purchase
of equipment under capital lease obligations
|
15,067
|
45,599
|
The
accompanying notes are an integral part of these financial
statements.
F-6
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and
Description of Business – Diatect International
Corporation (the “Company”) develops and markets non-toxic pesticide products.
The Company is located in Heber, Utah and sells its products to both wholesale
distributors and retail customers in the United States.
Use of
Estimates
– The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America which
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates may also affect
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates upon subsequent resolution of
identified matters.
Business
Condition – The Company generated sales of $1,931,660 during the year
ended December 31, 2008 compared to $2,015,484 during the year ended December
31, 2007, resulting in a gross profit of $1,381,614 and $1,415,060,
respectively. For the years ended December 31, 2008 and 2007, the Company
incurred net losses of $4,705,784 and $1,163,939, respectively, and used
$1,184,660 and $1,173,783, respectively, of cash in its operating activities. At
December 31, 2008, the Company had a stockholders’ deficit of $4,717,323 and its
current liabilities exceeded current assets by $4,847,568.
The
ability of the Company to continue operations is dependent upon obtaining
additional financing and being able to generate net profits in the future.
Management believes that these events are likely to occur in the near future,
even though no assurance thereof can be given. Additional financing arrangements
have been arranged and are discussed further in Note 11.
Cash and Cash
Equivalents - Cash and cash equivalents include all highly liquid
investments with original maturities of three months or less.
Credit
Risk - The carrying amounts of trade accounts receivable included in the
balance sheets represent the Company’s exposure to credit risk in relation to
its financial assets. The Company performs ongoing credit evaluations of each
customer’s financial condition. The Company has not had any significant credit
losses in the past and maintains allowances for doubtful accounts and such
allowances in the aggregate did not exceed management’s
estimations.
Trade Accounts
Receivable and Allowance for Doubtful Accounts - Trade accounts
receivable are carried at original invoiced amounts less an allowance for
doubtful accounts.
Inventory
– The Company’s current inventory consists primarily of raw materials and
finished goods and is valued at the lower of cost or market, with cost being
determined by the average cost method. Raw materials consist of the various
active ingredients that comprise the Company’s products and shipping and
packaging materials. When there is evidence that inventory values are less than
original cost, the inventory is reduced to market value. The Company determines
market value based on current prices and whether obsolescence
exists.
Property and
Equipment – Property and equipment are stated at cost. Expenditures for
normal repairs and maintenance are charged to operations as incurred. The cost
of an asset and related accumulated depreciation are also charged to operations
when retired or otherwise disposed. Depreciation is computed based on the
estimated useful life of the assets using straight-line and accelerated methods.
Useful lives for equipment range from 3 to 15 years. Leasehold
improvements are depreciated over the lesser of the remaining term of the lease
or the remaining useful life of the asset.
F-7
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
Intangible
Assets
– The Company’s intangible assets consist of the labels that
are placed on its products and that have been registered as non-toxic
insecticide products with the United States Environmental Protection Agency
pursuant to the Federal Insecticide, Fungicide and Rodenticide Act. The Company
recorded these labels at cost; however, it impaired the value thereof by
$2,869,570 in 2003. During 2004 and for the first 6 months of 2005, the Company
amortized the unimpaired value over an estimated useful life of 7 years using
the straight-line method.
In July
2005, the Company reconsidered this valuation and concluded that the estimated
useful life of the labels was indefinite and will henceforth subject the labels
to impairment if and when appropriate. In reaching that conclusion, the Company
considered the fact that the labels have a registration that lasts 15 years, at
which time a re-registration is required, and paragraph 11(d) of SFAS 142,
providing that such registration is a “contractual provision that enables
renewal or extension of the asset’s legal or contractual life without
substantial cost (provided there is evidence to support renewal or extension and
renewal or extension can be accomplished without material modifications of the
existing terms and conditions).”
In such
re-evaluation of the estimated useful life of the labels, the Company also
considered the fact that the EPA, at that time, had shown a propensity to
disallow the re-registration of some of the older and more harmful chemicals in
favor of organic formulas like those used by the Company. The Company
concluded that this aspect could cause an increase in the value of the Company’s
EPA labels, if they were resold. The Company considered this factor
together with the other factors discussed in the immediate preceding paragraph
in concluding that the useful life of the labels was
indefinite.
In 2006,
the Company received the financial backing of investors and experienced a
continued trend of increased sales through 2007. With low overhead
and a production process in place, it was believed at the time that the future
cash flows related to the EPA labels was sufficient to support the value without
further impairment. The Company reviewed the labels for impairment
during the fourth quarter of 2007. Based upon the historic trend of
increasing sales, the Company’s expectations regarding this trend in the future,
and the estimated replacement cost of the labels, the Company determined that
the labels were not impaired. It should be noted that in 2008, the
Company again reviewed the value of the labels and took a charge to write of the
value of the labels. This action was reflected in the 2008 Form
10K.
Long Lived
Assets – Long-lived assets are reviewed for impairment when events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount that the carrying amount
of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
Fair Value of
Financial Instruments – Due to the short maturity of trade receivables
and current liabilities, including trade payables, the carrying amount
approximates fair value. The carrying amount reported for notes payable
approximates fair value and interest rates on these notes approximate current
interest rates given the current business condition of the
Company.
F-8
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
Revenue
Recognition – The Company manufactures and sells non-toxic pesticides to
retailers, agricultural concerns and directly to the public through a Company
website. Revenue from the sale of its products when (a) persuasive evidence of
an arrangement exists, (b) delivery has occurred and no significant obligations
remain, (c) the sales price is fixed and determinable and (d) collection is
determined to be probable. Sales credits and price concessions are treated as a
reduction of revenue. Product returns are permitted, but historically have
occurred within a short period after the sale and are estimated and recognized
as a reduction of revenue at the time of the sale.
Shipping and
Handling Costs – Shipping and handling costs are billed to customers and
are recorded as sales and the associated costs are included in cost of goods
sold.
Marketing and
Selling Expenses – Marketing and selling expenses include the salaries
and wages of its in-house sales force, advertising, product samples and
promotional expenses. The Company designs and prints literature and marketing
materials for its products, as well as promotional materials used in trade
shows.
