UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2006
Or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to___________
Commission file number: 000-26703
Union Dental Holdings, Inc.
--------------------------------------------
(Name of small business issuer in its charter)
Florida 65-0710392
------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 University Drive, Suite 200
Coral Springs, Florida 33071
------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (954) 575-2252
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.0001 Per Share
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.
Yes |X| No |_|
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, 2006:
$2,197,099.
Of the 64,493,947 shares of our common stock issued and outstanding as of March
16, 2007 approximately 40,443,747 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 $.037 of our Common
Stock as reported on the OTC Bulletin Board on March 16, 2007 was approximately
$1,496,000.
DOCUMENTS INCORPORATED BY REFERENCE
Form SB-2 filed on September 9, 2005
Form SB-2A/-1 filed September 11, 2006
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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 Development. National Business Holdings, Inc., a Florida
corporation, was incorporated on November 26, 1996 as Stirus Research &
Development, Inc. We were originally in the business of development and sales
distribution of medical devices. We later changed our name to Mecaserto, Inc. on
November 9, 1998, when we acquired a French subsidiary, Mecaserto, S.A., whose
business was the manufacture and sale of a medical imaging device.
On or about May 1, 2002, Pieter Durand, our former officer and director,
loaned us $25,000 to support our working capital requirements. This indebtedness
was evidenced by a Convertible Note, convertible into our Common Stock at the
election of the holder. Pursuant to the December 27, 2004 Reorganization
Agreement, this debt has been canceled.
On or about May 5, 2003, our French subsidiary faced liquidation in a
French court and we relinquished our ownership interest in this subsidiary to
our French shareholders in exchange for such holders' agreement to assume the
debts and liabilities of the French subsidiary. Since the conclusion of this
transaction and prior to our reorganization with Union Dental Corp and Direct
Dental Services on December 27, 2004, we had no assets, liabilities or business
operations except our Convertible Note indebtedness and miscellaneous payables.
On or about February 2, 2004, we accepted a subscription from Gala
Enterprises Ltd. for 10,000,000 shares of our restricted, unregistered common
stock for cash proceeds of $25,000 in order to support our short-term working
capital requirements. We relied upon Section 4(2) of the Securities Act of 1933,
as amended ("Securities Act"), and Rule 506 of Regulation D promulgated
thereunder. This transaction did not involve a public offering and was exempt
from registration under the Securities Act. No underwriters were used in
connection with this transaction.
On February 2, 2004, Pieter Durand, the principal of Gala Enterprises Ltd.,
was appointed to serve as a member of our Board of Directors until the next
meeting of the shareholders in which directors are elected. Subsequently, on
February 6, 2004, Dennis Rault, our former sole officer and director, tendered
his resignation, leaving Mr. Durand as our sole officer and director.
3
On May 4, 2004, our Board of Directors ratified and accepted and the
majority shareholders approved by written consent an Amended and Restated
Articles of Amendment to the Articles of Incorporation, filed with the State of
Florida on May 11, 2004, changing our name from Mecaserto, Inc. to National
Business Holdings, Inc. Our Restated Articles of Incorporation allow us to issue
up to 300,000,000 shares of common stock, par value of $.0001, of which
29,510,585 shares are issued and outstanding at the present time. The Restated
Articles of Incorporation also allow us to issue up to 25,000,000 shares,
$0.0001 par value, of preferred stock with the specific terms, conditions,
limitations and preferences to be determined by the Board of Directors without
shareholder approval, of which 1,000,000 shares are issued and outstanding at
the present time.
On May 10, 2004, our Board of Directors ratified and accepted and a
majority of shareholders approved by written consent a subdivision of the issued
and outstanding common stock of the Company (a reverse split) at a ratio of one
(1) share for each forty (40) shares of common stock issued and outstanding,
effective May 24, 2004.
On May 28, 2004, we entered into a Share Exchange Agreement with Shava,
Inc. ("Shava"), whereby we acquired one hundred percent (100%) of all the
outstanding shares of common stock ("Shava Common Stock") of Shava from Roger E.
Pawson, Shava's sole officer, director and shareholder, in exchange for
3,100,000 post-reverse split shares of our common stock in order to effect a
reverse acquisition of Shava. As a part of the transaction, the Company changed
its fiscal year end from December 31 to May 31. We filed a Form 10-KSB for the
transition period from January 1, 2004 to May 31, 2004 in accordance with the
Securities Exchange Act of 1934.
After the May 28, 2004 change in control, we decided to initiate a new
business plan of lending and investing. In June 2004, we formed a new wholly
owned subsidiary in Florida, National Business Investors, Inc. with headquarters
in Falls Church, Virginia and San Diego, California. This subsidiary has not
conducted any business to date.
On December 27, 2004, we entered into a Share Exchange and Reorganization
Agreement ("Reorganization") with both Union Dental Corp, a Florida corporation
("UDC") and Direct Dental Services, Inc., a Florida corporation ("DDS") whereby
UDC and DDS became wholly-owned subsidiaries of us in exchange for an aggregate
of 17,500,000 shares of our common stock and 1,000,000 shares of our preferred
stock with each share of preferred stock providing voting rights equal to 15
shares of our common stock. In addition, we agreed to recognize the 3,452,250
issued and outstanding options to purchase UDC common stock as options to
purchase our common stock. Pursuant to the Reorganization Agreement, 22,287,977
shares of our common stock were canceled.
Effective October 15, 2004, UDC acquired substantially all of the assets
(except the patient list) of George D. Green D.D.S., P.A. in Coral Springs,
Florida. Pursuant to this Asset Purchase Agreement, the aggregate purchase price
payable by UDC for these assets was One Million Dollars ($ 1,000,000.00),
payable pursuant to a Promissory Note (the "PA Note") in the amount of One
Million Dollars ($1,000,000.00) with interest thereon of five percent (5%) per
annum, and which note shall be payable in ten (10) equal yearly installments.
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 unions. Pursuant to the
Stock Purchase Agreement, on August 14, 2000, Dr. Green acquired two hundred
fifty (250) shares of common stock of DDS from Melvyn Greenstein, DDS and Irene
Greenstein, the initial shareholders and Sellers (collectively the
"Greensteins"), for the purchase price of One Million Eight Hundred Fifty
Thousand Dollars ($1,850,000.00) (1st DDS Purchase Price). The 1st DDS Purchase
Price was payable as follows: One Million Four Hundred Fifty Thousand Dollars
($1,450,000.00) at closing and a promissory note of Four Hundred Thousand
4
Dollars ($400,000.00). On December 31, 2003, Dr. Green acquired the remaining
two hundred fifty (250) shares of common stock of DDS from the Greensteins for
the purchase price of Eight Hundred Seventy Five Thousand Dollars ($875,000.00)
(2nd DDS Purchase Price). As a result of the 1st DDS Purchase Price and the 2nd
DDS Purchase Price, Dr. Green owned of record and beneficially all of the issued
and outstanding common stock of DDS, consisting of five hundred (500) shares of
DDS.
On January 11, 2005, we amended our Articles of Incorporation to change our
name from National Business Holdings, Inc. to Union Dental Holdings, Inc. On
February 8, 2005, we further amended our Articles of Incorporation to issue
1,000,000 shares of preferred stock with each share of preferred stock providing
voting rights equal to 15 shares of our common stock to Dr. Green.
On May 17, 2005, Union Dental Holdings, Inc., a Florida corporation (the
"Company"), entered into an Asset Purchase Agreement to acquire certain assets
and assume 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 ("Purchase Price"). However, Dental Vision's patient list shall be
assigned to George D. Green. The patient list is assigned to Dr. Green for
partial consideration for personally guaranteeing the Company's bank loan. The
Purchase Price consists of the Company assuming debt in the amount of $169,486
and the issuance of 733,901 shares of the Company's common stock, valued at 15.5
cents per share for an aggregate price of $113,755 (the "Acquisition"). The
Asset Purchase Agreements contains customary representations and warranties,
closing and termination provisions. The closing relating to the Dental Vision
assets occurred upon entry into the Asset Purchase Agreement.
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
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
5
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.
To date, we have not received notice of default from Dutchess.
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.
During the year ended December 31, 2006, the Company issued 75,000 shares
of its common stock for settlement of $6,900 of the debenture.
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.
(b) Business of the Company. During the fiscal year ended December 31,
2006, we operated two business lines: operating a network of duly licensed
dental providers to a network of union members through DDS and managing a dental
practice through UDC.
DIRECT DENTAL SERVICES, INC.
Direct Dental Services, Inc. ("DDS") 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 DDS and various labor unions. DDS is not limited as to the
type of labor union which DDS may solicit. DDS charges a annual management
services fee to the participating dentists to practice in an "area of
exclusivity" for union members. DDS currently has exclusive 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").
Members of the Dental Network are assigned "areas of exclusivity"
established by DDS 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.
6
EXCLUSIVE AGREEMENTS
DDS 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.
DDS enters into contracts with labor unions to be the exclusive provider of
dental services to its memberships under existing dental benefit plans.
Presently, DDS 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. During 2006, we signed an agreement
with the Communications Workers of America ("CWA") Local 1101. This agreement
provides the impetus for us to build our network of dental providers in New
Jersey, Connecticut, Vermont, Rhode Island, New Hampshire, Massachusetts, New
Jersey and New York.
Also, during 2006, we signed our first nationwide agreement with the
Association of Flight Attendants. In furtherance thereof, we are trying to
establish a nationwide network to service the needs of the flight attendants
union. This nationwide network will be focused on various airport hubs. We will
concentrate initially on major hub locations. We intend to pursue other labor
unions as part of our expansion program.
DENTAL NETWORK
The Dental Network currently consists of approximately 1,600 licensed
dentists located in 27 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.
UNION DENTAL CORP.
Union Dental Corp., ("UDC") 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, UDC 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
The Company, in addition to sales and marketing of the "areas of
exclusivity", manages a dental practice in Coral Springs, Florida where its
subsidiary, UDC, utilizes the services of 17 individuals pursuant to a
management agreement with Dr. George D. Green, DDS, P.A. The Coral Springs
7
office is comprised of two licensed dentists, 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.
ACQUISITION OF ADDITIONAL PRACTICES
We intend to acquire existing dental practices in selected geographical
areas throughout the United States to further expand our base of operations by
providing additional locations for the benefit of union members. This expansion
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. This practice
has been integrated into the dental practice operated by Union Dental Corp. at
its principal place of business. If we are able to acquire additional dental
practices, of which there can be no assurance, we believe that this will allow
us to expand our network of union dental providers.
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. Prospective
members also had the opportunity to meet with current network members and other
prospective members. We believe that this is a cost-effective way to recruit
prospective Network members and will continue to sponsor these seminars in 2006.
WEB SITE DEVELOPMENT
We developed a website for use in the expansion of our Dental Network. Our
website will be 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 will also be used to establish a
direct link between the patient and the doctor. We believe this approach will
enhance 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.
8
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.
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. UDC
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 located at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549. Please 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
filed with the Securities and Exchange Commission ("SEC"), including the
Company's financial statements and related notes, in evaluating the Company's
9
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 2006 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. 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 ("DDS") 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, 2006 We have accumulated losses from operations
totaling $ $3,833,507, a working capital deficit of $3,135,166 and a
stockholders' deficit of $2,895,830. A significant portion of the operating
losses in 2006 is attributable to our salaries and related stock based
compensation as well as a significant increase in our borrowing costs.
Management also continues to invested 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.
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.
10
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
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
11
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.
We may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"),
the Securities and Exchange Commission adopted rules requiring public companies
to include a report of management on the company's internal controls over
financial reporting in their annual reports, including Form 10-KSB. In addition,
the independent registered public accounting firm auditing a company's financial
statements must also attest to and report on management's assessment of the
effectiveness of the company's internal controls over financial reporting as
well as the operating effectiveness of the company's internal controls. We are
evaluating our internal control systems in order to allow our management to
report on, and our independent auditors attest to, our internal controls, as a
required part of our Annual Report on Form 10-KSB beginning with our report for
the fiscal year ended December 31, 2007.
