UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ________ to __________
Commission File Number: 000-267031
UNION DENTAL HOLDINGS, INC.
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(Exact name of small business issuer as specified in charter)
Florida 65-0710392
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 University Drive, Suite 200
Coral Springs, Florida 33071
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(Address of principal executive offices)(Zip Code)
(954) 575-2252
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(Issuer's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes[_] No[_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes[_] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 39,112,420 shares at August 10, 2006
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
UNION DENTAL HOLDINGS, INC.
FORM 10-QSB
QUARTERLY PERIOD ENDED JUNE 30, 2006
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet (Unaudited)
As of June 30, 2006................................................. 3
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended June 30, 2006 and 2005........... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2006 and 2005..................... 5
Notes to Unaudited Consolidated Financial Statements........................ 6
Item 2 - Management's Discussion and Analysis or Plan of Operation.......... 22
Item 3 - Controls and Procedures............................................ 25
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................. 26
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds........ 26
Item 3 - Defaults Upon Senior Securities.................................... 26
Item 4 - Submission of Matters to a Vote of Security Holders................ 26
Item 5 - Other Information.................................................. 26
Item 6 - Exhibits........................................................... 27
Signatures.................................................................. 27
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2006
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 10,695
Accounts receivable, less allowance for doubtful accounts of $69,700 287,341
Inventory of supplies 30,500
Prepaid expenses and other current assets 3,850
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Total current assets 332,386
Property and equipment, net 260,121
Debt issuance costs, net 37,875
Other assets 7,513
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Total Assets $ 637,895
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LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Note payable, net $ 256,883
Convertible debenture payable, net 231,651
Note payable - bank 1,130,267
Accounts payable 29,551
Accrued expenses 97,411
Customer deposits 51,869
Unearned membership fees 265,787
Derivates liability 978,641
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Total current liabilities 3,042,060
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Commitments and contingencies
SHAREHOLDERS' DEFICIT:
Preferred stock ($.0001 Par value; 25,000,000 shares authorized;
1,000,000 shares issued and outstanding) 100
Common stock ($.0001 Par value; 300,000,000 share authorized;
38,612,420 shares issued and outstanding) 3,861
Additional paid-in capital 1,808,033
Accumulated deficit (2,726,448)
Shareholder transactions (1,489,711)
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Total shareholders' deficit (2,404,165)
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Total liabilities and shareholders' deficit $ 637,895
================
See accompanying notes to unaudited consolidated financial statements.
-3-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
June 30, June 30,
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2006 2005 2006 2005
--------------- ----------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues, net $ 525,284 $ 610,924 $ 1,088,343 $ 1,124,561
--------------- ----------------- --------------- ---------------
Operating expenses:
Cost of services performed 104,097 130,962 240,118 232,613
Salaries and related taxes and stock-based compensation 179,298 160,335 402,622 329,055
Depreciation and amortization 16,904 2,802 33,806 5,605
Professional fees 70,954 36,994 140,571 53,100
Consulting fees 55,755 37,500 145,522 42,500
Other general and administrative 192,945 182,475 388,438 313,272
--------------- ----------------- --------------- ---------------
619,953 551,068 1,351,077 976,145
--------------- ----------------- --------------- ---------------
Income (loss) from operations (94,669) 59,856 (262,734) 148,416
--------------- ----------------- --------------- ---------------
Other income (expense):
Amortization of debt issuance costs (33,250) - (88,400) -
Gain (loss) from valuation of derivatives liability (357,266) - 239,845 -
Interest expense (383,412) (24,746) (795,051) (37,628)
--------------- ----------------- --------------- ---------------
Total other income (expense) (773,928) (24,746) (643,606) (37,628)
--------------- ----------------- --------------- ---------------
Income (loss) before provision for income taxes (868,597) 35,110 (906,340) 110,788
Income tax expense - (11,550) - (36,450)
--------------- ----------------- --------------- ---------------
Net income (loss) $ (868,597) $ 23,560 $ (906,340) $ 74,338
=============== ================= =============== ===============
Net loss per common share:
Net income (loss) per common share - basic and diluted $ (0.02) $ 0.00 $ (0.03) $ 0.00
=============== ================= =============== ===============
Weighted average common shares outstanding - basic 37,333,795 28,964,023 36,095,445 28,763,650
=============== ================= =============== ===============
Weighted average common shares outstanding - diluted 37,333,795 29,714,023 36,095,445 29,513,650
=============== ================= =============== ===============
See accompanying notes to unaudited consolidated financial statements.
-4-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
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2006 2005
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(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net income (loss) $ (906,340) $ 74,338
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 33,806 5,605
Stock-based compensation and consulting 110,030 -
Common stock issued for interest 28,085 -
Amortization of debt issuance costs 88,400 -
Amortization of discount of debenture and note payable 620,440 -
Gain from valuation of derivatives (239,845) -
Changes in assets and liabilities:
Accounts receivable 23,492 (51,336)
Inventory of supplies (1,615) (1,130)
Prepaid expenses and other current assets 796 (1,356)
Other assets 8,200 1,000
Accounts payable 9,665 (147,753)
Accrued expenses 32,030 9,447
Income taxes - 36,450
Customer deposits 15,872 2,159
Unearned membership fees (47,587) 188
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Net cash used in operating activities (224,571) (72,388)
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Cash Flows From Investing Activities:
Purchase of property and equipment - (170,162)
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Net cash used in investing activities - (170,162)
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Cash Flows From Financing Activities:
Net proceeds from sales of common stock 173,366 60,000
Proceeds from loans from officer/shareholder - 95,820
Proceeds from long-term debt - 250,000
Payments on line of credit - (30,150)
Payments on debenture payable (116,972) -
Payments on convertible note payable (240,000) -
Payments on notes payable (138,400) (126,787)
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Net cash provided by (used in) financing activities (322,006) 248,883
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Net increase (decrease) in cash (546,577) 6,333
Cash - beginning of year 557,272 42,294
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Cash - end of period $ 10,695 $ 48,627
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Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 55,868 $ 37,628
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Cash payments for income taxes $ - $ -
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Non-cash investing and financing activities:
Issuance of common stock for debt $ 6,900 $ -
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Stockholder loan offset in stockholder transactions $ - $ 95,820
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Reclassification of derivative liability to equity $ 196,108 $ -
================== =================
Issuance of common stock to acquire assets $ - $ 113,755
================== =================
See accompanying notes to unaudited consolidated financial statements.