Income Taxes
– No income taxes have been paid or accrued for Federal income tax
purposes because the Company has had no net taxable income since inception. In
accordance with SFAS 109, the Company recognizes the amount of income taxes
payable or refundable for the current year and recognizes deferred tax assets
and liabilities for the future tax consequences attributable to differences
between the financial statement amounts of certain assets and liabilities and
their respective tax bases. Deferred tax assets and deferred liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years those temporary differences are expected to be recovered or settled.
Deferred tax assets are reduced by a valuation allowance to the extent that
uncertainty exists as to whether the deferred tax assets will ultimately be
realized.
Basic and Diluted
Loss Per Share – Basic loss per share
is computed by dividing the net loss by the weighted average number of shares
outstanding during the period presented. The potentially dilutive
common shares in the following table were not included in the computation of
diluted loss per share as their effect would have been
anti-dilutive.
December
31
|
||||||||
2008
|
2007
|
|||||||
Outstanding
warrants
|
94,383,820
|
74,410,444
|
||||||
Convertible
promissory notes convertible into:
|
||||||||
Common
stock
|
6,500,000
|
6,500,000
|
||||||
Warrants
|
1,500,000
|
1,500,000
|
||||||
Total
potentially dilutive common shares
|
102,383,820
|
82,410,444
|
Share Based
Payments – The Company accounts for stock-based compensation expense in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 123(R), “Share-Based Payment” (SFAS 123R). Under SFAS 123R,
stock-based compensation expense reflects the fair value of stock-based awards
measured at the grant date, is recognized over the relevant service period, and
is adjusted each period for anticipated forfeitures. As of December 31, 2008 and
2007, the Company has no unvested options and did not grant any options to
employees during the years ended December 31, 2008 and 2007. For future stock
awards, the Company intends to estimate the fair value of each stock-based award
on the date of grant using the Black-Scholes option valuation model. The
Black-Scholes option valuation model incorporates assumptions as to stock price
volatility, the expected life of options, a risk-free interest rate and dividend
yield.
F-9
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
Recently Enacted
Accounting Standards - In September 2006, the Financial Accounting
Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements”,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
extended the effective date for certain nonfinancial assets and nonfinancial
liabilities to fiscal years beginning after November 15, 2008. The
adoption of the portions of SFAS No. 157 that were not postponed did not have a
material impact on our financial statements. The Company does not expect the
adoption of the postponed portions of SFAS No. 157 to have a material
impact on our financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, and
SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”. SFAS No. 141(R) requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any non-controlling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. SFAS No. 160 clarifies that a non-controlling interest in
a subsidiary should be reported as equity in the consolidated financial
statements, consolidated net income shall be adjusted to include the net income
attributed to the non-controlling interest and consolidated comprehensive income
shall be adjusted to include the comprehensive income attributed to the
non-controlling interest. The calculation of earnings per share will continue to
be based on income amounts attributable to the parent. SFAS
No. 141(R) and SFAS No. 160 are effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
adoption is prohibited. SFAS No. 141(R) and SFAS No. 160 are not expected to
have a material impact on our results of operations or financial
position.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSB FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other
Intangible Assets. The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under FAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141(R) and other generally accepted accounting principles. FSP FAS
142-3 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2008. The Company does not expect the
adoption of FSP FAS 142-3 to have a material impact on our consolidated
financial statements.
In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP. The current GAAP hierarchy has been criticized
because it is directed to the auditor rather than the entity, it is complex, and
it ranks FASB Statements of Financial Accounting Concepts, which are subject to
the same level of due process as FASB Statements of Financial Accounting
Standards, below industry practices that are widely recognized as generally
accepted but that are not subject to due process. The Board believes
the GAAP hierarchy should be directed to entities because it is the entity (not
its auditors) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP. The
adoption of FASB 162 is not expected to have a material impact on the Company’s
financial statements.
F-10
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
In
October 2008, the FASB issued FSP FAS 157-3 Determining Fair Value of a
Financial Asset in a Market That Is Not Active (FSP FAS 157-3). FSP FAS
157-3 clarified the application of SFAS No. 157 in an inactive market. It
demonstrated how the fair value of a financial asset is determined when the
market for that financial asset is inactive. FSP FAS 157-3 was effective upon
issuance, including prior periods for which financial statements had not been
issued. The adoption of FSP FAS 157-3 is not expected to have a material impact
on the Company’s financial statements.
In
December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8,
Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities ("FSP FAS 140-4 and FIN 46(R)-8"). FSP FAS 140-4 and
FIN 46(R)-8 amends SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities and FIN
46(R), FASB Interpretation No.
46 (R), Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51, to require public entities to
provide additional disclosures about transfers of financial assets and their
involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is
effective for the first interim or annual reporting period ending after December
15, 2008. The adoption of FSP FAS 140-4 and FIN 46(R)-8 is not expected to have
a material impact on the Company’s financial statements.
NOTE
2 – INVENTORY
Inventory
is comprised of the following:
December
31,
|
||||||||
2008
|
2007
|
|||||||
Raw
materials
|
$
|
18,351
|
$
|
32,836
|
||||
Finished
goods
|
20,064
|
33,852
|
||||||
Total
Inventory
|
$
|
38,416
|
$
|
66,688
|
NOTE
3 – PROPERTY AND EQUIPMENT
Property
and equipment are stated at cost. Expenditures for normal repairs and
maintenance are charged to operations as incurred. Gains or losses on the sale
or disposal of equipment are recognized in the statement of operations.