While we expect to expend significant resources in developing the necessary
documentation and testing procedures required by SOX 404, there is a risk that
we will not comply with all of the requirements imposed thereby. At present,
there is no precedent available with which to measure compliance adequacy.
Accordingly, there can be no positive assurance that we will receive a positive
attestation from our independent auditors. In the event we identify significant
deficiencies or material weaknesses in our internal controls that we cannot
remediate in a timely manner or we are unable to receive a positive attestation
from our independent auditors with respect to our internal controls, investors
and others may lose confidence in the reliability of our financial statements
and our ability to obtain equity or debt financing could suffer.
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.
12
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;
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.
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.
13
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, Dutchess may acquire and resell
up to 8,857,396 shares of our common stock. The issuance of the shares of our
common stock upon conversion of the convertible Debenture 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. This
will require us 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.
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. Through December 31, 2006, we have
received a total of $498,355 under the terms and conditions of the investment
agreement and have approximately 33,268,100 shares available for future
issuance. Given our 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 likelihood continue to retain control.
If we were request the maximum of $5,000,000 pursuant to the Investment
Agreement, assuming a conversion price of $.13, we would issue to Dutchess
38,461,538 shares of our common stock. Based on the current price of our common
stock at $.04 per share, and assuming we were making our first draw, we would
only be able to draw down approximately $1.54 million from our equity credit
line and be required to issue approximately 38,461,000 shares of our Common
Stock. This would result in Dutchess and their assignees or transferees owning a
majority of our issued and outstanding common stock. As a result, 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
14
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
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
During the second quarter of 2005 we were 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. Management believes that it has meritorious defenses in
that this action was brought in response to a lawsuit filed by the company
15
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. Mediation is scheduled in this matter and if we can not
resolve this matter to our satisfaction, we intend to proceed with our
counterclaim.
We have been sued in the Court of Common Pleas in Lebanon County,
Pennsylvania individually and on behalf of a class (Jaromir Kovarik and Daria
Kovarikova v Union Dental Corp. and George Greeen. The complaint alleges
violation of 47 U.S.C. Section 227(b)(1)(c) and related sections in connection
with the distribution of an unsolicited facsmile transmissions. The suit seeks
class action certifications. The lawsuit was previously filed and was dismissed
by the Court. The Company believes that it has meritorious defenses to the
action.
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, 2006, covered by this report.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
a) Market Information. The Company's common stock began trading on the
Over-the-Counter Bulletin Board (the "OTCBB") on October 6, 2004. Our current
stock symbol is "UDHI.OB". The following table sets forth, for the periods
indicated, the range of high and low closing bid quotations for our common stock
as quoted on the OTCBB. The reported bid quotations reflect inter-dealer prices
without retail markup, markdown or commissions, and may not necessarily
represent actual transactions. Prices set forth below have been adjusted to give
effect to the one for forty reverse stock split which was approved by the
stockholders on May 10, 2004.
Year 2004 High Low
------------------- ------ -----
First Quarter $.0 $.0
Second Quarter .01 .01
Third Quarter .02 .01
Fourth Quarter .55 .02
Year 2005 High Low
------------------- ------ -----
First Quarter $.73 $.17
Second Quarter .21 .08
Third Quarter .22 .10
Fourth Quarter .15 .09
Year 2006 High Low
------------------- ------ -----
First Quarter $.12 $.08
Second Quarter .08 .02
Third Quarter .10 .07
Fourth Quarter .07 .04
Year 2007 High Low
-------------------- ------ -----
Through March 15, 2007 $.05 $.04
16
Such market quotations reflect the high bid and low prices as reflected by
the OTCBB or by prices, without retail mark-up, markdown or commissions and may
not necessarily represent actual transactions. Some of the companies who serve
as market makers for our common stock include WM. V. Frankel & Co., Hill
Thompson Magid & Co, Knight Equity Markets, L.P. and Schwab Capital Markets L.P.
Our shares are subject to the provisions of Section 15(g) and Rule 15g-9 of the
Securities Exchange Act of 1934, as amended (the Exchange Act"), commonly
referred to as the "penny stock" rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g9(d)(1) incorporates
the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act.
The Commission generally defines penny stock to be any equity security that
has a market price less than $5.00 per share, subject to certain exceptions.
Rule 3a51-1 provides that any equity security is considered to be penny stock
unless that security is: registered and traded on a national securities exchange
meeting specified criteria set by the Commission; authorized for quotation on
The NASDAQ Stock Market; issued by a registered investment company; excluded
from the definition on the basis of price (at least $5.00 persuade) or the
registrant's net tangible assets; or exempted from the definition by the
Commission. Since our shares are deemed to be "penny stocks", trading in the
shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors.
For transactions covered by these rules, broker-dealers must make a special
suitability determination for the purchase of such securities and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document relating to the penny stock market. A broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the securities. Finally,
the monthly statements must be sent disclosing recent price information for the
penny stocks held in the account and information on the limited market in penny
stocks. Consequently, these rules may restrict the ability of broker dealers to
trade and/or maintain a market in our Common Stock and may affect the ability of
shareholders to sell their shares.
Transfer Agent
Our transfer agent is Interwest Transfer Co., Inc., 1981 East Murray
Holiday Road, Suite 100, Salt Lake City, UT 84117. Their telephone number is
(801) 272-9294.
(b) Holders. As of March 13, 2007 there were 422 shareholders of record of
our common stock.
(c) Dividend Policy. We have not declared or paid cash dividends or made
distributions in the past, and we do not anticipate that we will pay cash
dividends or make distributions in the foreseeable future. We currently intend
to retain and reinvest future earnings, if any, to finance our operations.
(d) Securities authorized for issuance under equity compensation plans
The following table sets forth all securities which we may issue under any
equity compensation plan.
17
Number of securities to Weighted average
be issued upon exercise exercise price of Number of securities
of outstanding options, outstanding options, remaining available for
Plan category warrants and rights warrants and rights future issuance
(a) (b) (c)
===================================== ======================= ==================== =======================
Equity compensation plans approved
by security holders (1)(3) 1,508,000 $0.16 6,792,000
Equity compensation plans no
approved by security holders (2) -0- $-0- -0-
Total 1,508,000 $0.16 6,792,000
(1) Effective December 30, 2006, we reached agreement with several holders of
our outstanding options whereby we cancelled 1.5 million options at
exercise prices varying between $.50 and $.60 per share and issued a total
of 950,000 options at prices ranging from $.13 to $.15 per share. At the
time of the grant of the options, the closing bid price of the Company's
common stock was $.10 per share. All of the outstanding options were
cancelled, and new options were issued at a lower exercise price.
(2) Includes 1,304,348 warrants which may be exercised at a price of $.092 per
share issued to Dutchess Private Equities Fund II, L.P. and 500,000
warrants which may be exercised at a price of $.20 per share issued to Hawk
Associates. Both Dutchess options and the Hawk warrants and the underlying
shares were registered as part of our SB-2 registration statement filed
with the Securities and Exchange Commission on September 9, 2005.
(3) Does not include a total of 1,245,000 performance based options of which
997,500 have been granted to George Green and 247,500 granted to a
consultant.
Recent Sales of Unregistered Securities.
During the year ended December 31, 2006 we issued the following
unregistered shares of our Common Stock
Date: Number of Shares Valuation
March 7 62,000 $62,000
April 25 250,000 10,000
May 3 250,000 10,000
June 21 100,000 1,500
July 8 250,000 4,250
July 8 250,000 4,250
July 8 250,000 4,250
July 8 250,000 4,250
September 1 2,500,000 60,000
---------------------------------------------------------
September 1 100,000 2,400
September 6 250,000 17,500
---------------------------------------------------------
September 6 250,000 17,500
---------------------------------------------------------
October 5 1,000,000 60,000
October 11 50,000 3,000
October 13 1,000,000 60,000
November 7 250,000 17,500
18
The securities issued in the foregoing transactions were made in reliance
upon an exemption from registration under Rule 701 promulgated under Section
3(b) of the Securities Act and or Section 4(2) of the Securities Act.
Alternatively, these issuances of securities were undertaken under Rule 506 of
Regulation D under the Securities Act of 1933, as amended, by the fact that:
- the sale was made to a sophisticated or accredited investor, as
defined in Rule 502;
- we gave the purchaser the opportunity to ask questions and receive
answers concerning the terms and conditions of the offering and to
obtain any additional information which we possessed or could acquire
without unreasonable effort or expense that is necessary to verify the
accuracy of information furnished;
- at a reasonable time prior to the sale of securities, we advised the
purchaser of the limitations on resale in the manner contained in Rule
502(d)2; and
- neither we nor any person acting on our behalf sold the securities by
any form of general solicitation or general advertising; and
Use of Proceeds from sale of Registered Securities
During the year ended December 31, 2006, we issued approximately 4,554,100
shares of registered securities and received approximately $252,000 in net
proceeds. We received approximately $252,000 in net proceeds from the sale of
our registered securities pursuant to the Equity Line of Credit and Convertible
Debenture we executed with Dutchess. We used these funds for general working
capital purposes. We also issued approximately 3,900,000 shares of our Common
Stock pursuant to our Equity Compensation Plan which was registered with the
Securities and Exchange Commission on Form S-8. The shares were issued to
various consultants and employees for services rendered.
Item 6. Management's Discussion and Analysis
Operations
This report on Form 10-KSB contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those discussed in the forward-looking statements and from
historical results of operations. Among the risks and uncertainties which could
cause such a difference are those relating to our dependence upon certain key
personnel, our ability to manage our growth, our success in implementing the
business strategy, our success in arranging financing where required, and the
risk of economic and market factors affecting our customers or us. Many of such
risk factors are beyond the control of the Company and its management.
Plan of Operations
We operate our business through our two wholly owned subsidiaries, Direct
Dental Services, Inc. ("DDS") and Union Dental Corp. ("UDC"). DDS operates a
network of duly licensed dental providers. Members of the dental network pay an
annual management service fee for the right to be a member of the dental
network. UDC operates a dental practice in Coral Springs, Florida. The Company
intends to expand its network of dental providers. The Company may also expand
and offer participating unions other professional services such as chiropractic
and optometrists. The Company may also acquire additional dental practices which
the Company believes application of its Dental Practice Management Model will
improve operating performance.
19
Management's current focus is the expansion of its dental network. We
intend to expand in existing markets primarily by enhancing the operating
performance of our existing office, by acquiring dental practices, by adding
union contracts in states where we currently do not have union contracts and by
developing dental network union contracts with other unions. At this time it is
not possible to project what income or expenses will result from the expansion
of these services.
In order to finance our operations, growth and expansion to date, on August
17, 2005, we entered into an Investment Agreement with Dutchess Private Equity
Fund II, LLP ("Dutchess"). Pursuant to this Agreement, Dutchess 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) of our Common Stock for the 20 trading
days prior to our "Put" notice, multiplied by the average of the 3 daily closing
prices immediately preceding the Put Date. The Market Price shall be the lowest
closing bid price of our common stock during the Pricing Period. The Purchase
Price shall be set at 95% of the Market Price. This Investment Agreement
establishes what is sometimes termed an equity line of credit or an equity
drawdown facility.
In general, the drawdown facility operates as follows: Dutchess, has
committed to provide us with up to $5,000,000 as we request over a 36 month
period, in return for common stock that we issue to Dutchess. We may, in our
sole discretion, during the Open Period deliver a "put notice" (the "Put
Notice") to Duchess which states the dollar amount which we intend to sell to
Dutchess on the Closing Date. The Open Period is the period beginning on the
trading after the Effective Date and which ends on the earlier to occur of 36
months from the Effective Date or termination of the Investment Agreement in
accordance with its terms. The Closing Date shall mean no more than 7 trading
days following the Put Notice Date. The Put Notice Date shall mean the Trading
Day immediately following the day on which Dutchess receives a Put Notice, as
defined in the agreement.
