Union Dental Holdings, Inc.
(Name of small business issuer in its charter)
Check whether the issuer (1) has 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.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
State issuer's revenues for its most recent fiscal year ended December 31, 2007:
$2,593,176
Of the 109,722,510 shares of our common stock issued and outstanding as of March
7, 2008 approximately 76,582,310 shares were held by non-affiliates. The
aggregate market value of the voting stock held by non-affiliates of the
registrant computed by reference to the closing bid price of $0.006 of our
Common Stock as reported on the OTC Bulletin Board on March 7, 2008 was
approximately $459,494.
Post Effective Registration Statement No. 3 filed on August 16, 2007
PART I
The following discussion should be read in conjunction with the Company's
audited financial statements and notes thereto. In connection with, and because
the Company desires to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the Company cautions readers
regarding certain forward looking statements in the following discussion and
elsewhere in this report and in any other statement made by, or on its behalf,
whether or not in future filings with the Securities and Exchange Commission.
Forward-looking statements are statements not based on historical information
and which relate to future operations, strategies, financial results or other
developments. Forward looking statements are necessarily based upon estimates
and assumptions that are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward looking statements made by, or on the Company's behalf. Without
limiting the generality of the foregoing, words such as "may", "anticipate",
"intend", "could", "estimate", or "continue" or the negative or other comparable
terminology are intended to identify forward-looking statements. The Company
disclaims any obligation to update forward-looking statements.
Item 1. Description of Business
(a) Business Overview: We are a Florida corporation. We operate a dental
office and provide a network of dental providers who provide services to union
members through our two wholly owned subsidiaries, Union Dental Corp. ("UDC")
and Direct Dental Services, Inc. ("DDS").
DDS operates a dental practice in Coral Springs, Florida. UDC 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 UDC and various unions.
(b) Funding Agreements: On August 17, 2005, we entered into an Investment
Agreement with Dutchess Private Equities Fund II, L.P.. Pursuant to this
Agreement, Dutchess will commit to purchase up to $5,000,000 (the "Line") of our
Common Stock over the course of 36 months ("Line Period"), after a registration
statement has been declared effective by the SEC (the "Effective Date"). The
amount that we 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
(U.S market only) ("ADV") of our 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 Common Stock during the Pricing Period.
The Purchase Price shall be set at 95% of the Market Price. The Put Date shall
be the date that the Investor receives a Put Notice of draw down by us of a
portion of the Line. There are put restrictions applied on days between the Put
Date and the Closing Date with respect to that Put. During this time, we shall
not be entitled to deliver another Put Notice. We shall automatically withdraw
that portion of the put notice amount, if the Market Price with respect to that
Put does not meet the Minimum Acceptable Price. The Minimum Acceptable Price is
defined as 75% of the lowest closing bid price of the common stock for the ten
(10) trading day period prior to the Put Date.
In December 2005, we executed a promissory note in favor of Dutchess in the
amount of $960,000 and received gross proceeds in the amount of $800,000 less
$60,075 in fees for net proceeds of $739,925. We are obligated to repay the face
amount of the loan on or before December 23, 2006. We are obligated to make
payments to Dutchess from each Put notice under our equity line of credit. We
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are obligated to pay Dutchess the greater of a) 50% of each Put notice or b)
$80,000 until the face amount of the loan obligation has been repaid. We issued
50 signed Put notices to the Investor to use as collateral. Because of our
declining stock prices, the Puts have not been exercised as we do not have a
sufficient number of registered shares of Common Stock registered pursuant to
the equity line of credit. As a result, we are in default. 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.
We are currently in default with respect to this obligation.
Debenture Agreement
Also on August 17, 2005, we sold $600,000 in principal amount of our five
year convertible debentures to Dutchess Private Equities Fund II, L.P. These
debentures bear interest at 10% per annum (payable in cash or stock at Dutchess'
option). Our obligation to repay Dutchess is secured pursuant to the terms of a
security agreement, which we have entered into with Dutchess. We have pledged
all of our assets to insure repayment of the Debenture. Dutchess' security
interest in our assets will be subject to any claims by our bank, which provides
us with a line of credit. The conversion price of the debenture shall be $.092
per share or; the lowest closing bid price of the common stock during the
fifteen trading days prior to the filing of this Registration Statement with the
SEC covering the shares issuable on the underlying debt. We also issued Dutchess
a warrant to purchase 1,304,348 shares of common stock with a strike price of
$.092 per share. The warrant may be exercised for a period of five years.
Unless the context indicates otherwise, references hereinafter to the
"Company", "we", "us" or "Union" include both Union Dental Holdings, Inc., a
Florida corporation and our wholly owned subsidiaries, Union Dental Corp., a
Florida corporation, Direct Dental Services, Inc., a Florida corporation. Our
principal place of business is 1700 University Drive, Suite 200, Coral Springs,
Florida 33071, and our telephone number at that address is (954) 575-2252.
(c) Business of the Company: We operate two subsidiaries, each of which is
engaged in various aspects of our business. UDC operates a network of duly
licensed dental providers to a network of union members while DDS manages a
dental practice in Coral Springs, Florida.
Union Dental Corp.:
Union Dental Corp. ("UDC") is a Florida corporation that 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 UDC and various labor unions. UDC is not limited as to the type of labor
union which UDC may solicit. UDC charges a annual management services fee to the
participating dentists to practice in an "area of exclusivity" for union
members. UDC has signed contracts with local unions, such as Communications
Workers of America ("CWA"), International Brotherhood of Electrical Workers
("IBEW") and General Electric's International Union of Electronic, Electrical,
Salaried, Machine and Furniture Workers - Communications Workers of America
("IUE-CWA").