Depreciation is computed based on the estimated useful life of the assets using
straight-line and accelerated methods. Depreciation expense for the years ended
December 31, 2008 and 2007 was $92,904 and $63,071, respectively. The components
of property and equipment are as follows:
Estimated
|
||||||||||
Useful
Life
|
December
31,
|
|||||||||
in
Years
|
2008
|
2007
|
||||||||
Computer
equipment
|
3
to 5
|
$
|
80,613
|
$
|
89,774
|
|||||
Office
furniture and equipment
|
5
|
45,724
|
48,024
|
|||||||
Manufacturing
equipment
|
3
to 10
|
240,908
|
256,169
|
|||||||
Leasehold
improvements
|
15
|
4,935
|
4,935
|
|||||||
Total
Property and Equipment
|
372,180
|
398,902
|
||||||||
Less:
Accumulated depreciation
|
(189,894
|
)
|
(140,673
|
)
|
||||||
Net
Property and Equipment
|
$
|
182,286
|
$
|
258,229
|
The
Company owns association placer diatomaceous earth mining claims and placer
diatomaceous earth mining claims, in the State of Oregon. The Company has not
engaged in any mining operations and does not anticipate undertaking mining
operations in the near future. The mining claims are carried at no
cost.
F-11
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
Notes
payable are comprised of the following:
December
31,
|
||||||||
2008
|
2007
|
|||||||
Revolving
line of credit with financial institution
|
$
|
49,683
|
$
|
49,807
|
||||
Accounts
receivable line of credit
|
185,000
|
185,000
|
||||||
Unsecured
10% notes payable to investors, in default
|
292,250
|
292,250
|
||||||
Unsecured
12% notes payable to investors, in default
|
40,000
|
40,000
|
||||||
Unsecured
12% notes payable due February 28, 2009
|
55,000
|
-
|
||||||
Promissory
Note, 12%, secured by EPA Labels, due February 28, 2009
|
45,000
|
-
|
||||||
Unsecured
15% notes payable to investors, in default
|
32,500
|
36,500
|
||||||
Unsecured
12% convertible promissory notes payable, net
|
||||||||
of
unamortized discount of $0 and $135,855, respectively in
default
|
275,000
|
189,145
|
||||||
Unsecured
5% notes payable to shareholders, in default
|
1,210,937
|
1,220,937
|
||||||
Unsecured
5% notes payable to vendors, in default
|
564,626
|
564,626
|
||||||
Total
Notes Payable
|
$
|
2,749,996
|
$
|
2,578,265
|
Revolving Line of
Credit –The Company currently has unsecured, revolving credit notes with
a financial institution totaling $49,683. The line of credit bears interest at
9.0% per annum, is due on demand and requires monthly interest only payments.
The line is unsecured and is personally guaranteed by a former director of the
Company.
Accounts
Receivable Line of Credit – On September 20, 2007 the Company entered
into an accounts receivable loan agreement with Aspen Opportunity Fund, L.P. for
advances up to $500,000 in $5,000 increments, subject to maintaining a borrowing
base of 80% of eligible accounts receivable as defined in the agreement. The
Note bears interest at a rate of 12.0%, is secured by eligible accounts
receivable as defined in the agreement, requires monthly interest payments and
is due on September 30, 2009. Mandatory prepayments of principal are
required in the event that the eligible borrowing base falls below amounts
advanced under the agreement. In conjunction with the loan agreement,
the Company issued a five-year warrant to purchase 4,000,000 shares of the
Company’s common stock at an exercise price of $0.075 per share. The warrant was
valued at $169,294 and was recorded as prepaid expenses and other assets and
amortized over the life of the loan. A total of $83,617 and $23,304
was recorded as amortization expense for the years ended December 31, 2008 and
2007.
F-12
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
In
August, 2008 the Company executed an amendment to increase the currently
available amount of credit under the line to the greater of $185,000 or 80% of
eligible accounts receivable as defined in the agreement until January 1,
2009. The amendment also reduced the total available amount from
$500,000 to $250,000, subject to eligible accounts receivable
requirements.
The
estimated fair value of the above warrant was calculated using the Black Scholes
method and the following assumptions: market price of common stock – $0.05 per
share; estimated volatility – 135%; risk-free interest rate – 4.35%, expected
dividend rate – 0% and expected life – 5.0 years.
Secured
Promissory Note – On December 30, 2008 the Company issued a secured 12%
promissory note in the amount of $45,000 for cash payable February 28,
2009. The promissory note is secured by all tangible and intangible
property related to the Company’s EPA labels.
Cash Advances
from Shareholder – A minority
shareholder, who never had a position of control over the Company and who was
not considered a related party by the Company, advanced $97,000 of cash to the
Company. The cash advances are unsecured and have no stated maturity
date. During 2007, based upon consultation with corporate counsel,
the Company determined that the statute of limitations regarding the repayment
of these advances had expired and thus payment was no longer due. As
a result, the Company recognized a gain from settlement of debt of $97,000 in
the accompanying statement of operations for the year ended December 31,
2007.
Unsecured Notes
Payable – The Company has borrowed money from several entities, including
shareholders of the Company, with various terms, including demand promissory
notes. The notes are unsecured and bear interest at rates from 5% to
15% payable at different times. During the year ended December 31,
2007, based upon consultation with corporate counsel, the Company determined
that the statute of limitations had expired regarding the repayment of an
aggregate of $676,492. That included the expiration of the statute of
limitations on $251,000 in principal and related accrued interest of $411,772
through December 31, 2007 applicable to one of the holders of those notes, and
thus payment of those amounts was no longer due. Also based upon
consultation with corporate counsel, the Company concluded that a holder of
another of these promissory notes, with an outstanding principal amount of
$10,000 and accrued interest through December 31, 2007 of $3,719, who sued the
Company in Virginia on December 12, 2006, did not have jurisdiction over the
Company in such suit. The Company did not respond to the Virginia
suit and has concluded that the statute of limitations had expired regarding the
repayment of a total of $13,719 of the principal and accrued interest on such
note which was the subject of such litigation.
Convertible
Promissory Notes Payable – In
June 2006, the Company commenced a private placement offering of convertible
promissory notes and warrants through Pointe Capital, LLC (“Pointe”). From June
through December 31, 2006, the Company issued $795,000 of convertible promissory
notes that bear interest at 12% per annum, are unsecured and are due one year
from the date of issuance. The effective interest rates of the notes including
computed discounts issued in 2006 range from 12% to 39%. The notes are
convertible into units at $0.05 per unit, each unit consisting of one share of
common stock and one warrant to purchase one share of common stock at $0.075 per
share for a period of three years from the date of issuance. Thus, the notes are
convertible into an aggregate of 15,900,000 shares of common stock and warrants
to purchase an additional 15,900,000 shares of common stock. The Company has the
option to redeem the notes at their face value plus accrued interest if the
average market price of the Company’s common stock is $0.10 per share for a
period of twenty consecutive days. In conjunction with this offering, the
Company paid Pointe loan fees of $63,600 that were capitalized and included in
prepaid expenses and other assets. The loan costs are being amortized over the
terms of the respective notes. A total of $46,486 of amortization was
recorded for the year ended December 31, 2007.