During the Open Period, we are not entitled to submit a Put Notice until
after the previous Closing has been completed.
Upon the receipt by Dutchess of a validly delivered Put Notice, Dutchess
shall be required to purchase from us, during the period beginning on the Put
Notice Date and ending on and including the date that is 5 trading days after
such Put Notice, that number of shares having an aggregate purchase price equal
to the lesser of (a) the Put Amount set forth in the Put Notice, or (b) 20% of
the aggregate trading volume of our common stock during the applicable Pricing
Period times (x) the lowest closing bid price of our common stock during the
specified Pricing period, but only if such said shares bear no restrictive
legend and are not subject to stop transfer instructions, prior to the
applicable Closing Date.
As a result of this variable price feature, the number of shares issuable
pursuant to the agreement will increase if the market price of our stock
decreases. In addition there is no upper limited on the number of shares
issuable pursuant to the agreement. Therefore our shareholders may be subject to
significant dilution and face the prospect of a change in control. (See Footnote
4 to our Financial Statements).
For the year ended December 31, 2006, the Company delivered Put Notices to
draw on the equity line of credit. In connection with our Put Notices, the
Company issued 2,257,496 shares of our Common Stock and received net proceeds of
$173,366. (See note 4 to our financial statements.)
Because of the significant decline in the price of our common stock since
the execution of our Line of Credit with Dutchess, it is unlikely that we will
be able to draw down the entire $5,000,000. Through December 31, 2006, we have
approximately 33,268,100 registered shares available for issuance under our
equity credit line. We have drawn down approximately $498,355 available under
the line. As a result, we may have to obtain additional operating capital from
20
other sources to enable us to execute our business plan. We anticipate that we
may be able to obtain a portion of any additional required working capital
through the private placement of Common Stock to domestic accredited investors
pursuant to Regulation D of the Securities Act of 1933, as amended. We may also
rely on the exemption afforded by Regulation S of the Securities Act of 1933, as
amended, and solicit non-U.S. citizens. There is no assurance that we will
obtain the additional working capital that we need through the private placement
of our Common Stock. Such financing may not be available in sufficient amounts
or on terms acceptable to us. We may also seek institutional financings
interested in equity participation. There can be no assurance that we will be
able to identify these equity financing sources on terms acceptable to the
Company.
Also in connection with the Dutchess financing, on August 17, 2005, we
entered into a Debenture Agreement with Dutchess, an accredited investor, for
the issuance and sale of $600,000 of 10% secured convertible debenture due
August 17, 2010 in a private transaction exempt from registration under the
Securities Act of 1933 in reliance on exemptions provided by Section 4(2) and
Regulation D of the Act. At the time of signing the Debenture Agreement, we also
issued Dutchess a five-year common stock purchase warrant to purchase 1,304,348
shares of our common stock at $.092 per share.
Interest is payable on the secured convertible debentures at the rate of
10% per year. Amortizing payments will be made by us in satisfaction of this
Debenture. Payments shall be made monthly on the first day of each business day
of each month while there is an outstanding balance on the Debenture, to the
Holder, in the amounts outlined below on the following schedule:
Payment for Month 1: $ 4,951
(due within three (3)
days of the Issuance Date)
Payment for Month 2: $ 4,951
Payment for Month 3: $ 4,951
Payment for Month 4
and each month thereafter: $62,716
The principal amount of the Debenture plus accrued interest may be
converted at the option of Dutchess into shares of our common stock, anytime
following the closing date, at a conversion price equal to the lesser of (i) the
lowest closing bid price during the 15 days of full trading, as defined, prior
to the conversion date; or (ii) $0.092. In addition, in the event that any
portion of the debenture remains outstanding on the maturity date of August 17,
2010, such outstanding amount shall be automatically converted into shares of
our common stock. In the event that we do not make delivery of the common stock
as instructed by Dutchess, we shall be obligated to pay to Dutchess 3% in cash
of the dollar value of the debentures being converted, compounded daily, per
each day after the 3rd business day following the conversion date that the
common stock is not delivered to Dutchess. In the event of default as defined in
the Debenture Agreement, Dutchess may among other things:
(a) elect to secure a portion of the Company's assets not to exceed 200%
of the Face Amount of the Note, in Pledged Collateral;
(b) elect to garnish Revenue from us in an amount that will repay the
Holder on the payment schedule set forth above;
(c) exercise its right to increase the Face Amount of the debenture by ten
percent (10%) as an initial penalty and for each Event of Default
under the Debenture;
(d) elect to increase the Face Amount by two and one-half percent (2.5%)
per month (pro-rata for partial periods) paid as a penalty for
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.
21
In order to secure its obligations under the secured convertible debenture
and related documents, we have granted Dutchess a security interest in all of
our assets and property.
We are currently in default under the terms and conditions of this
Agreement. No notice of Default has been received.
For the year ended December 31, 2006 we issued 75,000 shares of our Common
Stock for settlement of $6,900 of the debenture
On December 22, 2005, the Company signed a promissory note (the "Note") in
favor of Dutchess in the amount of $960,000 (the "Face Amount") and received
gross proceeds in the amount of $800,000 less $60,075 in fees associated with
the financing for net proceeds of $739,925. The Company is obligated to repay
the Investor the Face Amount on or before December 23, 2006. There is no stated
interest rate on the Note. Payments are to be made by the Company from each Put
from the Company's Equity Credit Line we have with Dutchess. The Company is
obligated to pay Dutchess the greater of a) 50% of each Put to the Investor or
b) $80,000 until the face Amount minus any fees have been paid. The 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.
We issued 50 signed Put Notices to Dutchess as collateral. In the event,
that Dutchess uses the collateral in full, we are obligated to immediately
deliver to Dutchess additional Put Sheets as requested. In the event that on the
maturity date we have any remaining amounts unpaid on this Note (the "Residual
Amount"), the Holder can exercise its right to increase the Face Amount by ten
percent (10%) as an initial penalty and an additional 2.5% per month paid, pro
rata for partial periods, compounded daily, as liquated damages ("Liquidated
Damages").
Additionally, in the event of a default as defined in the agreement, the
Holder shall have the right, but not the obligation, to 1) switch the Residual
Amount to a three-year ("Convertible Maturity Date"), interest-bearing
convertible debenture. If the Holder chooses to convert the Residual Amount to a
Convertible Debenture, we shall have 20 business days after notice of the same
(the "Notice of Convertible Debenture") to file a registration statement
covering an amount of shares equal to 300% of the Residual Amount. Such
registration statement shall be declared effective under the Securities Act of
1933, as amended (the "Securities Act"), by the Securities and Exchange
Commission (the "Commission") within 40 business days of the date we file such
Registration Statement. In the event we do not file such registration statement
within 20 business days of the Holder's request, or such registration statement
is not declared by the Commission to be effective under the Securities Act
within the time period described above, the Residual Amount shall increase by
$5,000 per day.
The Holder is entitled to convert the Debenture Residual Amount, plus
accrued interest, anytime following the Convertible Maturity Date, at the lesser
of (i) 50% of the lowest closing bid price during the 15 trading immediately
preceding the Convertible Maturity Date or (ii) 100% of the lowest bid price for
the 20 trading days immediately preceding the Convertible Maturity Date ("Fixed
Conversion Price").
We are currently in default under the terms and conditions of this
Agreement. (See Footnote 5.)
22
Results of Operations
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
Revenues
For the year ended December 31, 2006 as compared to December 31, 2005 we
generated revenue of $2,197,099 as compared to $2,066,944.
Net Income
We incurred a net loss of $2,013,399 for 2006 as compared to a net loss of
$1,440,183 for 2005. The significant increase in our losses is primarily
attributable to an increase in our interest expense from $521,523 to $1,419,751,
an increase in salaries, related taxes and stock based compensation from
$843,204 to $1,086,777 and an increase in consulting fees from $373,215 to
$567,678. The significant increase in interest expense is primarily attributable
to our increased borrowing costs and repayment obligations as a result of the
various financings we have undertaken with Dutchess and to a lesser extent,
costs associated with our bank line of credit which was originally undertaken
with Bank of America and has since been transferred by Bank of America to
Capital Crossing. Many of the additional general and administrative were the
result of increased marketing expenses for DDS and consulting and professional
fees which we incurred during the fiscal year. We relied upon stock based
compensation as a means of compensating many of our consultants and employees.
Our depreciation expense for the year increased from $39,467 to $67,454.
Our net loss per share remained unchanged at $.05 per share.
Compensation
During the year ended December 31, 2006 and 2005, the Company incurred
$1,086,777 and $692,099 respectively, for salaries. 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.
General and Administrative expenses/amortization and depreciation
During the year ended December 31, 2006 as compared to 2005, our general
and administrative expenses declined from $762,057 to $743,679. Management
believes that even though the decline was insignificant, the decline
demonstrates that the Company is better utilizing its marketing dollars as it
attempts to expand its network of dental providers and secure additional union
contracts.
Consulting and Professional Fees
Consulting fees increased from $373,215 to $567,678 while our professional
fees declined from $199,018 to 188,538. The significant increase in consulting
fees is due to our reliance on outside third parties who have agreed to provide
services to the Company in exchange for the issuance of shares of our common
stock.
Liquidity and Capital Resources
At December 31, 2006, we had cash and accounts receivable totaling
$387,700. We had total current assets of $432,263 and our total assets were
$671,599. As of December 31, 2005, we had total assets of $1,337,549. Our total
current liabilities at December 31, 2006 was $3,567,429. We had a working
capital deficit as of December 31, 2006 of $3,135,166. Our working capital
deficit is primarily attributable to the financing we have secured with Dutchess
including the outstanding current portion of a convertible debenture which we
have recorded at $255,759, a note payable in the amount of $704,944 and a
derivative liability totaling $725,063. The derivative liability which we
recorded on our books is the result of the convertibility feature and the
23
registration rights which we have granted to Dutchess. (See Footnotes 3,4 and 5
of our financial statements). We are also in default under our lending agreement
with Bank of America because we have failed to maintain certain affirmative
covenants required under the loan documentation. We did receive notice from Bank
of America that we are in default. However, Bank of America following delivery
of notice of default, subsequently assigned the obligation to another financial
institution. We have not received notice from the assignee regarding the status
of the loan. We continue to make the monthly payments as required under the
original terms of the loan agreement. Therefore, we have designated the entire
amount of this liability, as a short term liability.
In addition to our bank line, Dr. Green, individually and on behalf of the
Company signed a one year balloon promissory note in the amount of $250,000 with
Black Forest International LLC, which provides for payment of interest at the
rate of 10% per annum with principal and interest due on June 19, 2007. The not
is secured by Dr. Green's preferred stock. Should the Company or Dr. Green
default on this obligation, there is a risk that voting control of the Company
may be transferred. George Green, D.D.S., P.A. on behalf of the Company also
signed a promissory note in the amount of $50,000 with Community Bank of
Broward. The note provides for equal monthly payments of $1,016.66. As a result
of the foregoing, the aggregate outstanding loan obligations is $1,288,386.
We have also recorded a liability for unearned membership fees totaling
$345,491.
To the extent that revenues are insufficient to support ongoing operations,
the Company will have to draw against its equity line of credit. With our stock
price currently trading below the conversion price of $.092 per share, it is
unlikely that Dutchess would convert any portion of the outstanding obligation
at the fixed conversion price. Moreover, we were required to deliver Put notices
to Dutchess to satisfy the terms and conditions of the $960,000 promissory note.
This obligation is in default. In order to satisfy this obligation, we will be
required to draw down our equity line of credit. This will require us to issue
additional shares of our common stock which will cause further dilution and
likely downward pressure on the price of our common stock. Our Common Stock
currently trades at approximately $.04 per share. At this price, we have not
registered a sufficient number of registeres shares available under our equity
line of credit to satisfy the outstanding obligation. If the price of our Common
Stock continues to decline, we will not have registered a sufficient number of
shares of common stock to draw against the equity credit line. Should this
happen, we would likely be in default under these obligations.