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UDC also has both regional and national union contracts. Presently, UDC has
a contract with the CWA covering its members in 19 states, including employees
of AT&T, Lucent, Avaya, Verizon, Bell South, Cingular and SBC/Pactell. We also
entered into agreements with the International Brotherhood of Electrical Workers
Local #824 in Tampa, Florida and Local # 728 in Ft. Lauderdale, FL and General
Electric's International Union of Electronic, Electrical, Salaried, Machine and
Furniture Workers - Communications Workers of America Local 761 in Louisville,
Kentucky. We have an agreement with the Communications Workers of America
("CWA") Local 1101. This agreement gives us the opportunity for us to build our
network of dental providers in New Jersey, Connecticut, Vermont, Rhode Island,
New Hampshire, Massachusetts, New Jersey and New York. Our agreement with the
Association of Flight Attendants represents our first nationwide agreement. We
signed this agreement during 2006. To date, our focus has been to build a
network of dental providers around various airport hubs. Once we are established
in several hub cities, we will attempt to expand the network to other major
airports.
During 2007, we did not secure contracts with any other union providers.
Rather our focus was to further service the needs of our licensed dentists who
are providing the dental services to the union member.
MARKETING AND SALES
BROCHURES AND POSTERS
The union itself is a viable component of our marketing strategy. We
anticipate that the respective unions will be extremely helpful with promoting
the dental benefits provided to their members. Currently, although we pay all
the costs associated with the printing, distribution and mailing of the
brochures, the individual unions are responsible for mailing all pamphlets and
other literature designed and produced by us. We will also design and distribute
poster boards to be placed in heavily frequented areas within the employer's
offices, factories or lunchrooms. These poster boards contain brochures which
provide information about the union's dental coverage and list the Dental
Network members in their respective geographical area. We pay for the printing
and mailing of the brochures and poster boards.
SEMINARS
During 2006 we held five seminars where prospective Network members could
learn about us and the benefits of Dental Network membership. Management was not
satisfied with the results from these seminars when compared to the costs and
time needed to host these seminars. As a result, no seminars were held in 2007.
WEB SITE DEVELOPMENT
We developed a website for use in the expansion of our Dental Network. Our
website is used as an informative site, and dental directory, for union patients
who are in need of the services offered by the dentists in the network and to
locate a network dentist. The website provides patients with information about
each member of the Dental Network to better inform the patient of the doctor's
professional credentials. The web site is also used to establish a direct link
between the patient and the doctor. We believe this approach enhances the
dentist-patient relationship, improve patient loyalty, and increase utilization
of dental services. We have two websites located at www.uniondental.com and
www.uniondentalcorp.com respectively. To date, several unions have hyperlinked
their website to our website in order to avail their members more access to the
dental benefits offered to them and current information of dental providers in
the network.
We presently derive our sales from the following: (1) sales of the "Areas
of Exclusivity" in the selected geographical areas to dentists who provide
dental services to the union employees in those specific areas; and (2)
operating a dental practice at its corporate headquarters located in Coral
Springs, Florida.
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The UDC Dental Network currently consists of approximately 1,800 licensed
dentists located in 35 states. The territory served by the Dental Network is
divided into geographic areas using a predetermined formula that allocated
approximately one general dentist to approximately 1,100 to 1,200 insured union
employees which includes their immediate family members. Exclusive areas for
specialists are allocated approximately 6,000-8,000 insured union employees,
which includes their immediate family members, per specialist. Each member of
the Dental Network enters into an annual network provider agreement with DDS for
his or her respective Exclusive Area. Consideration paid by the Dental Network
member is determined based upon the size of the Exclusive Area and the number of
specialties covered under the respective member's contract.
UDC selects certain dentists in selected geographical areas to represent
DDS. The dentists enter into exclusive agreements with DDS for an annual
management services which typically range from $3,000 to $6,000. The specific
fee which we charge is based on each specialty the dentist provides to the
patients on a per office basis. Significantly lower fees may be charged for
dental practices covering a large geographic area which employ a large number of
participating dentists. We believe that this practice will provide us with
greater exposure to the unions, dentists and the public. 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. Currently, areas of
specialties include: (1) General Dentistry (2) Orthodontics (3) Periodontics (4)
Pedodontics (5) Endodontics (6) Prosthodontics (7) Oral & Maxillofacial Surgery,
(8) Implants and (9) TMJ.
Members of the Dental Network are assigned "areas of exclusivity"
established by UDC which grants the Dental Network provider primary
responsibility to provide for the general dentistry and specialist services
required by covered union members. DDS's Network dentists accept as payment in
full for covered services the scheduled amount payable by the applicable union
sponsored dental benefit plan together with a relatively small co-payment from
the covered union member. The copayment to be paid by the union member is
generally substantially lower than the scheduled copayment set forth in the
applicable dental benefit plan, resulting in significant savings to the union
member.
During 2007, UDC generated $548,494 in operating revenues.
Direct Dental Services, Inc.:
Direct Dental Services, Inc. ("DDS") is a Florida corporation that has
acquired the assets (minus the client list) of Dr. George D. Green, P.A.
effective October 15, 2004. Subsequent thereto, on May 17, 2005, DDS acquired
certain assets and assumed certain liabilities of DORA VILK-SHAPIRO, D.M.D.,
P.A. d/b/a Dental Visions, a Florida corporation ("Dental Vision") for a
purchase price of $283,241.
DENTAL PRACTICE
DDS manages a dental practice in Coral Springs, Florida. The office is run
by Dr. George D. Green, a licensed dentist and our chief executive officer. DDS
utilizes the services of 18 individuals pursuant to a management agreement with
Dr. George D. Green, DDS, P.A. The Coral Springs office is comprised of two
licensed dentists, a licensed orthodontist, a licensed associate dentist, two
hygienists, four nurses, two office managers, a union dental insurance
specialist, a union dental administrative director and four managerial staff
members. For the year ended December 31, 2007, DDS generated $1,854,682 in
revenues.
ACQUISITION OF ADDITIONAL PRACTICES
DDS intends to acquire existing dental practices in selected geographical
areas throughout the United States to further expand its base of operations by
providing additional locations for the benefit of union members.
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In addition to providing services to the various unions, these dental
offices will generate fee for services from their normal patient base. We
believe that we have developed a unique management system which will enable us
to expand the business of any dental practice we acquire. Training will be
accomplished by having the licensed dentist train at the corporate headquarters
prior to being placed into the newly acquired dental practices. After a period
of time the dentist will be evaluated in his/her management skills and operating
procedures. At that time, we intend to allow these dentists to purchase the
existing dental practice from us, after the completion of a transition period.