-5-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, the consolidated financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and such adjustments are of a normal recurring nature. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 2005 and notes
thereto and other pertinent information contained in Form 10-KSB/A-1 of Union
Dental Holdings, Inc. (the "Company") as filed with the Securities and Exchange
Commission (the "Commission"). The results of operations for the six months
ended June 30, 2006 are not necessarily indicative of the results for the full
fiscal year ending December 31, 2006.
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
subsidiaries. All material intercompany balances and transactions have been
eliminated.
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 Coral Springs, Florida. The Company was incorporated on November
26, 1996. On December 27, 2004, the Company entered into a Share Exchange and
Reorganization Agreement ("Reorganization") with both Union Dental Corp.
("UDC"), a Florida corporation and Direct Dental Services, Inc. ("DDS"), a
Florida corporation, whereby UDC and DDS became wholly-owned subsidiaries of the
Company in exchange for an aggregate of 17,500,000 shares of its common stock
and 1,000,000 shares of its preferred stock issued to Dr. George Green with each
share of preferred stock providing voting rights equal to 15 shares of the
Company's common stock. In addition, the Company agreed to recognize the
3,452,250 issued and outstanding options to purchase UDC common stock as options
to purchase the Company's common stock. Pursuant to the Reorganization
Agreement, 22,287,977 shares of the Company's common stock were canceled. As a
result, UDC's and DDS's former stockholders became the Company's majority
stockholders with the Company's former shareholders retaining 10,000,000 shares
of common stock.
On January 11, 2005, the Company amended its Articles of Incorporation to change
its name from National Business Holdings, Inc. to Union Dental Holdings, Inc.
The acquisition of UDC and DDS by the Company was accounted for as a reverse
merger because on a post-merger basis, the former UDC and DDS shareholders hold
a majority of the outstanding common stock of the Company on a voting and fully
diluted basis. As a result, UDC and DDS were deemed to be the acquirer for
accounting purposes. Accordingly, the consolidated financial statements
presented for the period ending December 31, 2005, are those of the combined
results of UDC and DDS for all periods prior to the acquisition, and the
financial statements of the consolidated companies from the acquisition date
forward. The historical stockholders' deficit of the combined results of UDC and
DDS prior to the acquisition have been retroactively restated (a
recapitalization) for the equivalent number of shares received in the
acquisition after giving effect to any differences in the par value of the
Company and the combined UDC and DDS common stock, with an offset to additional
paid-in capital. The restated consolidated retained earnings of the accounting
acquirer (UDC and DDS) are carried forward after the acquisition.
-6-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Organization (continued)
Through its wholly-owned subsidiaries, UDC and DDS, the Company operates two
distinct lines of business.
DDS operates a network of duly licensed dental providers, the Dental Referral,
who provide dental services through the network to union members in accordance
with arrangements between DDS and various labor unions. DDS is not limited as to
the type of labor union which it may solicit. DDS charges an annual management
services fee to the participating dentists to practice in an "area of
exclusivity" for union members. DDS currently has exclusive contracts with
several local unions.
UDC acquired the assets of George D. Green, DDS, PA and manages the operation of
that general dental practice.
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 2006 and 2005 include the allowance for
doubtful accounts, stock-based compensation, the useful life of property and
equipment, and the valuation of derivative liabilities.
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 June 30, 2006, the Company has
established, based on a review of its outstanding balances, an allowance for
doubtful accounts in the amount of $69,700.
Inventory of dental supplies
The Company values its 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.
-7-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 1 - BASIS OF PRESENTATION 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 assets
estimated fair value and its book value. The Company did not consider it
necessary to record any impairment charges during the year ended June 30, 2006.
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
because it is anti-dilutive. The Company's common stock equivalents at June 30,
2006 include the following:
Convertible debentures 19,135,438
Derivatives options 48,000,000
Options 1,508,000
Warrants 1,304,348
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69,947,786
===============
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.
The Company recognizes revenue from its dental practice when dental services are
provided.
-8-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Non-Employee Stock Based Compensation
The cost of stock based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in Emerging
Issues Task Force Issue ("EITF") 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18").
Common stock purchase warrants
The Company accounts for common stock purchase warrants in accordance with the
provisions of the Emerging Issues Task Force ("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).
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 six
months ended June 30, 2005, the Company did not grant any stock options.
Recent accounting pronouncements
In February 2006, the Financial Accounting Standards Board issued Statement No.
155 ("SFAS No 155"), "Accounting for Certain Hybrid Instruments: An Amendment of
FASB Statements No. 133 and 140". Management does not believe that this
statement will have a significant impact as the Company does not use such
instruments.
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.
Reclassifications
Certain prior periods' balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or stockholders' equity.
-9-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 2 - 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
Payment for Month 2 $4,951
Payment for Month 3 $4,951
Payment for Month 4 and each month thereafter $62,716
The principal amount of the Debenture plus accrued interest may be converted at
the option of 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;
(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.