As stated above, our loan with Bank of America is in default. The loan was
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. (See Footnote
6 of our financial statements.) The outstanding principal balance of this note
as of December 31, 2006 was $991,124.
We have an accumulated deficit of $3,833,507 and a stockholder' deficit of
$2,895,830.
We recorded shareholder transactions in 2005 of $1,489,711. This amount was
originally recorded in 2004 as $1,539,129. This charge was a result of three
related party transactions. First, UDC issued a $1 million note payable to Dr.
Green, our controlling shareholder, as consideration for the purchase of the
assets (minus the client list) of his dental practice, Dr. George D. Green, DDS,
P.A. The Second transaction related to DDS executed a note payable to a bank in
the amount of $1,215,000 to satisfy an outstanding liability of Dr. Green to
purchase shares of DDS prior to the Reorganization. These amounts are offset by
$675,871, representing a note receivable from Dr. Green resulting from the above
transactions, net of other payables. See footnote 7 of our financial statements.
24
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.
On August 11, 2006, George Green, individually and on behalf of the
Company, entered into a Promissory Note in the amount of $50,000 with the
Community Bank of Broward. The interest rate on this promissory note is 8% per
annum calculated by using the 365/360 day method. The note requires 60 monthly
principal and interest payments of approximately $1,017 and is secured by
certain assets of the Company. At December 31, 2006, the principal amount
outstanding on this note amounts to $47,262.
On October 20, 2006, George Green, individually and on behalf of the
Company entered into a Promissory Note in the amount of $250,000 with, Black
Forrest International, LLC a non-affiliated 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.
The note is secured by certain assets of the Company.
Subsequent Events:
On January 24, 2007 the Company issued 2,000,000 shares if its class A
Preferred Stock to George Green, our chief executive officer and sole director
in exchange for personally guaranteeing certain loans of the Company. Each share
of class A Preferred Shares entitle the holder to 15 votes per share on any and
all matters brought to a vote of the holders of our common stock.
In January and February 2007, the Company issued shares of its common stock
under various agreements and for services rendered. A complete list of these
transactions is set forth in Footnote 12 of our financial statements.
CRITICAL ACCOUNTING POLICIES
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
materially from those estimates.
Income per share: Basic income per share excludes dilution and is computed
by dividing the income attributable to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
income per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that shared in the income of
the Company. Diluted income per share is computed by dividing the income
available to common shareholders by the weighted average number of common shares
outstanding for the period and dilutive potential common shares outstanding
unless consideration of such dilutive potential common shares would result in
anti-dilution. Common stock equivalents were not considered in the calculation
of diluted income per share as their effect would have been anti-dilutive for
the period ended December 31, 2006 and 2005.
Critical Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
25
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements. We do not
anticipate entering into any off-balance sheet arrangements during the next 12
months.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued SFAS 155, which applies to certain
"hybrid financial instruments," which are instruments that contain embedded
derivatives. The new standard establishes a requirement to evaluate beneficial
interests in securitized financial assets to determine if the interests
represent freestanding derivatives or are hybrid financial instruments
containing embedded derivatives requiring bifurcation. This new standard also
permits an election for fair value remeasurement of any hybrid financial
instrument containing an embedded derivative that otherwise would require
bifurcation under SFAS 133. The fair value election can be applied on an
instrument-by-instrument basis to existing instruments at the date of adoption
and can be applied to new instruments on a prospective basis. The adoption of
SFAS No.155 did not have a material impact on the Company's financial position
and results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
This statement requires all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable, and permits for
subsequent measurement using either fair value measurement with changes in fair
value reflected in earnings or the amortization and impairment requirements of
Statement No. 140. The subsequent measurement of separately recognized servicing
assets and servicing liabilities at fair value eliminates the necessity for
entities that manage the risks inherent in servicing assets and servicing
liabilities with derivatives to qualify for hedge accounting treatment and
eliminates the characterization of declines in fair value as impairments or
direct write-downs. SFAS No. 156 is effective for an entity's first fiscal year
beginning after September 15, 2006. The adoption of this statement is not
expected to have a significant effect on the Company's future reported financial
position or results of operations.
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.
26
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.
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.
Item 7. Financial Statements
Our financial statements for the year ended December 31, 2006 have been
examined to the extent indicated in their reports by Kramer Weisman and
Associates, LLP and have been prepared in accordance with generally accepted
accounting principles and pursuant to Regulation S-B as promulgated by the
Securities and Exchange Commission and are included herein, on Page F-1 hereof
in response to Part F/S of this Form 10-KSB.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
In December 2006 the Company engaged the services of Kramer Weisman and
Associates, LLP as its new certifying accountant.
Prior to their appointment as auditor, the Company had not used the
services of the new auditors nor has the Company consulted with Kramer Weisman
and Associates regarding either the application of accounting principles to a
specific transaction, either completed or proposed, or the type of audit opinion
that might be rendered on the Company's financial statements, or any matter that
was subject of a disagreement.
Our former auditors, De Meo, Young, McGrath ("DYM") in connection with the
audit for the year ended December 31, 2005 did not contain an adverse opinion or
a disclaimer of opinion, nor was such report qualified or modified as to
uncertainty, audit scope, or accounting principles. During their tenure as
auditors, there have been no disagreements with DYM on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of DYM, would
have caused DYM to make a reference to the subject matter of such disagreement
in connection with its audited report or interim financial statements for the
periods ended September 30, 2006.
27
ITEM 8A. CONTROLS AND PROCEDURES.
(a) Disclosure Controls and Procedures:
Within 90 days prior to the date of this Report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer (or persons performing similar
functions) of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer (or persons performing similar functions) concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic reports
that are filed with the Securities and Exchange Commission. It should be noted
that the design of any system of controls 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, regardless of how remote. In addition, we reviewed our
internal controls, and there have been no significant changes in our internal
controls or in other factors that could significantly affect those controls
subsequent to the date of their last valuation.
(b) Internal Control Over Financial Reporting:
There have been no significant changes in the Company's internal controls
or in other factors since the date of the Chief Executive Officer and Chief
Financial Officer's (or persons performing similar functions) evaluation that
could significantly affect these internal controls during the period covered by
this report or from the end of the reporting period to the date of this Form
10-KSB, including any corrective actions with regards to significant
deficiencies and material weaknesses.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
(a) The following table sets forth the names, ages, positions and address
of our current directors and executive officers.
Name Age Position(s) with Company Election Date
--------------- --- ----------------------------------- -------------
George D. Green 49 Chief Executive Officer, President, December 2004
Secretary and Director(1)
Business Experience
Dr. George D. Green 48, is Chairman of the Board of Directors, President
and Chief Executive Officer of Union Dental Corp. He currently serves as our
sole officer and director. He graduated from the University of Miami in 1983. He
attended Georgetown University School of Dentistry where he graduated in 1985
with his Doctor of Dental Surgery (DDS) degree. Dr. Green started his general
dentistry practice in Florida in 1986 and currently maintains that office. He
has been President of the Coral Springs Business Club from 1993-96 and President
of the Coral Springs/Parkland Rotary Club from 1996-97. He is the Founder of
Union Dental Corp., and has held the management positions of the Company since
inception. Dr. Green has been a Dental Network participant since 1992 in General
Dentistry, Endodontics and Periodontics. In August 2000, he purchased 50%
ownership of DDS and on December 31, 2003, he purchased the remaining 50% of
DDS.
Committees of the Board of Directors
We presently do not have an audit committee, compensation committee,
nominating committee, an executive committee of our board of directors, stock
plan committee or any other committees.
28
Compensation of Directors
Our directors do not receive cash compensation for their services as
directors or members of committees of the board, but are reimbursed for their
reasonable expenses incurred in attending board or committee meetings.
Terms of Office
There are no family relationships among our directors and/or officers. Our
directors are appointed for one-year terms to hold office until the next annual
general meeting of the holders of our Common Stock or until removed from office
in accordance with our by-laws. Our officers are appointed by our board of
directors and hold office until removed by our board of directors.
Involvement in Certain Legal Proceedings
Except as indicated in this Annual Report, no event listed in
Sub-paragraphs (1) through(4) of Subparagraph (d) of Item 401 of Regulation S-B,
has occurred with respect to any of our present executive officers or directors
or any nominee for director during the past five years which is material to an
evaluation of the ability or integrity of such director or officer.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
For companies registered pursuant to section 12(g) of the Exchange Act,
Section 16(a) of the Exchange Act requires our executive officers and directors,
and persons who beneficially own more than ten percent of our equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than ten percent
shareholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file. To our knowledge, based solely on a review of the
copies of reports furnished to us and written representations that no other
reports were required, Section 16(a) filing requirements applicable to our
officers, directors and greater than ten percent beneficial owners were complied
with on a timely basis for the period which this report relates.
Code of Ethics
On December 28, 2004, we adopted a Code of Ethics that meets the
requirements of Section 406 of the Sarbanes-Oxley Act of 2002. We will provide
to any person without charge, upon request, a copy of such Code of Ethics.
Persons wishing to make such a request should contact George D. Green, Chief
Executive Officer, 1700 University Drive, Suite 200, Coral Springs, Florida
33071.
Indemnification of Officers and Directors.
Our By-Laws provide for the indemnification of our directors, officers,
employees, and agents, under certain circumstances, against attorney's fees and
other expenses incurred by them in any litigation to which they become a party
arising from their association with or activities on behalf of the Company. We
will also bear the expenses of such litigation for any of our directors,
officers, employees, or agents, upon such persons promise to repay the Company
therefor if it is ultimately determined that any such person shall not have been
entitled to indemnification. This indemnification policy could result in
substantial expenditures by us, which we may not be able to recoup.
29
ITEM 10. EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid by the Company, as
well as certain other compensation paid or accrued, during the fiscal years
ended December 31, 2006, 2005 and 2004 to the Company's President and highest
paid executive officers. No restricted stock awards, long-term incentive plan
payouts or other types of compensation, other than the compensation identified
in the chart below, no compensation was paid to these executive officers during
these fiscal years.
SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------ ------- -------------------------------------- ---------------------- ---------- -------------
Annual Compensation Awards Payouts
------------------ ------- ------------ ---------- -------------- ----------- ---------- ---------- -------------
Other Restricted Securities LTIP All Other
Name and Annual Stock Underlying Payouts Compensation
Principal Year Salary ($) Bonus ($) Compensation Award(s) Options/
Position ($) ($) SARs
------------------ ------- ------------ ---------- -------------- ----------- ---------- ---------- -------------
George D. Green, 2005 195,000
CEO & President 2004 190,000
2004 118,000
Compensation of Directors
Dr. Green, our sole director, did not receive any compensation solely by
virtue of his role as a member of our Board of Directors.
Bonuses and Deferred Compensation
We do not have any bonus, deferred compensation or retirement plan. Such
plans may be adopted by us at such time as deemed reasonable by our board of
directors. We do not have a compensation committee, all decisions regarding
compensation are determined by our board of directors.
Stock Option Plans.
In June 2005 the Board of Directors adopted the 2005 Equity Compensation
Plan (the "2005 Plan"). The Plan permits the granting of an aggregate of
5,000,000 Shares. The Plan also permits the granting of either incentive or
nonstatutory options. The 2005 Plan was filed with the Securities and Exchange
Commission on Form S-8. During the year ended December 31, 2005, we issued a
total of 1,200,000 shares of our common stock pursuant to the Plan. There were
no incentive or nonstatutory options granted under the Plan.
In June 2005 the Board of Directors adopted the 2005 Equity Compensation
Plan (the "2005 Plan"). The Plan permits the granting of an aggregate of
5,000,000 Shares. The Plan also permits the granting of either incentive or
nonstatutory options. The 2005 Plan was filed with the Securities and Exchange
Commission on Form S-8. During the year ended December 31, 2005. There were no
incentive or nonstatutory options granted under the Plan.
