UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2008
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ________ to __________
Commission File Number: 000-26703
UNION DENTAL HOLDINGS, INC.
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(Exact name of registrant as specified in charter)
Florida 65-0710392
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 University Drive, Suite 200
Coral Springs, Florida 33071
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(Address of principal executive offices)(Zip Code)
(954) 575-2252
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(Issuer's telephone number, including area code)
N/A
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(Former name, former address and
former fiscal year, if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_] Accelerated filer [_]
Non-accelerated filer [_] Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Indicated the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date, 109,897,510 shares of common
stock are issued and outstanding as of April 29, 2008.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008
contains "forward-looking statements". Generally, the words "believes",
"anticipates," "may," "will," "should," "expect," "intend," "estimate,"
"continue," and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements which include,
but are not limited to, statements concerning the Company's expectations
regarding its working capital requirements, financing requirements, business
prospects, and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. Such statements are subject to certain
risks and uncertainties, including the matters set forth in this Quarterly
Report or other reports or documents the Company files with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not be
placed on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to update these forward-looking
statements. In addition, the forward-looking statements in this Quarterly Report
on Form 10-Q involve known and unknown risks, uncertainties and other factors
that could cause the actual results, performance or achievements of the Company
to differ materially from those expressed in or implied by the forward-looking
statements contained herein.
OTHER PERTINENT INFORMATION
When used in this report the terms "Union Dental," the "Company," "we," "our,"
and "us" refers to Union Dental Holdings, Inc., a Florida corporation.
UNION DENTAL HOLDINGS, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2008
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1 - Consolidated Financial Statements
Consolidated Balance Sheet (Unaudited)
As of March 31, 2008...................................................4
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2008 and 2007.....................5
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2008 and 2007.....................6
Notes to Unaudited Consolidated Financial Statements........................7
ITEM 2 - Management's Discussion and Analysis or Plan of Operation............23
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk...........31
ITEM 4 - Controls and Procedures..............................................31
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings....................................................32
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds..........32
ITEM 3 - Defaults Upon Senior Securities......................................32
ITEM 4 - Submission of Matters to a Vote of Security Holders..................32
ITEM 5 - Other Information....................................................32
ITEM 6 - Exhibits.............................................................33
Signatures....................................................................33
PART 1 - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2008 Year ended
(Unaudited) December 31, 2007
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash $ 17,692 $ 13,486
Accounts receivable, net 234,153 326,842
Inventory of supplies 37,480 37,480
Prepaid expenses and other current assets 22,333 27,724
----------------- -----------------
Total current assets 311,658 405,532
Property and equipment, net 146,804 164,019
Other assets 1,680 1,680
----------------- -----------------
Total Assets $ 460,142 $ 571,231
================= =================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Convertible notes payable $ 549,153 $ 586,408
Convertible debenture payable, net 226,873 226,873
Notes payable 681,415 752,899
Loan payable - related party 267,913 268,451
Line of credit 40,650 20,650
Accounts payable 95,740 74,395
Accrued expenses 133,447 129,603
Unearned membership fees 213,494 333,752
Derivative liability 599,609 613,722
----------------- -----------------
Total current liabilities $ 2,808,294 $ 3,006,753
----------------- -----------------
Commitments and contingencies
SHAREHOLDERS' DEFICIT:
Preferred stock ($.0001 Par value; 25,000,000 shares authorized;
3,000,000 shares issued and outstanding) 300 300
Common stock ($.0001 Par value; 300,000,000 share authorized;
109,722,510 and 103,078,014 shares issued and outstanding at
March 31, 2008 and December 31, 2007, respectively) 10,972 10,308
Additional paid-in capital 3,836,444 3,761,347
Accumulated deficit (4,706,157) (4,717,766)
Shareholder transactions (1,489,711) (1,489,711)
----------------- -----------------
Total shareholders' deficit (2,348,152) (2,435,522)
----------------- -----------------
Total liabilities and shareholders' deficit $ 460,142 $ 571,231
================= =================
See accompanying notes to unaudited consolidated financial statements.
4
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
----------------------------------------
2008 2007
------------------- ------------------
(Unaudited) (Unaudited)
Revenues, net $ 709,595 $ 632,637
------------------- ------------------
Operating expenses:
Cost of services performed 106,857 85,166
Salaries and related taxes and stock-based compensation 290,059 459,178
Depreciation and amortization 17,215 16,902
Professional fees 32,671 46,457
Consulting fees 12,700 171,425
Other general and administrative 189,092 189,588
------------------- ------------------
Total operating expenses 648,594 968,716
------------------- ------------------
Income (loss) from operations 61,001 (336,079)
------------------- ------------------
Other income (expense):
Amortization of debt issuance costs - (6,685)
Gain (loss) from valuation of derivatives liability (24,393) (203,611)
Interest income 95 -
Interest expense (25,094) (35,416)
------------------- ------------------
Total other expense (49,392) (245,712)
------------------- ------------------
Income (loss) before provision for income taxes 11,609 (581,791)
Income tax expense - -
------------------- ------------------
Net Income (loss) $ 11,609 $ (581,791)
=================== ==================
Net income (loss) per common share:
Net income (loss) per common share - basic $ - $ (0.01)
Net income (loss) per common share - diluted $ - $ (0.01)
=================== ==================
Weighted average common shares outstanding - basic 108,470,906 54,804,613
=================== ==================
Weighted average common shares outstanding - diluted 307,260,624 54,804,613
=================== ==================
See accompanying notes to unaudited consolidated financial statements.