-10-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 2 - CONVERTIBLE DEBENTURES PAYABLE (continued)
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 June 30, 2006, the Company revalued this derivative
liability. For the six months ended June 30, 2006, after adjustment, the Company
recorded a gain on revaluation of this derivative liability of $71,418 and
reclassified $68,051 of the derivative liability to paid-in capital due to the
payment or conversion of the debenture. For the six months ended June 30, 2006,
amortization of the discount on debenture amounted to $149,032. Additionally,
during the six months ended June 30, 2006, the Company issued 75,000 shares of
its common stock for settlement of $6,900 of the debenture.
The convertible debenture liability is as follows at June 30, 2006:
Convertible debentures payable $ 306,167
Less: unamortized discount on debentures (74,516)
----------------
Convertible debentures, net $ 231,651
===============
As of June 30, 2006, the Company is delinquent on its payments on the
convertible debenture by two payments. As of June 30, 2006, the Company had not
received notice of default from the holder of the convertible debentures.
NOTE 3 - 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.
-11-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 3 - EQUITY CREDIT LINE (continued)
In general, the drawdown facility operates as follows: Dutchess, has committed
to provide the Company up to $5,000,000 as it requests over a 36 month period,
in return for common stock the Company issues to Dutchess. The Company, at its
sole discretion, may during the Open Period deliver a "put notice" (the "Put
Notice") to Dutchess which states the dollar amount which the Company intends to
sell to Dutchess on the Closing Date. The Open Period is the period beginning on
the trading after the Effective Date and which ends on the earlier to occur of
36 months from the Effective Date or termination of the Investment Agreement in
accordance with its terms. The Closing Date shall mean no more than 7 trading
days following the Put Notice Date. The Put Notice Date shall mean the Trading
Day immediately following the day on which Dutchess receives a Put Notice, as
defined in the agreement. During the Open Period, the Company shall not be
entitled to submit a Put Notice until after the previous Closing has been
completed. Additionally, Dutchess shall not be obligated to honor any Put Notice
if at the time of the Put Notice Dutchess would own more than 4.99% of the
Company's issued and outstanding common stock.
Upon the receipt by Dutchess of a validly delivered Put Notice, Dutchess shall
be required to purchase from the Company, during the period beginning on the Put
Notice Date and ending on and including the date that is 5 trading days after
such Put Notice, that number of shares having an aggregate purchase price equal
to the lesser of (a) the Put Amount set forth in the Put Notice, or (b) 20% of
the aggregate trading volume of the Company's common stock during the applicable
Pricing Period times (x) the lowest closing bid price of the Company's common
stock during the specified Pricing period, but only if such said shares bear no
restrictive legend and are not subject to stop transfer instructions, prior to
the applicable Closing Date.
For the six months ended June 30, 2006, the Company delivered Put Notices to
draw on the equity line of credit. In connection with these puts, the Company
issued 2,257,496 shares of common stock for net proceeds of $173,366.
NOTE 4 - 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. As described in note 3, 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 as of the date of
grant of $135,000 or $.09 per share and is reflected as a discount on the Note,
which will be amortized over the term.
-12-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 4 - NOTE PAYABLE (continued)
The Company agreed to issue 50 signed Put Notices to the Investor to use as
collateral. In the event, the Investor uses the collateral in full, the Company
shall immediately deliver to the Investor additional Put Sheets as requested by
the Holder. In the event that on the maturity date the Company has any remaining
amounts unpaid on this Note (the "Residual Amount"), the Holder can exercise its
right to increase the Face Amount by ten percent (10%) as an initial penalty and
an additional 2.5% per month paid, pro rata for partial periods, compounded
daily, as liquated damages ("Liquidated Damages").
Additionally, in the event of a default as defined in the agreement, the Holder
shall have the right, but not the obligation, to 1) switch the Residual Amount
to a three-year ("Convertible Maturity Date"), interest-bearing convertible
debenture. If the Holder chooses to convert the Residual Amount to a Convertible
Debenture, the Company shall have 20 business days after notice of the same (the
"Notice of Convertible Debenture") to file a registration statement covering an
amount of shares equal to 300% of the Residual Amount. Such registration
statement shall be declared effective under the Securities Act of 1933, as
amended (the "Securities Act"), by the Securities and Exchange Commission (the
"Commission") within 40 business days of the date the Company files such
Registration Statement. In the event the Company does not file such registration
statement within 20 business days of the Holder's request, or such registration
statement is not declared by the Commission to be effective under the Securities
Act within the time period described above, the Residual Amount shall increase
by $5,000 per day.
The Holder is entitled to convert the Debenture Residual Amount, plus accrued
interest, anytime following the Convertible Maturity Date, at the lesser of (i)
50% of the lowest closing bid price during the 15 trading immediately preceding
the Convertible Maturity Date or (ii) 100% of the lowest bid price for the 20
trading days immediately preceding the Convertible Maturity Date ("Fixed
Conversion Price").
In accordance with Statement of Financial Accounting Standards No. 133,
`Accounting for Derivative Instruments and Hedging Activities', ("FASB 133"),
the Company determined that the conversion feature of the Note met the criteria
of an embedded derivative and therefore the conversion feature of this debt
needed to be bifurcated and accounted for as a derivative. Due to the conversion
features of the Note which is convertible based on draws from the equity credit
line, the debt does not meet the definition of "conventional convertible debt"
because the number of shares which may be issued upon the conversion of the debt
is not fixed. Therefore, the conversion feature fails to qualify for equity
classification under EITF 00-19, and must be accounted for as a derivative
liability.
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 will be amortized to interest expense, using the effective interest
method, over the term of the Note.
-13-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 4 - NOTE PAYABLE (continued)
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
six months ended June 30, 2006, the Company revalued this derivative liability.
For the six months ended June 30, 2006, after adjustment, the Company recorded a
gain on revaluation of this derivative liability of $168,427 and reclassified
$128,057 of the derivative liability to paid-in capital due to the payment of
the debenture. For the six months year ended June 30, 2006, amortization of the
discount on the note amounted to $471,408.
