DPAT Dental Patient Care America Inc (PK)

Item 2. Management’s Discussion and Analysis and Plan of Operation

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements included in our Form 10-KSB for the year ended December 31, 2006, and notes thereto.

Overview

We earn revenue from our dental cooperative business through member fees assessed to our members and through marketing fees for patient referral services. In return, the Cooperative provides services to its members in the form of centralized purchasing of dental supplies and lab services, HR benefits, marketing services for patient flow and the opportunity to participate in profit sharing or bonus pools. Our member dentists remain independent practitioners wholly responsible and liable for the conduct and performance of their dental practices. Such member dentists are referred to as Associate Member Dentists. Another original and important part of our business model is to offer dental practice transition funding. Such funding is designed to finance the transitional sale of successful dental practices from retiring dentists into the hands of younger practitioners, and involves a membership fee sufficiently increased to pay the membership fee and repay the financed amount. Through our exclusive referral agreement with Stillwater National Bank and Trust Company, we were able to commence such dental practice transition financing in early 2007. Members who enter into such financing arrangements with the Cooperative are referred to as Affiliate Members. Such affiliate member dentists enter into agreements with the Company to acquire their dental practice over an agreed period of time and they agree to continue to manage the practice over the same period. At the end of the agreed period the Company finances a new dentist into the ownership and management of the dental practice.

Under our Dental Practice Transition business, we earn revenue by retaining a percentage of the margin from dental practices that enter into affiliate memberships. To date, in 2007 we have entered into five dental practice purchase arrangements and one sale arrangement, as described below.

Acquisition of Practice from Dr. Clegg

On November 17, 2006, the Company, through Dental Cooperative, entered into a Purchase Agreement with Dr. Richard Clegg and Richard R. Clegg DDS PC. At the closing of the Purchase Agreement, the Cooperative will acquire substantially all of the assets of Dr. Clegg’s dental practice in consideration for a payments in the form of Company stock and cash. The Purchase Agreement also contains non-compete, confidentiality and indemnification provisions. The closing of the Purchase Agreement was subject to various contingencies. On January 20, 2007, the Company and Dr. Clegg waived all closing contingencies and the parties closed on the Purchase Agreement.

In connection with the Purchase Agreement, the Cooperative and Dr. Clegg executed a Management Services Agreement. Under the Management Agreement, the Company has retained Dr. Clegg to manage and operate the dental practice for a five year period in consideration a percentage of the dental practice’s margin (i.e., the dental practice’s collections less operating expenses ) plus an additional cash payment. The Management Agreement contains, among other provisions, (i) requirements with respect to minimum collection and minimum margin levels that must be maintained during the term of the agreement, (ii) confidentiality and indemnification provisions, and (iii) a purchase option whereby Dr. Clegg could purchase the dental practice for (a) the number of shares of the Company’s common stock that the Company has issued in connection with the purchase of the dental practice, plus (b) cash in an amount equal to one percent of the dental practice’s collection during the period during which Dr. Clegg managed the dental practice while the Management Agreement was effective. The Management Agreement is effective immediately upon closing of the Purchase Agreement.

The period ended September 30, 2007 includes consolidated financial information from of DPAT and Richard R. Clegg DDS PC, which we acquired during the first quarter of 2007.

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Acquisition of Practice from DPAT  

DPAT owns and operates a dental practice. Michael Silva, Marlon Berrett, and Harry L. “Pete” Peterson (the “Members”), who are directors of the Company, were the sole owners of DPAT. Effective January 22, 2007, the Members assigned their entire membership interest in DPAT to Dental Practice Transition, Inc. so that after the assignment was effective Dental Practice Transition, Inc. became the sole member of DPAT. The Members were not paid any consideration in connection with this transaction.

Effective March 9, 2007, the Company, through Dental Cooperative, entered into a Purchase Agreement with Dental Associates, Inc. and Drs. Jack Rasmussen and Robert Boyer. Under the Purchase Agreement, the Cooperative may acquire substantially all of Drs. Rasmussen’s and Boyer’s dental practices in consideration for a payments in the form of cash. The transfer of the practice assets is not anticipated to occur until the five year anniversary of closing date. In connection with the initial closing, Dental Associates, Inc. obtained a loan in the principal amount of one-half of the practice purchase price from Stillwater National Bank and Trust Company. The Purchase Agreement also contains non-compete, confidentiality and indemnification provisions.

In connection with the Purchase Agreement, the Cooperative, Dental Associates, Inc. and Drs. Rasmussen and Boyer executed a Management Agreement. Under the Management Agreement, the Company has retained Dental Associates, Inc. to manage and operate the dental practice for a five year period in consideration a percentage of Dental Associates, Inc.’s margin (i.e., Dental Associates, Inc.’s collections less operating expenses ) plus an additional cash payment. The Management Agreement contains, among other provisions, (i) requirements with respect to minimum collection and minimum margin levels that must be maintained during the term of the agreement, and (ii) confidentiality and indemnification provisions. The Management Agreement was effective immediately upon initial closing of the Purchase Agreement.