5
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
----------------------------------------
2008 2007
------------------- ------------------
(Unaudited) (Unaudited)
Cash Flows From Operating Activities:
Net Income (loss) $ 11,609 $ (581,791)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 17,215 16,902
Stock-based compensation and consulting - 353,925
Amortization of debt issuance costs - 6,685
Amortization of discount of debenture and note payable - 2,463
Gain (loss) from valuation of derivatives 24,393 203,611
Changes in assets and liabilities:
Accounts receivable 92,689 (84,860)
Prepaid expenses and other current assets 5,391 (376)
Accounts payable 21,345 (6,504)
Accrued expenses 3,844 (16,778)
Accrued interest included in note payable - 6,455
Due to related parties - (3,000)
Unearned membership fees (120,258) 72,915
------------------- ------------------
Net cash provided by (used in) operating activities 56,228 (30,353)
------------------- ------------------
Cash Flows From Financing Activities:
Net proceeds from sales of common stock - 35,025
Proceeds from note payable - 35,025
Proceeds from loan payable - related party (538) 270,000
Line of credit 20,000 -
Payments on notes payable (71,484) (333,263)
------------------- ------------------
Net cash provided by (used in) financing activities (52,022) 6,787
------------------- ------------------
Net increase (decrease) in cash 4,206 (23,566)
Cash - beginning of year 13,486 117,556
------------------- ------------------
Cash - end of period $ 17,692 $ 93,990
=================== ==================
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 20,923 $ 17,024
=================== ==================
Cash payments for income taxes $ - $ -
=================== ==================
Non-cash investing and financing activities:
Issuance of common stock for debt and accrued interest $ 37,255 $ 24,983
=================== ==================
Reclassification of derivative liability to equity $ 38,506 $ 35,845
=================== ==================
Common stock issued in connection with accrued services $ - $ 75,278
=================== ==================
See accompanying notes to unaudited consolidated financial statements.
6
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 March 31, 2008, 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 shareholders' deficit of the combined results of UDC and
DDS prior to the acquisition have been retroactively restated (a
recapitalization) for the equivalent number of shares received in the
acquisition after giving effect to any differences in the par value of the
Company and the combined UDC and DDS common stock, with an offset to additional
paid-in capital. The restated consolidated retained earnings of the accounting
acquirer (UDC and DDS) are carried forward after the acquisition.
Through its wholly-owned subsidiaries, UDC and DDS, the Company operates two
distinct lines of business.
UDC operates a network of duly licensed dental providers, the Dental Referral,
who provide dental services through the network to union members in accordance
with arrangements between UDC and various labor unions. UDC is not limited as to
the type of labor union which it may solicit. UDC charges an annual management
services fee to the participating dentists to practice in an "area of
exclusivity" for union members. UDC currently has exclusive contracts with
several local unions.
DDS acquired the assets of George D. Green, DDS, PA and manages the operation of
that general dental practice.
7
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10Q. Accordingly, the
consolidated financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and such adjustments are of
a normal recurring nature. These consolidated financial statements should be
read in conjunction with the consolidated financial statements for the year
ended December 31, 2007 and notes thereto and other pertinent information
contained in Form 10-KSB of Union Dental Holdings, Inc. (the "Company") as filed
with the Securities and Exchange Commission (the "Commission"). The results of
operations for the three months ended March 31, 2008 are not necessarily
indicative of the results for the full fiscal year ending December 31, 2008.
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP"). The
consolidated financial statements of the Company include the Company and its
wholly-owned subsidiaries. All material intercompany balances and transactions
have been eliminated.
Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates. Significant estimates in 2008 and 2007 include the allowance for
doubtful accounts, stock-based compensation, valuation of derivative
liabilities, and the useful life of property and equipment.
Fair value of financial instruments
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses, debenture and loans payable
approximate their fair market value based on the short-term maturity of these
instruments.
Inventory of dental supplies
The Company values inventory of dental supplies at the lower of cost or market,
using the specific unit cost method.
8
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 March 31, 2008, the Company has
established, based on a review of its outstanding balances, an allowance for
doubtful accounts in the amount of $109,930.
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 three months ended March
31, 2008.
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.
9
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Had income taxes been determined based on an effective tax rate of 37.6%
consistent with the method of SFAS 109, the Company's net losses for all periods
presented would not materially change.
Loss per common share
In accordance with SFAS No. 128 "Earnings Per Share," Basic earnings per share
is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share is
computed by dividing net income by the weighted average number of shares of
common stock, common stock equivalents and potentially dilutive securities
outstanding during each period. Diluted loss per common share is not presented
during the three months ended March 31, 2007 because it is anti-dilutive. The
Company's common stock equivalents at March 31, 2008 include the following:
Convertible debentures 38,124,593
Derivatives options 160,665,125
Options 1,508,000
Warrants 1,304,348
--------------
201,602,066
==============
The following table presents a reconciliation of basic and diluted earnings per
share:
March 31, 2008
---------------
Net income $ 11,609
Weighted average shares outstanding - basic 108,470,906
Income (loss) per share - basic 0.00
===============
Net income $ 11,609
Impact of assumed conversions
Derivative (income) expense 24,393
---------------
Net income - diluted $ 36,002
Weighted average shares outstanding - basic 108,470,906
Effect of dilutive securities
Convertible debentures 38,124,593
Derivatives options 160,665,125
---------------
Weighted average shares outstanding- diluted 307,260,624
===============
Income (loss) per share - diluted $ 0.00
===============
10
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectibility is reasonably assured. The
following policies reflect specific criteria for the various revenues streams of
the Company:
DDS selects certain dentists in selected geographical areas to represent the
Company. The dentist enters into an exclusive agreement with DDS for an annual
management services fee, which is based on each specialty the dentist provides
to the patients on a per office basis. DDS receives a yearly membership fee from
each dentist in order for him/her to maintain the exclusive area of each
specialty that the dentist provides. Revenues from membership fees are
recognized over the term of the contract. Unearned membership fees at March 31,
2008 and 2007 amounted to $213,494 and $333,752 respectively, and will be
recognized as revenues over their respective term of contract.
The Company recognizes revenue from its dental practice when dental services are
provided.
Concentrations of credit risk
The Company maintains its cash in bank deposit accounts, which, at times, exceed
federally insured limits. During the three month period ended March 31, 2008,
the Company has not reached bank balances exceeding the FDIC insurance limit.
The Company has not experienced any losses in such accounts through March 31,
2008.
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 three
months ended March 31, 2008, the Company did not grant any stock options.
11
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Non-Employee Stock Based Compensation
The cost of stock based compensation awards issued to non-employees for services
are recorded at either the fair value of the services rendered or the
instruments issued in exchange for such services, whichever is more readily
determinable, using the measurement date guidelines enumerated in Emerging
Issues Task Force Issue ("EITF") 96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18").
