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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Xcelerate Inc (QB) | USOTC:XCRT | OTCMarkets | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.025 | 0.024 | 0.025 | 0.025 | 0.025 | 0.025 | 40,308 | 13:14:58 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: September 30, 2007
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ________ to __________
Commission File Number: 000-267031
Florida 65-0710392 ---------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) |
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No [_]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes[_] No [X]
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 89,414,013 shares at November 5, 2007
Transitional Small Business Disclosure Format (Check one): Yes [_] No [x]
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2007 contains "forward-looking statements". Generally, the words "believes", "anticipates," "may," "will," "should," "expect," "intend," "estimate," "continue," and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements which include, but are not limited to, statements concerning the Company's expectations regarding its working capital requirements, financing requirements, business prospects, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update these forward-looking statements. In addition, the forward-looking statements in this Quarterly Report on Form 10-QSB involve known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to differ materially from those expressed in or implied by the forward-looking statements contained herein.
UNION DENTAL HOLDINGS, INC.
FORM 10-QSB
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
INDEX
Page PART I - FINANCIAL INFORMATION Item 1 - Consolidated Financial Statements Consolidated Balance Sheet (Unaudited) As of September 30, 2007............................................ 4 Consolidated Statements of Operations (Unaudited) For the Three and Nine Months Ended September 30, 2007 and 2006..... 5 Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2007 and 2006............... 6 Notes to Unaudited Consolidated Financial Statements........................ 7 Item 2 - Management's Discussion and Analysis or Plan of Operation.......... 25 Item 3 - Controls and Procedures............................................ 33 PART II - OTHER INFORMATION Item 1 - Legal Proceedings.................................................. 34 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds........ 34 Item 3 - Defaults Upon Senior Securities.................................... 34 Item 4 - Submission of Matters to a Vote of Security Holders................ 34 Item 5 - Other Information.................................................. 34 Item 6 - Exhibits and Reports filed on Form 8-K............................. 34 Signatures.................................................................. 35 |
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2007 (Unaudited) ASSETS CURRENT ASSETS: Cash $ 6,165 Accounts receivable, less allowance for doubtful accounts of $109,600 223,564 Inventory of supplies 39,730 Prepaid expenses and other current assets 5,218 ---------------- Total current assets 274,677 Property and equipment, net 181,210 Other assets 1,680 ---------------- Total Assets $ 457,567 ================ LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Convertible notes payable $ 586,408 Convertible debenture payable 275,533 Notes payable 824,340 Loan payable - related party 268,978 Line of credit 650 Accounts payable 74,524 Accrued expenses 103,894 Unearned membership fees 260,781 Derivates liability 614,798 ---------------- Total current liabilities 3,009,906 ---------------- Commitments and contingencies SHAREHOLDERS' DEFICIT: Preferred stock ($.0001 Par value; 25,000,000 shares authorized; 3,000,000 shares issued and outstanding) 300 Common stock ($.0001 Par value; 300,000,000 share authorized; 82,471,376 shares issued and outstanding) 8,247 Additional paid-in capital 3,590,083 Accumulated deficit (4,642,508) Shareholder transactions (1,489,711) Less: Deferred compensation (18,750) ---------------- Total shareholders' deficit (2,552,339) ---------------- Total liabilities and shareholders' deficit $ 457,567 ================ |
See accompanying notes to unaudited consolidated financial statements.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended For the Nine Months Ended September 30, September 30, -------------------------------- ---------------------------------- 2007 2006 2007 2006 --------------- ---------------- ---------------- ---------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenues, net $ 566,497 $ 506,950 $ 1,755,873 $ 1,595,293 Other revenue - - 190,000 - --------------- --------------- ----------------- ----------------- Total Revenues 566,497 506,950 1,945,873 1,595,293 Operating expenses: Cost of services performed 92,796 113,604 247,434 353,722 Salaries and related taxes and stock-based compensation 312,842 361,013 1,157,026 763,635 Depreciation and amortization 17,037 16,901 50,776 50,707 Professional fees 53,270 27,004 136,293 110,575 Consulting fees 60,500 238,389 326,300 440,911 Other general and administrative 170,357 77,113 621,998 465,551 --------------- --------------- ----------------- ----------------- Total operating expenses 706,802 834,024 2,539,827 2,185,101 --------------- --------------- ----------------- ----------------- Loss from operations (140,305) (327,074) (593,954) (589,808) --------------- --------------- ----------------- ----------------- Other income (expense): Amortization of debt issuance costs - (33,250) (6,685) (121,650) Gain (loss) from valuation of derivatives liability 209,345 66,276 (110,554) 306,121 Interest income 1,304 - 1,338 - Interest expense (31,356) (386,429) (99,146) (1,181,480) --------------- --------------- ----------------- ----------------- Total other income (expense) 179,293 (353,403) (215,047) (997,009) --------------- --------------- ----------------- ----------------- Loss before provision for income taxes 38,988 (680,477) (809,001) (1,586,817) Income tax expense - - - - --------------- --------------- ----------------- ----------------- Net loss $ 38,988 $ (680,477) $ (809,001) $ (1,586,817) =============== =============== ================= ================= Net loss per common share: Net loss per common share - basic and diluted $ - $ (0.02) $ (0.01) $ (0.04) =============== ================ ================ ================= Weighted average common shares outstanding - basic 73,902,128 40,385,304 64,097,524 37,541,111 =============== ================ ================ ================== Weighted average common shares outstanding - diluted 211,732,112 40,385,304 64,097,524 37,541,111 =============== ================ ================ ================== |
See accompanying notes to unaudited consolidated financial statements.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, ------------------------------------------- 2007 2006 --------------------- -------------------- (Unaudited) (Unaudited) Cacsh Flows From Operating Activities: Net loss $ (809,001) $ (1,586,817) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 50,777 50,707 Stock-based compensation and consulting 650,346 253,888 Common stock issued for interest - 39,880 Amortization of debt issuance costs 6,685 121,650 Amortization of discount of debenture and note payable 2,463 955,611 Gain (loss) from valuation of derivatives 110,554 (306,121) Changes in assets and liabilities: Accounts receivable 46,580 9,167 Inventory of supplies - (5,676) Prepaid expenses and other current assets (385) 2,278 Other assets - 8,700 Accounts payable 939 6,182 Accrued expenses 19,915 257,871 Accrued interest included in note payable 19,774 - Due to related parties (3,000) - Customer deposits - 41,314 Unearned membership fees (84,710) (58,113) --------------------- --------------------- Net cash provided by (used in) operating activities 10,937 (209,479) --------------------- --------------------- Cash Flows From Investing Activities: Purchase of property and equipment (1,016) - --------------------- --------------------- Net cash used in investing activities (1,016) - --------------------- --------------------- Cash Flows From Financing Activities: Net proceeds from sales of common stock 50,025 173,366 Proceeds from note payable 35,025 50,000 Proceeds from loan payable - related party 270,000 - Line of credit 650 - Payments on debenture payable - (116,972) Payments on loans payable - related party (1,022) - Payments on convertible note payable - (240,000) Payments on notes payable (475,990) (208,272) --------------------- --------------------- Net cash provided by (used in) financing activities (121,312) (341,878) --------------------- --------------------- Net increase (decrease) in cash (111,391) (551,357) Cash - beginning of year 117,556 557,272 --------------------- --------------------- Cash - end of period $ 6,165 $ 5,915 ===================== ===================== Supplemental Disclosures of Cash Flow Information Cash payments for interest $ 103,425 $ 55,868 ===================== ===================== Cash payments for income taxes $ - $ - ===================== ===================== Non-cash investing and financing activities: Issuance of common stock for debt and accrued interest $ 156,023 $ 6,900 ===================== ===================== Reclassification of derivative liability to equity $ 220,819 $ 196,108 ===================== ===================== Common stock issued in connection with accrued services $ 75,278 $ - ===================== ===================== |
See accompanying notes to unaudited consolidated financial statements.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Union Dental Holdings, Inc., (f/k/a National Business Holdings, Inc.), (the "Company") is a Florida corporation which conducts business from its headquarters in Ft. Lauderdale, Florida. The Company was incorporated on November 26, 1996. On December 27, 2004, the Company entered into a Share Exchange and Reorganization Agreement ("Reorganization") with both Union Dental Corp. ("UDC"), a Florida corporation and Direct Dental Services, Inc. ("DDS"), a Florida corporation, whereby UDC and DDS became wholly-owned subsidiaries of the Company in exchange for an aggregate of 17,500,000 shares of its common stock and 1,000,000 shares of its preferred stock issued to Dr. George Green with each share of preferred stock providing voting rights equal to 15 shares of the Company's common stock. In addition, the Company agreed to recognize the 3,452,250 issued and outstanding options to purchase UDC common stock as options to purchase the Company's common stock. Pursuant to the Reorganization Agreement, 22,287,977 shares of the Company's common stock were canceled. As a result, UDC's and DDS's former stockholders became the Company's majority stockholders with the Company's former shareholders retaining 10,000,000 shares of common stock.