In December 2006 the Board of Directors adopted the 2007 Equity
Compensation Plan (the "2007 Plan"). The Plan permits the granting of an
aggregate of 5,000,000 Shares. The Plan also permits the granting of either
incentive or nonstatutory options. The 2007 Plan was filed with the Securities
and Exchange Commission on Form S-8 on December 21, 2006. There were no
incentive or nonstatutory options granted under the Plan.
30
Option Grants in Last Fiscal Year to Executive Officers
The Company did not issue any stock options during 2006. In prior years,
the Company has issued the following options.
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price Expiration
Name Granted (#) in Fiscal Year ($/sh) Date
---------------- ----------- -------------- --------- ----------
George D. Green 500,000* 49.6% $0.15 2009
------
* Dr. Green was initially issued 750,000 options at an exercise price of $.60
per share. On December 30, 2005, the Company cancelled these options and
issued Dr. Green a total of 500,000 options at an exercise price of $0.15
per share. At the time of the grant, the closing bid price of the Company's
common stock was $.10 per share. All options are now fully vested. The
Company has issued a total of 1,008,000 options to various employees
including Dr. Green.
During the year ended 2004, Dr. Green was granted 997,500 performance based
options. These options vest at the market value calculated as of the date the
following revenue milestones are met: 332,500 shares upon the Company reaching
$3,000,000 in revenue, 332,500 shares upon the Company reaching $4,000,000 in
revenue, and 332,500 shares upon the Company reaching $5,000,000 in revenue. The
Company has issued a total of 1,245,000 performance options
On October 15, 2004, the Board of Directors adopted the 2004 Stock Option
Plan (the "2004 Plan"). The 2004 Plan permits the granting of an aggregate of
5,000,000 Shares. As of March 15, 2006 we have issued a total of 1,508,000
options under this Plan at exercise prices ranging from $0.13 to $0.50 per share
plus an additional 1,740,000 performance based options which are issuable at the
then current market price. Under the 2004 Plan, either incentive stock options
or nonstatutory options may be granted as an incentive to key employees
(including directors and officers who are key employees), non-employee
directors, independent contractors and consultants of the Company and to offer
an additional inducement in obtaining the services of such individuals. The Plan
also permits the award of common stock to qualified recipients.
The exercise price of the Shares under each option is determined by a
committee appointed by the Board of Directors; provided, however, that the
exercise price shall not be less than the fair market value of the Shares on the
date of the grant for statutory options. The term of each option granted
pursuant to the 2004 Plans is established by the committee appointed by the
Board of Directors, in its sole discretion, provided that the term shall not
exceed ten years from the date of the grant.
All of the Company's Plans provide that the number of Shares subject
thereto and the outstanding options and their exercise prices are to be
appropriately adjusted for mergers, consolidations, recapitalizations, stock
dividends, stock splits or combinations of shares.
The following table summarizes the number and dollar value of unexercised
stock options at March 1, 2006 for the Named Executive Officers.
Shares Value Number of Securities Value of Unexercised
Acquired Realized Underlying Unexercised In-the-Money Options
Name on Exercise (#) ($) Options at FY-End (#) at FY-End ($)(1)
----------------- -------------- ---------- ------------------------- -------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
----------- ------------- ----------- -------------
George D. Green -0- -0- 500,000 997,500 $ -0- -0-*
31
--------------------------
(1) The closing price of the Company's Shares on March 15, 2007 as reported by
OTC Bulletin Board was $0.04 per Share.
* The value of the exercisable and unexercisable options shall be determined
upon the date of issuance.
Termination of Employment and Change of Control Arrangement
There are no compensatory plans or arrangements, including payments to be
received from us, with respect to any person named in cash compensation set out
above which would in any way result in payments to any such person because of
his resignation, retirement, or other termination of such person's employment
with us or our subsidiaries, or any change in control of us, or a change in the
person's responsibilities following a changing in control.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 1, 2006 information with
respect to the beneficial ownership of our common stock by (i) persons known by
us to beneficially own more than five percent of the outstanding shares, (ii)
each director, (iii) each executive officer and (iv) all directors and executive
officers as a group. As of March 15, 2007 there were issued and outstanding
64,493,947 shares of Common Stock and 1,508,000 Shares of Common Stock issuable
upon the exercise of presently exercisable stock options and warrants.
Common Stock
Beneficially Owned
Title of ----------------------------
Name and Address Class Number Percent (4)
--------------------------------------------------------------------------------
George D. Green Common 24,550,200(1))2)(3) 38.1%
1700 University Drive
Coral Springs, FL 33071
All Executive Officers and
Directors as a Group Common 24,550,200 38.1%
(One (1) person)
--------------------------------------------------------------------------------
(1) Includes a total of 75,000 and 50,000 shares which Dr. Green transferred to
his children, Jacyln and Joshua. However, Dr. Green has disclaimed
beneficial ownership of these transferred shares.
(2) Includes options to purchase 500,000 shares which are either currently
exercisable or which become exercisable within 60 days of the date of March
15, 2007.
(3) George D. Green holds 3,000,000 shares of our Series A preferred stock that
provides for holders to receive 15 votes on all matters brought to a vote
of our shareholders.
(4) Under Rule 13d-3, a beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which includes
the power to vote, or to direct the voting of shares; and (ii) investment
power, which includes the power to dispose or direct the disposition of
shares. Certain shares may be deemed to be beneficially owned by more than
one person (if, for example, persons share the power to vote or the power
to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire the
shares (for example, upon exercise of an option) within 60 days of the date
as of which the information is provided. In computing the percentage
32
ownership of any person, the amount of shares outstanding is deemed to
include the amount of shares beneficially owned by such person (and only
such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does
not necessarily reflect the person's actual ownership or voting power with
respect to the number of shares of common stock actually outstanding on
March 15, 2007. As of March 15, 2007, there were 64,493,947 shares of our
common stock issued and outstanding.
Item 12. Certain Relationships and Related Transactions
Except as described below, none of the following persons has any direct or
indirect material interest in any transaction to which we are a party during the
past two years, or in any proposed transaction to which the Company is proposed
to be a party:
(A) any director or officer;
(B) any proposed nominee for election as a director;
(C) any person who beneficially owns, directly or indirectly, shares
carrying more than 5% of the voting rights attached to our common
stock; or
(D) any relative or spouse of any of the foregoing persons, or any
relative of such spouse, who has the same house as such person or who
is a director or officer of any parent or subsidiary.
UDC entered into a Management Services Agreement and a Business Associate
Agreement with Dr. George D. Green, DDS, P.A. ("Green PA") on October 15, 2004.
Pursuant to these agreements, UDC shall manage the operations of Green PA for a
management fee pursuant to the agreements.
On March 20, 2004, UDC, a wholly owned subsidiary of the Company, entered
into an employment agreement with Dr. Green, the sole officer of UDC and our
chief executive officer, for a term of seven years. The agreement provides for a
base salary to Dr. Green of $225,000 in year one, $125,000 in year two, $185,000
in year three, $196,630 in year four, $208,427 in year five, $220,932 in year
six and $234,187 in year seven. The agreement also provides for the issuance of
options to Dr. Green upon signing, 750,000 options 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. The agreement also provides for the
issuance of options to Dr. Green as well, if certain revenue milestones are
reached: If we achieve gross revenues of $3,000,000 in any calendar year, Dr.
Green will be issued 332,500 options with an exercise price at the market price
of the underlying common stock at issue date. Additional options pursuant to the
same terms and conditions will be issued if the Company achieves $4,000,000 and
again at $5,000,000 in gross revenue for any calendar year.
On October 15, 2004, Dr. Green sold his interest in his dental practice to
UDC, an entity that he previously controlled, for $1,000,000, which amount was
recorded by the Company as a shareholder loan. Specifically, in the financial
statement presentation, the amount of the purchase price that exceeded the net
book value of the dental practice assets acquired has been treated as a
shareholder loan. This amount was deducted from the Company's stockholder's
equity because the transaction was with a related party and such amount is not
reflective of any funds due from Dr. Green.
In 2004 we incurred a charge to stockholders' equity in the amount of
$1,539,129. This charge was a result of three related party transactions. First,
UDC issued a $1 million note payable to Dr. Green, our controlling shareholder,
as consideration for the purchase of the assets (minus the client list) of his
dental practice, Dr. George D. Green, DDS, P.A. The Second transaction related
to DDS executed a note payable to a bank in the amount of $1,215,000 to satisfy
an outstanding liability of Dr. Green to purchase shares of DDS prior to the
33
Reorganization. These amounts are offset by $675,871, representing a note
receivable from Dr. Green resulting from the above transactions, net of other
payables.
In December 2005, the Company cancelled the 750,000 options previously
granted to Dr. Green with an exercise price of $.60 per share in consideration
for the grant of 500,000 options at an exercise price of $.15 per share. At the
time of the cancellation and grant, our common stock was trading at $.10 per
share.
UDC entered into an employment agreement with Robert Gene Smith on February
15, 2004, pursuant to which Mr. Smith became a member of the Board of Directors
of UDC and received an annual compensation of $24,000. The current agreement
expired February 15, 2006. The parties have verbally agreed to extend the
agreement on an annual basis pursuant to the same terms and conditions. However,
it can be cancelled at any time by the Company on written notice to Mr. Smith.
Mr. Smith was previously granted 250,000 options to purchase shares of common
stock at $0.50 per share and an additional 247,500 options dependent upon the
achievement of certain revenue milestones.
In August 2006. Dr. Green on behalf of the Company, personally guaranteed a
promissory note in the amount of $50,000. Also, in October 2006, Dr. Green
personally guaranteed a promissory note in the amount of $250,000. In
consideration for these personal guarantees, Dr. Green was issued three million
shares of our Common Stock.
Item 13. Exhibits and Reports on Form 8-K.
(a) The exhibits required to be filed herewith by Item 601 of Regulation
S-B, as described in the following index of exhibits, are either filed herewith
or incorporated herein by reference.
Exhibit
No. Description
-------- ----------------------------------------------------
2.2 Share Exchange Agreement between Shava, Inc. and National Business
Holdings, Inc. dated May 28, 2004.
2.3 Reorganization Agreement, dated December 28, 2004, by and among the
Company, Union Dental, DDS and the shareholders of Union Dental and
DDS. (4)
2.4 Asset Purchase Agreement dated October 15, 2004 by and among Union
Dental and George D. Green, DDS, P.A. (4)
3(i).1 Amended and Restated Articles of Amendment to the Articles of
Incorporation of Mecaserto, Inc., A Florida Corporation
3(i).2 Articles of Incorporation of National Business Investors, Inc.
3(i).3 Articles of Incorporation of Union Dental Corp.(5)
3(i).4 Articles of Incorporation of Direct Dental Services, Inc. (5)
3(ii).1 Bylaws of National Business Holdings, Inc. (5)
34
3(ii).2 Bylaws of Union Dental Corp. (5)
3(ii).3 Bylaws of Direct Dental Services, Inc.