Common stock purchase warrants
The Company accounts for common stock purchase warrants in accordance with the
provisions of Emerging Issues Tack Force Issue ("EITF") issue No. 00-19
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock" ("EITF 00-19"). Based on the provisions of
EITF 00-19, the Company classifies as equity any contracts that (i) require
physical settlement or net-share settlement, or (ii) gives the company a choice
of net-cash settlement or settlement in its own shares (physical settlement or
net-share settlement). The Company classifies as assets or liabilities any
contracts that (i) require net-cash settlement (including a requirement to net
cash settle the contract if an event occurs and if that event is outside the
control of the company), or (ii) give the counterparty a choice of net-cash
settlement or settlement in shares (physical settlement or net-share
settlement).
Recent accounting pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109." This interpretation provides guidance
for recognizing and measuring uncertain tax positions, as defined in SFAS No.
109, "Accounting for Income Taxes." FIN No. 48 prescribes a threshold condition
that a tax position must meet for any of the benefit of an uncertain tax
position to be recognized in the financial statements. Guidance is also provided
regarding de-recognition, classification, and disclosure of uncertain tax
positions. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. The Company has determined that this interpretation does not 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 has determined
that this interpretation does not have a material impact on its financial
position, results of operations, or cash flows.
12
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when quantifying Misstatements in
Current Year Financial Statements ("SAB 108"). SAB 108 requires companies to
evaluate the materiality of identified unadjusted errors on each financial
statement and related financial statement disclosure using both the rollover
approach and the iron curtain approach, as those terms are defined in SAB 108.
The rollover approach quantifies misstatements based on the amount of the error
in the current year financial statement, whereas the iron curtain approach
quantifies misstatements based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of
the misstatement's year(s) of origin. Financial statements would require
adjustment when either approach results in quantifying a misstatement that is
material. Correcting prior year financial statements for immaterial errors would
not require previously filed reports to be amended. If a Company determines that
an adjustment to prior year financial statements is required upon adoption of
SAB 108 and does not elect to restate its previous financial statements, then it
must recognize the cumulative effect of applying SAB 108 in fiscal 2006
beginning balances of the affected assets and liabilities with a corresponding
adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is
effective for interim periods of the first fiscal year ending after November 15,
2006. The adoption of SAB 108 did not have an impact on the Company's
consolidated financial statements.
In December 2006, FASB Staff Position No. EITF 00-19-2, "Accounting for
Registration Payment Arrangements," was issued. The FSP specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with SFAS
No. 5, "Accounting for Contingencies." The Company believes that its current
accounting is consistent with the FSP.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115", under which entities will now be permitted to measure many
financial instruments and certain other assets and liabilities at fair value on
an instrument-by-instrument basis. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157. The Company has determined that this interpretation does
not have a material impact on its financial position, results of operations, or
cash flows.
In May 2007, the FASB issued FASB Staff Position No. FIN 48-1, Definition of
Settlement in FASB Interpretation No. 48 ("the FSP"). The FSP provides guidance
about how an enterprise should determine whether a tax position is effectively
settled for the purpose of recognizing previously unrecognized tax benefits.
Under the FSP, a tax position could be effectively settled on completion of
examination by a taxing authority if the entity does not intend to appeal or
litigate the result and it is remote that the taxing authority would examine or
re-examine the tax position. The Company does not expect that this
interpretation will have a material impact on its financial position, results of
operations, or cash flows.
13
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations,"
which replaces SFAS No. 141, " Business Combinations," which, among other
things, establishes principles and requirements for how an acquirer entity
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed (including intangibles) and any noncontrolling
interests in the acquired entity. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. We are currently evaluating what impact our adoption of SFAS No.
141(R) will have on our financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51." SFAS No. 160
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51's consolidation procedures for
consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. We are currently evaluating what impact our adoption of
SFAS No. 160 will have on our financial statements.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Useful Life March 31, 2008 December 31, 2007
----------- -------------- -----------------
Computer equipment 5 Years $ 9,695 $ 9,695
Office equipment 5 years 424,747 424,747
Office furniture and fixtures 7 Years 62,128 62,128
Leasehold improvements 10 Years 30,593 30,593
--------------- -----------------
527,163 527,163
Less:accumulated depreciation (380,359) (363,144)
--------------- ------------------
$ 146,804 $ 164,019
=============== =================
For the three months ended March 31, 2008 and 2007, depreciation expense
amounted to $17,215 and $16,902, respectively.
14
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
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;
15
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 3 - CONVERTIBLE DEBENTURES PAYABLE (continued)
The debenture provides that Dutchess shall not be entitled to convert that
amount of Debenture into common stock, which when added with the sum of the
number of shares beneficially owned by Dutchess would exceed 4.99% of the number
of shares of our common stock outstanding on the conversion date.
In order to secure its obligations under the secured convertible debenture and
related documents, the Company has granted the debenture holder a security
interest in all of its assets and property.
In accordance with Statement of Financial Accounting Standards No. 133,
`Accounting for Derivative Instruments and Hedging Activities', ("FASB 133"),
the Company determined that the conversion feature of the Debentures met the
criteria of an embedded derivative and therefore the conversion feature of the
debt needed to be bifurcated and accounted for as a derivative. Due to the reset
provisions of the Debentures, the debt does not meet the definition of
"conventional convertible debt" because the number of shares which may be issued
upon the conversion of the debt is not fixed. Therefore, the conversion feature
fails to qualify for equity classification under EITF 00-19, and must be
accounted for as a derivative liability.
The $600,000 face amount of the debenture was stripped of its conversion feature
due to the accounting for the conversion feature as a derivative, which was
recorded using the residual proceeds method, whereby any remaining proceeds
after allocating the proceeds to the warrants and conversion option were
attributed to the debt. At March 31, 2008, the Company revalued this derivative
liability. For the three months ended March 31, 2008, after adjustment, the
Company recorded a loss on revaluation of this derivative liability of $14,013.