We intend to finance the acquired business when it is sold to the new dentist.
To date, we have acquired one dental practice.
COMPETITIVE BUSINESS CONDITIONS
The fields of dental practice and dental network participation with unions
are highly competitive. We compete with a number of businesses that provide the
same or similar services. Many of these competitors have a longer operating
history, greater financial resources, and provide other services to insurance
companies that we do not provide. Principal competitors include national firms,
as well as many regional firms. We believe that quality of service, high caliber
dental services, proper pricing and range of services offered are the principal
factors that will enable us to compete effectively.
GOVERNMENT REGULATIONS
As a participant in the health care industry, our operations are subject to
extensive and increasing regulation by a number of governmental entities at the
federal, state and local levels. We also are subject to laws and regulations
relating to business corporations in general. The Company believes its
operations are in material compliance with applicable laws and will be able to
maintain compliant in an ever increasing regulatory environment.
Costs and Effects of Compliance with Environmental Laws.
Some of the services provided by the Company will produce byproducts or
waste, the disposal of which is regulated by Federal or State guidelines. The
Company is aware of the requirements of these regulating agencies and has taken
steps to ensure compliance with the legal requirements.
EMPLOYEES
We operate our business through our wholly owned subsidiaries. Dr. Green,
our chief executive officer, is the only employee of Union Dental Holdings. DDS
employs a total of twenty three (23) individuals that assist in the operation of
both Dr. George D. Green, DDS, P.A., its dental laboratory and Union Dental
Corp. We anticipate hiring additional employees over the next twelve months if
we are successful in implementing our plan of operations.
AVAILABLE INFORMATION
Information regarding the Company's annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K, and any
amendments to these reports, are available to the public from the SEC's website
at http://www.sec.gov as soon as reasonably practicable after the Company
electronically files such reports with the Securities and Exchange Commission.
Any document that the Company files with the SEC may also be read and copied at
the SEC's public reference room. You may call the SEC at 1-800-SEC-0330 for
further information on the public reference room. We will also supply this
information to any shareholder requesting copies of any of the foregoing free of
charge. Shareholders should contact our office at (954) 575-2252 if they desire
copies of any of our filings with the Securities and Exchange Commission.
RISK FACTORS
Before you invest in our securities, you should be aware that there are
various risks. you should consider each of the following risk factors and any
other information set forth in this Form 10-KSB and the other Company's reports
7
filed with the Securities and Exchange Commission ("SEC"), including the
Company's financial statements and related notes, in evaluating the Company's
business and prospects. The risks and uncertainties described below are not the
only ones that impact on the Company's operations and business. Additional risks
and uncertainties not presently known to the Company, or that the Company
currently considers immaterial, may also impair its business or operations. If
any of the following risks actually occur, the Company's business and financial
condition, results or prospects could be harmed.
RISKS ASSOCIATED WITH THE COMPANY'S PROSPECTIVE BUSINESS AND OPERATIONS
IT IS UNLIKELY THAT WE WILL BE ABLE TO SUSTAIN PROFITABILITY IN THE FUTURE.
We incurred significant losses in 2007 and there can be no assurance that
we will be able to reverse this trend. Even if we are able to successfully
implement our planned operations. There can be no assurance that we will be able
to operate profitably.
It is critical to our success that we continue to devote financial
resources to sales and marketing our network of dental providers and to acquire
additional dental practices. As a result, we expect that our operating expenses
will continue to increase. As we increase spending, there can be no assurance
that we will be able to operate on a profitable basis. As a result, we may not
be able to sustain profitable operations, or if we do achieve profitability in
any period, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
The Company has a limited operating history in connection with its network
provider business ("UDC") upon which an evaluation of its future success or
failure can be made. The Company's ability to achieve and maintain profitability
and positive cash flow over time will be dependent upon, among other things, its
ability to (i) identify and execute exclusive contracts with the unions and (ii)
raise the necessary capital to operate during this period. At this stage in the
Company's development, it cannot be predicted how much financing will be
required to accomplish these objectives.
Our auditors have issued a going concern opinion based on our financial
situation as of December 31, 2007 We have accumulated losses from operations
totaling $4,717,766, a working capital deficit of $2,601,221 and a stockholders'
deficit of $2,435,522. A significant portion of the operating losses in 2007 is
attributable to our salaries and related stock based compensation. Management
also continues to invest significant time and money in cultivating closer
relationships with the unions, marketing its union contracts with dental
practitioners and securing a network of dental providers. Management believes
that these steps will result in increased revenues in the coming years.
Nevertheless, if we are not able to continue as a going concern, you will likely
lose your entire investment.
The Company needs to raise substantial funds in the foreseeable future in
order to implement its business plan. The Company presently does not have
sufficient revenues nor profits required to acquire dental practices and to
expand its network provider businesses. No assurances can be given that the
Company will be able to obtain the necessary funding during this time to make
these acquisitions and expand its network of dental providers or even maintain
its current operating levels. The inability to raise additional funds will have
a material adverse affect on the Company's business, plan of operation and
prospects. The Company's success is dependent upon a limited number of people.
The ability to implement the Company's business plan is significantly
dependent upon the efforts of its President, Dr. George D. Green. The loss of
his services would have a material adverse affect on the Company.
8
The Company's business will be harmed if it is unable to manage growth.
The Company's business may experience periods of rapid growth that will
place significant demands on its managerial, operational and financial
resources. In order to manage this possible growth, the Company must continue to
improve and expand its management, operational and financial systems and
controls. The Company will need to expand, train and manage its employee base.
No assurances can be given that the Company will be able to timely and
effectively meet such demands. The issuance of shares through our stock
compensation and incentive plan has enabled us to retain the services of various
consultants. However, issuance of shares of our Common Stock to these
consultants has had a dilutive impact on existing shareholders.