The note payable is as follows at June 30, 2006:
Note payable $ 720,000
Less: unamortized discount on note (463,117)
---------------
Note payable, net $ 256,883
===============
As of June 30, 2006, the Company is delinquent on its payments on the note
payable by two payments. As of June 30, 2006, the Company had not received
notice of default from the holder of the note payable.
NOTE 5 - LONG-TERM DEBT
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 June 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 June 30, 2006, 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 June 30, 2006, the principal amount
outstanding on this note amounts to $1,130,267.
-14-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 6 - SHAREHOLDERS' EQUITY
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 June 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.
On April 4, 2006, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 3) 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.
On April 25, 2006, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 3) 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. 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.
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.
-15-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 6 - SHAREHOLDERS' EQUITY
Stock Options
A summary of the status of the Company's outstanding stock options as of June
30, 2006 and changes during the period ending on that date is as follows:
Weighted
Average
Exercise
Shares Price
-------------- -------------
Outstanding at December 31, 2005 1,508,000 $ 0.16
Granted - -
Exercised - -
Forfeited - -
-------------- -------------
Outstanding at June 30, 2006 1,508,000 $ 0.16
============== ==============
Options exercisable at end of period 1,508,000 $ 0.16
============== ==============
Weighted-average fair value of options
granted during the period $ 0.00
The following information applies to options outstanding at June 30, 2006:
Options Outstanding Options Exercisable
---------------------------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price June 30, 2006 Life (Years) Price June 30, 2006 Price
------------ ----------------- --------------- ------------- ----------------- ------------
$ 0.13-0.15 950,000 4.50 $ 0.14 950,000 $ 0.14
$ 0.20-.0.25 525,000 2.25 $ 0.21 525,000 $ 0.21
$ 0.50 33,000 3.50 $ 0.50 33,000 $ 0.50
------------- ------------ ----------------- ------------
1,508,000 $ 0.16 1,508,000 $ 0.16
============= ============ ================= ============
Common Stock Warrants
In November and December 2005, in connection with a debenture payable, the
Company granted 1,304,348 warrants to purchase 1,304,348 shares of common stock
at $0.092 per share. The warrants expire on the three-year anniversary of the
date of issuance.
-16-
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 7 - GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $2,726,448 and a working capital deficit of
$2,709,674 at June 30, 2006, net losses for the six months ended June 30, 2006
of $906,340 and cash used in operations during the six months ended June 30,
2006 of $224,571. 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 2 and 3), and a note payable
agreement (See note 4), and has a note payable to a bank. 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 8 - SUBSEQUENT EVENT
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.
[Balance of this page intentionally left blank.]
-17-
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
2006 contains "forward-looking statements". Generally, the words "believes",
"anticipates," "may," "will," "should," "expect," "intend," "estimate,"
"continue," and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements which include,
but are not limited to, statements concerning the Company's expectations
regarding its working capital requirements, financing requirements, business
prospects, and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. Such statements are subject to certain
risks and uncertainties, including the matters set forth in this Quarterly
Report or other reports or documents the Company files with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not be
placed on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to update these forward-looking
statements. In addition, the forward-looking statements in this Quarterly Report
on Form 10-QSB involve known and unknown risks, uncertainties and other factors
that could cause the actual results, performance or achievements of the Company
to differ materially from those expressed in or implied by the forward-looking
statements contained herein.
Item 1A - Risk Factors
We are in default with our two primary lenders.
As reflected in the notes to our financial statements, we are in default
with respect to a note payable due Dutchess Private Equities Fund, LP and an
Amended and Restated Promissory Note with Bank of America. While we hope to
enter into some type of forebearance agreement with both of these lenders, there
can be no assurance that either will agree to any new terms or conditions which
we propose. Bank of America has a lien on our assets. If they were to foreclose
on this lien or Dutchess were to exercise its default remedies, we risk
foreclosure on the lien or the attachment of our future revenue streams. If this
should occur, it is unlikely that we would be able to continue our operations
without additional financing of which there can be no assurance.
Item 2 - Management's Discussion and Analysis or Plan of Operation
OVERVIEW
We operate our business through our two wholly owned subsidiaries, Direct
Dental Services, Inc. ("DDS") and Union Dental Corp. ("UDC"). DDS operates a
network of duly licensed dental providers. Members of the dental network pay an
annual management service fee for the right to be a member of the dental
network. UDC operates a dental practice in Coral Springs, Florida. The Company
intends to expand its network of dental providers. The Company may also expand
and offer participating unions other professional services such as chiropractic
and optometrists. The Company may also acquire additional dental practices which
the Company believes will improve operating performance.
Management's current focus is the expansion of its dental network. We
intend to expand in existing markets primarily by enhancing the operating
performance of our existing office, by acquiring dental practices, by adding
union contracts in states where we currently do not have union contracts and by
developing dental network union contracts with other unions. At this time it is
not possible to project what income or expenses will result from the expansion
of these services.
In order to finance our operations, growth and expansion, on August 17,
2005, we entered into an Investment Agreement with Dutchess Private Equity Fund
II, LLP ("Dutchess"). Pursuant to this Agreement, Dutchess will commit to
purchase up to $5,000,000 of our Common Stock over the course of 36 months,
beginning September 15, 2005, the date our registration statement was declared
effective by the SEC. Under the agreement, we may sell to Dutchess on each
occasion, either (1) $100,000 in shares of our common stock or (2) 200% of the
averaged daily volume (U.S. market only)
-18-
Item 2 - Management's Discussion and Analysis or Plan of Operation (continued)
of our Common Stock for the 20 trading days prior to our "Put" notice,
multiplied by the average of the 3 daily closing prices immediately preceding
the Put Date. The Market Price shall be the lowest closing bid price of our
common stock during the Pricing Period. The Purchase Price shall be set at 95%
of the Market Price. This Investment Agreement establishes what is sometimes
termed an equity line of credit or an equity drawdown facility.