F-13
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
In 2007,
the Company issued an additional $533,500 of convertible promissory notes on the
same terms. The notes are convertible into an aggregate of 10,670,000 shares of
common stock and warrants to purchase an additional 10,670,000 shares of common
stock. Based upon the fair value of the Company’s common stock on the dates the
notes were issued, the investors received a beneficial conversion option of
$239,895 during 2006 and $64,421 during 2007. The beneficial conversion option
was computed as the difference between the fair value of the common stock
issuable upon conversion of the promissory notes and the proceeds allocated to
the common stock portion of the conversion option. The recognition of the
beneficial conversion option resulted in a discount to the notes payable that is
being amortized over the term of the convertible notes using the effective
interest method, or through the date of conversion, and resulted in the
recognition of $3,523 and $251,993 of interest expense during the years ended
December 31, 2008 and 2007, respectively.
During
the second quarter of 2007, $107,500 of principal on the convertible notes was
repaid in cash. During the fourth quarter of 2007, $1,146,000 of principal on
the convertible notes was converted into 22,920,000 shares of common stock and
22,920,000 three-year warrants with an exercise price of $0.075. In addition,
the holders of the notes converted $124,522 in accrued interest into 2,490,444
shares of common stock, with a fair value of $99,618 based on the closing market
price of $0.04 as of the date of conversion, and 2,490,444 three-year warrants
to purchase common stock at an exercise price of $0.075 per share with an
aggregate fair value of $61,454. The estimated fair value of the warrants issued
in conjunction with the conversion of accrued interest was calculated using the
Black-Scholes option pricing model and the following weighted-average
assumptions: market price of common stock – $0.04 per share; estimated
volatility – 120%; risk-free interest rate – 3.35%, expected dividend rate – 0%
and expected life – 3.0 years. The excess of the fair value of the common stock
and the warrants over the accrued interest was recognized as additional interest
expense in the amount of $36,550.
In July
2007, the Company issued 12% convertible promissory notes for $250,000 and
warrants to purchase 5,000,000 shares of common stock at an exercise price of
$0.075 for a period of three years to Aspen Opportunity Fund LP in exchange for
proceeds of $250,000. The notes are convertible at $0.05 per share into
5,000,000 shares of common stock. The estimated fair value of the warrants
issued with the promissory notes of $138,291 was calculated using the
Black-Scholes option pricing model and the following assumptions: market price
of common stock – $0.04 per share; estimated volatility – 135%; risk-free
interest rate – 4.56%, expected dividend rate – 0% and expected life – 3.0
years. The beneficial conversion option was computed as the difference between
the fair value of the common stock issuable upon conversion of the promissory
notes and the proceeds allocated to the common stock portion of the conversion
option.
The
proceeds were allocated between the promissory note and the warrants based upon
their relative fair values and resulted in allocating $56,124 to the promissory
notes, $89,038 to the warrants and $104,838 to the beneficial conversion option.
The resulting $193,876 discount to the note payable is being amortized over the
term of the convertible notes using the effective interest method and resulted
in the recognition of $132,333 and $61,544 of interest expense during the year
ended December 31, 2008 and 2007, respectively.
F-14
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
NOTE
5 – SETTLEMENT OBLIGATIONS AND LITIGATION CLAIMS
The
Company has obligations due to creditors that arose from cash loans and the
receipt of goods or services. The Company is in default in its payment of each
of these obligations. The obligations are unsecured and are currently due.
Certain of the obligations are in dispute as further described below. The
obligations have not been reduced by any amounts that may be compromised by the
creditors in the future, but include all amounts due and include default
judgments obtained by the creditors. The accrued settlement obligations include
the following:
December
31,
|
||||||||
2008
|
2007
|
|||||||
Litigation
Claim
|
$
|
282,367
|
$
|
-
|
||||
Jack
Stites
|
150,180
|
|||||||
Litho-Flexo
Graphics, Inc.
|
-
|
63,283
|
||||||
Other
|
69,704
|
25,904
|
||||||
Total
|
$
|
502,251
|
$
|
89,187
|
Litigation Claim
- The Company has been threatened with litigation regarding a loan
agreement on which the statute of limitations was believed by management to have
expired. Although the Company has not received a formal complaint
regarding this claim, the Company has accrued an estimated loss from this
threatened litigation in the amount of $282,367.
Jack Stites-
On June 23, 2008 Jack Stites (“Stites”) filed a complaint in the Chancery
Court of Putnam County, Tennessee naming the Company as a
defendant. Stites contends that the Company failed to make payment on
an unsecured note payable in the amount of $40,000 plus accrued interest and
fees of $110,180. The Company did not respond to the suit, and a
default judgment was entered against the Company in the amount of $150,180.
Stites has also obtained a judgment in the state of Utah against the Company.
The Company has recorded this amount as loss contingency on the accompanying
statement of operations as of December 31, 2008.
Litho-Flexo
Grafics, Inc. – On May 23, 2003, Litho-Flexo Grafics, Inc.
(“Litho-Flexo”) filed a complaint in the Fourth District Court in and for
Wasatch County, State of Utah, naming the Company as the defendant. Litho-Flexo
contended that the Company failed to make payment of a trade payable that, with
interest and costs amounted to $92,478. The Company contended that the packaging
labels purchased from Litho-Flexo were defective and could not be used in the
packaging of the Company’s products. The Company filed a counterclaim claiming
in excess of $100,000 for damages resulting from the use of the defective
labels. The Company accrued a $72,625 accrued settlement obligation liability at
December 31, 2004. During 2005, the Company paid $9,342 to the vendor, which
decreased the recorded accrued settlement obligation liability to $63,283 at
December 31, 2007. In March, 2008 the Company entered into a
settlement agreement by which all claims of both parties will be settled upon
the payment by the Company of an aggregate of $60,000 to
Litho-Flexo. The Company made all required payments on a timely
basis.