We have used and anticipate continuing to use stock options, stock grants
and other equity-based incentives, to provide motivation and compensation to our
officers, employees and key independent consultants. The award of any such
incentives will continue to result in immediate and potentially substantial
dilution to our existing shareholders and can result in a decline in the value
of our stock price.
We have financed part of our growth over the past year through an equity
line of credit and the sale of convertible debt instruments. The use of these
financing tools has resulted in further dilution to our existing shareholders
and has been a contributing factor to the decline in the value of our Common
Stock.
We have not voluntarily implemented various corporate governance measures in the
absence of which, shareholders may have more limited protections against
interested director transactions, conflicts of interest and similar matters.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002, has
resulted in the adoption of various corporate governance measures designed to
promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges and Nasdaq are
those that address board of directors' independence, audit committee oversight,
and the adoption of a code of ethics. While our board of directors has adopted a
Code of Ethics and Business Conduct, we have not yet adopted any of these other
corporate governance measures and, since our securities are not yet listed on a
national securities exchange or Nasdaq, we are not required to do so. It is
possible that if we were to adopt some or all of these corporate governance
measures, shareholders would benefit from somewhat greater assurances that
internal corporate decisions were being made by disinterested directors and that
policies had been implemented to define responsible conduct. For example, in the
absence of audit, nominating and compensation committees comprised of at least a
majority of independent directors, decisions concerning matters such as
compensation packages to our senior officers and recommendations for director
nominees may be made by a majority of directors who have an interest in the
outcome of the matters being decided. Prospective investors should bear in mind
our current lack of corporate governance measures in formulating their
investment decisions.
Provisions of our Articles of Incorporation and Bylaws may delay or prevent
take-over, which may not be in the best interest of our stockholders.
Provisions of our articles of incorporation and bylaws may be deemed to
have anti-takeover effects, which include when and by whom special meetings of
our stockholders may be called, and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of the Florida Statutes also may be
deemed to have certain anti-takeover effects , which include that control of
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless these voting rights are approved by a majority of a
corporation's disinterested stockholders. In addition, our articles of
9
incorporation authorize the issuance of up to 25,000,000 shares of preferred
stock with such rights and preferences as may be determined from time to time by
our board of directors, of which 3,000,000 shares of Class A Preferred Stock are
issued and outstanding as of March 1, 2007. Each share of Class A Preferred
shall have 15 votes per share. Our board of directors may, without stockholder
approval, issue preferred stock with dividends, liquidation, conversion, voting
or other rights that could adversely affect the voting power or other rights of
the holders of our common stock.
Risks Related to the Company's Common Stock
The Company does not expect to pay dividends in the foreseeable future.
The Company has never paid cash dividends on its common stock and has no
plans to do so in the foreseeable future. The Company intends to retain
earnings, if any, to develop and expand its business.
"Penny stock" rules may make buying or selling the common stock difficult and
severely limit their market and liquidity.
Trading in the Company's common stock is subject to certain regulations
adopted by the SEC commonly known as the "Penny Stock Rules". The Company's
common stock qualifies as penny stock and is covered by Section 15(g) of the
Securities and Exchange Act of 1934, as amended (the "1934 Act"), which imposes
additional sales practice requirements on broker/dealers who sell the Company's
common stock in the market. The "Penny Stock" rules govern how broker/dealers
can deal with their clients and "penny stock". For sales of the Company's common
stock, the broker/dealer must make a special suitability determination and
receive from clients a written agreement prior to making a sale. The additional
burdens imposed upon broker/dealers by the "penny stock" rules may discourage
broker/dealers from effecting transactions in the Company's common stock, which
could severely limit its market price and liquidity. This could prevent
investors from reselling our common stock and may cause the price of the common
stock to decline.
Although publicly traded, the Company's common stock has substantially less
liquidity than the average trading market for a stock quoted on other national
exchanges, and our price may fluctuate dramatically in the future.
Although the Company's common stock is listed for trading on the
Over-the-Counter Electronic Bulletin Board, the trading market in the common
stock has substantially less liquidity than the average trading market for
companies quoted on other national stock exchanges and our price may fluctuate
dramatically. A public trading market having the desired characteristics of
depth, liquidity and orderliness depends on the presence in the marketplace of
willing buyers and sellers of our common stock at any given time. This presence
depends on the individual decisions of investors and general economic and market
conditions over which we have no control. Due to limited trading volume, the
market price of the Company's common stock may fluctuate significantly in the
future, and these fluctuations may be unrelated to the Company's performance.
General market price declines or overall market volatility in the future could
adversely affect the price of the Company's common stock, and the current market
price may not be indicative of future market prices.
Our stock price may be volatile
The market price of our common stock is likely to be highly volatile and
could fluctuate widely in price in response to various factors, many of which
are beyond our control, including:
o technological innovations or new products and services by us or our
competitors;
o additions or departures of key personnel;
o sales of our common stock
o our ability to integrate operations, technology, products and
services;
o our ability to execute our business plan;
o operating results below expectations;
10
o loss of any strategic relationship;
o industry developments;
o economic and other external factors; and
o period-to-period fluctuations in our financial results.
Because we have a limited operating history with our Direct Dental
Services, business, you may consider any one of these factors to be material.
Our stock price may fluctuate widely as a result of any of the above listed
factors.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
Risks relating to the Debenture Agreement:
Dutchess, the holder of a Convertible Debenture issued by us on August 17,
2005 has the option of converting the Debenture into shares of our common stock.
Dutchess may also exercise their common stock purchase options. If the Debenture
is converted or the warrants exercised, there will be dilution of your shares of
our common stock.
The issuance of shares of our common stock upon conversion of the Debenture
will result in the dilution to the interests of other holders of our common
stock, since Dutchess may sell all of the resulting shares into the public
market.
The principal amount of the Debenture plus accrued interest may be
converted at the option of the Dutchess into shares of our common stock at a
conversion price equal to $.092. Based on the price of our common stock over the
past year, there is very little likelihood that Dutchess will convert any part
of the Debenture into shares of our Common Stock.