On January 11, 2005, the Company amended its Articles of Incorporation to change its name from National Business Holdings, Inc. to Union Dental Holdings, Inc.
The acquisition of UDC and DDS by the Company was accounted for as a reverse merger because on a post-merger basis, the former UDC and DDS shareholders hold a majority of the outstanding common stock of the Company on a voting and fully diluted basis. As a result, UDC and DDS were deemed to be the acquirer for accounting purposes. Accordingly, the consolidated financial statements presented for the period ending December 31, 2005, are those of the combined results of UDC and DDS for all periods prior to the acquisition, and the financial statements of the consolidated companies from the acquisition date forward. The historical stockholders' deficit of the combined results of UDC and DDS prior to the acquisition have been retroactively restated (a recapitalization) for the equivalent number of shares received in the acquisition after giving effect to any differences in the par value of the Company and the combined UDC and DDS common stock, with an offset to additional paid-in capital. The restated consolidated retained earnings of the accounting acquirer (UDC and DDS) are carried forward after the acquisition.
Through its wholly-owned subsidiaries, UDC and DDS, the Company operates two distinct lines of business.
DDS operates a network of duly licensed dental providers, the Dental Referral, who provide dental services through the network to union members in accordance with arrangements between DDS and various labor unions. DDS is not limited as to the type of labor union which it may solicit. DDS charges an annual management services fee to the participating dentists to practice in an "area of exclusivity" for union members. DDS currently has exclusive contracts with several local unions.
UDC acquired the assets of George D. Green, DDS, PA and manages the operation of that general dental practice.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2006 and notes thereto and other pertinent information contained in Form 10-KSB of Union Dental Holdings, Inc. (the "Company") as filed with the Securities and Exchange Commission (the "Commission"). The results of operations for the nine months ended September 30, 2007 are not necessarily indicative of the results for the full fiscal year ending December 31, 2007.
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The consolidated financial statements of the Company include the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates in 2007 and 2006 include the allowance for doubtful accounts, stock-based compensation, valuation of derivative liabilities, and the useful life of property and equipment.
Fair value of financial instruments
The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses, debenture and loans payable approximate their fair market value based on the short-term maturity of these instruments.
Accounts receivable
The Company has a policy of reserving for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At September 30, 2007, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amount of $109,600.
Inventory of dental supplies
The Company values inventory of dental supplies at the lower of cost or market, using the specific unit cost method.
Reclassifications
Certain prior periods' balances have been reclassified to conform to the current period's financial statement presentation. These reclassifications had no impact on previously reported results of operations or stockholders' equity.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and equipment
Property and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," The Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset's estimated fair value and its book value. The Company did not consider it necessary to record any impairment charges during the nine months ended September 30, 2007.
Income taxes
The Company was taxed as an S-Corporation combination until December 31, 2004, when the Company changed its form of ownership to a C corporation. As a result of the change of ownership, the Company accounts for income taxes under the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Had income taxes been determined based on an effective tax rate of 37.6% consistent with the method of SFAS 109, the Company's net losses for all periods presented would not materially change.
Loss per common share
In accordance with SFAS No. 128 "Earnings Per Share," Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Diluted loss per common share is not presented during the nine months ended September 30, 2007 and 2006 because it is anti-dilutive. The Company's common stock equivalents at September 30, 2007 include the following:
Convertible debentures 27,553,304 Derivatives options 110,276,680 Options 1,508,000 Warrants 1,304,348 -------------- 140,642,332 ============== |
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loss per common share (continued)
The following table presents a reconciliation of basic and diluted earnings per share:
For the three Months Ended September 30, 2007 2006 --------------- --------------- Net income (loss) $ 38,988 $ (680,477) Weighted average shares outstanding - basic 73,902,128 40,385,304 Income (loss) per share - basic $ 0.00 $ (0.02) =============== =============== Net income (loss) 38,988 (680,477) Impact of assumed conversions Derivative (income) expense (209,345) ---------------- ---------------- Net loss - diluted $ (170,357)$ (680,477) Weighted average shares outstanding - basic 73,902,128 40,385,304 Effect of dilutive securities Convertible debentures 27,553,304 - Derivatives options 110,276,680 - ---------------- ---------------- Weighted average shares outstanding- diluted 211,732,112 40,385,304 ================ ================ Income (loss) per share - diluted $ 0.00 $ (0.01) ================ ================ |
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. The following policies reflect specific criteria for the various revenues streams of the Company:
DDS selects certain dentists in selected geographical areas to represent the Company. The dentist enters into an exclusive agreement with DDS for an annual management services fee, which is based on each specialty the dentist provides to the patients on a per office basis. DDS receives a yearly membership fee from each dentist in order for him/her to maintain the exclusive area of each specialty that the dentist provides. Revenues from membership fees are recognized over the term of the contract. Unearned membership fees at September 30, 2007 amounted to $260,781 and will be recognized as revenues over their respective term of contract.
The Company recognizes revenue from its dental practice when dental services are provided.
Concentrations of credit risk
The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. During the nine month period ended September 30, 2007, the Company has reached bank balances exceeding the FDIC insurance limit. The Company has not experienced any losses in such accounts through September 30, 2007.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment ("SFAS No. 123R"). SFAS No. 123R establishes the financial accounting and reporting standards for stock-based compensation plans. As required by SFAS No. 123R, the Company recognized the cost resulting from all stock-based payment transactions including shares issued under its stock option plans in the financial statements.
Prior to January 1, 2006, the Company accounted for stock-based employee compensation plans (including shares issued under its stock option plans) in accordance with APB Opinion No. 25 and followed the pro forma net income, pro forma income per share, and stock-based compensation plan disclosure requirements set forth in the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). For the nine months ended September 30, 2007, the Company did not grant any stock options.
Non-Employee Stock Based Compensation
The cost of stock based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in Emerging Issues Task Force Issue ("EITF") 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18").
Common stock purchase warrants
The Company accounts for common stock purchase warrants in accordance with the provisions of Emerging Issues Tack Force Issue ("EITF") issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). Based on the provisions of EITF 00-19, the Company classifies as equity any contracts that (i) require physical settlement or net-share settlement, or (ii) gives the company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the company), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
Recent accounting pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109." This interpretation provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS No. 109, "Accounting for Income Taxes." FIN No. 48 prescribes a threshold condition that a tax position must meet for any of the benefit of an uncertain tax position to be recognized in the financial statements. Guidance is also provided regarding de-recognition, classification, and disclosure of uncertain tax positions. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that this interpretation will have a material impact on its financial position, results of operations, or cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"). This Statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. The Statement is to be effective for the Company's financial statements issued in 2008; however, earlier application is encouraged. The Company is currently evaluating the timing of adoption and the impact that adoption might have on its financial position or results of operations.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements (continued)
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the rollover approach and the iron curtain approach, as those terms are defined in SAB 108. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statement, whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement's year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. If a Company determines that an adjustment to prior year financial statements is required upon adoption of SAB 108 and does not elect to restate its previous financial statements, then it must recognize the cumulative effect of applying SAB 108 in fiscal 2006 beginning balances of the affected assets and liabilities with a corresponding adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is effective for interim periods of the first fiscal year ending after November 15, 2006. The adoption of SAB 108 did not have an impact on the Company's consolidated financial statements.
In December 2006, FASB Staff Position No. EITF 00-19-2, "Accounting for Registration Payment Arrangements," was issued. The FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, "Accounting for Contingencies." The Company believes that its current accounting is consistent with the FSP.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115", under which entities will now be permitted to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis. This Statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. The Company is currently assessing the impact, if any, the adoption of SFAS 159 will have on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 2 - PROPERTY AND EQUIPMENT
At September 30, 2007, property and equipment consist of the following:
Useful Life ----------- Computer equipment 5 Years $ 9,695 Office equipment 5 years 424,747 Office furniture and fixtures 7 Years 62,128 Leasehold improvements 10 Years 30,593 ---------- 527,163 Less accumulated depreciation (345,953) ---------- $ 181,210 ========== |
For the nine months ended September 30, 2007 and 2006, depreciation expense amounted to $50,777 and $50,707, respectively.