Complete
Packaging, LLC d.b.a. Compax – On October 17, 2003, Complete Packaging,
LLC, doing business as Compax, filed a complaint in the Third District
Court of Salt Lake County, State of Utah, naming the Company as the defendant.
Compax contended that the Company failed to make payment of a trade payable
that, with interest and costs amounted to $323,892, which amount continued to
accrue interest from November 30, 2004. The complaint concluded in Compax
obtaining a judgment against the Company. During 2005, the Company entered into
a settlement agreement with Compax that required the Company to make three
monthly payments of $25,000 through May 2005 and a lump sum payment of $145,000
in June 2005. As a result, the Company accrued a $220,000 settlement obligation
liability at December 31, 2004. The Company made two of the monthly payments but
failed to make the remaining payments due under the terms of the settlement
agreement. In July 2006, the Company and Compax reached a further agreement
dated June 6, 2006 under which Compax agreed to accept payment of $150,000 in
total satisfaction of the Company’s obligation. The Company paid $75,000 of this
obligation during 2006. The remaining amount was paid at prescribed
intervals with the final payment made on September 1, 2007, which resulted in
the Company being released from the judgment.
Williams and
Webster – The Company reached a settlement on May 24, 2007 resulting in
no amount being due from the Company and recognized a gain from termination of
debt of $54,564 in the accompanying statement of operations.
Xerox – In
December 2007, the Company negotiated a settlement for all amounts due, paid
$10,000 and recognized a gain from termination of debt of $7,590 in the
accompanying statement of operations.
National
Bulk – On May 4, 2007 the Company negotiated a settlement for all amounts
due, paid $15,000 and recognized a gain from termination of debt of $5,418 in
the accompanying statement of operations.
F-15
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
NOTE
6 – COMMITMENTS AND CONTINGENCIES
Administrative
Proceeding – U.S. Securities and Exchange Commission
One
September 27, 2007, the Commission entered an order instituting a proceeding
under Section 12(j) of the Securities Exchange Act of 1934 (“1934 Act”) naming
the Company as a respondent. This administrative proceeding has file
no. 3-12843. The administrative proceeding sought to revoke the
Company’s registration under the Securities Exchange Act of 1934 (“Exchange
Act”) under which the Company files quarterly and annual financial
reports. The Company had not filed nine quarterly and annual
financial reports. All of these reports have been filed as of January
2, 2008.
On
January 30, 2008, Administrative Law Judge James Kelly issued an Initial
Decision. This decision denied the Division of Enforcement’s Motion for
revocation and granted the Company’s motion for summary disposition. The
Judge found that the Company violated rules promulgated under the Exchange Act
which required the filing of annual and quarterly reports. In the
decision the Judge expressly stated that the sanctions of revocation or trading
suspension would not be imposed as such sanctions were not appropriate or
necessary and denied the Division’s motion for revocation. The
initial decision dismissed the administrative proceeding. The parties had 21
days to appeal which has expired. Neither party appealed and on March
6, 2008 the Commission issued a notice making the Initial Decision the Final
Decision.
U.S. Securities
and Exchange Commission , The U.S. Securities and Exchange
Commission in the U.S. District Court, District of Utah, Central Division having
Case No.: 2:07cv00709. The caption on the Complaint is Securities and Exchange Commission
v. Diatect International Corporation et al. The four
defendants are the acting president who is also a director, a former officer and
director, a former director, and the Company. The allegations
of the Complaint claim that the Defendants engaged in a transaction in 2003
involving the sale of mining claims located in the State of Oregon which
transaction was improperly recorded on the Company’s financial statements
causing the overstatement of revenues and assets. The
allegations of the Complaint also claim that certain revenues were improperly
recorded in the Company’s 2002 financial statements because the sales were
consignment sales and not actual sales. The Complaint alleges
various violations of the federal securities laws and regulations promulgated
thereunder including violations of the anti-fraud provisions and violations of
regulations pertaining to periodic reports filed by the Company with the SEC in
2003 and 2004. On May 17, 2004 the Company issued restated
financial statements as of December 31, 2003. On April 14, 2005, the
Company issued restated financial statements as of December 31,
2004. These filings restated the sale of the mining claims and
revenues for those years. The Complaint seeks injunctive action against the
defendants including the Company and seeks fines from the three individual
defendants, and from two individual defendant’s disgorgement of stock sale
proceeds and bars as an officer and director. In February, 2008 a
scheduling conference was held and a tentative trial date has been set for
January, 2010. The Company is seeking to constructively resolve this issue
by settlement with the SEC.
On
January 1, 2007, the Company entered into a five year lease with Aspen Capital
Management, LLC, requiring monthly rental payments of $12,000 plus taxes and
maintenance. The lease is renewable for two additional 5 year terms with 10%
increases of the rental payments to $13,200 per month and $14,520 per month,
respectively.
Future
minimum lease payments over the next five years ending December 31 are as
follows:
2009
|
$
|
144,000
|
||
2010
|
144,000
|
|||
2011
|
144,000
|
|||
2012
|
158,400
|
|||
2013
|
158,400
|
In
February 2006, the Company entered into a one year Investment Banking Agreement
with Pointe. The terms of the Investment Banking Agreement required that the
Company pay $25,000 upon completion of $150,000 in bridge financing. The Company
subsequently received $150,000 under the terms of a convertible promissory note
that was arranged by Pointe and the Company made the $25,000 payment to Pointe.
Additionally, the Company issued Pointe 8,000,000 warrants to purchase common
stock at $0.01 per share for a period of 3 years. The warrants issued pursuant
to this agreement were valued at $125,892. This amount was recorded as a prepaid
expense and is being amortized over the one-year term of the agreement. The
Company further agreed to pay Pointe a 7% commission and a 1% unaccountable
expense allowance upon receipt of financing brought to the Company by Pointe,
agreed to pay Pointe a fee equal to 5% of the value of the transaction as
defined in the agreement in the event of a merger or acquisition of the
Company.