Sales of a substantial number of shares of our common stock into the public
market by the holder of our Convertible Debenture may result in significant
downward pressure on the price of our common stock and could affect the ability
of our stockholders to realize the current trading price of our stock.
As we draw down the equity line of credit and we issue common stock to
Dutchess, such common stock will be purchased by Dutchess at less than the then
market price. At such times, Dutchess will have a financial incentive to sell
our common stock immediately upon receiving the shares. When Dutchess sells
shares of our common stock, the price of our stock could decrease. If our stock
price decreases, Dutchess may have a further incentive to sell the shares of our
common stock that it holds. Such sales of common stock by Dutchess could cause
the market price of our common stock to decline. If Dutchess converts the
Convertible Debenture and any accrued interest, we will be required to issue a
significant number of additional shares of our common stock. This will result in
dilution to the interests of the other holders of our common stock. The resale
of our common stock will increase the number of publicly traded shares which
could depress the market price of our common stock and thereby affect the
ability of our shareholders to realize the current price of our common stock. In
addition, as all of the shares we issue to Dutchess will be available for
resale, the mere prospect of our sales to them could depress the market price of
our common stock.
With our Common Stock trading at significantly less than the Conversion
Price it is unlikely that Dutchess will convert any of its common stock. As a
result, we are required to make monthly interest payments of approximately
$62,000. We do not have sufficient operating funds to make these monthly
interests payments and as a result, we are in default.
We are also obligated to repay Dutchess the sum of $960,000 pursuant to a
one year promissory note dated December 22, 2005. We have not repaid this note
and are in default. For so long as this obligation remains in default, our
ability to secure additional financing will be impaired.
11
Risks relating to the Investment Agreement:
There are a large number of shares underlying our periodic equity
investment agreement with Dutchess. The issuance and sale of shares upon
delivery of an advance by Dutchess Private Equities Fund II, LP ("Dutchess")
pursuant to the Investment Agreement in the amount up to $5,000,000 and the
conversion of the Debenture and exercise of options by Dutchess are likely to
result in substantial dilution to the interests of other stockholders. Up to
38,461,538 are reserved for issuance pursuant to the Investment Agreement with
Dutchess Private Equities Fund II, LP. Assuming the issuance of 38,461,538
shares under the Investment Agreement, existing shareholders will experience
substantial dilution of our shares of Common Stock.
Our Investment Agreement with Dutchess contemplates the potential future
issuance and sales of up to $5,000,000 of our Common Stock to Dutchess subject
to certain restrictions and obligations. Given out current capital needs and the
market price of our common stock, we presently have no intention of drawing down
the entire amount available to us unless the market price of our common stock
increases.
The large number of shares issuable under the Investment Agreement may
result in a change of control. Provided however, that the holders of our Series
A preferred shares will in all likeli.
We have registered a total of 40,080,763 shares for sale pursuant to the
Investment Agreement. Based on our current trading price, and after taking into
account the number of shares of common stock which we have already issued
pursuant to our equity line of credit, it is unlikely that we will be able to
secure even $1 million in financing unless we register additional shares of our
common stock. This will result in even further dilution to our common stock and
the likelihood of an even lower price of our common stock. Because we are in
default under our obligations to Dutchess and the likelihood that we will have
to issue to Dutchess a significant amount of additional common stock, Dutchess
may be able to exert substantial influence over all matters submitted to a vote
of the shareholders, including the election and removal of directors, amendments
to our articles of incorporation and by-laws, and the approval of a merger,
consolidation or sale of all or substantially all of our assets. In addition,
this concentration of ownership could inhibit the management of our business and
affairs and have the effect of delaying, deferring or preventing a change in
control or impeding a merger, consolidation, takeover or other business
combination which our shareholders, may view unfavorably.
The lower the stock price, the greater the number of shares issuable under the
Investment Agreement.
The number of shares that Dutchess will receive under its agreement with us
is calculated based upon the market price of our common stock prevailing at the
time of each "put". The lower the market price, the greater the number of shares
issuable under the agreement. Upon issuance of the shares, to the extent that
Dutchess will attempt to sell the shares into the market, these sales may
further reduce the market price of our common stock. This in turn will increase
the number of shares issuable under the agreement. This may lead to an
escalation of lower market prices and ever greater numbers of shares to be
issued. A larger number of shares issuable at a discount to a continuously
declining stock price will expose our shareholders to greater dilution and a
reduction of the value of their investment.
The sale of our stock under the Dutchess agreement could encourage short
sales which could contribute to the future decline of our stock price and
materially dilute existing stockholders' equity and voting rights.
Neither the Investment Agreement nor the Debenture Agreement contain
restrictions on short selling. Accordingly, any significant downward pressure on
the price of our common stock can encourage short sales by them or others,
subject to applicable securities laws. This is particularly the case if the
shares being placed into the market exceed the market's ability to absorb the
increased number of shares of stock or if we have not performed in such a manner
12
to show that the equity funds raised will be used by us to grow. Such an event
could place further downward pressure on the price of our common stock. Even if
we use the proceeds under the agreement to grow our revenues and profits or
invest in assets, which are materially beneficial to us, the opportunity exists
for short sellers and others to contribute to the future decline of our stock
price. If there are significant short sales of our stock, the price decline that
would result from this activity will cause the share price to decline more so,
which, in turn, may cause long holders of the stock to sell their shares thereby
contributing to sales of stock in the market. If there is an imbalance on the
sell side of the market for the stock, our stock price will decline. If this
occurs, the number of shares of our common stock that is issuable pursuant to
the Investment Agreement will increase, which will materially dilute existing
stockholders' equity and voting rights.
Item 2. Description of Property
Our offices are located at 1700 University Drive, Coral Springs, Florida
33071. In June 2006, we signed a new lease agreement consolidating all of our
operations under a single lease agreement. We currently lease approximately
4,650 square feet of space at a cost of $6,982 per month inclusive of sales tax
but exclusive of common area operating expenses which are estimated to be an
additional $2,200 per month. Our base rent will increase on the anniversary date
of the lease by the greater of 5% or the increase in the Consumer Price Index.