At March 31, 2008 and December 31, 2007, the balance of the convertible
debenture amounted to $226,873.
NOTE 4 - EQUITY CREDIT LINE
On August 17, 2005, the Company entered into an Investment Agreement with
Dutchess Private Equities Fund II, LLP ("Dutchess"). Pursuant to this Agreement,
Dutchess committed to purchase up to $5,000,000 (the "Line") of the Company's
common stock over the course of 36 months ("Line Period"), after the
registration statement was declared effective by the SEC in September 2005 (the
"Effective Date"). The amount that the Company shall be entitled to request from
each of the purchase "Puts", shall be equal to either (1) $100,000 or (2) 200%
of the averaged daily volume (US market only) ("ADV") of the Company's common
stock for the 20 trading days prior to the "Put" notice, multiplied by the
average of the 3 daily closing prices immediately preceding the Put Date. The
Pricing Period shall be the five (5) consecutive trading days immediately after
the Put Date. The Market Price shall be the lowest closing bid price of the
Company's common stock during the Pricing Period. The Purchase Price shall be
set at 95% of the Market Price. This Investment Agreement establishes what is
sometimes termed an equity line of credit or an equity drawdown facility.
16
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 4 - EQUITY CREDIT LINE (continued)
In general, the drawdown facility operates as follows: Dutchess, has committed
to provide the Company up to $5,000,000 as it requests over a 36 month period,
in return for common stock the Company issues to Dutchess. The Company, at its
sole discretion, may during the Open Period deliver a "put notice" (the "Put
Notice") to Dutchess which states the dollar amount which the Company intends to
sell to Dutchess on the Closing Date. The Open Period is the period beginning on
the trading after the Effective Date and which ends on the earlier to occur of
36 months from the Effective Date or termination of the Investment Agreement in
accordance with its terms. The Closing Date shall mean no more than 7 trading
days following the Put Notice Date. The Put Notice Date shall mean the Trading
Day immediately following the day on which Dutchess receives a Put Notice, as
defined in the agreement. During the Open Period, the Company shall not be
entitled to submit a Put Notice until after the previous Closing has been
completed. Additionally, Dutchess shall not be obligated to honor any Put Notice
if at the time of the Put Notice Dutchess would own more than 4.99% of the
Company's issued and outstanding common stock.
Upon the receipt by Dutchess of a validly delivered Put Notice, Dutchess shall
be required to purchase from the Company, during the period beginning on the Put
Notice Date and ending on and including the date that is 5 trading days after
such Put Notice, that number of shares having an aggregate purchase price equal
to the lesser of (a) the Put Amount set forth in the Put Notice, or (b) 20% of
the aggregate trading volume of the Company's common stock during the applicable
Pricing Period times (x) the lowest closing bid price of the Company's common
stock during the specified Pricing period, but only if such said shares bear no
restrictive legend and are not subject to stop transfer instructions, prior to
the applicable Closing Date.
For the year ended December 31, 2007, the Company delivered Put Notices to draw
on the equity line of credit. In connection with these puts, the Company issued
4,306,452 shares of common stock for net proceeds of $69,825.
NOTE 5 - CONVERTIBLE NOTE PAYABLE
On December 22, 2005, the Company signed a promissory note (the "Note") in favor
of Dutchess Private Equities Fund, LP (the "Investor"), in the amount of
$960,000 (the "Face Amount") and received gross proceeds in the amount of
$800,000 less $60,075 in fees associated with the financing for net proceeds of
$739,925. The Company is obligated to repay the Investor the Face Amount on or
before December 23, 2006. There is no stated interest rate on the Note and
interest has been imputed at a rate of 32% per annum. Payments are to be made by
the Company from each Put from the Company's Equity Credit Line (see note 4)
with the Investor. The Company is obligated to pay the Investor the greater of
a) 50% of each Put to the Investor or b) $80,000 until the face Amount minus any
fees have been paid. The first payment was due on February 15, 2006 and all
subsequent payments will be made at the Closing of every Put to the Investor
thereafter. The Put Amount will be the maximum amount allowed under the
Investment Agreement with the Investor. The Company has not received any written
notice of default in connection with this note.
17
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 5 - CONVERTIBLE NOTE PAYABLE (continued)
As described in note 4, the Investment Agreement provides in part that the
maximum amount of each Put is either $100,000 or 200% of the average daily
volume multiplied by the average of the three daily closing prices immediately
preceding the Put Date. Payments made by the Company in satisfaction of this
Note shall be made from each Put from the Equity Line of Credit with the
Investor given by the Company to the Investor. Additionally, in connection with
Note, the Company issued 1,500,000 shares of common stock. The shares were
valued at fair market value at date grant of $135,000 or $.09 per share and is
reflected as a discount on the Note, which was amortized over the term.
The Company agreed to issue 50 signed Put Notices to the Investor to use as
collateral. In the event, the Investor uses the collateral in full, the Company
shall immediately deliver to the Investor additional Put Sheets as requested by
the Holder. In the event that on the maturity date the Company has any remaining
amounts unpaid on this Note (the "Residual Amount"), the Holder can exercise its
right to increase the Face Amount by ten percent (10%) as an initial penalty and
an additional 2.5% per month paid, pro rata for partial periods, compounded
daily, as liquated damages ("Liquidated Damages").
Additionally, in the event of a default as defined in the agreement, the Holder
shall have the right, but not the obligation, to 1) switch the Residual Amount
to a three-year ("Convertible Maturity Date"), interest-bearing convertible
debenture. If the Holder chooses to convert the Residual Amount to a Convertible
Debenture, the Company shall have 20 business days after notice of the same (the
"Notice of Convertible Debenture") to file a registration statement covering an
amount of shares equal to 300% of the Residual Amount. Such registration
statement shall be declared effective under the Securities Act of 1933, as
amended (the "Securities Act"), by the Securities and Exchange Commission (the
"Commission") within 40 business days of the date the Company files such
Registration Statement. In the event the Company does not file such registration
statement within 20 business days of the Holder's request, or such registration
statement is not declared by the Commission to be effective under the Securities
Act within the time period described above, the Residual Amount shall increase
by $5,000 per day.