In general, the drawdown facility operates as follows: Dutchess, has
committed to provide us with up to $5,000,000 as we request over a 36 month
period, in return for common stock that we issue to Dutchess. We may, in our
sole discretion, during the Open Period deliver a "put notice" (the "Put
Notice") to Duchess which states the dollar amount which we intend to sell to
Dutchess on the Closing Date. The Open Period is the period beginning on the
trading after the Effective Date and which ends on the earlier to occur of 36
months from the Effective Date or termination of the Investment Agreement in
accordance with its terms. The Closing Date shall mean no more than 7 trading
days following the Put Notice Date. The Put Notice Date shall mean the Trading
Day immediately following the day on which Dutchess receives a Put Notice, as
defined in the agreement.
During the Open Period, we are not entitled to submit a Put Notice until
after the previous Closing has been completed.
Upon the receipt by Dutchess of a validly delivered Put Notice, Dutchess
shall be required to purchase from us, during the period beginning on the Put
Notice Date and ending on and including the date that is 5 trading days after
such Put Notice, that number of shares having an aggregate purchase price equal
to the lesser of (a) the Put Amount set forth in the Put Notice, or (b) 20% of
the aggregate trading volume of our common stock during the applicable Pricing
Period times (x) the lowest closing bid price of our common stock during the
specified Pricing period, but only if such said shares bear no restrictive
legend and are not subject to stop transfer instructions, prior to the
applicable Closing Date.
As a result of this variable price feature, the number of shares issuable
pursuant to the agreement will increase if the market price of our stock
decreases. In addition, there is no upper limit on the number of shares issuable
pursuant to the agreement. Therefore our shareholders may be subject to
significant dilution and face the prospect of a change in control. (See Footnote
4 to our Financial Statements).
Through June 30, 2006, we exercised put notices in accordance with its
Investment Agreement with Dutchess and received $173,366 of net cash proceeds
for which the Company issued 2,257,496 shares of its common stock to Dutchess.
Because of the significant decline in the price of our common stock since
the execution of our Line of Credit with Dutchess, it is unlikely that we will
be able to draw down the entire $5,000,000. As a result, we may have to obtain
additional operating capital from other sources to enable us to execute our
business plan. We may be able to obtain a portion of any additional required
working capital through the private placement of common stock to domestic
accredited investors pursuant to Regulation D of the Securities Act of 1933, as
amended. We may also rely on the exemption afforded by Regulation S of the
Securities Act of 1933, as amended, and solicit non-U.S. citizens. There is no
assurance that we will obtain the additional working capital that we need
through the private placement of our common stock. In addition, such financing
may not be available in sufficient amounts or on terms acceptable to us.
Also in connection with the Dutchess financing, on August 17, 2005, we
entered into a Debenture Agreement with Dutchess, an accredited investor, for
the issuance and sale of $600,000 of 10% secured convertible debenture due
August 17, 2010 in a private transaction exempt from registration under the
Securities Act of 1933 in reliance on exemptions provided by Section 4(2) and
Regulation D of the Act. At the time of signing the Debenture Agreement, we also
issued Dutchess a five-year common stock purchase warrant to purchase 1,304,348
shares of our common stock at $.092 per share.
-19-
Item 2 - Management's Discussion and Analysis or Plan of Operation (continued)
Interest is payable on the secured convertible debentures at the rate of
10% per year. Amortizing payments will be made by us in satisfaction of this
Debenture. Payments shall be made monthly on the first day of each business day
of each month while there is an outstanding balance on the Debenture, to the
Holder, in the amounts outlined below on the following schedule:
Payment for Month 1: $4,951
(due within three (3) days of the Issuance Date)
Payment for Month 2: $4,951
Payment for Month 3: $4,951
Payment for Month 4 and each month thereafter: $62,716
The principal amount of the Debenture plus accrued interest may be
converted at the option of Dutchess into shares of our common stock, anytime
following the closing date, at a conversion price equal to the lesser of (i) the
lowest closing bid price during the 15 days of full trading, as defined, prior
to the conversion date; or (ii) $0.092. In addition, in the event that any
portion of the debenture remains outstanding on the maturity date of August 17,
2010, such outstanding amount shall be automatically converted into shares of
our common stock. In the event that we do not make delivery of the common stock
as instructed by Dutchess, we shall be obligated to pay to Dutchess 3% in cash
of the dollar value of the debentures being converted, compounded daily, per
each day after the 3rd business day following the conversion date that the
common stock is not delivered to Dutchess. In the event of default as defined in
the Debenture Agreement, Dutchess may among other things:
(a) elect to secure a portion of our assets not to exceed 200% of the Face
Amount of the Note, in Pledged Collateral;
(b) elect to garnish revenue from us in an amount that will repay the Holder on
the payment schedule set forth above;
(c) exercise its right to increase the Face Amount of the debenture by ten
percent (10%) as an initial penalty and for each Event of Default under the
Debenture;
(d) elect to increase the Face Amount by two and one-half percent (2.5%) per
month (pro-rata for partial periods) paid as a penalty for 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, we have granted Dutchess a security interest in all of
our assets and property.
On December 22, 2005, the Company signed a promissory note (the "Note") in
favor of Dutchess in the amount of $960,000 (the "Face Amount") and received
gross proceeds in the amount of $800,000 less $60,075 in fees associated with
the financing for net proceeds of $739,925. The Company is obligated to repay
the Investor the Face Amount on or before December 23, 2006. There is no stated
interest rate on the Note. Payments are to be made by the Company from each Put
from the Company's Equity Credit Line we have with Dutchess. The Company is
obligated to pay Dutchess the greater of a) 50% of each Put to the Investor or
b) $80,000 until the face Amount minus any fees have been paid. The first
payment was due and made on February 15, 2006 and all subsequent payments will
be made at the Closing of every Put to Dutchess thereafter. The Put Amount will
be the maximum amount allowed under the Investment Agreement with Dutchess.