4.1 Form of Option issued to Union Dental optionholders. (4)
16.1 Letter from Lawrence Scharfman, CPA, P.A. (3)
10.1 Business Associate Agreement dated October 15, 2004 by and among Union
Dental and George D. Green, DDS, P.A. (5)
10.2 Management Services Agreement dated October 15, 2004 by and among
Union Dental and George D. Green, DDS, P.A. (5)
10.3 Employment Agreement dated March 20, 2004 by and among Union Dental
and Dr. George D. Green. (4)
10.4 Employment Agreement dated October 26, 2004 by and among Union Dental
and Dr. Leonard I. Weinstein. (4)
10.5 Shareholder's Agreement and Management Contract by and among Union
Dental and Tropical Medical Services. (4)
10.6 Employment Agreement dated February 15, 2004 by and among Union Dental
and Robert Gene Smith. (4)
10.7 2004 Stock Option Plan for Union Dental (4)
10.8 Form of Management Service Agreement with Participating Dentists
10.9 Form of Service Agreement with Participating Unions
10.10 Debenture Agreement executed between the Company and Dutchess Private
Equities Fund II, L.P. (6)
10.11 Registration Rights Agreement between the Company and Dutchess Private
Equities Fund II, L.P. (6)
10.12 Warrant Registration Rights Agreement between the Company and Dutchess
Private Equities Fund II, L.P. (6)
10.13 Equity Line of Credit Registration Rights Agreement between the
Company and Dutchess Private Equities Fund II, L.P. (6)
10.14 Investment Agreement between the Company and Dutchess Private Equities
Fund II, L.P. (6)
10.15 Debenture Agreement between the Company and Dutchess Private Equities
Fund II, L.P. (7)
14.1 Code of Ethics (4)
16.1 Letter from Lawrence Scharfman to the Securities and Exchange
Commission dated January 3, 2005 (4)
16.2 Letter of Consent from DeMeo, Young, McGrath, dated March 28, 2007
17.1 Letter of Resignation of Dr. Melvyn Greenstein (4)
17.2 Letter of Resignation of Roger E. Pawson (4)
31 * Certificate of the Chief Executive Officer and Chief Financial Officer
pursuant Section 302 of the Sarbanes-Oxley Act of 2002
35
32 * Certificate of the Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
---------------------------
(1) Filed as Exhibits 2.1, 2.2, 2.3 to the Company's Form 10-SB filed with the
Securities and Exchange Commission on July 14, 1999, and incorporated by
Reference herein.
(2) Filed as Exhibit 3.1 to the Company's Form 8-K filed with the Securities
and Exchange Commission on March 10, 2003, and incorporated by reference
herein.
(3) Filed as Exhibits 16.1 and 16.2 to the Company's Form 8-K filed with the
Securities and Exchange Commission on February 26, 2004.
(4) Filed as Exhibits to the Company's Form 8-K filed with the Securities and
Exchange Commission on January 4, 2005.
(5) Filed as Exhibits to the Company's Form 8-K/A filed with the Securities and
Exchange Commission on February 4, 2005.
(6) Filed as an exhibit to the Company's Form 8-k filed August 22, 2005.
(7) Filed as an exhibit to the Company's Form 8-k filed December 27, 2006
* Included herein
(b) Reports on Form 8-k. During the last quarter of the fiscal year ended
December 31, 2006, no reports we filed on Form 8-k with the Securities and
Exchange Commission.
ITEM 14. PRINCIPLE ACCOUNTANT FEES AND SERVICES
AUDIT FEES. The aggregate fees billed for professional services rendered
was $50,677 and $27,831 for the audit of our annual financial statements for the
fiscal years ended December 31, 2006 and 2005, respectively, and the reviews of
the financial statements included in our Forms 10-QSB for those fiscal years.
AUDIT-RELATED FEES. There were no fees billed in each of the last two
fiscal years for assurance and related services by the principal accountant that
are reasonably related to the performance of the audit or review of our
financial statements and not reported under the caption "Audit Fee."
TAX FEES. No fees were billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax compliance,
tax advice and tax planning services.
ALL OTHER FEES. Other than the services described above, there were no
other services provided by our principal accountants for the fiscal years ended
December 31, 2006 and 2005.
We have no formal audit committee. However, our entire Board of Directors
(the "Board") serves in the capacity of the audit committee. In discharging its
oversight responsibility as to the audit process, the Board obtained from the
independent auditors a formal written statement describing all relationships
between the auditors and us that might bear on the auditors' independence as
required by Independence Standards Board Standard No. 1, "Independence
Discussions with Audit Committees." The Board discussed with the auditors any
relationships that may impact their objectivity and independence, including fees
for non-audit services, and satisfied itself as to the auditors' independence.
The Board also discussed with management and the independent auditors the
quality and adequacy of its internal controls. The Board reviewed with the
independent auditors their management letter on internal controls.
36
The Board discussed and reviewed with the independent auditors all matters
required to be discussed by auditing standards generally accepted in the United
States of America, including those described in Statement on Auditing Standards
No. 61, as amended, "Communication with Audit Committees". The Board reviewed
the audited consolidated financial statements of the Company as of and for the
year ended December 31, 2005 with management and the independent auditors.
Management has the responsibility for the preparation of the Company's financial
statements and the independent auditors have the responsibility for the
examination of those statements. Based on the above-mentioned review and
discussions with the independent auditors and management, the Board of Directors
approved the Company's audited consolidated financial statements and recommended
that they be included in its Annual Report on Form 10-KSB for the year ended
December 31, 2006, for filing with the Securities and Exchange Commission.
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by
the following persons on our behalf and in the capacities and on the dates
indicated.
Date: March 29, 2007
Union Dental Holdings, Inc.
----------------------------------------
(Registrant)
By: /s/ GEORGE D. GREEN
----------------------------------------
GEORGE D. GREEN, President and Director
Pursuant to the requirements of the Exchange Act, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ GEORGE D. GREEN CEO, President & Director March 29, 2007
-------------------
GEORGE D. GREEN
37
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public Accounting Firm.....................F-2
Consolidated Financial Statements:
Consolidated Balance Sheet..............................................F-3
Consolidated Statements of Operations...................................F-4
Consolidated Statements of Stockholders' Deficit........................F-5
Consolidated Statements of Cash Flows...................................F-7
Notes to Consolidated Financial Statements..................................F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Union Dental Holdings, Inc. and Subsidiaries
Coral Springs, Florida
We have audited the accompanying consolidated balance sheet of Union Dental
Holdings, Inc. and Subsidiaries as of December 31, 2006 and the related
consolidated statements of operations, changes in shareholders' deficit and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
financial statements of Union Dental Holdings, Inc. and Subsidiaries as of
December 31, 2005 were audited by other auditors whose report dated March 31,
2006, expressed an unqualified opinion, with an explanatory paragraph relating
to the assumption the Company will continue as a going concern, on those
statements.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amount and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the 2006 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Union
Dental Holdings, Inc. and Subsidiaries as of December 31, 2006, and the results
of their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 10
to the consolidated financial statements, the Company has net losses of
$2,013,399 for the year ended December 31, 2006, had a working capital
deficiency of $3,135,166 and a shareholders' deficit of $ 2,895,830 at December
31, 2006 and for the year ended December 31, 2006, used cash in operations of
$271,329. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 10. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Kramer, Weisman and Associates, LLP
Certified Public Accountants
Davie, Florida
March 20, 2007
F-2
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2006
ASSETS
CURRENT ASSETS:
Cash $ 117,556
Accounts receivable, less allowance for doubtful accounts of $109,600 270,144
Inventory of supplies 39,730
Prepaid expenses and other current assets 4,833
-----------------------
Total current assets 432,263
Property and equipment, net 230,971
Debt issuance costs, net 6,685
Other assets 1,680
-----------------------
Total Assets $ 671,599
=======================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Note payable, net $ 704,944
Convertible debenture payable, net 255,759
Notes payable 1,288,386
Accounts payable 81,363
Accrued expenses 163,423
Due to related parties 3,000
Unearned membership fees 345,491
Derivates liability 725,063
-----------------------
Total current liabilities 3,567,429
-----------------------
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;
48,837,422 shares issued and outstanding) 4,884
Additional paid-in capital 2,503,654
Accumulated deficit (3,833,507)
Shareholder transactions (1,489,711)
Less: Deferred compensation (81,250)
-----------------------
Total shareholders' deficit (2,895,830)
-----------------------
Total liabilities and shareholders' deficit $ 671,599
=======================
See accompanying notes to consolidated financial statements.
F-3
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
-----------------------------------------
2006 2005
------------------- --------------------
Revenues, net $ 2,197,099 $ 2,066,944
------------------- --------------------
Operating expenses:
Cost of services performed 447,090 488,187
Salaries and related taxes and stock-based compensation 1,086,777 843,204
Depreciation and amortization 67,454 39,467
Professional fees 186,538 199,018
Consulting fees 567,678 373,215
Other general and administrative 743,679 762,057
------------------- --------------------
3,099,216 2,705,148
------------------- --------------------
Loss from operations (902,117) (638,204)
------------------- --------------------
Other income (expense):
Amortization of debt issuance costs (129,028) (6,725)
Gain (loss) from valuation of derivatives liability 437,497 (273,731)
Interest expense (1,419,751) (521,523)
------------------- --------------------
Total other income (expense) (1,111,282) (801,979)
------------------- --------------------
Loss before provision for income taxes (2,013,399) (1,440,183)
Income tax expense - -
------------------- --------------------
Net loss $ (2,013,399) $ (1,440,183)
=================== ====================
Net loss per common share:
Net loss per common share - basic and diluted $ (0.05) $ (0.05)
=================== ====================
Weighted average common shares outstanding - basic
40,056,555 29,702,912
=================== ====================
Weighted average common shares outstanding - diluted
40,056,555 29,702,912
=================== ====================
See accompanying notes to consolidated financial statements.
F-4
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDER' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2006 and 2005
Preferred Stock Common Stock
$.0001 Par Value $.0001 Par Value
-----------------------------------------------
Number of Number of Paid-in
Shares Amount Shares Amount Capital
----------------------------------------------------------
Balance - December 31, 2004 1,000,000 100 28,519,939 2,852 519,067
Common stock in connection with note payable - - 1,500,000 150 134,850
Common stock issued for acquisition of assets - - 733,901 74 113,681
Common stock issued for debenture conversion - - 590,000 59 54,221
Common stock issued for interest - - 53,817 5 4,947
Common stock issued for services - - 2,158,646 216 238,237
Warrant value related to debenture payable - - - - 124,138
Common stock issued in private placement - - 120,000 12 59,988
Grant of stock options - - - - 59,878
Repayment of shareholder loan - - - - -
Net loss for the year - - - - -
----------------------------------------------------------
Balance - December 31, 2005 1,000,000 $ 100 33,676,303 $3,368 $1,309,007
Sale of common stock in connection with
equity line of credit - - 2,257,49 226 173,140
Common stock issued pursuant to debenture
conversion - - 1,002,205 100 60,640
Common stock issued for interest - - 1,289,418 129 39,751
Common stock issued for services - - 10,612,000 1,061 669,083
Derivative liabilty reclassified to equity - - - - 252,033
Amortization of deferred compensation - - - - -
Net loss for the year - - - - -
----------------------------------------------------------
Balance - December 31, 2006 1,000,000 100 48,837,422 4,884 2,503,654
==========================================================
F-5
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDER' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2005 and 2004
(Continued)
Additional Total
Accumulated Shareholder Deferred Stockholders'
Deficit Transactions Compensation Equity (Deficit)
-------------------------------------------------------------------------
(379,925) (1,539,129) - (1,397,035)
- - - 135,000
- - - 113,755
- - - 54,280
- - - 4,952
- - - 238,453
- - - 124,138
- - - 60,000
- (14,970) 44,908
- 49,418 - 49,418
(1,440,183) - - (1,440,183)
-------------------------------------------------------------------------
$(1,820,108) $ (1,489,711) $ (14,970) $ (2,012,314)
- - - 173,366
- - - 60,740
- - - 39,880
- - (150,000) 520,144
- - - 252,033
- - 83,720 83,720
(2,013,399) - - (2,013,399)
-------------------------------------------------------------------------
$ (3,833,507) $ (1,489,711) $ (81,250) $ (2,895,830)
=========================================================================
See accompanying notes to consolidated financial statements.