NOTE 3 - CONVERTIBLE DEBENTURES PAYABLE
On August 17, 2005, the Company entered into a Debenture Agreement with Dutchess Private Equity Fund II, LLP ("Dutchess"), an accredited investor, for the issuance and sale of $600,000 of 10% secured convertible debentures in a private transaction exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) and Regulation D of that act. On August 17, 2005, the Company issued Dutchess a $600,000 principal amount 10% secured convertible debenture due August 17, 2010. At the time of signing the Debenture Agreement, the Company also issued Dutchess five-year common stock purchase warrants to purchase 1,304,348 shares of the Company's common stock at $.092 per share. Interest is payable on the secured convertible debentures at the rate of 10% per year. Amortizing payments will be made by the Company in satisfaction of this Debenture. Payments shall be made monthly on the first day of each business day of each month while there is an outstanding balance on the Debenture, to the Holder, in the amounts outlined below on the following schedule:
Payment for Month 1 (due within three (3) days of the Issuance Date) $4,951 Payments for Months 2 and 3, respectively $4,951 Payment for Month 4 and each month thereafter $62,716
The principal amount of the Debenture plus accrued interest may be converted at the option of the Dutchess into shares of the Company's common stock, anytime following the closing date, at a conversion price equal to the lesser of (i) the lowest closing bid price during the 15 days of full trading, as defined, prior to the conversion date; or (ii) $0.092. In addition, in the event that any portion of the debenture remains outstanding on the maturity date of August 17, 2010, such outstanding amount shall be automatically converted into shares of the Company's common stock. In the event that the Company does not make delivery of the common stock as instructed by Dutchess, the Company shall be obligated to pay to Dutchess 3% in cash of the dollar value of the debentures being converted, compounded daily, per each day after the 3rd business day following the conversion date that the common stock is not delivered to Dutchess.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 3 - CONVERTIBLE DEBENTURES PAYABLE (continued)
In the Event of default as defined in the Debenture Agreement, Dutchess may among other things:
(a) elect to secure a portion of the Company's assets not to exceed 200% of the
Face Amount of the Note, in Pledged Collateral;
(b) elect to garnish revenue from the Company in an amount that will repay the
Holder on the payment schedule set forth above;
(c) exercise its right to increase the Face Amount of the debenture by ten
percent (10%) as an initial penalty and for each Event of Default under the
Debenture;
(d) elect to increase the Face Amount by two and one-half percent (2.5%) per
month (pro-rata for partial periods) paid as a penalty for liquated damages
which will be compounded daily;
The debenture provides that Dutchess shall not be entitled to convert that amount of Debenture into common stock, which when added with the sum of the number of shares beneficially owned by Dutchess would exceed 4.99% of the number of shares of our common stock outstanding on the conversion date.
In order to secure its obligations under the secured convertible debenture and related documents, the Company has granted the debenture holder a security interest in all of its assets and property.
In accordance with Statement of Financial Accounting Standards No. 133, `Accounting for Derivative Instruments and Hedging Activities', ("FASB 133"), the Company determined that the conversion feature of the Debentures met the criteria of an embedded derivative and therefore the conversion feature of the debt needed to be bifurcated and accounted for as a derivative. Due to the reset provisions of the Debentures, the debt does not meet the definition of "conventional convertible debt" because the number of shares which may be issued upon the conversion of the debt is not fixed. Therefore, the conversion feature fails to qualify for equity classification under EITF 00-19, and must be accounted for as a derivative liability.
The $600,000 face amount of the debenture was stripped of its conversion feature due to the accounting for the conversion feature as a derivative, which was recorded using the residual proceeds method, whereby any remaining proceeds after allocating the proceeds to the warrants and conversion option were attributed to the debt. At September 30, 2007, the Company revalued this derivative liability. For the nine months ended September 30, 2007, after adjustment, the Company recorded a gain on revaluation of this derivative liability of $142,910. For the nine months ended September 30, 2007 and 2006, amortization of the discount on debenture amounted to $0 and $223,548. Additionally, during the year ended December 31, 2006, the Company issued 75,000 shares of its common stock for settlement of $6,900 of the debenture.
The convertible debenture liability is as follows at September 30, 2007:
Convertible debentures payable $ 275,533 Less: unamortized discount on debentures - --------------- Convertible debentures, net $ 275,533 =============== |
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 4 - EQUITY CREDIT LINE
On August 17, 2005, the Company entered into an Investment Agreement with Dutchess Private Equities Fund II, LLP ("Dutchess"). Pursuant to this Agreement, Dutchess committed to purchase up to $5,000,000 (the "Line") of the Company's common stock over the course of 36 months ("Line Period"), after the registration statement was declared effective by the SEC in September 2005 (the "Effective Date"). The amount that the Company shall be entitled to request from each of the purchase "Puts", shall be equal to either (1) $100,000 or (2) 200% of the averaged daily volume (US market only) ("ADV") of the Company's common stock for the 20 trading days prior to the "Put" notice, multiplied by the average of the 3 daily closing prices immediately preceding the Put Date. The Pricing Period shall be the five (5) consecutive trading days immediately after the Put Date. The Market Price shall be the lowest closing bid price of the Company's common stock during the Pricing Period. The Purchase Price shall be set at 95% of the Market Price. This Investment Agreement establishes what is sometimes termed an equity line of credit or an equity drawdown facility.
In general, the drawdown facility operates as follows: Dutchess, has committed to provide the Company up to $5,000,000 as it requests over a 36 month period, in return for common stock the Company issues to Dutchess. The Company, at its sole discretion, may during the Open Period deliver a "put notice" (the "Put Notice") to Dutchess which states the dollar amount which the Company intends to sell to Dutchess on the Closing Date. The Open Period is the period beginning on the trading after the Effective Date and which ends on the earlier to occur of 36 months from the Effective Date or termination of the Investment Agreement in accordance with its terms. The Closing Date shall mean no more than 7 trading days following the Put Notice Date. The Put Notice Date shall mean the Trading Day immediately following the day on which Dutchess receives a Put Notice, as defined in the agreement. During the Open Period, the Company shall not be entitled to submit a Put Notice until after the previous Closing has been completed. Additionally, Dutchess shall not be obligated to honor any Put Notice if at the time of the Put Notice Dutchess would own more than 4.99% of the Company's issued and outstanding common stock.
Upon the receipt by Dutchess of a validly delivered Put Notice, Dutchess shall be required to purchase from the Company, during the period beginning on the Put Notice Date and ending on and including the date that is 5 trading days after such Put Notice, that number of shares having an aggregate purchase price equal to the lesser of (a) the Put Amount set forth in the Put Notice, or (b) 20% of the aggregate trading volume of the Company's common stock during the applicable Pricing Period times (x) the lowest closing bid price of the Company's common stock during the specified Pricing period, but only if such said shares bear no restrictive legend and are not subject to stop transfer instructions, prior to the applicable Closing Date.
For the nine months ended September 30, 2007, the Company delivered Put Notices to draw on the equity line of credit. In connection with these puts, the Company issued 1,691,360 shares of common stock for net proceeds of $50,025.
NOTE 5 - CONVERTIBLE NOTE PAYABLE
On December 22, 2005, the Company signed a promissory note (the "Note") in favor of Dutchess Private Equities Fund, LP (the "Investor"), in the amount of $960,000 (the "Face Amount") and received gross proceeds in the amount of $800,000 less $60,075 in fees associated with the financing for net proceeds of $739,925. The Company is obligated to repay the Investor the Face Amount on or before December 23, 2006. There is no stated interest rate on the Note and interest has been imputed at a rate of 32% per annum. Payments are to be made by the Company from each Put from the Company's Equity Credit Line (see note 4) with the Investor. The Company is obligated to pay the Investor the greater of
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 5 - CONVERTIBLE NOTE PAYABLE (continued)
a) 50% of each Put to the Investor or b) $80,000 until the face Amount minus any fees have been paid. The first payment was due on February 15, 2006 and all subsequent payments will be made at the Closing of every Put to the Investor thereafter. The Put Amount will be the maximum amount allowed under the Investment Agreement with the Investor. The Company has not received any written notice of default in connection with this note.
As described in note 4, the Investment Agreement provides in part that the maximum amount of each Put is either $100,000 or 200% of the average daily volume multiplied by the average of the three daily closing prices immediately preceding the Put Date. Payments made by the Company in satisfaction of this Note shall be made from each Put from the Equity Line of Credit with the Investor given by the Company to the Investor. Additionally, in connection with Note, the Company issued 1,500,000 shares of common stock. The shares were valued at fair market value at date grant of $135,000 or $.09 per share and is reflected as a discount on the Note, which will be amortized over the term.
The Company agreed to issue 50 signed Put Notices to the Investor to use as collateral. In the event, the Investor uses the collateral in full, the Company shall immediately deliver to the Investor additional Put Sheets as requested by the Holder. In the event that on the maturity date the Company has any remaining amounts unpaid on this Note (the "Residual Amount"), the Holder can exercise its right to increase the Face Amount by ten percent (10%) as an initial penalty and an additional 2.5% per month paid, pro rata for partial periods, compounded daily, as liquated damages ("Liquidated Damages").
Additionally, in the event of a default as defined in the agreement, the Holder shall have the right, but not the obligation, to 1) switch the Residual Amount to a three-year ("Convertible Maturity Date"), interest-bearing convertible debenture. If the Holder chooses to convert the Residual Amount to a Convertible Debenture, the Company shall have 20 business days after notice of the same (the "Notice of Convertible Debenture") to file a registration statement covering an amount of shares equal to 300% of the Residual Amount. Such registration statement shall be declared effective under the Securities Act of 1933, as amended (the "Securities Act"), by the Securities and Exchange Commission (the "Commission") within 40 business days of the date the Company files such Registration Statement. In the event the Company does not file such registration statement within 20 business days of the Holder's request, or such registration statement is not declared by the Commission to be effective under the Securities Act within the time period described above, the Residual Amount shall increase by $5,000 per day.