In
February 2006, the Company entered into a renewable two-year non-exclusive
engagement letter ( the “Engagement Letter”) with Aspen Capital Partners, LLC,
an entity that employs a person that was on the board of directors of the
Company at that time for consulting services in a variety of areas relating to
financial, strategic and developmental growth of the Company. The financial
terms of the Engagement Letter required a non-refundable retainer fee of
$25,000, the issuance of 2,500,000 shares of common stock and payments of
$15,000 per month for a two-year period. Additional provisions of the Engagement
Letter provide that the Company issue 8,000,000 warrants to purchase common
stock at $0.01 per share for a period of five years and, upon the completion of
the $150,000 bridge financing, the Company issued 4,500,000 warrants to purchase
common stock at $.01 per share for a period of five years. The 8,000,000
warrants issued pursuant to the Engagement Letter were valued at $125,892. This
amount was recorded as a prepaid expense and will be amortized over the two year
term of the agreement. The 4,500,000 warrants were valued at $76,410 and were
recorded as interest expense. The agreement also provides for the issuance of
5,000,000 warrants to purchase common stock at $0.05 per share for a period of
five years upon the completion of one million dollars of funding. These warrants
were issued in May 2007. It is the intent of the Company to renew
this agreement.
F-16
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
On May
22, 2007 the Company entered into a Master Lease Line with Gulf Pointe Capital,
LLC (“Gulf Pointe”). The terms of the lease line provide a credit
limit of $500,000 that can be used for various new and used tier-one production,
material handling, computer, technology and fixture related equipment. Upon
entering into the lease agreement, the Company sold certain manufacturing,
computer and office furniture and equipment to Gulf Pointe for $160,000 and
leased the assets back from Gulf Pointe under the terms of a three-year lease
agreement. The assets sold had a net book value of $51,152. The
resultant gain on sale of $108,848 was deferred and is being recognized over the
three-year term of the capital lease obligation. During the years ended December
31, 2008 and 2007, the Company recognized $36,283 and $22,043, respectively of
this gain. In connection with entering into the lease for the equipment, the
Company recognized a $160,000 capital lease obligation. The Company
has utilized an additional $15,067 and $45,599 of this lease financing facility
during 2008 and 2007, respectively.
The
capital lease obligations bear interest at a rates ranging from 21.5% to 26.5%
and require payments of principal and interest over the 36-month term of the
leases. The assets acquired under the capital lease obligation are being
depreciated over the three-year term of the lease. The following is a schedule
by years of future minimum lease payments under the capital leases together with
the present value of the net minimum lease payments as of December 31,
2008:
Years
Ending December 31:
|
||||
2009
|
$
|
102,330
|
||
2010
|
56,152
|
|||
2011
|
611
|
|||
Total
minimum lease payments
|
159,092
|
|||
Less: Amount
representing interest
|
(27,239
|
)
|
||
Present
value of minimum lease payments
|
131,853
|
|||
Less:
Current portion
|
(79,812
|
)
|
||
Capital
lease obligations, long-term
|
$
|
52,041
|
In
conjunction with the Master Lease Line, the Company issued a five-year warrant
to purchase 10,000,000 shares of common stock at an exercise price of $0.05 per
share. A total of 2,500,000 of these warrants vested upon the
execution of the Master Lease Line. The remaining 7,500,000 warrants
vest pro-rata upon the funding of the credit limit of $500,000. Based
upon the estimated total funding that will take place under the Master Lease
Line, the Company has estimated that it is probable that 5,809,984 of the
warrants will vest and have been valued at $212,994. That amount has been
recorded as deferred loan costs and is being amortized to interest expense over
the term of the respective capital lease obligations. That amount has been
recorded as deferred loan costs and is being amortized to interest expense over
the term of the respective capital lease obligations. A total of $78,586 and
$72,665 was recorded as amortization expense during the years ended December 31,
2008 and 2007, respectively. In August, 2008 the Company executed an
amendment to the Master Lease Line who agreed to exercise 2,000,000 warrants to
purchase common stock at an exercise price of $0.05 per share in exchange for
past due payments totaling $51,943 and cash of $48,057. In addition,
the Company agreed to vest the remaining 4,190,016 of the warrants to purchase
common stock at an exercise price of $0.05 per share issued in conjunction with
the Master Lease Line. Upon vesting, the Company expensed the remaining fair
value at issuance of $153,630 as additional loan cost
amortization.
F-17
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
The
Company had agreements with three vendors to issue three year warrants to
purchase of an aggregate of 4,500,000 shares of common stock at a price of $0.05
per share upon the achievement of certain performance milestones as defined in
the respective agreements. During the second quarter of 2008, the
Company terminated an agreement with a vendor which included the potential
issuance of three year warrants to purchase 750,000 shares of common stock at an
exercise price of $0.05 per share. None of the contractually defined milestones
has been achieved and no warrants have been issued pursuant to these
agreements.
The
Company is party to certain litigation from time to time regarding trade
accounts payable and certain notes payable. The amount surrounding
the litigation has in each case been properly recorded in the financial
statements.
The
production of pesticides is subject to complex environmental regulations. As of
the date of these financial statements and the date of this report, the Company
is unaware of any significant pending environmentally related litigation or of
any specific past or prospective matters involving environmental concerns, which
could impair the marketing of its products.
NOTE
7 - COMMON STOCK
In May
2008, the shareholders approved an increase of the authorized common stock of
the Company from 300,000,000 shares to 500,000,000 shares.
During
2008, the Company issued 1,600,000 shares valued at $115,200 or $0.072 per share
as compensation to a vendor, 1,640,000 shares valued at $123,000 or $0.075 per
share, as compensation to employees and two vendors and 150,000 shares valued at
$6,750 or $0.45 per share as compensation to a vendor. The values represent the
market price of the Company’s common stock on the dates of
issuance.
The
Company issued 9,250,000 shares of common stock upon the exercise of warrants
for proceeds of $172,500.