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.
18
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 5 - CONVERTIBLE NOTE PAYABLE (continued)
The $960,000 face amount of the debenture was stripped of its conversion feature
due to the accounting for the conversion feature as a derivative, which was
recorded using the residual proceeds method, whereby any remaining proceeds
after allocating the proceeds to the 1,500,000 common shares and conversion
option would be attributed to the debt. The beneficial conversion feature (an
embedded derivative) included in this Note resulted in a note discount of
$665,000 in 2005. In accordance with EITF No. 00-19, EITF No. 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments, the values assigned to
both the Note, and conversion feature were allocated based on their fair values.
The amount allocated as a discount on the Note for the value of the conversion
option is 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
three months ended March 31, 2008, the Company revalued this derivative
liability. For the three months ended March 31, 2008, after adjustment, the
Company recorded a loss on revaluation of this derivative liability of $10,380
and reclassified $38,506 of the derivative liability to paid-in capital due to
the payment of the debenture. For the three months ended March 31, 2008 and
2007, amortization of the discount on the note amounted to $0 and $2,463,
respectively. At March 31, 2008 and December 31, 2007, the balance of the
convertible note amounted to $549,153 and $586,408, respectively.
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 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 March 31,
2008, 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.
19
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 6 - NOTES PAYABLE (continued)
At March 31, 2008 and December 31, 2007, the principal amount outstanding on
this note amounts to $645,124 and $714,324, respectively.
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 March 31, 2008 and December 31, 2007, the principal amount
outstanding on this note amounts to $36,291 and $38,575, respectively.
NOTE 7 - LINE OF CREDIT
On May 16, 2007, the Company was issued a $100,000 line of credit with SunTrust
Bank. The line of credit bears an annual interest rate of 8.25% and interest is
payable monthly. The balance of the line of credit was $20,650 as of December
31, 2007 and $40,650 as of March 31, 2008.
NOTE 8 - RELATED PARTY TRANSACTIONS
On March 20, 2004, UDC, a wholly owned subsidiary of the Company, entered into
an employment agreement with the principal stockholder, the sole officer of UDC,
with a term of 7 years. This contract provides for a base salary to the
principal stockholder of $225,000 in year 1, $125,000 in year 2, $185,500 in
year 3, $196,630 in year 4, $208,427 in year 5, $220,932 in year 6 and $234,187
in year 7. This contract also provides for the issuance of options to the
principal stockholder upon signing , 750,000 options, (1 share per option), with
an exercise price of $0.60 per share, half vested immediately and half vesting
after two years , having an exercise life of five years. This contract also
provides for the issuance of options to the principal stockholder as well, if
certain revenue milestones are reached: at $3,000,000 in gross revenue for any
calendar year he receives 332,500 options, (1 share per option), with an
exercise price at the market price of the underlying common stock at issue date
and the same again at $4,000,000 and $5,000,000 in gross revenue for a calendar
year.
On March 7, 2007, the Company received a loan amounting to $270,000 from the
Company's CEO for a full payment of the principal and accrued interest of the
10% promissory note which amounted to approximately $261,000. The Company's CEO
individually signed a 30 year promissory note in the amount of $270,000 with
SunTrust Bank, which requires 360 monthly principal and interest payments at the
rate of 8.4% per annum until March 7, 2037 and is secured by a personal asset
owned by the Company's CEO. The loan from the Company's CEO calls for the
Company to make equal monthly payments. In the event of a default, all payments
under the loan shall become immediately due and payable. The loan represents an
unsecured obligation of the Company. At March 31, 2008 and December 31, 2007,
the principal amount outstanding on this loan amounts to $267,913 and $268,451,
respectively.
20
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 9 - SHAREHOLDERS' DEFICIT
Between January and February 2008, the Company exercised a put notice in
accordance with its Investment Agreement with Dutchess (see note 4) and repaid
principal and accrued interest on its notes payable of $37,255 for which the
Company issued in aggregate 6,644,496 shares of its common stock to Dutchess.
Stock Options
In October 2004, the Company adopted a Stock Option Plan that allows for both
incentive based options as well as non-qualified options. As part and parcel to
the reorganization on December 27, 2004, UDHI adopted this Plan. Under the terms
of the Plan, the Plan Committee will set the option term and the exercise price.
The Plan limits the ability to exercise incentive options for a first time
holder in any one calendar year to $100,000 aggregate fair market value, based
on grant date. The Plan also allows for the issuance of Stock Appreciation
Rights to allow for cash-less exercise of underlying issued options.
A summary of the stock options as of March 31, 2008 and changes during the
periods is presented below:
Weighted Average
Number of Options Exercise Price
----------------- ----------------
Balance at beginning of year 1,508,000 $ 0.16
Granted - -
Exercised - -
Forfeited - -
----------------- ----------------
Balance at end of period 1,508,000 $ 0.16
================= ================
Options exercisable at end of period 1,508,000 $ 0.16
================= ================
Weighted average fair value of
options granted during the period $ -
The following information applies to options outstanding at March 31, 2008:
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Exercisable Price
------------ ------------- ------------ ---------- ------------- ----------
$0.10-0.15 950,000 2.75 $0.14 950,000 $0.14
$0.20-.0.25 525,000 0.50 $0.21 525,000 $0.21
$0.50 33,000 1.75 $0.50 33,000 $0.50
------------- ---------- ------------- ----------
1,508,000 $0.16 1,508,000 $0.16
============= ========== ============= ==========
21
UNION DENTAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
NOTE 10 - GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $4,706,157 and a working capital deficit of
$2,496,636 at March 31, 2008 and net income for the three months ended March 31,
2008 of $11,609. While the Company is attempting to increase sales, the growth
has not been significant enough to support the Company's daily operations. In
order to raise funds, on August 2005, the Company entered into an Investment
Agreement and a Debenture Agreement (See Note 3 and 4), and a note payable
agreement (See note 5), and has notes payable to a bank and a third party.