The Holder is entitled to convert the Debenture Residual Amount, plus accrued interest, anytime following the Convertible Maturity Date, at the lesser of (i) 50% of the lowest closing bid price during the 15 trading immediately preceding the Convertible Maturity Date or (ii) 100% of the lowest bid price for the 20 trading days immediately preceding the Convertible Maturity Date ("Fixed Conversion Price").
In accordance with Statement of Financial Accounting Standards No. 133, `Accounting for Derivative Instruments and Hedging Activities', ("FASB 133"), the Company determined that the conversion feature of the Note met the criteria of an embedded derivative and therefore the conversion feature of this debt needed to be bifurcated and accounted for as a derivative. Due to the conversion features of the Note which is convertible based on draws from the equity credit line, the debt does not meet the definition of "conventional convertible debt" because the number of shares which may be issued upon the conversion of the debt is not fixed. Therefore, the conversion feature fails to qualify for equity classification under EITF 00-19, and must be accounted for as a derivative liability.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 5 - CONVERTIBLE NOTE PAYABLE (continued)
The $960,000 face amount of the debenture was stripped of its conversion feature due to the accounting for the conversion feature as a derivative, which was recorded using the residual proceeds method, whereby any remaining proceeds after allocating the proceeds to the 1,500,000 common shares and conversion option would be attributed to the debt. The beneficial conversion feature (an embedded derivative) included in this Note resulted in a note discount of $665,000 in 2005. In accordance with EITF No. 00-19, EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, the values assigned to both the Note, and conversion feature were allocated based on their fair values. The amount allocated as a discount on the Note for the value of the conversion option is being amortized to interest expense, using the effective interest method, over the term of the Note.
The holders of the Note and the underlying shares on the equity credit line have registration rights that required the Company to file a registration statement with the Securities and Exchange Commission to register the resale of the common stock issuable upon conversion of the debenture or the exercise of the warrants. Under EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, the ability to register stock was deemed to be outside of the Company's control. Accordingly, in 2005, the initial aggregate fair value of the derivatives (embedded and free-standing) of $1,002,049 was recorded as a derivative liability in the consolidated balance sheet, and is marked to market at the end of each reporting period. During the nine months ended September 30, 2007, the Company revalued this derivative liability. For the nine months ended September 30, 2007, after adjustment, the Company recorded a loss on revaluation of this derivative liability of $253,464 and reclassified $220,819 of the derivative liability to paid-in capital due to the payment of the debenture. For the nine months ended September 30, 2007, amortization of the discount on the note amounted to $2,463.
The note payable is as follows at September 30, 2007:
Note payable $ 586,408 Less: unamortized discount on note - ------------- Note payable, net $ 586,408 ============= |
NOTE 6 - NOTES PAYABLE
In December 2004, the Company agreed to assume the debt obligation of the principal stockholder for a bank loan utilized to purchase 50% of DDS from its founder and former owner and the remaining balance owed on the original 50% acquisition. The original note was in the amount $1,215,000. On May 17, 2005, the Company entered into an Amended and Restated Promissory Note in the amount of $1,384,000. The interest rate on this note is the LIBOR Fixed Rate plus 255 basis points (6.92% at September 30, 2006) calculated by using the 365/360 day method. The note requires monthly principal payments of $23,067 plus accrued interest payable monthly, and is secured by all of the assets of the Company. The principal stockholder is also the guarantor of this loan. In addition, the Company, on a consolidated basis, must maintain a minimum Global Debt Service Ratio, as defined by the bank, which is calculated annually, based on the Company's year end financial statements. The Company must also maintain property and casualty insurance on the business as well as a minimum of $700,000 of life insurance on the principal stockholder, assigned to the bank. In October 2005, as a result of a hurricane relief program, the bank extended the due date on the November and December 2005 payments, thereby extending the Note due date to July 17, 2010. As of September 30, 2007, the Company is in default of loan covenants and other terms of the agreement. Accordingly, the Company has shown the entire principal balance in current liabilities. At September 30, 2007, the principal amount outstanding on this note amounts to $783,524.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 6 - NOTES PAYABLE (continued)
On August 11, 2006, the Company entered into a Promissory Note in the amount of $50,000 with a bank. The interest rate on this promissory note is 8% per annum calculated by using the 365/360 day method. The note requires 60 monthly principal and interest payments of approximately $1,017 and is secured by certain assets of the Company. This note is personally guaranteed by the Company's CEO. At September 30, 2007, the principal amount outstanding on this note amounts to $40,816.
On October 20, 2006, the Company entered into a Promissory Note in the amount of $250,000 with a third party. The interest rate on this promissory note is 10% per annum calculated by using a 360 day year. The principal balance and all accrued and unpaid interest is due on June 19, 2007. This note is personally guaranteed by the Company's CEO. The note is secured by certain assets of the Company. In connection with this note, on March 7, 2007 the Company received a loan amounting to $270,000 from the Company's CEO for a full payment of the principal and accrued interest of the 10% promissory note which amounted to approximately $261,000 (see Note 8).
NOTE 7 - LINE OF CREDIT
On May 16, 2007, the Company was issued a $100,000 line of credit with SunTrust Bank. The line of credit bears an annual interest rate of 8.25% and interest is payable monthly. The balance of the line of credit was $650 as of September 30, 2007.
NOTE 8 - RELATED PARTY TRANSACTIONS
On March 20, 2004, UDC, a wholly owned subsidiary of the Company, entered into an employment agreement with the principal stockholder, the sole officer of UDC, with a term of 7 years. This contract provides for a base salary to the principal stockholder of $225,000 in year 1, $125,000 in year 2, $185,500 in year 3, $196,630 in year 4, $208,427 in year 5, $220,932 in year 6 and $234,187 in year 7. This contract also provides for the issuance of options to the principal stockholder upon signing , 750,000 options, (1 share per option), with an exercise price of $0.60 per share, half vested immediately and half vesting after two years , having an exercise life of five years. This contract also provides for the issuance of options to the principal stockholder as well, if certain revenue milestones are reached: at $3,000,000 in gross revenue for any calendar year he receives 332,500 options, (1 share per option), with an exercise price at the market price of the underlying common stock at issue date and the same again at $4,000,000 and $5,000,000 in gross revenue for a calendar year.
On March 7, 2007, the Company received a loan amounting to $270,000 from the Company's CEO for a full payment of the principal and accrued interest of the 10% promissory note which amounted to approximately $261,000 (see Note 6). The Company's CEO individually signed a 30 year promissory note in the amount of $270,000 with SunTrust Bank, which requires 360 monthly principal and interest payments at the rate of 8.4% per annum until March 7, 2037 and is secured by a personal asset owned by the Company's CEO. The loan from the Company's CEO calls for the Company to make equal monthly payments. In the event of a default, all payments under the loan shall become immediately due and payable. The loan represents an unsecured obligation of the Company. At September 30, 2007, the principal amount outstanding on this loan amounts to $268,978.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT
Preferred Stock
On January 24, 2007, the Company issued 2,000,000 shares of class A Preferred Stock to a director/officer, in exchange for personally guaranteeing the loans of the Company. Each share of Class A Preferred shall have 15 votes per share. The Preferred shareholder is entitled to vote on any and all matters brought to a vote of shareholders of Common Stock. The Company recorded the issuance of 2,000,000 shares of class A Preferred Stock at par value.
Common Stock
On January 4, 2007, the Company issued 250,000 shares of common stock for services rendered. The Company valued these common shares at the fair market value on the date of grant at $.044 per share or $11,000. In connection with the issuance of these shares, the Company recorded consulting fees of $11,000 for business development services performed.
On January 5, 2007, the Company issued 250,000 shares of common stock for services rendered. The Company valued these common shares at the fair market value on the date of grant at $.045 per share or $11,250. In connection with the issuance of these shares, the Company recorded professional fees of $11,250 for professional services performed.
On January 5, 2007, the Company issued 400,000 shares of common stock for services rendered to three employees of the Company. The Company valued these common shares at the fair market value on the date of grant at $.045 per share or $18,000. In connection with the issuance of these shares, the Company recorded stock based compensation expense of $18,000.
On January 5, 2007, the Company issued 62,700 shares of common stock for accrued accounting services during 2006. The Company valued these common shares at the fair market value on the date of grant at $.05 per share or $3,135. In connection with issuance of these shares, the Company offset the value against accounts payable.
On January 12, 2007, the Company issued 300,000 shares of common stock for services rendered. The Company valued these common shares at the fair market value on the date of grant at $.045 per share or $13,500. In connection with issuance of these shares, the Company recorded consulting fees of $13,500 for business development services performed.
On January 24, 2007, the Company issued an aggregate 1,750,000 shares of common stock for services rendered to an officer/director and an employee of the Company. The Company valued these common shares at the fair market value on the date of grant at $.045 per share or $78,750. In connection with issuance of these shares, the Company recorded stock based compensation expense of $78,750.