The
Company issued 9,800,000 shares of common stock and two year warrants to
purchase 2,000,000 shares of common stock at an exercise price of $0.075 per
share for gross proceeds of $490,000. The proceeds were allocated
based on the relative fair values of the common stock and the warrants on the
dates of issuance. The allocated fair value of the warrants was
$190,282 and the balance of the proceeds of $299,718 was allocated to the common
stock. The fair value of the warrants, determined using the Black-Scholes Option
Pricing Model, was calculated using the following weighted average assumptions:
risk free interest rate of 1.80% - 2.48%, expected dividend yield of 0%,
expected volatility of 117% - 131% and an expected life of 2 years.
The
Company also issued 1,153,845 shares of common stock and two year warrants to
purchase 1,153,845 shares of common stock at an exercise price of $0.13 per
share for gross proceeds of $75,000. The proceeds were allocated
based on the relative fair values of the common stock and the warrants on the
dates of issuance. The allocated fair value of the warrants was
$22,590 and the balance of the proceeds of $52,410 was allocated to the common
stock. The fair value of the warrants, determined using the Black-Scholes Option
Pricing Model, was calculated using the following weighted average assumptions:
risk free interest rate of 2.35% - 2.52%, expected dividend yield of 0%,
expected volatility of 113% - 117% and an expected life of 2
years.
F-18
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
During
2007, the Company issued 500,000 shares valued at $20,000 or $0.04 per share,
250,000 shares of common stock valued at $7,500 or $0.03 per share as
compensation to employees, 100,000 shares of common stock as compensation to an
employee valued at $4,500 or $0.045 per share and 250,000 shares to a vendor for
services valued at $11,250 or $0.045 per share. The value represents the market
price of the Company’s common stock on the dates of issuance. An
aggregate of 22,920,000 shares of common stock were issued upon the conversion
of $1,146,000 of 12% convertible notes and 2,490,443 shares of common stock
valued at $99,618 or $0.04 per share based on the closing market price on the
date of issuance. In addition, 7,500,000 shares of common stock were
issued upon the exercise of warrants for cash of $75,000 or $0.01 per
share.
The
Company also issued 5,000,000 shares of common stock and three-year warrants to
purchase 5,000,000 shares of common stock for proceeds of
$250,000. The proceeds were allocated to the warrants based upon
their fair value of $123,383, and the balance of the proceeds of $126,617 was
allocated to the shares of common stock. The fair value of the warrants,
determined using the Black-Scholes Option Pricing Model, was calculated using
the following assumptions: risk free interest rate of 3.35%, expected dividend
yield of 0%, expected volatility of 120% and an expected life of 3
years.
NOTE
8 - STOCK WARRANTS
In May,
2008 the Company issued a warrant to purchase 1,000,000 shares of common stock
at an exercise price of $0.10 per share to a vendor for services which expires
November 30, 2011. The value of the warrant of $61,000 was charged to
General and Administrative expenses on the issuance date. The fair value of the
warrants, determined using the Black-Scholes Option Pricing Model, was
calculated using the following assumptions: risk free interest rate of 2.7%,
expected dividend yield of 0%, expected volatility of 117% and an expected life
of 3.55 years.
In
September, 2008 the Company issued three-year warrants to purchase 1,741,667
shares of common stock at an exercise price of $0.05 per share to five
consultants for services provided. In addition, the Company issued
three-year warrants to purchase 1,500,000 shares of common stock at an exercise
price of $0.75 per share to two vendors for services provided. The
fair value of the warrants of $134,925 was charged to General and Administrative
expenses on the issuance date. The fair value was determined using
the Black Scholes Option Pricing Model using the following assumptions: risk
free interest rate of 2.0%, expected dividend yield of 0%, expected volatility
of 115% and an expected life of 3 years.
On
September 25, 2008 the Company issued 12,000,000 three-year warrants to purchase
common stock at an exercise price of $0.07 per share its officers and
directors. The Chief Executive Officer received 5,000,000 warrants,
the Chief Financial Officer received 3,000,000 warrants, and four directors each
received 1,000,000 warrants. The director warrants vested on the date of
issuance. The warrant issued to the Chief Executive Officer vests
1,000,000 shares on the date of issuance, with 2,000,000 warrants vesting on
September 25, 2009 and 2010, respectively. The warrant issued to the
Chief Financial Officer vests 1,000,000 shares on issuance, with 1,000,000
shares vesting on September 25, 2009 and 2010, respectively. The
warrants were valued at $552,000, of which $327,750 was recognized as General
and Administrative expenses during fiscal 2008, representing the vested portion
of the fair value of the warrants. The unvested value of 224,250 will be
recognized over the remaining vesting period of 1.75 years. The fair value was
determined using the Black Scholes Option Pricing Model using the following
assumptions: risk free interest rate of 2.4%, expected dividend yield of 0%,
expected volatility of 112% and an expected life of 3 years. The
exercise price exceeded the closing market price on the date of
issuance.
F-19
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
In May
2007, the Company issued five-year warrants to purchase 5,000,000 shares of
common stock at $0.05 per share upon the completion of one million dollars of
funding pursuant to the Engagement Letter with Aspen Capital Partners,
LLC. The warrants were valued at $127,357.
In May
2007, and as further described in Note 6, the Company issued five-year warrants
to purchase 10,000,000 shares of common stock at an exercise price of $0.05 per
share to Gulf Pointe in connection with a lease line of credit. Under the terms
of the warrants, Gulf Pointe has the option to pay the exercise price to the
Company indirectly repurchasing shares from Gulf Pointe at the market price of
the Company’s common stock on the day prior to the exercise date.
In July
2007 and as further described in Note 4, the Company issued three-year warrants
to purchase 5,000,000 shares of common stock at an exercise price of $0.075 per
share to Aspen Opportunity Fund, L.P. in connection with a 12% convertible note
payable.
In
September 2007, the Company issued five-year warrants to purchase 4,000,000
shares of the Company’s common stock at an exercise price of $0.075 per share
pursuant to the accounts receivable loan agreement with Aspen Opportunity Fund,
L.P. as discussed in Note 4. The warrants were valued at $169,294. Under the
terms of the warrants, the holder of the warrants has the option to pay the
exercise price to the Company indirectly repurchasing shares from the holder at
the market price of the Company’s common stock on the day prior to the exercise
date.