We operate both subsidiaries from the leased premises as well as operate a
dental lab.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our shareholders, through the
solicitation of proxies or otherwise during the fourth quarter of our fiscal
year ended December 31, 2007, covered by this report.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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, 2007, 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.
UDC 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 UDC and various labor unions. UDC is not limited as to
the type of labor union which it may solicit. UDC charges an annual management
services fee to the participating dentists to practice in an "area of
exclusivity" for union members. UDC currently has exclusive contracts with
several local unions.
DDS acquired the assets of George D. Green, DDS, PA and manages the operation of
that general dental practice.
F-9
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of presentation
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 December 31, 2007, the Company has
established, based on a review of its outstanding balances, an allowance for
doubtful accounts in the amount of $109,930.
Inventory of dental supplies
The Company values inventory of dental supplies at the lower of cost or market,
using the specific unit cost method.
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.
F-10
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 year ended December 31,
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 year ended December 31, 2007 and 2006 because it is anti-dilutive.
The Company's common stock equivalents at December 31, 2007 include the
following:
Convertible debentures 37,368,363
Derivatives options 147,035,573
Options 1,508,000
Warrants 1,304,348
---------------
187,216,284
===============
|
F-11
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 December
31, 2007 amounted to $333,752 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. At December 31, 2007, the Company did not reached bank
balances exceeding the FDIC insurance limit. The Company has not experienced any
losses in such accounts through December 31, 2007.
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 year
ended December 31, 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").
F-12
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
F-13
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements (continued)
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.
In May 2007, the FASB issued FASB Staff Position No. FIN 48-1, Definition of
Settlement in FASB Interpretation No. 48 ("the FSP"). The FSP provides guidance
about how an enterprise should determine whether a tax position is effectively
settled for the purpose of recognizing previously unrecognized tax benefits.
Under the FSP, a tax position could be effectively settled on completion of
examination by a taxing authority if the entity does not intend to appeal or
litigate the result and it is remote that the taxing authority would examine or
re-examine the tax position. The Company does not expect that this
interpretation will have a material impact on its financial position, results of
operations, or cash flows.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations,"
which replaces SFAS No. 141, " Business Combinations," which, among other
things, establishes principles and requirements for how an acquirer entity
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed (including intangibles) and any noncontrolling
interests in the acquired entity. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. We are currently evaluating what impact our adoption of SFAS No.
141(R) will have on our financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51." SFAS No. 160
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51's consolidation procedures for
consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. We are currently evaluating what impact our adoption of
SFAS No. 160 will have on our 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.
F-14
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 2 - PROPERTY AND EQUIPMENT
At December 31, 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 (363,144)
----------
$ 164,019
==========
|
For the years ended December 31, 2007 and 2006, depreciation expense amounted to
$67,967 and $67,454, 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.
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;
F-15
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 3 - CONVERTIBLE DEBENTURES PAYABLE (continued)
(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 December 31, 2007, the Company revalued this
derivative liability. For the year ended December 31, 2007, after adjustment,
the Company recorded a gain on revaluation of this derivative liability of
$143,143. For the years ended December 31, 2007 and 2006, amortization of the
discount on debenture amounted to $0 and $232,548. At December 31, 2007, the
balance of the convertible debenture amounted to $226,873.
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.
F-16
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 4 - EQUITY CREDIT LINE (continued)
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 year ended December 31, 2007, the Company delivered Put Notices to draw
on the equity line of credit. In connection with these puts, the Company issued
4,306,452 shares of common stock for net proceeds of $69,825.
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
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 was 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.
F-17
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 5 - CONVERTIBLE NOTE PAYABLE (continued)
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.
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 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
year ended December 31, 2007, the Company revalued this derivative liability.
For the year ended December 31, 2007, after adjustment, the Company recorded a
loss on revaluation of this derivative liability of $252,621 and reclassified
$220,819 of the derivative liability to paid-in capital due to the payment of
the debenture. For the years ended December 31, 2007 and 2006, amortization of
the discount on the note amounted to $2,463 and $932,062, respectively. At
December 31, 2007, the balance of the convertible note amounted to $586,408.
F-18
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
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 December 31, 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 December 31, 2007, the principal
amount outstanding on this note amounts to $714,324.
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 December 31, 2007, the principal amount outstanding on this
note amounts to $38,575.
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 $20,650 as of December
31, 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.
F-19
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 8 - RELATED PARTY TRANSACTIONS (continued)
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 December 31, 2007, the
principal amount outstanding on this loan amounts to $268,451.
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
In January 2006, the Company issued 75,000 shares of common stock upon the
conversion of the debenture payable at $.092 per share or $6,900.
For the period from January 21, 2006 to September 30, 2006, the Company
exercised put notices in accordance with its Investment Agreement with Dutchess
(see note 3) and received $157,005 of net cash proceeds for which the Company
issued 1,947,496 shares of its common stock to Dutchess.
During the three months ended March 31, 2006, the Company issued an aggregate
522,000 shares of common stock for services rendered. The Company valued these
common shares at the fair market value on the date of grant at per share prices
ranging from $.08 to $.10 or an aggregate of $44,960. In connection with
issuance of these shares, the Company recorded professional fees of $16,000 for
legal services performed, stock-based compensation of $4,960, and $24,000 in
consulting fees for business development services performed during fiscal 2006.
On April 4, 2006, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 4) and received $5,273 of net cash
proceeds for which the Company issued 75,000 shares of its common stock to
Dutchess.
On April 25, 2006, the Company issued an aggregate 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 $.07 per share or $17,500. In connection
with issuance of these shares, the Company recorded consulting fees of $17,500
for business development services performed during fiscal 2006.
On April 25, 2006, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 4) and received $11,088 of net cash
proceeds for which the Company issued 235,000 shares of its common stock to
Dutchess.
On May 5, 2006, the Company issued an aggregate 622,000 shares of common stock
for services rendered. The Company valued these common shares at the fair market
value on the date of grant at $.05 per share or $31,100. During fiscal 2006, in
connection with issuance of these shares, the Company recorded consulting fees
of $12,500 and professional fees of $18,600 for business development and
professional services performed, respectively.