On January 24, 2007, the Company issued 500,000 restricted shares of common stock for advisory and business development services in connection with a 240-day consulting agreement entered on October 20, 2006. The Company valued these common shares at the fair market value on the date of grant at $.045 per share or $22,500. In connection with the issuance of these shares, for the nine months ended September 30, 2007, the Company recorded consulting expense of $22,500.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT (continued)
Common Stock (continued)
On January 24, 2007, the Company issued 250,000 shares of common stock for services rendered. The Company valued these common shares at the fair market value on the date of grant at $.045 per share or $11,250. In connection with issuance of these shares, the Company recorded consulting fees of $11,250 for business development services performed.
On January 24, 2007, the Company issued 250,000 shares of common stock for services rendered. The Company valued these common shares at the fair market value on the date of grant at $.045 per share or $11,250. In connection with issuance of these shares, the Company recorded consulting fees of $11,250 for business development services performed.
On February 1, 2007, the Company issued 92,850 shares of common stock for accrued accounting services during 2006. The Company valued these common shares at the fair market value on the date of grant at $.05 per share or $4,643. In connection with issuance of these shares, the Company offset the value against accounts payable.
On February 6, 2007, the Company issued 200,000 shares of common stock for legal services rendered. The Company valued these common shares at the fair market value on the date of grant at $.045 per share or $9,000. In connection with issuance of these shares, the Company recorded professional fees of $9,000 for professional services performed.
On February 16, 2007, the Company issued an aggregate 4,000,000 shares of common stock for services rendered to an officer/director and an employee of the Company. The Company valued these common shares at the fair market value on the date of grant at $.042 per share or $168,000. In connection with issuance of these shares, the Company recorded stock based compensation expense of $168,000.
During February 2007, the Company exercised a put notice in accordance with its Investment Agreement with Dutchess (see note 4) and repaid principal balance on its notes payable of $9,456 for which the Company issued 247,000 shares of its common stock to Dutchess.
During February 2007, the Company exercised a put notice in accordance with its Investment Agreement with Dutchess (see note 4) and received proceeds of $35,025 for which the Company issued 900,000 shares of its common stock to Dutchess.
On March 12, 2007, the Company issued 700,000 shares of common stock for services rendered. The Company valued these common shares at the fair market value on the date of grant at $.039 per share or $27,300. In connection with issuance of these shares, the Company recorded consulting fees of $27,300 for business development services performed.
During March 2007, the Company exercised a put notice in accordance with its Investment Agreement with Dutchess (see note 4) and repaid principal balance on its notes payable of $15,528 for which the Company issued 453,300 shares of its common stock to Dutchess.
The Company agreed to issue 3,000,000 shares of common stock for investor relation services in connection with a 60-day consulting agreement entered on May 14, 2007. The Company issued 2,000,000 shares at the date of agreement and the 1,000,000 shares were issued in September 2007. The Company valued these common shares at the fair market value on the date of grant at $.025 per share or $75,000. In connection with the issuance of these shares, for the nine months ended September 30, 2007, the Company recorded consulting expense of $56,250 and deferred consulting fees of $18,750 to be amortized over the service period.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT (continued)
Common Stock (continued)
On June 19, 2007, the Company issued an aggregate 3,821,750 shares of common stock for services rendered to an officer/director and an employee of the Company. The Company valued these common shares at the fair market value on the date of grant at $.02 per share or $76,435. In connection with issuance of these shares, the Company recorded stock based compensation expense of $76,435.
On June 20, 2007, the Company issued 2,000,000 restricted shares of common stock for investor relation services in connection with a 30-day consulting agreement. The Company valued these common shares at the fair market value on the date of grant at $.021 per share or $42,000. In connection with the issuance of these shares, for the nine months ended September 30, 2007, the Company recorded consulting expense of $42,000.
On June 26, 2007, the Company issued 502,700 shares of common stock for accounting services rendered. The Company valued these common shares at the fair market value on the date of grant at $.025 per share or $12,568. In connection with issuance of these shares, the Company recorded professional fees of $12,568 for professional services performed.
On June 28, 2007, the Company issued 300,000 shares of common stock for legal services rendered. The Company valued these common shares at the fair market value on the date of grant at $.024 per share or $7,200. In connection with issuance of these shares, the Company recorded professional fees of $7,200 for professional services performed.
In June 2007, the Company issued 220,000 shares of common stock for legal services rendered. The Company valued these common shares at the fair market value on the date of grant at $.022 per share or $4,855. In connection with issuance of these shares, the Company recorded professional fees of $4,855 for professional services performed.
During June 2007, the Company exercised a put notice in accordance with its Investment Agreement with Dutchess (see note 4) and received proceeds of $15,000 for which the Company issued 791,360 shares of its common stock to Dutchess.
During the three months ended June 30, 2007, the Company exercised a put notice in accordance with its Investment Agreement with Dutchess (see note 4) and repaid principal balance on its notes payable of $94,896 for which the Company issued 4,020,740 shares of its common stock to Dutchess.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT (continued)
Common Stock (continued)
On September 27, 2007, the Company issued an aggregate 4,000,000 shares of common stock for services rendered to an officer/director and an employee of the Company. The Company valued these common shares at the fair market value on the date of grant at $.01 per share or $40,000. In connection with issuance of these shares, the Company recorded stock based compensation expense of $40,000.
In September 2007, the Company issued 1,518,554 shares of common stock for legal services rendered. The Company valued these common shares at the fair market value on the date of grant at $.01 per share or $15,489. In connection with issuance of these shares, the Company recorded professional fees of $15,489 for professional services performed.
During the three months ended September 30, 2007, the Company exercised a put notice in accordance with its Investment Agreement with Dutchess (see note 4) and repaid principal balance on its notes payable of $36,144 for which the Company issued 2,853,000 shares of its common stock to Dutchess.
Stock Options
In October 2004, the Company adopted a Stock Option Plan that allows for both incentive based options as well as non-qualified options. As part and parcel to the reorganization on December 27, 2004, UDHI adopted this Plan. Under the terms of the Plan, the Plan Committee will set the option term and the exercise price. The Plan limits the ability to exercise incentive options for a first time holder in any one calendar year to $100,000 aggregate fair market value, based on grant date. The Plan also allows for the issuance of Stock Appreciation Rights to allow for cash-less exercise of underlying issued options.
A summary of the stock options as of September 30, 2007 and changes during the periods is presented below:
Weighted Average Number of Options Exercise Price ----------------- ----------------- Balance at beginning of year 1,508,000 $ 0.16 Granted - - Exercised - - Forfeited - - ---------------- ----------------- Balance at end of the period 1,508,000 $ 0.16 ================ ================= Options exercisable at end of the period 1,508,000 $ 0.16 ================ ================= Weighted average fair value of options granted during the year $ - |
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT (continued)
Stock Options (continued)
The following information applies to options outstanding at September 30, 2007:
Options Outstanding Options Exercisable --------------------------------------------- -------------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life (Years) Price Exercisable Price ----------- ------------ ------------ --------- ------------ -------- $ 0.13-0.15 950,000 3.25 $ 0.14 950,000 $ 0.14 $0.20-.0.25 525,000 1.00 $ 0.21 525,000 $ 0.21 $ 0.50 33,000 2.25 $ 0.50 33,000 $ 0.50 ------------- --------- ------------ -------- 1,508,000 $ 0.16 1,508,000 $ 0.16 ============= ========= ============ ======== |
Common Stock Warrants
In November and December 2005, in connection with a debenture payable, the Company granted 1,304,348 warrants to purchase 1,304,348 shares of common stock at $0.092 per share. The warrants expire on the three-year anniversary of the date of issuance.
NOTE 10 - GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company had an accumulated deficit of $4,642,508 and a working capital deficit of $2,735,229 at September 30, 2007 and net losses for the nine months ended September 30, 2007 of $809,001. While the Company is attempting to increase sales, the growth has not been significant enough to support the Company's daily operations. In order to raise funds, on August 2005, the Company entered into an Investment Agreement and a Debenture Agreement (See Note 3 and 4), and a note payable agreement (See note 5), and has notes payable to a bank and a third party. Additionally, during the nine months ended September 30, 2007, the Company has a loan payable with the Company's CEO (see Note 8). Management may attempt to raise additional funds by way of a public or private offering. While the Company believes in the viability of its strategy to improve sales volume and in its ability to raise additional funds, there can be no assurances to that effect. The Company's limited financial resources have prevented the Company from aggressively advertising its products and services to achieve consumer recognition. The ability of the Company to continue as a going concern is dependent on the Company's ability to further implement its business plan and generate increased revenues. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management believes that the actions presently being taken to further implement its business plan and generate additional revenues provide the opportunity for the Company to continue as a going concern.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
During the second quarter of 2005, the Company was sued by another dentist who was previously a Direct Dental member. The suit was filed in Dade County, Florida (Case No. 05-0077-99) and alleges tortuous interference with a business relationship and libel. The Company filed a counterclaim against the Plaintiff. In April 2007, the Company was successful with the counterclaim and settled the litigation for payment of $190,000 and was included in the total revenues as other revenue in the accompanying consolidated statements of operations.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 12 - SUBSEQUENT EVENTS
In October, 2007, the Company exercised a put notice in accordance with its Investment Agreement with Dutchess (see note 4) and repaid principal balance on its notes payable of $44,129 for which the Company issued in aggregate 4,879,000 shares of its common stock to Dutchess.