F-6
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
-----------------------------------------
2006 2005
------------------- --------------------
Cash Flows From Operating Activities:
Net loss $ (2,013,399) $ (1,440,183)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 67,454 39,467
Stock-based compensation and consulting 603,864 283,361
Common stock issued for interest 39,880 4,952
Provision for bad debts - 62,500
Amortization of debt issuance costs 119,590 6,725
Amortization of discount of debenture and note payable 1,155,610 401,927
Gain (loss) from valuation of derivatives (437,497) 273,731
Changes in assets and liabilities:
Accounts receivable 40,689 (56,256)
Inventory of supplies (10,845) (4,830)
Prepaid expenses and other current assets (187) (1,137)
Other assets 14,033 (5,200)
Accounts payable 61,477 (36,857)
Accrued expenses 88,882 65,380
Due to related parties 3,000 (110,839)
Income taxes - -
Customer deposits (35,997) 5,195
Unearned membership fees 32,117 (12,952)
------------------- -------------------
Net cash used in operating activities (271,329) (525,016)
------------------- -------------------
Cash Flows From Investing Activities:
Purchase of property and equipment (4,500) (170,161)
------------------- -------------------
Net cash used in investing activities (4,500) (170,161)
------------------- -------------------
Cash Flows From Financing Activities:
Net proceeds from sales of common stock 173,366 60,000
Repayment of other stockholder transactions - 49,418
Payments on loan from officer/shareholder - -
Proceeds from short-term debt 250,000 800,000
Payment on short term debt - (50,581)
Proceeds from long-term debt - -
Payments on line of credit - -
Proceeds from debenture payable - 600,000
Payments on debenture payable (116,972) (115,682)
Payment of placement fees - (133,000)
Payments on convertible note payable (240,000) -
Payments on notes payable (230,281) -
------------------- -------------------
Net cash provided by (used in) financing activities (163,887) 1,210,155
------------------- -------------------
Net increase (decrease) in cash (439,716) 514,978
F-6
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
For the Year Ended December 31,
-----------------------------------------
2006 2005
------------------- --------------------
Cash - beginning of year 557,272 42,294
------------------- -------------------
Cash - end of period $ 117,556 $ 557,272
=================== ===================
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 55,868 $ 114,644
=================== ===================
Cash payments for income taxes $ - $ -
=================== ===================
Non-cash investing and financing activities:
Issuance of common stock for debt and accrued interest $ 63,027 $ 54,280
=================== ===================
Stockholder loan offset in stockholder transactions $ - $ 61,120
=================== ===================
Reclassification of derivative liability to equity $ 252,033 $ -
=================== ===================
Issuance of common stock to acquire assets $ - $ 113,755
=================== ===================
Common stock issued in connection with promissory note $ - $ 135,000
=================== ===================
Warrants granted in connection with discount of debenture $ - $ 124,138
=================== ===================
Derivatives liability reflected as discount to debenture
and note payable $ - $ 1,140,862
=================== ===================
See accompanying notes to consolidated financial statements.
F-7
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Union Dental Holdings, Inc., (f/k/a National Business Holdings, Inc.), (the
"Company") is a Florida corporation which conducts business from its
headquarters in Ft. Lauderdale, Florida. The Company was incorporated on
November 26, 1996. On December 27, 2004, the Company entered into a Share
Exchange and Reorganization Agreement ("Reorganization") with both Union Dental
Corp. ("UDC"), a Florida corporation and Direct Dental Services, Inc. ("DDS"), a
Florida corporation, whereby UDC and DDS became wholly-owned subsidiaries of the
Company in exchange for an aggregate of 17,500,000 shares of its common stock
and 1,000,000 shares of its preferred stock issued to Dr. George Green with each
share of preferred stock providing voting rights equal to 15 shares of the
Company's common stock. In addition, the Company agreed to recognize the
3,452,250 issued and outstanding options to purchase UDC common stock as options
to purchase the Company's common stock. Pursuant to the Reorganization
Agreement, 22,287,977 shares of the Company's common stock were canceled. As a
result, UDC's and DDS's former stockholders became the Company's majority
stockholders with the Company's former shareholders retaining 10,000,000 shares
of common stock.
On January 11, 2005, the Company amended its Articles of Incorporation to change
its name from National Business Holdings, Inc. to Union Dental Holdings, Inc.
The acquisition of UDC and DDS by the Company was accounted for as a reverse
merger because on a post-merger basis, the former UDC and DDS shareholders hold
a majority of the outstanding common stock of the Company on a voting and fully
diluted basis. As a result, UDC and DDS were deemed to be the acquirer for
accounting purposes. Accordingly, the consolidated financial statements
presented for the period ending December 31, 2005, are those of the combined
results of UDC and DDS for all periods prior to the acquisition, and the
financial statements of the consolidated companies from the acquisition date
forward. The historical stockholders' deficit of the combined results of UDC and
DDS prior to the acquisition have been retroactively restated (a
recapitalization) for the equivalent number of shares received in the
acquisition after giving effect to any differences in the par value of the
Company and the combined UDC and DDS common stock, with an offset to additional
paid-in capital. The restated consolidated retained earnings of the accounting
acquirer (UDC and DDS) are carried forward after the acquisition.
Through its wholly-owned subsidiaries, UDC and DDS, the Company operates two
distinct lines of business.
DDS operates a network of duly licensed dental providers, the Dental Referral,
who provide dental services through the network to union members in accordance
with arrangements between DDS and various labor unions. DDS is not limited as to
the type of labor union which it may solicit. DDS charges an annual management
services fee to the participating dentists to practice in an "area of
exclusivity" for union members. DDS currently has exclusive contracts with
several local unions.
UDC acquired the assets of George D. Green, DDS, PA and manages the operation of
that general dental practice.
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.
F-8
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 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, 2006, the Company has
established, based on a review of its outstanding balances, an allowance for
doubtful accounts in the amount of $109,600.
Inventory of dental supplies
The Company values inventory of dental supplies at the lower of cost or market,
using the specific unit cost method.
Property and equipment
Property and equipment are carried at cost. The cost of repairs and maintenance
is expensed as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included in
income in the year of disposition. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", the Company examines the possibility of decreases in the
value of fixed assets when events or changes in circumstances reflect the fact
that their recorded value may not be recoverable.
Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," The Company
periodically reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. The Company recognizes an impairment loss when the sum of
expected undiscounted future cash flows is less than the carrying amount of the
asset. The amount of impairment is measured as the difference between the
asset's estimated fair value and its book value. The Company did not consider it
necessary to record any impairment charges during the year ended December 31,
2006.
F-9
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
because it is anti-dilutive. The Company's common stock equivalents at December
31, 2006 include the following:
Convertible debentures 7,307,391
Derivatives options 17,253,829
Options 1,508,000
Warrants 1,304,348
-------------
27,373,568
=============
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.
F-10
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share Based Payment ("SFAS No. 123R"). SFAS
No. 123R establishes the financial accounting and reporting standards for
stock-based compensation plans. As required by SFAS No. 123R, the Company
recognized the cost resulting from all stock-based payment transactions
including shares issued under its stock option plans in the financial
statements.
Prior to January 1, 2006, the Company accounted for stock-based employee
compensation plans (including shares issued under its stock option plans) in
accordance with APB Opinion No. 25 and followed the pro forma net income, pro
forma income per share, and stock-based compensation plan disclosure
requirements set forth in the Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"). For the period
ended December 31, 2006, the Company did not grant any stock options.
The following table sets forth the computation of basic and diluted income per
share for the year ended December 31, 2005 and illustrates the effect on net
loss and loss per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation:
2005
===============
Net (loss) income, as reported $ (1,440,183)
Less: stock-based employee compensation expense
determined under fair value based method, net of related
tax effect (97,686)
Pro forma net (loss) income $ (1,537,869)
Basic and diluted net (loss) income per common share:
As reported $ (0.05)
Pro forma $ (0.05)
The option grants are estimated as of the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants as of
December 31, 2005: expected volatility of 307%; risk free interest rate of
3.75%; expected life of 5 years and annual dividend rate of 0%.
Concentrations of credit risk
The Company maintains its cash in bank deposit accounts, which, at times, exceed
federally insured limits. At December 31, 2006, the Company had approximately
$137,000 in United States bank deposits, which exceed federally insured limits.
The Company has not experienced any losses in such accounts through December 31,
2006.
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-11
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
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 February 2006, the FASB issued SFAS 155, which applies to certain "hybrid
financial instruments," which are instruments that contain embedded derivatives.
The new standard establishes a requirement to evaluate beneficial interests in
securitized financial assets to determine if the interests represent
freestanding derivatives or are hybrid financial instruments containing embedded
derivatives requiring bifurcation. This new standard also permits an election
for fair value remeasurement of any hybrid financial instrument containing an
embedded derivative that otherwise would require bifurcation under SFAS 133. The
fair value election can be applied on an instrument-by-instrument basis to
existing instruments at the date of adoption and can be applied to new
instruments on a prospective basis. The adoption of SFAS No.155 did not have a
material impact on the Company's financial position and results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
This statement requires all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable, and permits for
subsequent measurement using either fair value measurement with changes in fair
value reflected in earnings or the amortization and impairment requirements of
Statement No. 140. The subsequent measurement of separately recognized servicing
assets and servicing liabilities at fair value eliminates the necessity for
entities that manage the risks inherent in servicing assets and servicing
liabilities with derivatives to qualify for hedge accounting treatment and
eliminates the characterization of declines in fair value as impairments or
direct write-downs. SFAS No. 156 is effective for an entity's first fiscal year
beginning after September 15, 2006. The adoption of this statement is not
expected to have a significant effect on the Company's future reported financial
position or results of operations.
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.
F-12
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements (continued)
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when quantifying Misstatements in
Current Year Financial Statements ("SAB 108"). SAB 108 requires companies to
evaluate the materiality of identified unadjusted errors on each financial
statement and related financial statement disclosure using both the rollover
approach and the iron curtain approach, as those terms are defined in SAB 108.
The rollover approach quantifies misstatements based on the amount of the error
in the current year financial statement, whereas the iron curtain approach
quantifies misstatements based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of
the misstatement's year(s) of origin. Financial statements would require
adjustment when either approach results in quantifying a misstatement that is
material. Correcting prior year financial statements for immaterial errors would
not require previously filed reports to be amended. If a Company determines that
an adjustment to prior year financial statements is required upon adoption of
SAB 108 and does not elect to restate its previous financial statements, then it
must recognize the cumulative effect of applying SAB 108 in fiscal 2006
beginning balances of the affected assets and liabilities with a corresponding
adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is
effective for interim periods of the first fiscal year ending after November 15,
2006. The adoption of SAB 108 did not have an impact on the Company's
consolidated financial statements.
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.
NOTE 2 - PROPERTY AND EQUIPMENT
At December 31, 2006, property and equipment consist of the following:
Useful Life
-----------
Computer equipment 5 Years $ 8,680
Office equipment 5 years 424,747
Office furniture and fixtures 7 Years 62,128
Leasehold improvements 10 Years 30,593
---------------
526,148
Less accumulated depreciation (295,177)
---------------
$ 230,971
===============
For the years ended December 31, 2006 and 2005, depreciation expense amounted to
$67,454 and $39,467, respectively.
In May 2005, the Company acquired certain office equipment from Dental Visions,
Inc., (DVI), in exchange for 733,901 shares of common stock valued at $113,755
and payment of DVI debt in the amount of $169,486, for a total valuation of
$283,241.
F-13
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
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;
(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.
F-14
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 3 - CONVERTIBLE DEBENTURES PAYABLE (continued)
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, 2006, the Company revalued this
derivative liability. For the year ended December 31, 2006, after adjustment,
the Company recorded a gain on revaluation of this derivative liability of
$106,398 and reclassified $113,578 of the derivative liability to paid-in
capital due to the payment or conversion of the debenture. For the year ended
December 31, 2006, amortization of the discount on debenture amounted to
$223,548. Additionally, during the year ended December 31, 2006, the Company
issued 75,000 shares of its common stock for settlement of $6,900 of the
debenture.
The convertible debenture liability is as follows at December 31, 2006:
Convertible debentures payable $ 255,759
Less: unamortized discount on debentures -
---------------
Convertible debentures, net $ 255,759
===============
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-15
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
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, 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 5 - NOTE PAYABLE, NET
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 will be amortized over the term.
The Company agreed to issue 50 signed Put Notices to the Investor to use as
collateral. In the event, the Investor uses the collateral in full, the Company
shall immediately deliver to the Investor additional Put Sheets as requested by
the Holder. In the event that on the maturity date the Company has any remaining
amounts unpaid on this Note (the "Residual Amount"), the Holder can exercise its
right to increase the Face Amount by ten percent (10%) as an initial penalty and
an additional 2.5% per month paid, pro rata for partial periods, compounded
daily, as liquated damages ("Liquidated Damages").