Additionally, , the Company has a loan payable with the Company's CEO (see Note
8). Management may attempt to raise additional funds by way of a public or
private offering. While the Company believes in the viability of its strategy to
improve sales volume and in its ability to raise additional funds, there can be
no assurances to that effect. The Company's limited financial resources have
prevented the Company from aggressively advertising its products and services to
achieve consumer recognition. The ability of the Company to continue as a going
concern is dependent on the Company's ability to further implement its business
plan and generate increased revenues. The consolidated financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern. Management believes that the actions presently
being taken to further implement its business plan and generate additional
revenues provide the opportunity for the Company to continue as a going concern.
NOTE 11 - SUBSEQUENT EVENTS:
In April 2008, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 4) and repaid principal on its
notes payable of $963 for which the Company issued in aggregate 175,000 shares
of its common stock to Dutchess.
[Balance of this page intentionally left blank.]
22
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
OVERVIEW
We operate our business through our two wholly owned subsidiaries, Direct
Dental Services, Inc. ("DDS") and Union Dental Corp. ("UDC"). UDC 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. DDS operates a dental practice in Coral Springs, Florida. During the
coming year, the Company's primary focus will be to acquire additional dental
practices which the Company believes application of its Dental Practice
Management Model will improve operating performance, enhance revenues and
generate a positive return on the Company's investment..
In furtherance thereof during 2007, we spent significant time and money
exploring the possible acquisition of a large dental practice in California.
Closing of the transaction would have required us to pay the Seller a large sum
of cash at Closing. We could not be certain if we could secure the required
financing to close on this transaction. As a result, when we were required to
deliver a non-refundable deposit on the purchase of the property, we determined
that the risk was too great to put this money at risk and as a result, turned
down the potential acquisition without further liability except for the fees and
costs we incurred in conducting our due diligence.
We are currently investigating the possible acquisition of a dental
practice in North Carolina. Closing of the transaction will be subject to our
further due diligence and securing the required financing. The acquisition of
the dental practice will also include real estate
Ultimately, if management is going to be successful in this endeavor, the
Company will require significant additional funding in the form of debt or
equity. To date, we have no commitment for funding and even if we secure a
funding commitment, there can be no assurance that we will be able to satisfy
the conditions precedent set forth in any funding commitment.
While we will continue to recruit additional unions and recruit dentists to
service the union contracts in those regions we have secured contracts, we have
determined that the significant marketing costs involved in securing these
dentists provides a limited return on our investment. However, until such time
as we close on a funding commitment for the acquisition of a dental practice, we
will attempt to add union contracts in states where we currently do not have
union contracts We will continue to solicit dentists to expand our network and
focus on the expansion of our dental facility in Coral Springs, Florida where
our chief executive officer practices.
In order to finance our operations, growth and expansion, on August 17,
2005, we entered into an Investment Agreement with Dutchess Private Equity Fund
II, LLP ("Dutchess"). Pursuant to this Agreement, Dutchess will commit to
purchase up to $5,000,000 of our Common Stock over the course of 36 months,
beginning September 15, 2005, the date our registration statement was declared
effective by the SEC. Under the agreement, we may sell to Dutchess on each
occasion, either (1) $100,000 in shares of our common stock or (2) 200% of the
averaged daily volume (U.S market only) 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
23
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).
Because of the significant decline in the price of our common stock since
the execution of our Line of Credit with Dutchess, it is unlikely that we will
be able to draw down the entire $5,000,000. As a result, we may have to obtain
additional operating capital from other sources to enable us to execute our
business plan. We 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. In
addition, such financing may not be available in sufficient amounts or on terms
acceptable to us.
Also in connection with the Dutchess financing, on August 17, 2005, we
entered into a Debenture Agreement with Dutchess, an accredited investor, for
the issuance and sale of $600,000 of 10% secured convertible debenture due
August 17, 2010 in a private transaction exempt from registration under the
Securities Act of 1933 in reliance on exemptions provided by Section 4(2) and
Regulation D of the Act. At the time of signing the Debenture Agreement, we also
issued Dutchess a five-year common stock purchase warrant to purchase 1,304,348
shares of our common stock at $.092 per share.
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
24
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.
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.
At March 31, 2008 and December 31, 2007, the balance of the convertible
debenture amounted to $549,153 and $586,408, respectively.
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
25
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. No notice of Default has been received. (See Footnote 5.)
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the Securities
and Exchange Commission (the "SEC"), encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The Company's consolidated financial statements include a
summary of the significant accounting policies and methods used in the
preparation of the consolidated financial statements. Management believes the
following critical accounting policies affect the significant judgments and
estimates used in the preparation of the financial statements.
Use of Estimates - Management's discussion and analysis or plan of
operation is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses, and related disclosure
of contingent assets and liabilities. On an ongoing basis, management evaluates
these estimates, including those related to allowances for doubtful accounts
receivable and long-lived assets. Management bases these estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
We review the carrying value of property and equipment for impairment at
least annually or whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of long-lived
assets is measured by comparison of its carrying amount to the undiscounted cash
flows that the asset or asset group is expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the property, if any, exceeds its fair
market value.
Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R),
"Share-Based Payment," under the modified prospective method. SFAS No. 123(R)
eliminates accounting for share-based compensation transactions using the
intrinsic value method prescribed under APB Opinion No. 25, "Accounting for
26
Stock Issued to Employees," and requires instead that such transactions be
accounted for using a fair-value-based method. Under the modified prospective
method, we are required to recognize compensation cost for share-based payments
to employees based on their grant-date fair value from the beginning of the
fiscal period in which the recognition provisions are first applied. For periods
prior to adoption, the financial statements are unchanged, and the pro forma
disclosures previously required by SFAS No. 123, as amended by SFAS No. 148,
will continue to be required under SFAS No. 123(R) to the extent those amounts
differ from those in the Statement of Operations.
Results of Operations
THREE MONTHS ENDED MARCH 31, 2008 AS COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2007
Revenues
For the three months ended March 31, 2008, we generated revenues of
$709,595 as compared to $632,637 for the three months ended March 31, 2007, an
increase of approximately 12%. This increase in revenues is attributable to both
increased revenues which we generated from the dental practice and an increase
in the number of participating dental service providers as we continue to expand
our network of local, regional and national agreements with unions to provide
discounted dental services to their members.