F-20
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT (continued)
Common Stock (continued)
During May 2006, the Company issued 1,109,621 shares of common stock to Dutchess
in accordance with its Investment Agreement for interest due amounting to
$28,085.
On June 21, 2006, the Company issued 100,000 shares of common stock for services
rendered. The Company valued these common shares at the fair market value on the
date of grant at $.015 per share or $1,500. In connection with issuance of these
shares, the Company recorded consulting fees of $1,500 for business development
services performed during fiscal 2006.
On July 8, 2006, the Company issued 500,000 shares of common stock for services
rendered. The Company valued these common shares at the fair market value on the
date of grant at $.017 per share or $8,500. In connection with issuance of these
shares, the Company recorded consulting fees of $8,500 for business development
services performed during fiscal 2006.
On August 10, 2006, the Company issued 500,000 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 $22,500. In connection with
issuance of these shares, the Company recorded consulting fees of $22,500 for
business development services performed during fiscal 2006.
On August 25, 2006, the Company issued 136,820 shares of common stock for
services rendered. The Company valued these common shares at the fair market
value on the date of grant at $.055 per share or $7,525. In connection with
issuance of these shares, the Company recorded professional fees of $7,525 for
accounting services performed during fiscal 2006.
On August 31, 2006, in connection with a three month consulting agreement, the
Company issued 2,500,000 restricted shares of common stock for investor relation
services. The Company valued these common shares at the fair market value on the
date of grant at $.07 per share or $175,000. In connection with issuance of
these shares, the Company recorded consulting expense of $175,000 during fiscal
2006.
On August 31, 2006, the Company issued 100,000 shares of common stock for
services rendered. The Company valued these common shares at the fair market
value on the date of grant at $.07 per share or $7,000. In connection with
issuance of these shares, the Company recorded consulting fees of $7,000 for
business development services performed during fiscal 2006.
On September 6, 2006, the Company issued 500,000 shares of common stock for
services rendered. The Company valued these common shares at the fair market
value on the date of grant at $.08 per share or $40,000. In connection with
issuance of these shares, the Company recorded consulting fees of $40,000 for
business development services performed during fiscal 2006.
On September 29, 2006, the Company issued 179,797 shares of common stock to
Dutchess in accordance with its Investment Agreement for interest due amounting
to $11,795.
During October 2006, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 4) and repaid principal balance and
accrued interest on its notes payable of $18,100 and $3,102, respectively for
which the Company issued 343,500 shares of its common stock to Dutchess.
Additionally, the Company issued 191,205 shares of common stock to Dutchess as
payment for a $10,000 penalty related to the Investment Agreement.
F-21
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT (continued)
Common Stock (continued)
On October 5, 2006, the Company issued 2,000,000 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 $.06 per share or $120,000. In connection with issuance of these shares, the
Company recorded stock-based compensation expense of $120,000 during fiscal
2006.
On October 11, 2006, the Company issued 50,000 shares of common stock for
services rendered. The Company valued these common shares at the fair market
value on the date of grant at $.06 per share or $3,000. In connection with
issuance of these shares, the Company recorded consulting fees of $3,000 during
fiscal 2006.
On October 20, 2006, in connection with a three month consulting agreement, the
Company issued 1,000,000 restricted shares of common stock for investor relation
services. The Company valued these common shares at the fair market value on the
date of grant at $.075 per share or $75,000. In connection with issuance of
these shares, the Company recorded consulting fees during the years ended
December 31, 2006 and 2007 of $50,000 and $25,000, respectively.
On October 20, 2006, in connection with a 240-day consulting agreement, the
Company issued 1,000,000 restricted shares of common stock for advisory and
business development services. The Company valued these common shares at the
fair market value on the date of grant at $.075 per share or $75,000. In
connection with the issuance of these shares, the Company recorded consulting
fees during the years ended December 31, 2006 and 2007 of $18,750 and $56,250,
respectively. Additionally, in connection with this agreement, the Company shall
issue to the consultant 500,000 shares of common on the 100th day subsequent to
the execution of this agreement and 500,000 common shares on the 200th day
subsequent to the execution of this agreement.
On November 21, 2006, the Company issued 831,180 shares of common stock for
services rendered to an employee of the Company. The Company valued these common
shares at the fair market value on the date of grant at $.05 per share or
$41,559. In connection with issuance of these shares, the Company recorded
stock-based compensation expense of $41,559 during fiscal 2006.
During November 2006, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 4) and repaid principal balance and
accrued interest on its notes payable of $15,199 and $3,039, respectively for
which the Company issued 298,000 shares of its common stock to Dutchess.
During December 2006, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 4) and repaid principal balance and
accrued interest on its notes payable of $3,667 and $733, respectively for which
the Company issued 94,500 shares of its common stock to Dutchess.
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 during fiscal 2007.
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 during fiscal 2007.
F-22
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT (continued)
Common Stock (continued)
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 during fiscal 2007.
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 applied 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 during fiscal 2007.
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
during fiscal 2007.
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 year
ended December 31, 2007, the Company recorded consulting expense of $22,500.
On January 24, 2007, the Company issued 500,000 shares of common stock to two
consultants for services rendered. 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 issuance of these shares, the Company recorded consulting fees
of $22,500 for business development services performed during fiscal 2007.
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 applied 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 during fiscal 2007.
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 fiscal 2007.
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.
F-23
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT (continued)
Common Stock (continued)
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 fiscal 2007.
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 year ended
December 31, 2007, the Company recorded consulting expense of $75,000.
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 during
fiscal 2007.
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 year ended December 31, 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 during fiscal 2007.
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 during fiscal 2007.
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 fiscal 2007.
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.
F-24
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT (continued)
Common Stock (continued)
Between April 2007 and June 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.
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 during
fiscal 2007.
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 fiscal 2007.
Between July 2007 and September 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.
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 during fiscal 2007.
In October 2007, the Company issued 1,363,637 shares of common stock for
services rendered. The Company valued these common shares at the fair market
value on the date of grant at $.011 per share or $15,000. In connection with
issuance of these shares, the Company recorded stock-based consulting fees of
$15,000 for services performed during fiscal 2007.