During
2007, the Company issued three-year warrants to purchase 22,920,000
shares of common stock with an exercise price of $0.075 on the conversion of
$1,146,000 of 12% notes payable and issued 2,490,444 three-year warrants with an
exercise price of $0.075 per share on the conversion of $124,522 of accrued
interest as discussed in Note 4. The warrants were recorded at their
fair value of $61,454.
In
November 2007, the Company issued three-year warrants to purchase 5,000,000
shares of common stock at an exercise price of $0.075 in conjunction with an
issuance of 5,000,000 shares of common stock for cash as discussed in Note
7.
The
following summarizes the outstanding warrants as of December 31,
2008:
Weighted-Average
|
||||||||||||||
Exercise
|
Warrants
|
Remaining Contractual
|
Number
|
|||||||||||
Price
|
Outstanding
|
Life (Years)
|
Exercisable
|
|||||||||||
$ | 0.01 |
12,750,000
|
0.9
|
12,750,000
|
||||||||||
$ | 0.05 |
15,075,000
|
3.3
|
15,075,000
|
||||||||||
$ | 0.07 |
12,500,000
|
2.7
|
6,500,000
|
||||||||||
$ | 0.075 |
51,904,975
|
1.8
|
51,904,975
|
||||||||||
$ | 0.10 |
1,000,000
|
2.9
|
1,000,000
|
||||||||||
$ | 0.13 |
1,153,845
|
1.6
|
1,153,845
|
||||||||||
94,383,820
|
1.7
|
88,383,820
|
F-20
DIATECT
INTERNATIONAL CORPORATION
NOTES
TO FINANCIAL STATEMENTS
NOTE
9 – INCOME TAXES
Income
taxes are provided based upon the liability method of accounting pursuant to
SFAS No. 109, “Accounting for
Income Taxes.” Under this approach, deferred income taxes are
recorded to reflect the tax consequences on future years of differences between
the tax basis of assets and liabilities and their financial reporting amounts at
each year-end. A valuation allowance is recorded against deferred tax assets if
management does not believe the Company has met the "more likely than not"
standard imposed by SFAS No. 109. The tax effects of temporary differences and
carry forwards which give rise to the deferred income tax assets as of December
31, 2008 and 2007 are as follows:
December
31,
|
2008
|
2007
|
||||||
Net
Operating Loss Carryforwards:
|
||||||||
Federal
|
$
|
10,087,271
|
$
|
8,852,470
|
||||
State
|
1,456,230
|
1,347,277
|
||||||
Allowance
for doubtful accounts
|
5,968
|
6,198
|
||||||
Deferred
gain on capital lease
|
18,845
|
32,379
|
||||||
Total
deferred income tax assets
|
11,568,314
|
10,238,324
|
||||||
Valuation
allowance
|
(11,568,314
|
)
|
(9,902,544
|
)
|
||||
Deferred
income tax liability - intangible assets
|
-
|
(335,780
|
)
|
|||||
Net
Deferred Income Tax Assets
|
$
|
-
|
$
|
-
|
A
reconciliation of the income tax expense from continuing operations and the
amount that would be computed using statutory federal income tax rates is as
follows:
Years
Ended December 31,
|
2008
|
2007
|
||||||
Federal
tax benefit at statutory rate (34%)
|
$
|
(1,599,967
|
)
|
$
|
(395,739
|
)
|
||
State
tax benefit, net of federal effect
|
(155,291
|
)
|
(38,410
|
)
|
||||
Non-deductible
and other items
|
89,487
|
133,443
|
||||||
Change
in valuation allowance
|
1,665,771
|
300,706
|
||||||
Provision
for Income Taxes
|
$
|
-
|
$
|
-
|
NOTE
11 – SUBSEQUENT EVENTS
On March
1, 2009, the Company entered into a promissory note agreement in the amount of
$100,000. The note bears interest at the rate of 15% per annum
and is due and payable on August 1, 2009. Pursuant to this note, the
Company entered into a common stock purchase warrant agreement granting the
noteholder the right to purchase a total of 1,000,000 shares of the
Company’s common stock at a price of $0.025 per share for two years from the
date of the agreement.
On March
30, 2009, the Company entered into a promissory note agreement in the
amount of $100,000. The note bears interest at the rate of 20%
per annum and was due and payable on April 30, 2009. Pursuant to this
note, the Company entered into a common stock purchase warrant agreement
granting the noteholder the right to purchase a total of 833,333 shares of
the Company’s common stock at a price of $0.030 per share for two years from the
date of the agreement.
On April
30, 2009, the Company entered into a promissory note agreement in the
amount of $100,000 that satisfied and replaced the March 30 2008
note. This second note bears interest at the rate of 20% per annum
and is due and payable on May 31, 2009. Pursuant to this note,
the Company entered into a common stock purchase warrant agreement granting the
noteholder the right to purchase a total of 1,250,000 shares of the
Company’s common stock at a price of $0.02 per share for two years from the date
of the agreement.
On May 7,
2009, the Company entered into a promissory note agreement in the amount of
$500,000. The note bears interest at the rate of 18% per annum and
is due and payable on July 31, 2009. Pursuant to this note, the
Company entered into a common stock purchase warrant agreement granting the
noteholder the right to purchase a total of 3,000,000 shares of the
Company’s common stock at a price of $0.025 per share for two years from the
date of the agreement.
On May 7, 2009, the Company entered
into a common stock purchase warrant agreement with the co-guarantor of the
$500,000 note and granted the right to purchase a total of 3,000,000 shares of
the Company’s common stock at a price of $0.025 per share for two years from the
date of the agreement. Also on May 7, 2009, the Company entered into
a common stock purchase warrant agreement with the guarantor of the April 30,
2009 note and the co-guarantor of the $500,000 note and granted the right to
purchase a total of 4,000,000 shares of the Company’s common stock at a price of
$0.025 per share for two years from the date of the agreement.
F-22