Additionally, in the event of a default as defined in the agreement, the Holder
shall have the right, but not the obligation, to 1) switch the Residual Amount
to a three-year ("Convertible Maturity Date"), interest-bearing convertible
debenture. If the Holder chooses to convert the Residual Amount to a Convertible
Debenture, the Company shall have 20 business days after notice of the same (the
"Notice of Convertible Debenture") to file a registration statement covering an
amount of shares equal to 300% of the Residual Amount. Such registration
statement shall be declared effective under the Securities Act of 1933, as
amended (the "Securities Act"), by the Securities and Exchange Commission (the
"Commission") within 40 business days of the date the Company files such
Registration Statement. In the event the Company does not file such registration
statement within 20 business days of the Holder's request, or such registration
statement is not declared by the Commission to be effective under the Securities
Act within the time period described above, the Residual Amount shall increase
by $5,000 per day.
F-16
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 5 - NOTE PAYABLE, NET (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 being be 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, 2006, the Company revalued this derivative liability.
For the year ended December 31, 2006, after adjustment, the Company recorded a
gain on revaluation of this derivative liability of $331,100 and reclassified
$138,455 of the derivative liability to paid-in capital due to the payment of
the debenture. For the year ended December 31, 2006, amortization of the
discount on the note amounted to $932,062.
The note payable is as follows at December 31, 2006:
Note payable $ 707,407
Less: unamortized discount on note (2,463)
--------------
Note payable, net $ 704,944
===============
F-17
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
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, 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 December 31, 2006, the principal
amount outstanding on this note amounts to $991,124.
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, 2006, the principal amount outstanding on this
note amounts to $47,262.
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.
NOTE 7 - 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-18
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 8 - SHAREHOLDERS' DEFICIT
Common Stock
In the first and second quarter 2005, the Company issued 120,000 shares of
restricted common stock in exchange for $60,000 in cash.
In May 2005, the Company acquired certain assets of Dental Visions, Inc., (DVI),
a dental practice, in exchange for 733,901 shares of common stock valued at
$113,755 and payment of DVI debt in the amount of $169,486, for a total
valuation of $283,241.
On December 22, 2005, in connection with a note payable, the Company issued
1,500,000 shares of common stock. The Company valued the 1,500,000 common shares
at $.09 per share of $135,000 based on the recent selling price of the shares.
The fair value of $135,000 was treated as a discount on note payable (see note
5).
For the year ended December 31, 2005, the Company issued an aggregate 2,158,646
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 $.105 to $.13 or an aggregate of $238,453. In connection with issuance of
these shares, the Company recorded professional fees of $107,975 for legal
services performed and $130,478 in consulting fees for investor relation and
business development services performed.
In November and December 2005, the Company issued 590,000 shares of common stock
upon the conversion of the debenture payable at $.092 per share or $54,280.
Additionally, the Company issued 53,817 shares for settlement of interest of
$4,952
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.
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.
F-19
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 8 - SHAREHOLDERS' DEFICIT (continued)
Common Stock (continued)
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.
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.
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.
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.
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. If at the
close of business on August 31, 2007, the fair value of these shares is less
than $60,000, the Company shall issue to the consultant additional shares of our
common stock (valued at the bid price at the close of business on August 31,
2007) to make up the difference.
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.
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.
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-20
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 8 - 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 non-cash compensation expense of $120,000.
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.
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 of $50,000 and deferred
consulting expense of $25,000 to be amortized over the service period.
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 of $18,750 and deferred consulting expense of $56,250 to be amortized over
the service period. 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
non-cash compensation expense of $41,559.
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.
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.
On August 17, 2005, the Company granted options to purchase 500,000 shares of
common stock to a consultant for investor relations serviced rendered. The
options expire on August 16, 2008 and are exercisable at $0.20 per share. These
options were valued using the Black-Scholes pricing method at a fair value of
$0.12 per option. Accordingly, the Company recorded stock-based consulting
expense of $59,878.
F-21
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 8 - SHAREHOLDERS' DEFICIT (continued)
Stock Options (continued)
On November 20, 2005, the Company granted options to purchase 25,000 shares of
common stock to an employee for services rendered. The options expire on
November 20, 2010 and are exercisable at $0.25 per share. The exercise price
exceeded the fair market value of the common stock at the grant date.
Accordingly, under APB 25, no compensation expense was recognized.
On December 30, 2005, the Company granted options to purchase 950,000 shares of
common stock to executives and certain employees of the Company for services
rendered. The options expire on December 30 2010 with 500,000 options
exercisable at $0.15 per share and 450,000 exercisable at $.13 per share. The
exercise price exceeded the fair market value of the common stock at the grant
date. Accordingly, under APB 25, no compensation expense was recognized.
A summary of the stock options as of December 31, 2006 and 2005 and changes
during the periods is presented below:
Year Ended December 31, 2006 Year Ended December 31, 2005
---------------------------- ----------------------------
Weighted Average Number of Weighted Average
Number of Options Exercise Price Options Exercise Price
----------------- -- ---------------- --------------- -- ----------------
Balance at beginning of year 1,508,000 $ 0.16 1,533,000 $ 0.54
Granted - - 1,475,000 0.17
Exercised - - - -
Forfeited - - (1,500,000) 0.55
----------------- -- ---------------- --------------- -- ----------------
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 $ - $ 0.17
The following information applies to options outstanding at December 31, 2006:
Options Outstanding Options Exercisable
--------------------------------------------------------------- ----------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 2006 Life (Years) Price 2006 Price
------------ ---------------- --------------- ------------ ----------------- ------------
$ 0.13-0.15 950,000 4.00 $ 0.14 950,000 $ 0.14
$ 0.20-.0.25 525,000 1.75 $ 0.21 525,000 $ 0.21
$ 0.50 33,000 3.00 $ 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.
F-22
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 9 - 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,
2006, the Company had approximately $549,000 of U.S. federal and state net
operating loss carryforwards available to offset future taxable income which
begin expiring in 2026, 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, 2006.
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, 2006 and 2005:
Year Ended Year Ended
December 31, 2006 December 31, 2005
----------------- -------------------
Tax benefit computed at "expected" statutory rate $ (684,556) $ (489,662)
State income taxes, net of benefit (72,482) (51,847)
Other permanent differences 661,562 259,378
Increase in valuation allowance 95,476 282,131
----------------- -------------------
Net income tax benefit $ - $ -
================= ===================
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, 2006 December 31, 2005
Deferred tax assets:
Net operating loss carryforward $ 206,492 $ 122,002
Depreciation - 5,640
Allowance for doubtful accounts 41,210 23,500
Unearned membership fees 129,905 117,829
Customer deposits - 13,160
----------------- -----------------
Total deferred tax asset 377,607 282,131
Less: Valuation allowance (377,607) (282,131)
----------------- -----------------
- -
================= =================
The valuation allowance at December 31, 2006 was $377,607. The increase during
2006 was approximately $95,476.
F-23
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 10 - GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $3,833,507 and a working capital deficit of
$3,135,166 at December 31, 2006, net losses for the year ended December 31, 2006
of $2,013,399 and cash used in operations during the year ended December 31,
2006 of $271,329. 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.
Management may attempt to raise additional funds by way of a public or private
offering. While the Company believes in the viability of its strategy to improve
sales volume and in its ability to raise additional funds, there can be no
assurances to that effect. The Company's limited financial resources have
prevented the Company from aggressively advertising its products and services to
achieve consumer recognition. The ability of the Company to continue as a going
concern is dependent on the Company's ability to further implement its business
plan and generate increased revenues. The consolidated financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern. Management believes that the actions presently
being taken to further implement its business plan and generate additional
revenues provide the opportunity for the Company to continue as a going concern.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
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.
Operating Leases
The Company leases its office facility under a five year lease that expires May
2007. The monthly lease payments are $2,300 per month or $27,600 per year. In
May 2005, the Company assumed a lease for additional space as part of the DVI
asset acquisition. This lease expires in May 2010, and has monthly payments of
$2,175, or $26,100 per year, for a total of $53,700 per year.
Year Ended December 31,
2007 37,600
2008 26,100
2009 26,100
2010 10,875
----------
Total minimum lease payments $ 100,675
==========
Rent expense for the years ended December 31, 2006 and 2005 was $99,774 and
$95,820, respectively.
F-24
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)
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. 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).
The Company 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.
The Company have been sued in the Court of Common Pleas in Lebanon County,
Pennsylvania individually and on behalf of a class (Jaromir Kovarik and Daria
Kovarikova vs Union Dental Corp. and George Greeen. The complaint alleges
violation of 47 U.S.C. Section 227(b)(1)(c) and related sections in connection
with the distribution of an unsolicited facsmile transmissions. The suit seeks
class action certifications. The lawsuit was previously filed and was dismissed
by the Court. The Company believes that it has meritorious defenses to the
action.
NOTE 12 - SUBSEQUENT EVENTS
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
issuance of these shares, the Company recorded consulting fees of $11,000 for
business development services performed.
On January 5, 2007, the Company issued an aggregate 312,700 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 $14,072. In connection
with issuance of these shares, the Company recorded professional fees of $14,072
for professional services performed.
On January 5, 2007, the Company issued 400,000 shares of common stock for
services rendered to three employees of the Company. The Company valued these
common shares at the fair market value on the date of grant at $.045 per share
or $18,000. In connection with issuance of these shares, the Company recorded
non-cash compensation expense of $18,000.
On January 12, 2007, the Company issued 300,000 shares of common stock for
services rendered. The Company valued these common shares at the fair market
value on the date of grant at $.045 per share or $13,500. In connection with
issuance of these shares, the Company recorded consulting fees of $13,500 for
business development services performed.
On January 24, 2007, the Company issued an aggregate 1,750,000 shares of common
stock for services rendered to an officer/director and an employee of the
Company. The Company valued these common shares at the fair market value on the
date of grant at $.045 per share or $78,750. In connection with issuance of
these shares, the Company recorded non-cash compensation expense of $78,750.
On January 24, 2007, the Company issued 500,000 restricted shares of common
stock for advisory and business development services in connection with a
240-day consulting agreement entered on October 20, 2006. The Company valued
these common shares at the fair market value on the date of grant at $.045 per
share or $22,500. In connection with the issuance of these shares, the Company
recorded deferred consulting expense of $22,500 to be amortized over the service
period.
On January 24, 2007, the Company issued 250,000 shares of common stock for
services rendered. The Company valued these common shares at the fair market
value on the date of grant at $.045 per share or $11,250. In connection with
F-25
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 12 - SUBSEQUENT EVENTS (continued)
issuance of these shares, the Company recorded consulting fees of $11,250 for
business development services performed.
On January 24, 2007, the Company issued 250,000 shares of common stock for
services rendered. The Company valued these common shares at the fair market
value on the date of grant at $.045 per share or $11,250. In connection with
issuance of these shares, the Company recorded consulting fees of $11,250 for
business development services performed.
On 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.
On February 1, 2007, the Company issued 92,850 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 $.044 per share or $4,086. In connection
with issuance of these shares, the Company recorded professional fees of $4,086
for professional services performed.
On February 6, 2007, the Company issued 200,000 shares of common stock for legal
services rendered. The Company valued these common shares at the fair market
value on the date of grant at $.045 per share or $9,000. In connection with
issuance of these shares, the Company recorded professional fees of $9,000 for
professional services performed.
On February 16, 2007, the Company issued an aggregate 4,000,000 shares of common
stock for services rendered to an officer/director and an employee of the
Company. The Company valued these common shares at the fair market value on the
date of grant at $.042 per share or $168,000. In connection with issuance of
these shares, the Company recorded non-cash compensation expense of $168,000.
During February 2007, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 4) and repaid principal balance and
accrued interest on its notes payable of $44,481 for which the Company issued
1,147,000 shares of its common stock to Dutchess.
F-26