Payments made by the Company in satisfaction of this Note shall be made from
each Put from the Equity Line of Credit with Dutchess. Additionally, in
connection with this obligation, the Company issued 1,500,000 shares of common
stock.
-20-
Item 2 - Management's Discussion and Analysis or Plan of Operation (continued)
We issued 50 signed Put Notices to Dutchess as collateral. In the event,
that Dutchess uses the collateral in full, we are obligated to immediately
deliver to Dutchess additional Put Sheets as requested. In the event that on the
maturity date we have any remaining amounts unpaid on this Note (the "Residual
Amount"), the Holder can exercise its right to increase the Face Amount by ten
percent (10%) as an initial penalty and an additional 2.5% per month paid, pro
rata for partial periods, compounded daily, as liquated damages ("Liquidated
Damages").
Additionally, in the event of a default as defined in the agreement, the
Holder shall have the right, but not the obligation, to 1) switch the Residual
Amount to a three-year ("Convertible Maturity Date"), interest-bearing
convertible debenture. If the Holder chooses to convert the Residual Amount to a
Convertible Debenture, we shall have 20 business days after notice of the same
(the "Notice of Convertible Debenture") to file a registration statement
covering an amount of shares equal to 300% of the Residual Amount. Such
registration statement shall be declared effective under the Securities Act of
1933, as amended (the "Securities Act"), by the Securities and Exchange
Commission (the "Commission") within 40 business days of the date we file such
Registration Statement. In the event we do not file such registration statement
within 20 business days of the Holder's request, or such registration statement
is not declared by the Commission to be effective under the Securities Act
within the time period described above, the Residual Amount shall increase by
$5,000 per day.
The Holder is entitled to convert the Debenture Residual Amount, plus
accrued interest, anytime following the Convertible Maturity Date, at the lesser
of (i) 50% of the lowest closing bid price during the 15 trading immediately
preceding the Convertible Maturity Date or (ii) 100% of the lowest bid price for
the 20 trading days immediately preceding the Convertible Maturity Date ("Fixed
Conversion Price").
We are in default under this obligation. We have not however received
notice of Default from Dutchess.
We have adopted a code of conduct for the operations of our business. We
believe that this code of conduct will promote our business dealings with the
public in general, govern the activities of our officers and employees with
respect to safeguarding corporate assets and dealing fairly with our
shareholders.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the Securities
and Exchange Commission (the "SEC"), encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The Company's consolidated financial statements include a
summary of the significant accounting policies and methods used in the
preparation of the consolidated financial statements. Management believes the
following critical accounting policies affect the significant judgments and
estimates used in the preparation of the financial statements.
Use of Estimates - Management's discussion and analysis or plan of
operation is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses, and related disclosure
of contingent assets and liabilities. On an ongoing basis, management evaluates
these estimates, including those related to allowances for doubtful accounts
receivable and long-lived assets. Management bases these estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We review the carrying value of property and equipment for impairment at
least annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of long-lived
assets is measured by comparison of its carrying amount to the undiscounted cash
flows that the asset or asset group is expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the property, if any, exceeds its fair
market value.
-21-
Item 2 - Management's Discussion and Analysis or Plan of Operation (continued)
Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R),
"Share-Based Payment," under the modified prospective method. SFAS No. 123(R)
eliminates accounting for share-based compensation transactions using the
intrinsic value method prescribed under APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and requires instead that such transactions be
accounted for using a fair-value-based method. Under the modified prospective
method, we are required to recognize compensation cost for share-based payments
to employees based on their grant-date fair value from the beginning of the
fiscal period in which the recognition provisions are first applied. For periods
prior to adoption, the financial statements are unchanged, and the pro forma
disclosures previously required by SFAS No. 123, as amended by SFAS No. 148,
will continue to be required under SFAS No. 123(R) to the extent those amounts
differ from those in the Statement of Operations.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
Revenues
For the six months ended June 30, 2006, we generated revenues of $1,088,343
compared to $1,124,561 for the six months ended June 30, 2005, a decrease of
$36,218 or 3.2%. For the three months ended June 30, 2006, we generated revenues
of $525,284 compared to $610,924 for the three months ended June 30, 2005, a
decrease of $85,640 or 14.0%. The primary reasons for this decrease in revenues
is due to our write-off of that portion of insurance reimbursement which are
being waived as a result of agreements with the unions and/or insurance
carriers. Beginning with the third quarter of 2006, we will make these
adjustments on a quarterly basis.
Total Operating Expenses
The Company's total operating expenses increased $374,932 or 38.4% for the
six months ended June 30, 2006 as compared to the 2005 period. These increases
include:
o Cost of services performed - Cost of services performed expense consists of
personnel cost, dental supplies, and lab costs. For the six months ended
June 30, 2006, the cost of services performed were $240,118 as compared to
$232,613 for the 2005 period, an increase of $7,505 or 3.2%. These
increases were the result of additional dental personnel employed by the
Company.
o Salaries, related taxes and stock-based compensation - Salaries, related
taxes and stock-based compensation expense consists of personnel cost and
the fair value of common shares issued for services to employees. For the
six months ended June 30, 2006, salaries, related taxes and stock-based
compensation costs were $402,622 as compared to $329,055 for the 2005
period, an increase of $73,567 or 22.4%. The increase in salaries relates
to adding additional personnel and normal wage increases including
additional staff personnel resulting from the acquisition of the assets of
Dental Visions.
o For the six months ended June 30, 2006, we recorded depreciation expense of
$33,806 as compared to $5,605 for the 2005 period. In mid 2005, we acquired
the assets of Dental Visions which we began amortizing in the third quarter
of 2005.
o For the six months ended June 30, 2006, we incurred professional fees of
$140,571 as compared to $53,100 for the 2005 period, an increase of $87,471
or 164.7%. During the six months ended June 30, 2006, we incurred legal
fees of $26,000 from the issuance of common shares for services rendered
and incurred legal fees related to other corporate legal matters.