In October 2007, the Company issued 700,000 shares of common stock for accounting services rendered. The Company valued these common shares at the fair market value on the date of grant at $.01 per share or $7,000. In connection with issuance of these shares, the Company recorded professional fees of $7,000 for professional services performed.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
We operate our business through our two wholly owned subsidiaries, Direct Dental Services, Inc. ("DDS") and Union Dental Corp. ("UDC"). DDS operates a network of duly licensed dental providers. Members of the dental network pay an annual management service fee for the right to be a member of the dental network. UDC operates a dental practice in Coral Springs, Florida. The Company intends to expand its network of dental providers. The Company may also expand and offer participating unions other professional services such as chiropractic and optometrists. The Company may also acquire additional dental practices which the Company believes application of its Dental Practice Management Model will improve operating performance.
Management's current focus is the expansion of its dental network. We intend to expand in existing markets primarily by enhancing the operating performance of our existing office, by acquiring dental practices, by adding union contracts in states where we currently do not have union contracts and by developing dental network union contracts with other unions. At this time it is not possible to project what income or expenses will result from the expansion of these services.
In order to finance our operations, growth and expansion to date, on August 17, 2005, we entered into an Investment Agreement with Dutchess Private Equity Fund II, LLP ("Dutchess"). Pursuant to this Agreement, Dutchess has committed to purchase up to $5,000,000 of our Common Stock over the course of 36 months, beginning September 15, 2005, the date our registration statement was declared effective by the SEC. Under the agreement, we may sell to Dutchess on each occasion, either (1) $100,000 in shares of our common stock or (2) 200% of the averaged daily volume (U.S market only) of our Common Stock for the 20 trading days prior to our "Put" notice, multiplied by the average of the 3 daily closing prices immediately preceding the Put Date. The Market Price shall be the lowest closing bid price of our common stock during the Pricing Period. The Purchase Price shall be set at 95% of the Market Price. This Investment Agreement establishes what is sometimes termed an equity line of credit or an equity drawdown facility.
In general, the drawdown facility operates as follows: Dutchess, has committed to provide us with up to $5,000,000 as we request over a 36 month period, in return for common stock that we issue to Dutchess. We may, in our sole discretion, during the Open Period deliver a "put notice" (the "Put Notice") to Duchess which states the dollar amount which we intend to sell to Dutchess on the Closing Date. The Open Period is the period beginning on the trading after the Effective Date and which ends on the earlier to occur of 36 months from the Effective Date or termination of the Investment Agreement in accordance with its terms. The Closing Date shall mean no more than 7 trading days following the Put Notice Date. The Put Notice Date shall mean the Trading Day immediately following the day on which Dutchess receives a Put Notice, as defined in the agreement.
During the Open Period, we are not entitled to submit a Put Notice until after the previous Closing has been completed.
Upon the receipt by Dutchess of a validly delivered Put Notice, Dutchess shall be required to purchase from us, during the period beginning on the Put Notice Date and ending on and including the date that is 5 trading days after such Put Notice, that number of shares having an aggregate purchase price equal to the lesser of (a) the Put Amount set forth in the Put Notice, or (b) 20% of the aggregate trading volume of our common stock during the applicable Pricing Period times (x) the lowest closing bid price of our common stock during the specified Pricing period, but only if such said shares bear no restrictive legend and are not subject to stop transfer instructions, prior to the applicable Closing Date.
As a result of this variable price feature, the number of shares issuable pursuant to the agreement will increase if the market price of our stock decreases. In addition there is no upper limited on the number of shares issuable pursuant to the agreement. Therefore our shareholders may be subject to significant dilution and face the prospect of a change in control. (See Footnote 4 to our Financial Statements).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
For the year ended December 31, 2006, the Company delivered Put Notices to draw on the equity line of credit. In connection with our Put Notices, the Company issued 2,257,496 shares of our Common Stock and received net proceeds of $173,366.
For the nine months ended September 30, 2007, the Company delivered Put Notices to draw on the equity line of credit. In connection with our Put Notices, the Company issued 1,691,360 shares of our Common Stock and received net proceeds of $50,025.
Because of the significant decline in the price of our common stock since the execution of our Line of Credit with Dutchess, it is unlikely that we will be able to draw down the entire $5,000,000. Through September 30, 2007, we have issued 31,221,019 shares of our Common Stock to Dutchess and received $203,708. As a result, we may have to obtain additional operating capital from other sources to enable us to execute our business plan. We anticipate that we may be able to obtain a portion of any additional required working capital through the private placement of Common Stock to domestic accredited investors pursuant to Regulation D of the Securities Act of 1933, as amended. We may also rely on the exemption afforded by Regulation S of the Securities Act of 1933, as amended, and solicit non-U.S. citizens. There is no assurance that we will obtain the additional working capital that we need through the private placement of our Common Stock. Such financing may not be available in sufficient amounts or on terms acceptable to us. We may also seek institutional financings interested in equity participation. There can be no assurance that we will be able to identify these equity financing sources on terms acceptable to the Company.
Also in connection with the Dutchess financing, on August 17, 2005, we entered into a Debenture Agreement with Dutchess, an accredited investor, for the issuance and sale of $600,000 of 10% secured convertible debenture due August 17, 2010 in a private transaction exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) and Regulation D of the Act. At the time of signing the Debenture Agreement, we also issued Dutchess a five-year common stock purchase warrant to purchase 1,304,348 shares of our common stock at $.092 per share.
Interest is payable on the secured convertible debentures at the rate of 10% per year. Amortizing payments will be made by us in satisfaction of this Debenture. Payments shall be made monthly on the first day of each business day of each month while there is an outstanding balance on the Debenture, to the Holder, in the amounts outlined below on the following schedule:
Payment for Month 1: $ 4,951 (due within three (3) days of the Issuance Date) Payment for Month 2: $ 4,951 Payment for Month 3: $ 4,951 Payment for Month 4 and each month thereafter: $62,716 |
The principal amount of the Debenture plus accrued interest may be converted at the option of Dutchess into shares of our common stock, anytime following the closing date, at a conversion price equal to the lesser of (i) the lowest closing bid price during the 15 days of full trading, as defined, prior to the conversion date; or (ii) $0.092. In addition, in the event that any portion of the debenture remains outstanding on the maturity date of August 17, 2010, such outstanding amount shall be automatically converted into shares of our common stock. In the event that we do not make delivery of the common stock as instructed by Dutchess, we shall be obligated to pay to Dutchess 3% in cash of the dollar value of the debentures being converted, compounded daily, per each day after the 3rd business day following the conversion date that the common stock is not delivered to Dutchess.
In the event of default as defined in the Debenture Agreement, Dutchess may among other things:
(a) elect to secure a portion of the Company's assets not to exceed 200%
of the Face Amount of the Note, in Pledged Collateral;
(b) elect to garnish Revenue from us in an amount that will repay the
Holder on the payment schedule set forth above;
(c) exercise its right to increase the Face Amount of the debenture by ten
percent (10%) as an initial penalty and for each Event of Default
under the Debenture;
(d) elect to increase the Face Amount by two and one-half percent (2.5%)
per month (pro-rata for partial periods) paid as a penalty for iquated
damages which will be compounded daily;
The debenture provides that Dutchess shall not be entitled to convert that amount of Debenture into common stock, which when added with the sum of the number of shares beneficially owned by Dutchess would exceed 4.99% of the number of shares of our common stock outstanding on the conversion date.
In order to secure its obligations under the secured convertible debenture and related documents, we have granted Dutchess a security interest in all of our assets and property.
We are currently in default under the terms and conditions of this Agreement. No notice of Default has been received.
For the year ended December 31, 2006 we issued 75,000 shares of our Common Stock for settlement of $6,900 of the debenture.
On December 22, 2005, the Company signed a promissory note (the "Note") in
favor of Dutchess in the amount of $960,000 (the "Face Amount") and received
gross proceeds in the amount of $800,000 less $60,075 in fees associated with
the financing for net proceeds of $739,925. The Company is obligated to repay
the Investor the Face Amount on or before December 23, 2006. There is no stated
interest rate on the Note. Payments are to be made by the Company from each Put
from the Company's Equity Credit Line we have with Dutchess. The Company is
obligated to pay Dutchess the greater of a) 50% of each Put to the Investor or
b) $80,000 until the face Amount minus any fees have been paid. The firstpayment
was due and made on February 15, 2006 and all subsequent payments will be made
at the Closing of every Put to Dutchess thereafter. The Put Amount will be the
maximum amount allowed under the Investment Agreement with Dutchess. Payments
made by the Company in satisfaction of this Note shall be made from each Put
from the Equity Line of Credit with Dutchess. Additionally, in connection with
this obligation, the Company issued 1,500,000 shares of common stock.