In November 2007, the Company issued 1,150,000 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 $.01 per share or $12,000. In connection with
issuance of these shares, the Company recorded professional fees of $12,000 for
professional services performed during fiscal 2007.
During November 2007, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 4) and received proceeds of $19,800
for which the Company issued 2,615,092 shares of its common stock to Dutchess.
Between November 2007 and December 2007, the Company issued an aggregate
5,867,809 shares of common stock for services rendered to an officer/director
and two employees of the Company. The Company valued these common shares at the
fair market value on the date of grant ranging from $.007 to $.01 per share or
$47,075. In connection with issuance of these shares, the Company recorded stock
based compensation expense of $47,075 during fiscal 2007.
In December 2007, the Company issued 1,000,000 restricted shares of common stock
for investor relation services in connection with a consulting agreement. The
Company valued these common shares at the fair market value on the date of grant
at $.007 per share or $7,000. In connection with the issuance of these shares,
for the year ended December 31, 2007, the Company recorded consulting expense of
$7,000.
F-25
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT (continued)
Common Stock (continued)
In December 2007, the Company issued 400,000 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 $.007 per share or $2,780. In connection
with issuance of these shares, the Company recorded professional fees of $2,780
for professional services performed during fiscal 2007.
Between October 2007 and December 2007, the Company exercised a put notice in
accordance with its Investment Agreement with Dutchess (see note 4) and repaid
accrued interest on its notes payable of $63,875 for which the Company issued in
aggregate 7,510,100 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 December 31, 2007 and 2006 and changes
during the periods is presented below:
Year Ended December 31, 2007 Year Ended December 31, 2006
---------------------------- ----------------------------
Weighted Average Number of Weighted Average
Number of Options Exercise Price Options Exercise Price
----------------- ----------------- ---------- -----------------
Balance at beginning of year 1,508,000 $ 0.16 1,508,000 $ 0.16
Granted - - - -
Exercised - - - -
Forfeited - - - -
----------------- ----------------- ---------- -----------------
Balance at end of year 1,508,000 $ 0.16 1,508,000 $ 0.16
================= ================= ========== =================
Options exercisable at end of year 1,508,000 $ 0.16 1,508,000 $ 0.16
================= ================= ========== =================
Weighted average fair value of
options granted during the year $ - $ -
|
F-26
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 9 - SHAREHOLDERS' DEFICIT (continued)
Stock Options (continued)
The following information applies to options outstanding at December 31, 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
------------ ---------------- --------------- ------------ ----------------- ------------
$ 0.10-0.15 950,000 3.00 $ 0.14 950,000 $ 0.14
$ 0.20-0.25 525,000 0.75 $ 0.21 525,000 $ 0.21
$ 0.50 33,000 2.00 $ 0.50 33,000 $ 0.50
---------------- ------------ ----------------- ------------
1,508,000 $ 0.16 1,508,000 $ 0.16
================ ============ ================= ============
|
NOTE 10 - INCOME TAXES
The Company was taxed as an S-Corporation until December 31, 2004, when the
Company changed its form of ownership to a C corporation. As of December 31,
2007, the Company had approximately $1,421,000 of U.S. federal and state net
operating loss carryforwards available to offset future taxable income which
begin expiring in 2027, if not utilized. Deferred income taxes reflect the net
tax effects of operating loss and tax credit carry forwards and temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which
temporary differences representing net future deductible amounts become
deductible. Due to the uncertainty of the Company's ability to realize the
benefit of the deferred tax assets, the deferred tax assets are fully offset by
a valuation allowance at December 31, 2007.
The table below summarizes the differences between the Company's effective tax
rate and the statutory federal rate as follows for the periods ended December
31, 2007 and 2006:
Year Ended Year Ended
December 31, 2007 December 31, 2006
----------------- -----------------
Tax benefit computed at "expected" statutory rate $ (297,111) $ (684,556)
State income taxes, net of benefit (35,370) (72,482)
Other permanent differences 8,827 661,562
Increase in valuation allowance 323,654 95,476
----------------- -----------------
Net income tax benefit $ - $ -
================= =================
|
F-27
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 10 - INCOME TAXES (continued)
Deferred tax assets and liabilities are provided for significant income and
expense items recognized in different years for tax and financial reporting
purposes. Temporary differences, which give rise to a net deferred tax asset is
as follows:
December 31, 2007 December 31, 2006
Deferred tax assets:
Net operating loss carryforward $ 534,436 $ 206,492
Allowance for doubtful accounts 41,334 41,210
Unearned membership fees 125,491 129,905
----------------- -----------------
Total deferred tax asset 701,261 377,607
Less: Valuation allowance (701,261) (377,607)
----------------- -----------------
- -
================= =================
|
The valuation allowance at December 31, 2007 was $701,261. The increase during
2007 was approximately $323,654.
NOTE 11 - GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $4,717,766 and a working capital deficit of
$2,601,221 at December 31, 2007 and net losses for the year ended December 31,
2007 of $884,259. 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 year ended December 31, 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 12 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
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 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, 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.
F-28
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 12 - COMMITMENTS AND CONTINGENCIES (continued)
Operating Leases
The Company leases its office facility under a five year lease that will expire
in June 2011. The lease requires the Company to pay monthly base rent of $6,587
plus pro rata share of operating expenses. The base rental shall be subject to
an increase by an amount greater of 5% or the Consumer Prices Index adjusted
rent as defined in the agreement.
Year Ended December 31,
2008 $ 85,078
2009 89,331
2010 93,798
2011 48,043
------------
Total minimum lease payments $ 316,250
============
|
Rent expense for the years ended December 31, 2007 and 2006 was $120,426 and
$99,774, respectively.
Litigations
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.
NOTE 13 - SUBSEQUENT EVENTS
In January 2008, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 4) and repaid principal and accrued
interest on its notes payable of $37,501 for which the Company issued in
aggregate 6,644,496 shares of its common stock to Dutchess.
F-29