Additionally, we incurred increased accounting fees related to the audit of
our books and records and SEC filings.
o For the six months ended June 30, 2006, we incurred consulting fees of
$145,522, including $70,469 of stock based consulting fees, as compared to
$42,500 for the 2005 period, an increase of $103,022. For the six months
ended June 30, 2006, we incurred investor relations fees of $57,000 as
compared to $0 for the six months ended June 30, 2005.
-22-
Item 2 - Management's Discussion and Analysis or Plan of Operation (continued)
o For the six months ended June 30, 2006, we incurred other general and
administrative expenses of $388,438 as compared to $313,272 for the 2005
period, an increase of $75,166 or 24%. Other general and administrative
expenses consisted of the following:
For the six months
Ended June 30,
-------------------------------
2006 2005
--------------- ---------------
Rent $ 50,729 $ 42,570
Insurance 54,266 47,925
Postage 37,499 20,404
Printing 23,405 22,376
Other 222,539 179,997
--------------- ---------------
Total $ 388,438 $ 313,272
=============== ===============
o Increases in rent of $8,159 are attributable to additional costs we
incurred as a result of the acquisition of the dental practice owned by Dr.
Dora Vilk-Shapiro, d/b/a Dental Visions where we assumed the leasehold
obligation.
o During the six months ended June 30, 2006, we had an increase in insurance
expense of $6,341 compared to the 2005 period primarily related with an
increase in health insurance costs.
o For the six months ended June 30, 2006, postage amounted to $37,499 s
compared to $20,404 for the six months ended June 30, 2005, an increase of
$17,095 or 83.4%. This increase was attributable to the mailing of
promotional materials to union members in new contracted areas.
o For the six months ended June 30, 2006, printing amounted to $23,405 as
compared to $22,376 for the six months ended June 30, 2005, an increase of
$1,029 or 4.6%. This increase was attributable to the printing of
promotional materials for union members in new contracted areas.
o Other general and administrative expenses consisted of casual labor, office
expenses, utilities, maintenance, computer expenses, postage, travel, and
other expenses. The increase for the six months ended June 30, 2006 as
compared to the 2005 period of $42,542 is attributable to an increase in
operational activities.
Other income (expenses)
o For the six months ended June 30, 2006, we recorded amortization of debt
issuance costs of $88,400 as compared to $0 in the 2005 period.
o For the six months ended June 30, 2006, we recorded a gain from the
revaluation of a derivative liability of $239,845 which was attributable to
our stock volatility and the value of our stock price.
o For the six months ended June 30, 2006, interest expense was $795,051 as
compared to $37,628 for the 2005 period, an increase of $757,423 and was
attributable to the amortization of discount on our debenture and note
payable.
-23-
Item 2 - Management's Discussion and Analysis or Plan of Operation (continued)
Net loss
As a result of these factors, we reported a net loss of $(906,340) or
$(.03) per share for the six months ended June 30, 2006 as compared to net
income of $74,338 or $.00 per share for the six months ended June 30, 2005. For
the three months ended June 30, 2006, we reported a net loss of $(868,597) or
$(.02) per share as compared to net income of $23,560 or $0.00 per share for the
three months ended June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2006, we had cash and accounts receivable amounting to $10,695
and $287,341, respectively. We had total current assets of $332,386 and our
total assets were $637,895. Our total current liabilities were $3,042,060. We
have a working capital deficit as of June 30, 2006 of $2,709,674. Our working
capital deficit is attributable primarily to two factors:
We have recorded $1,130,267 as a short term loan liability representing the
entire principal balance due and owing Bank of America. The loan was established
to finance our ongoing operations and as a result of our agreement in December
2004 to assume the debt obligation of the principal stockholder for a bank loan
utilized to purchase 50% of DDS from its founder and former owner and the
remaining balance owed on the original 50% acquisition. The original note was in
the amount $1,215,000. On May 17, 2005, the Company entered into an Amended and
Restated Promissory Note in the amount of $1,384,000. We have made all required
monthly payments under this obligation. However, we have failed to comply with
certain covenants contained within the loan documentation and have received a
notice of default from Bank of America. We have met with our Bank of America
account representative and their legal counsel to discuss this matter further.
While we have discussed the possibility of entering into some type of
forbearance agreement with Bank of America while this loan agreement remains in
default, we have not discussed the specific terms or conditions of such an
agreement nor can there be any assurance that we will be able to come to any
type of agreement with respect to the execution of a forbearance agreement.
In order to finance our ongoing operations, we entered into several
different financing arrangements with Dutchess Private Equity Fund II, LLP (See
Footnotes 2, 3, and 4 of our financial statements). As a result of these
financings, at June 30, 2006, we have recorded $231,651 as the outstanding
current portion of the convertible debenture, a derivative liability totaling
$978,641, and a note payable totaling $256,883. The derivative liability which
we recorded on our books is the result of the convertibility feature and the
registration rights which we have granted to Dutchess. We have failed to comply
with the terms and conditions of the note payable due Dutchess and our in
default. We have not received any notice of default from Dutchess. (See
Footnotes 2, 3 and 4 of our financial statements).
We have also recorded a liability for unearned membership fees totaling
$265,787.