Operating Expenses
The Company's total operating expenses decreased $320,122 or 33% for the
three months ended March 31, 2008 as compared to the 2007 period. These
decreases include:
o Cost of services performed - Cost of services performed expense
consists of personnel cost, dental supplies, and lab costs. For the
three months ended March 31, 2008, the cost of services performed were
$106,857 as compared to $85,166 for the 2007 period, an increase of
$21,691 or 25%. This increase was primarily due to the increase in
dental supplies of approximately $16,000.
o Salaries, related taxes and stock-based compensation - Salaries,
related taxes and stock-based compensation expense consists of
personnel cost and the fair value of common shares issued for services
to employees. For the three months ended March 31, 2008, salaries,
related taxes and stock-based compensation costs were $290,059 as
compared to $459,178 for the 2007 period, a decrease of $169,119 or
37%. The decrease was primarily attributable to a decrease in stock
based compensation of $197,250 attributable to the fair value of
common shares issued for services to our CEO and certain employees
offset by increase in salaries that relates to adding additional
personnel and normal wage increases during the three months ended
March 31, 2008.
o For the three months ended March 31, 2008, we recorded depreciation
expense of $17,215 as compared to $16,902 for the 2007 period. We
purchase additional computer equipment in August 2007 amounting to
$1,015 which resulted in a minimal increase in depreciation.
o For the three months ended March 31, 2008, we incurred professional
fees of $32,671 as compared to $46,457 for the 2007 period, a decrease
of $13,786 or 30%. The decrease during the three months ended March
31, 2008 was attributable to decrease in accounting fees.
o For the three months ended March 31, 2008, we incurred consulting fees
of $12,700 as compared to $171,425 for the 2007 period, a decrease of
$158,725 or 93%. The decrease was primarily attributable to a decrease
in use of consultants for investor relations, business development and
advisory services during the three months ended March 31, 2008.
27
o For the three months ended March 31, 2008, we incurred other general
and administrative expenses of $189,092 as compared to $189,588 for
the 2007 period, a minimal decrease of $496. Other general and
administrative expenses consisted of rent, insurance, printing, office
expenses, utilities, maintenance, computer expenses, postage, travel,
and other expenses.
Other income (expenses)
o For the three months ended March 31, 2008, we recorded amortization of
debt issuance costs of $0 as compared to $6,685 in the 2007 period.
The decrease was primarily attributable to the full amortization of
debt issuance cost related to our notes payable with Dutchess in the
2007 period.
o For the three months ended March 31, 2008, we recorded a loss from the
revaluation of a derivative liability of $24,393 as compared to
$203,611 in the 2007 period which was attributable to our stock
volatility and the value of our stock price.
o For the three months ended March 31, 2008, interest expense was
$25,094 as compared to $35,416 for the 2007 period, a decrease of
$10,322 The decrease in interest expense is primarily attributable to
decreasing 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.
Net Income (loss)
As a result of these factors, we reported a net income for the three months
ended March 31, 2008 of $11,609 or $.00 per share as compared to a net loss of
$581,791 or $.01 per share for the 2007 period. Investors should note that as of
March 31, 2008, the weighted average number of shares outstanding - basic was
108,470,906 as compared to 54,804,613 for the 2007 period and the weighted
average number of shares outstanding - diluted was 307,260,624 as compared to
54,804,613 for the 2007 period
Liquidity and Capital Resources
At March 31, 2008, we had cash and accounts receivable totaling $251,845.
We had total current assets of $311,658. Also, as of March 31, 2008, we had
total assets of $460,142. Our total current liabilities at March 31, 2008 were
$2,808,294. We have a working capital deficit as of March 31, 2008 of
$2,496,636. 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 $226,873, a note
payable in the amount of $681,415 and a derivative liability in the amount of
$599,609. We also have convertible notes payable totaling $549,153. The
derivative liability which we recorded on our books is the result of the
convertibility feature and the registration rights which we have granted to
Dutchess. (See Footnotes 3, 4 and 5 of our financial statements). We are also in
default under our lending agreement when we failed to maintain certain
affirmative covenants required under the loan documentation. This loan
obligation has been subsequently assigned by Bank of America. We have not
received any notice of default by the Assignee and we continue to make the
required monthly payments. Nevertheless, we have designated the entire amount of
this liability, as a short term liability.
We owe our CEO, George Green, the sum of $267,913. This liability resulted
from a loan which he provided the company in the amount of $270,000. Dr. Green
individually signed a 30 year promissory note in the amount of $270,000 with Sun
Trust Bank, which requires 360 monthly principal and interest payments at the
rate of 8.4% per annum until March 7, 2037. (See Footnote 8.)
We have also recorded a liability for unearned membership fees totaling
$213,494.
28
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 $.006 per share. At this price, we have not
registered a sufficient number of registered shares available under our equity
line of credit to satisfy the outstanding obligation. Based on the current price
of our common stock, we have not have registered a sufficient number of shares
of common stock to draw against the equity credit line. As such, we will in all
likelihood continue to be in default under these obligations.
We have an accumulated deficit of $4,706,157. We recorded shareholder
transactions as March 31, 2008 of $1,489,711. As of March 31, 2008, we had a
shareholders' deficit of $2,348,152.
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 March 31, 2008, the principal amount
outstanding on this note amounts to $36,291.
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 was due on June 19, 2007
and was paid in full. The note is secured by certain assets of the Company.
Subsequent Events:
In April 2008, the Company exercised a put notice in accordance with its
Investment Agreement with Dutchess (see note 4) and repaid principal on its
notes payable of $963 for which the Company issued in aggregate 175,000 shares
of its common stock to Dutchess.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109." This interpretation provides guidance
for recognizing and measuring uncertain tax positions, as defined in SFAS No.