We issued 50 signed Put Notices to Dutchess as collateral. In the event, that Dutchess uses the collateral in full, we are obligated to immediately deliver to Dutchess additional Put Sheets as requested. In the event that on the maturity date we have any remaining amounts unpaid on this Note (the "Residual Amount"), the Holder can exercise its right to increase the Face Amount by ten percent (10%) as an initial penalty and an additional 2.5% per month paid, pro rata for partial periods, compounded daily, as liquated damages ("Liquidated Damages").
Additionally, in the event of a default as defined in the agreement, the Holder shall have the right, but not the obligation, to 1) switch the Residual Amount to a three-year ("Convertible Maturity Date"), interest-bearing convertible debenture. If the Holder chooses to convert the Residual Amount to a Convertible Debenture, we shall have 20 business days after notice of the same (the "Notice of Convertible Debenture") to file a registration statement covering an amount of shares equal to 300% of the Residual Amount. Such registration statement shall be declared effective under the Securities Act of 1933, as amended (the "Securities Act"), by the Securities and Exchange Commission (the "Commission") within 40 business days of the date we file such Registration Statement. In the event we do not file such registration statement within 20 business days of the Holder's request, or such registration statement is not declared by the Commission to be effective under the Securities Act within the time period described above, the Residual Amount shall increase by $5,000 per day.
The Holder is entitled to convert the Debenture Residual Amount, plus accrued interest, anytime following the Convertible Maturity Date, at the lesser of (i) 50% of the lowest closing bid price during the 15 trading immediately preceding the Convertible Maturity Date or (ii) 100% of the lowest bid price for the 20 trading days immediately preceding the Convertible Maturity Date ("Fixed Conversion Price").
We are currently in default under the terms and conditions of this Agreement.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the Securities and Exchange Commission (the "SEC"), encourages all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The Company's consolidated financial statements include a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the financial statements.
Use of Estimates - Management's discussion and analysis or plan of operation is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates, including those related to allowances for doubtful accounts receivable and long-lived assets. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We review the carrying value of property and equipment for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.
Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), "Share-Based Payment," under the modified prospective method. SFAS No. 123(R) eliminates accounting for share-based compensation transactions using the intrinsic value method prescribed under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and requires instead that such transactions be accounted for using a fair-value-based method. Under the modified prospective method, we are required to recognize compensation cost for share-based payments to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied. For periods prior to adoption, the financial statements are unchanged, and the pro forma disclosures previously required by SFAS No. 123, as amended by SFAS No. 148, will continue to be required under SFAS No. 123(R) to the extent those amounts differ from those in the Statement of Operations.
RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006
Revenues
For the three and nine months ended September 30, 2007, we generated revenues of $566,497 and $1,755,873 as compared to $506,950 and $1,595,293 for the three and nine months ended September 30, 2006, an increase of approximately 12% and 10% respectively. This increase in revenues is attributable to both increased revenues which we generated from the dental practice and an increase in the number of participating dental service providers as we continue to expand our network of local, regional and national agreements with unions to provide discounted dental services to their members. Additionally, for the nine months ended September 30, 2007, we recorded other revenue from the settlement of litigation of $190,000. During the second quarter of 2005 we were sued by another dentist who was previously a Direct Dental member. We filed a counterclaim against the Plaintiff. In April 2007, the Company was successful with the counterclaim and settled the litigation for payment of $190,000.
Operating Expenses
The Company's total operating expenses increased $354,726 or 16% for the nine months ended September 30, 2007 as compared to the 2006 period. These increases include:
o Cost of services performed - Cost of services performed expense
consists of personnel cost, dental supplies, and lab costs. For the
nine months ended September 30, 2007, the cost of services performed
were $247,434 as compared to $353,722 for the 2006 period, a decrease
of $106,288 or 30%. This decrease was primarily due to the result of a
decrease in lab expenses of approximately $93,000 due to the
performance of certain lab procedures in-house, a decrease in dental
personnel employed of approximately $4,000 and a decrease in dental
supplies of approximately $9,000.
o Salaries, related taxes and stock-based compensation - Salaries,
related taxes and stock-based compensation expense consists of
personnel cost and the fair value of common shares issued for services
to employees. For the nine months ended September 30, 2007, salaries,
related taxes and stock-based compensation costs were $1,157,026 as
compared to $763,635 for the 2006 period, an increase of $393,391 or
51.5%. The increase in salaries relates to adding additional personnel
and normal wage increases including additional staff personnel
resulting from the acquisition of the assets of Dental Visions.
Additionally, we recognized stock based compensation of $313,685 for
the nine months ended September 30, 2007 attributable to the fair
value of common shares issued for services to our CEO and certain
employees.
o For the nine months ended September 30, 2007, we recorded depreciation
expense of $50,776 as compared to $50,707 for the 2006 period. We
purchase additional computer equipment during the nine months ended
September 30, 2007 amounting to $1,016.
o For the nine months ended September 30, 2007, we incurred professional
fees of $136,293 as compared to $110,575 for the 2006 period, an
increase of $25,718 or 23%. The increase during the nine months ended
September 30, 2007 was attributable to increase in accounting fees
associated with potential acquisitions as compared to the 2006 period.
o For the nine months ended September 30, 2007, we incurred consulting
fees of $326,300 (including $251,300 of stock-based consulting fees)
as compared to $440,911 for the 2006 period, a decrease of $114,611 or
26%. The decrease was primarily attributable to a decrease in use of
consultants for investor relations, business development and advisory
services during the nine months ended September 30, 2007.
o For the nine months ended September 30, 2007, we incurred other
general and administrative expenses of $621,998 as compared to
$465,551 for the 2006 period, an increase of $156,447 or 33.6%. Other
general and administrative expenses consisted of the following:
For the nine months Ended September 30, ---------------------------- 2007 2006 ------------ ------------ Rent $ 90,304 $ 73,413 Insurance 90,392 93,000 Postage 60,892 40,871 Printing 41,600 38,634 Other 338,810 219,633 ------------ ------------ Total $ 621,998 $ 465,551 ============ ============ |
o Increases in rent of $16,891 are attributable to additional costs we
incurred as a result of the acquisition of the dental practice owned
by Dr. Dora Vilk-Shapiro, d/b/a Dental Visions where we assumed the
leasehold obligation.
o During the nine months ended September 30, 2007, we had a decrease in
insurance expense of $392 compared to the 2006 period.
o For the nine months ended September 30, 2007, postage amounted to
$60,892 as compared to $40,871 for the nine months ended September 30,
2006, an increase of $20,021 or 49%. This increase was attributable to
the mailing of promotional materials to union members in new
contracted areas.
o For the nine months ended September 30, 2007, printing amounted to
$41,600 as compared to $38,634 for the nine months ended September 30,
2006, an increase of $2,966. This increase was attributable to the
printing of promotional materials for union members in new contracted
areas.
o Other general and administrative expenses consisted of casual labor,
office expenses, utilities, maintenance, computer expenses, postage,
travel, and other expenses. The increase for the nine months ended
September 30, 2007 as compared to the 2006 period of $119,177 or 54%
is primarily related to an increase in operations.
Other income (expenses)
o For the nine months ended September 30, 2007, we recorded amortization
of debt issuance costs of $6,685 as compared to $121,650 in the 2006
period. The decrease was primarily attributable to the full
amortization of debt issuance cost related to our notes payable with
dutchess in the 2006 period as compared to $0 for the nine months
ended September 30, 2007.
o For the nine months ended September 30, 2007, we recorded a loss from
the revaluation of a derivative liability of $110,554 which was
attributable to a decrease in conversion price of our convertible
notes payable from dutchess after its maturity date.
o For the nine months ended September 30, 2007, interest expense was
$99,146 as compared to $1,181,480 for the 2006 period, a decrease of
$1,082,334 and was attributable to the amortization of discount on our
debenture and convertible note payable in 2006. The amortization of
debt discount for the nine months ended September 30, 2007 amounted to
$2,462 as compared to $955,611 in the 2006 period.
Our operations for the three months ended September 30, 2007 reflect our overall operations as described above for the nine months ended September 30, 2007. These results are similar to the results of our operations for the three months ended September 30, 2006. Costs of services performed were $92,796 as compared to $113,604. Salaries and related taxes and stock-based compensation were $312,842 as compared to $361,013. Professional fees were $53,270 as compared to $27,004. Consulting fees were $60,500 as compared to $238,389 while our total general and administrative expenses were $170,357 as compared to $$77,113,
Net Income/Loss
As a result of these factors, we reported a net loss of $809,001 or $.01 per share for the nine months ended September 30, 2007 as compared to net loss of $1,586,817 or $.04 per share for the 2006 period. Investors should note that as of September 30, 2007, the weighted average number of shares outstanding was 64,097,524 as compared to 37,541,111 for the nine months ended September 30, 2006.