To the extent that revenues are insufficient to support ongoing operations
and satisfy existing debt obligations, the Company was required to draw against
its equity line of credit. With our stock price currently trading below the
conversion price of $.092 per share, it is unlikely that Dutchess would convert
any portion of the outstanding obligation at the fixed conversion price.
Moreover, we were required to deliver Put notices to Dutchess to satisfy the
terms and conditions of the $960,000 promissory note. In connection with these
puts, for the six months ended June 30, 2006, we issued 2,257,496 shares of
common stock for net proceeds of $66,938 and the reduction of its debenture
payable and convertible note payable of $106,428 for an aggregate Put value of
$173,366.
Since we will continue to draw down our equity line of credit, we will have
to issue additional shares of our common stock which will cause further dilution
and likely downward pressure on the price of our common stock. If the price of
our common stock continues to decline, we will not have registered a sufficient
number of shares of common stock to draw against the equity credit line. For the
period from January 21, 2006 to June 30, 2006, the Company exercised put notices
in accordance with its Investment Agreement with Dutchess (see note 4) and
received $173,366 of net cash proceeds for which the Company issued 2,257,496
shares of its common stock to Dutchess.
-24-
Item 2 - Management's Discussion and Analysis or Plan of Operation (continued)
We have an accumulated deficit of $2,726,448 and a stockholders' deficit of
$2,404,165 at June 30, 2006.
As a result of the foregoing accounting treatment of the various
transactions, Dr. Green will be required to repay a portion of these sums to the
Company. As of the date hereof, no repayment schedule has been established. To
the extent that any sums are due as a result of any reclassification of
goodwill, no payments will be made by Dr. Green.
You are urged to review the accompanying financial statements and financial
footnotes in order to fully understand our financial condition.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this Report, the Company's
President, who is its chief executive officer and is also its Treasurer and
principal financial officer (the "Certifying Officer"), evaluated the
effectiveness of the Company's "disclosure controls and procedures," as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that
evaluation, this officer concluded that, as of the date of his evaluation, the
Company's disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed in the Company's
periodic filings under the Securities Exchange Act of 1934 is accumulated and
communicated to management, including that officer, to allow timely decisions
regarding required disclosure.
The Certifying Officer has also indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
Our management, including the Certifying Officer, does not expect that our
disclosure controls or our internal controls will prevent all errors and fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. In addition, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of these inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
-25-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Except as described below, there have been no changes or developments in
any legal proceedings which have been filed against the Company.
During the second quarter of 2006, we were sued by another dentist who was
previously a Direct Dental member. The suit was filed in Broward County, Florida
(Case No. 06-11588CA27) and alleges tortuous interference with a business
relationship and libel.
A similar suit was filed by this same dentist in Dade County, Florida.
Management believes that it has meritorious defenses in that this action was
brought in response to a lawsuit filed by the company against the same dentist
for breach of contract, slander, tortuous interference with a business
relationship and injunctive relief (Case No. 04-12109 CA 10). We filed this
action when the dentist failed to pay the required fee to remain a member of the
Direct Dental network and attempted to create his own network of service
providers.
In August 2006 we were sued in Orange County, California Small Claims Court
by a Direct Dental member dentist Case No. 06WS02050 . The complaint alleges
that Direct Dental did not provide the required services and seeks damages in
the amount of $5,000. We believe that we have a meritorious defense to this
cause of action.
For a complete description of all legal proceedings which are currently
pending, you are urged to read our Form 10-KSB-A-1 which was filed with the
Securities and Exchange Commission on April 27, 2006.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
During the three month period covered by this report, we issued the
following unregistered securities:
Date Title Amount Consideration
-------------- ------- ------- ----------------
April 25, 2006 C/S(1) 250,000 Services
June 21, 2006 C/S(1) 100,000 Services
--------
(1) The shares were issued pursuant to an exemption from registration under
Section 4(2) of the Act.
Also during the three months ended June 30, 2006, we issued a total of
1,344,621 shares of our common and received a total of received a total of
$39,173 shares of our common stock pursuant to certain Put options under our
equity credit line with Dutchess Private Equities Fund II, L.P. We used the net
proceeds from the sale of the common stock for working capital purposes.
Also during the period ended June 30, 2006, we issued a total of 372,000
shares of common stock to two of our consultants. These shares were valued at
$.05 per share and issued pursuant to the Company's 2005 Equity Compensation
Plan which was filed on Form S-8 on July 1, 2005.
-26-
Item 3 - Defaults Upon Senior Securities
We have received a notice of default with respect to our amended and
restated promissory note with Bank of America. As a result, we have
characterized our line of credit with Bank of America as a short term liability.
Although we are current with all monthly payments, we have failed to maintain
certain covenants required under the loan documentation. We have met with our
account representative at Bank of America and their legal counsel and hope to
come to terms with respect to some type of forbearance agreement, of which there
can be no assurance.
We are also in default with respect to our note payable with Dutchess
Private Equities Fund, LP. We have failed to make the required monthly payments
due under the note since June 2006. Notwithstanding the foregoing, we have not
received any notice of default from Dutchess.
Item 4 - Submissions of Matters to a Vote of Security Holders
During the period covered by this Report, there were no matters submitted
to a vote of security holders through the solicitation of proxies or otherwise.
Item 5 - Other Information
None
Item 6 - Exhibits
Exhibit
No. Description
------- ---------------------------------
31.1 * Section 302 Certification of the Principal Executive Officer
31.2 * Section 302 Certification of the Principal Financial Officer
32.1 * Section 906 Certification of Principal Executive Officer *
32.2 * Section 906 Certification of Principal Financial and Accounting Officer
------------
* Filed herewith
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
UNION DENTAL HOLDINGS, INC.
Dated: August 14, 2006 By: /s/ George D. Green
-----------------------------------
George D. Green
Chief Executive Officer, President and Director
-27-