109, "Accounting for Income Taxes." FIN No. 48 prescribes a threshold condition
that a tax position must meet for any of the benefit of an uncertain tax
position to be recognized in the financial statements. Guidance is also provided
regarding de-recognition, classification, and disclosure of uncertain tax
positions. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. The Company has determined that this interpretation does not 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
29
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 has determined that this interpretation does not have a material impact
on its financial position, results of operations, or cash flows.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when quantifying
Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 requires
companies to evaluate the materiality of identified unadjusted errors on each
financial statement and related financial statement disclosure using both the
rollover approach and the iron curtain approach, as those terms are defined in
SAB 108. The rollover approach quantifies misstatements based on the amount of
the error in the current year financial statement, whereas the iron curtain
approach quantifies misstatements based on the effects of correcting the
misstatement existing in the balance sheet at the end of the current year,
irrespective of the misstatement's year(s) of origin. Financial statements would
require adjustment when either approach results in quantifying a misstatement
that is material. Correcting prior year financial statements for immaterial
errors would not require previously filed reports to be amended. If a Company
determines that an adjustment to prior year financial statements is required
upon adoption of SAB 108 and does not elect to restate its previous financial
statements, then it must recognize the cumulative effect of applying SAB 108 in
fiscal 2006 beginning balances of the affected assets and liabilities with a
corresponding adjustment to the fiscal 2006 opening balance in retained
earnings. SAB 108 is effective for interim periods of the first fiscal year
ending after November 15, 2006. The adoption of SAB 108 did not have an impact
on the Company's consolidated financial statements.
In December 2006, FASB Staff Position No. EITF 00-19-2, "Accounting for
Registration Payment Arrangements," was issued. The FSP specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with SFAS
No. 5, "Accounting for Contingencies." The Company believes that its current
accounting is consistent with the FSP.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115", under which entities will now be permitted to measure many
financial instruments and certain other assets and liabilities at fair value on
an instrument-by-instrument basis. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157. The Company has determined that this interpretation does
not have a material impact on its financial position, results of operations, or
cash flows.
In May 2007, the FASB issued FASB Staff Position No. FIN 48-1, Definition
of Settlement in FASB Interpretation No. 48 ("the FSP"). The FSP provides
guidance about how an enterprise should determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized tax
benefits. Under the FSP, a tax position could be effectively settled on
completion of examination by a taxing authority if the entity does not intend to
appeal or litigate the result and it is remote that the taxing authority would
examine or re-examine the tax position. The Company does not expect that this
interpretation will have a material impact on its financial position, results of
operations, or cash flows.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations,"
which replaces SFAS No. 141, " Business Combinations," which, among other
things, establishes principles and requirements for how an acquirer entity
recognizes and measures in its financial statements the identifiable assets
30
acquired, the liabilities assumed (including intangibles) and any noncontrolling
interests in the acquired entity. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. We are currently evaluating what impact our adoption of SFAS No.
141(R) will have on our financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51." SFAS No. 160
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51's consolidation procedures for
consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. We are currently evaluating what impact our adoption of
SFAS No. 160 will have on our financial statements.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable for a smaller reporting company.
ITEM 4. Controls and Procedures.
As of the end of the period covered by this Report, the Company's
President, who is its chief executive officer and is also its Treasurer and
principal financial officer (the "Certifying Officer"), evaluated the
effectiveness of the Company's "disclosure controls and procedures," as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that
evaluation, this officer concluded that, as of the date of his evaluation, the
Company's disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed in the Company's
periodic filings under the Securities Exchange Act of 1934 is accumulated and
communicated to management, including that officer, to allow timely decisions
regarding required disclosure.
The Certifying Officer has also indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
Our management, including the Certifying Officer, does not expect that our
disclosure controls or our internal controls will prevent all errors and fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. In addition, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of these inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
31
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 1A. Risk Factors
We are in default with our two primary lenders.
As reflected in the notes to our financial statements, we are in default
with respect to a note payable and debenture payable due Dutchess Private
Equities Fund, LP and an Amended and Restated Promissory Note with Bank of
America. Following the occurrence of the default, Bank of America assigned the
obligation to Lehman Brothers Bank. We have not received notice from the
assignee regarding the status of the loan. While we hope to enter into some type
of forebearance agreement with these lenders, there can be no assurance that
either will agree to any new terms or conditions which we propose. Lehman
Brothers, as the assignee of the Bank of America obligation, has a lien on our
assets. If Lehman Brothers were to foreclose on this lien or Dutchess were to
exercise its default remedies, we risk foreclosure on the lien or the attachment
of our future revenue streams. If this should occur, it is unlikely that we
would be able to continue our operations without additional financing of which
there can be no assurance.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
ITEM 3. Defaults Upon Senior Securities.
We have received a notice of default with respect to our amended and
restated promissory note with Bank of America. This obligation has been
subsequently assigned by Bank of America to Lehman Brothers. Even though we have
made and continue to make timely payments pursuant to this obligation, we have
failed to maintain certain affirmative covenants required under the loan
documentation. As a result, we have characterized our line of credit with Lehman
Brothers as a short term liability. We have not had any discussions with Lehman
Brothers bank regarding this matter.
We are also in default with respect to our note payable with Dutchess
Private Equities Fund, LP. We have failed to make the required monthly payments
due under the note since June 2006. Notwithstanding the foregoing, we have not
received any notice of default from Dutchess.
ITEM 4. Submission of Matters to a Vote of Security Holders.
During the period covered by this Report, there were no matters submitted
to a vote of security holders through the solicitation of proxies or otherwise.
ITEM 5. Other Information.
None.
32
ITEM 6. Exhibits
(a) The exhibits required to be filed herewith by Item 601 of Regulation
S-B, as described in the following index of exhibits, are incorporated herein by
reference, as follows:
Exhibit
No. Description
-------- -----------------------------------------------------------
31.1 * RULE 13A-14(A)/15D-14(A) Certification of Chief Executive Officer
31.2 * RULE 13A-14(A)/15D-14(A) Certification of principal financial and
accounting officer
32.1 * SECTION 1350 Certification of Chief Executive Officer and the Principal
Financial Officer
---------------
* Filed herewith.
(b) The following documents are hereby referenced and filed with the
following Forms 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION DENTAL HOLDINGS, INC.
Dated: May 14, 2008 By: /s/ George D. Green
-----------------------------------
George D. Green
Chief Executive Officer, President and Director
33