For the three months ended September 30, 2007 as compared to the three months ended September 30, 2006 we incurred a net income of $38,988 with a basic and diluted net income per share of $0 as compared to a loss of $(680,477) for the three months ended September 30, 2006 and a net loss per share of $.02 based on a basic weighted average number of shares outstanding of 73,902,128 as compared to 40,385,304 for the three months ended September 30, 2006. Investors should note that we incurred a loss from operations of $(140,305) for the three months ended September 30, 2007 as compared to a loss from operations of $(327,074). While we have significantly reduced our operating losses from the comparable period in 2006, the principal reason for our first quarterly profit was a gain of $209,345 we incurred as a result of the valuation of our derivative liability.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2007, we had cash and accounts receivable of $6,165 and $223,564, respectively. We had total current assets of $274,677 and our total assets were $457,567. We had a working capital deficit as of September 30, 2007 of $2,735,229. Our working capital deficit is primarily attributable to the financing we have secured with Dutchess including the outstanding current portion of a convertible debenture which we have recorded at $275,533, a convertible note payable in the amount of $586,408 and a derivative liability totaling $614,798. The derivative liability which we recorded on our books is the result of the convertibility feature and the registration rights which we have granted to Dutchess. We are also in default under our lending agreement with Bank of America because we have failed to maintain certain affirmative covenants required under the loan documentation. We did receive notice from Bank of America that we are in default. However, Bank of America following delivery of notice of default, subsequently assigned the obligation to Lehman Brothers Bank (the "Assignee"). We have not received notice from the Assignee regarding the status of the loan. We continue to make the monthly payments as required under the original terms of the loan agreement. Notwithstanding the foregoing, we have designated the entire amount of this liability, as a short term liability.
In addition to our bank line, Dr. Green, individually and on behalf of the Company signed a one year balloon promissory note in the amount of $250,000 with Black Forest International LLC, which provides for payment of interest at the rate of 10% per annum with principal and interest due on June 19, 2007. The note was secured by Dr. Green's preferred stock. The obligation has been repaid in full. On March 7, 2007, the Company received a loan amounting to $270,000 from Dr. Green for a full payment of the principal and accrued interest of the 10% promissory note which amounted to approximately $261,000. Dr. Green individually signed a 30 year promissory note in the amount of $270,000 with Suntrust Bank, which provides for a monthly equal payment of $2,055 at the rate of 8.4% per annum until March 7, 2037. Dr. George Green, D.D.S., P.A. on behalf of the Company also signed a promissory note in the amount of $50,000 with Community Bank of Broward. The note provides for equal monthly payments of $1,016.66. As a result of the foregoing, the aggregate outstanding bank loan obligations are $824,340 and also a loan payable to Dr. Green of $268,978.
We have also recorded a liability for unearned membership fees totaling $260,781.
To the extent that revenues are insufficient to support ongoing operations, the Company will have to draw against its equity line of credit. With our stock price currently trading below the conversion price of $.092 per share, it is unlikely that Dutchess would convert any portion of the outstanding obligation at the fixed conversion price. Moreover, we were required to deliver Put notices to Dutchess to satisfy the terms and conditions of the $960,000 promissory note. This obligation is in default. In order to satisfy this obligation, we will be required to draw down our equity line of credit. This will require us to issue additional shares of our common stock which will cause further dilution and likely downward pressure on the price of our common stock. Our Common Stock currently trades at approximately $.02 per share. At this price, we have not registered a sufficient number of registered shares available under our equity line of credit to satisfy the outstanding obligation. If the price of our Common Stock continues to decline, we will not have registered a sufficient number of shares of common stock to draw against the equity credit line. Should this happen, we would likely be in default under these obligations.
As stated above, our loan with Bank of America is in default. The loan was originally established with Bank of America to finance our ongoing operations and as a result of our agreement in December 2004 to assume the debt obligation of the principal stockholder for a bank loan utilized to purchase 50% of DDS from its founder and former owner and the remaining balance owed on the original 50% acquisition. The original note was in the amount $1,215,000. On May 17, 2005, the Company entered into an Amended and Restated Promissory Note in the amount of $1,384,000. The outstanding principal balance of this note as of September 30, 2007 was $783,524. This obligation has been assigned by Bank of America to Lehman Brothers Bank.
We have an accumulated deficit of $4,642,508 and a stockholders' deficit of $2,552,339.
We recorded shareholder transactions in 2005 of $1,489,711. This amount was originally recorded in 2004 as $1,539,129. This charge was a result of three related party transactions. First, UDC issued a $1 million note payable to Dr. Green, our controlling shareholder, as consideration for the purchase of the assets (minus the client list) of his dental practice, Dr. George D. Green, DDS, P.A. The Second transaction related to DDS executed a note payable to a bank in the amount of $1,215,000 to satisfy an outstanding liability of Dr. Green to purchase shares of DDS prior to the Reorganization. These amounts are offset by $675,871, representing a note receivable from Dr. Green resulting from the above transactions, net of other payables.
As a result of the foregoing accounting treatment of the various transactions, Dr. Green will be required to repay a portion of these sums to the Company. As of the date hereof, no repayment schedule has been established. To the extent that any sums are due as a result of any reclassification of goodwill, no payments will be made by Dr. Green.
On August 11, 2006, George Green, individually and on behalf of the Company, entered into a Promissory Note in the amount of $50,000 with the Community Bank of Broward. The interest rate on this promissory note is 8% per annum calculated by using the 365/360 day method. The note requires 60 monthly principal and interest payments of approximately $1,017 and is secured by certain assets of the Company. At September 30, 2007, the principal amount outstanding on this note amounts to $40,816.
You are urged to review the accompanying financial statements and financial footnotes in order to fully understand our financial condition.
Bellflower Dental
In June 2007 we signed a Letter of Intent to acquire substantially all of the assets of the Bellflower Dental Group, a large dental practice located in Bellflower, California for a purchase price of $5 million. After further negotiations with the Seller, we could not come to terms on a definitive agreement nor were we able to secure adequate financing in a timely manner to satisfy the Seller.
RISK FACTORS
We are in default with our two primary lenders.
As reflected in the notes to our financial statements, we are in default with respect to a note payable and debenture payable due Dutchess Private Equities Fund, LP and an Amended and Restated Promissory Note with Bank of America. Following the occurrence of the default, Bank of America assigned the obligation to Lehman Brothers Bank. We have not received notice from the assignee regarding the status of the loan. While we hope to enter into some type of forebearance agreement with these lenders, there can be no assurance that either will agree to any new terms or conditions which we propose. Lehman Brothers, as the assignee of the Bank of America obligation, has a lien on our assets. If Lehman Brothers were to foreclose on this lien or Dutchess were to exercise its default remedies, we risk foreclosure on the lien or the attachment of our future revenue streams. If this should occur, it is unlikely that we would be able to continue our operations without additional financing of which there can be no assurance.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this Report, the Company's President, who is its chief executive officer and is also its Treasurer and principal financial officer (the "Certifying Officer"), evaluated the effectiveness of the Company's "disclosure controls and procedures," as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, this officer concluded that, as of the date of his evaluation, the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company's periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to management, including that officer, to allow timely decisions regarding required disclosure.
The Certifying Officer has also indicated that there were no significant changes in our internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses.
Our management, including the Certifying Officer, does not expect that our disclosure controls or our internal controls will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three month period covered by this report, we issued the following unregistered securities: . Date Title Number Consideration
9/14/07 C/S 1,000,000 Services Rendered 9/28/07 C/S 3,000,000(2) Services Rendered
(1) The shares were issued to a consultant for consulting services rendered.
The shares were issued pursuant to an exemption from registration under
Section 4(2) of the Act.
(2) The Shares were issued for services rendered by an officer of the Company.
Also during the three months ended September 30, 2007, we issued a total of 2,853,000 shares of our common stock representing payment of interest to Dutchess Private Equities Fund II, L.P. pursuant to our equity line of credit.
Also during the period ended September 30, 2007, we issued a total of 2,518,554 shares of common stock to several different consultants. These shares were valued at $.01 per share and issued pursuant to the Company's 2007/08 Equity Compensation Plan which was filed on Form S-8 on September 26, 2007.
The shares of common stock set forth above were issued pursuant to an exemption from registration under Section 4(2) of the Act. The shares were valued on the date of grant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We have received a notice of default with respect to our amended and restated promissory note with Bank of America. This obligation has been subsequently assigned by Bank of America to Lehman Brothers. As a result, we have characterized our line of credit with Lehman Brothers as a short term liability. Although we are current with all monthly payments, we have failed to maintain certain covenants required under the loan documentation. We have not had any discussions with Lehman Brothers bank regarding this matter.
We are also in default with respect to our note payable with Dutchess Private Equities Fund, LP. We have failed to make the required monthly payments due under the note since June 2006. Notwithstanding the foregoing, we have not received any notice of default from Dutchess.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the period covered by this Report, there were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
During the period covered by this report there were no reports filed on Form 8-k.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UNION DENTAL HOLDINGS, INC.
Dated: November 13, 2007 By: /s/ George D. Green ----------------------------------- George D. Green Chief Executive Officer, President and Director |
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