In connection with the loan, the Company and the Cooperative agreed to subordinate certain rights that may accrue in connection with the Purchase Agreement and Management Agreement to the amounts owing to Stillwater National Bank and Trust Company under the loan.

Effective April 1, 2007, the Company, through its wholly owned subsidiary, Dental Cooperative, Inc., entered into an Affiliate Member Practice Purchase Agreement with P. Berrett Packer DDS, Inc. Dr. Berrett Packer. Under the purchase agreement, the Cooperative may acquire substantially all of Dr. Packer’s dental practice in consideration for future cash payments and 120,000 shares of common stock (24,000 were issued at closing and 24,000 will be issued on each of the first four annual anniversary dates and the closing). The transfer of the practice assets is not anticipated to occur until the five-year anniversary of closing date. In connection with the closing, the Provider obtained a loan in the principal amount of twenty-percent (20%) of the practice purchase price from Stillwater National Bank and Trust Company (the “Loan”). The Purchase Agreement also contains confidentiality, indemnification and other provisions.

In connection with the Purchase Agreement, the Cooperative, Provider and Dr. Packer executed a Management Services Agreement. Under the Management Agreement, the Company has retained the provider to independently manage and operate the dental practice for a five year period in consideration for a percentage of the provider’s margin (i.e., the provider’s collections less operating expenses) plus an additional cash payment. The Management Agreement contains, among other provisions, (i) requirements with respect to minimum collection and minimum margin levels that must be maintained during the term of the agreement, and (ii) confidentiality and indemnification provisions. The Management Agreement is effective immediately upon closing of the Purchase Agreement.

In connection with the loan, the Company and the Cooperative agreed to subordinate certain rights that may accrue in connection with the purchase agreement and related management agreement to the amounts owing to Stillwater National Bank and Trust Company under the loan.

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Effective June 4, 2007, the Company, through its wholly owned subsidiary, Dental Cooperative, Inc., closed on an Affiliate Member Practice Purchase Agreement with Lowell K. Anderson DMD PC and Dr. Lowell K. Anderson. Under the purchase agreement, the Cooperative may acquire substantially all of Dr. Anderson’s dental practice in consideration for future cash payments and stock options exercisable for 1,000,000 shares of common stock. The options will be granted under the Company’s 2007 Stock Option Plan (the “Plan”). The Plan is subject to shareholder approval and if such approval is not obtained then any options granted under the Plan will be null, void and of no force or effect. The transfer of the practice assets is not anticipated to occur until the five-year anniversary of closing date. In connection with the closing, the provider obtained a loan in the principal amount of fifty-percent (50%) of the practice purchase price from Stillwater National Bank and Trust Company. The purchase agreement also contains confidentiality, indemnification and other provisions.

In connection with the Purchase Agreement, the Cooperative, Provider and Dr. Anderson executed a Management Services Agreement. Under the Management Agreement, the Company has retained the Provider to independently manage and operate the dental practice for a five year period in consideration for a percentage of the provider’s margin (i.e., the provider’s collections less operating expenses) plus an additional cash payment. The Management Agreement contains, among other provisions, (i) requirements with respect to minimum collection and minimum margin levels that must be maintained during the term of the agreement, and (ii) confidentiality and indemnification provisions. The Management Agreement is effective immediately upon closing of the Purchase Agreement.

In connection with the loan, the Company and the Cooperative agreed to subordinate certain rights that may accrue in connection with the purchase agreement and management agreement to the amounts owing to the lender under the loan.

  On September 11, 2007, Dental Practice Transition, Inc., in accordance with its business model and purpose, assigned its entire membership interest in DPAT to 39 ^th Street Dental, LLC so that after the assignment was effective, 39 ^th Street Dental, LLC became the sole member of DPAT. Dental Practice Transition, Inc. received $429,000, which included $396,598 in cash and a note receivable of $32,402, in consideration for the assignment. 39 ^th Street Dental, LLC borrowed the funds to purchase DPAT from Stillwater National Bank and Trust Company. The members of 39 ^th Street Dental, LLC personally guaranteed the loan.

          Dental Practice Transition, Inc. is in the business of transitioning dental practices between dental practitioners who are exiting and entering their practice tenure, as well as providing financing for these transitions. The sale price of DPAT was evaluated and determined by the parties to the transaction utilizing 1) national and local comparable data relative to practice values for similarly situated dental operations of its size, type, historical operations, geographic location and sale terms; and 2) the relationship with respect to which the Company has financed and transitioned other practices it assists in similar transactions. The purpose of the sale was to provide the Company with working capital.

   In connection with the sale, the company recognized a gain of $419,334. The sale was effective September 1, 2007. The results of operations for DPAT were reported within discontinued operations in the accompanying Consolidated of Statements of Operations. The 2007 Consolidated Statement of Cash Flows reports the cash flows of the discontinued operations.

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                Marlon R. Berrett, an officer and director of the Company, and Andrew Eberhardt, an officer of the Company, together own a fifty percent membership interest in 39 ^th Street Dental, LLC. The remaining fifty percent membership interest is owned by the independent dentists who provide the 39 ^th Street Dental, LLC’s dental services.

Financial Position

We had $181,410 in cash as of September 30, 2007. Our working capital as of September 30, 2007 was $290,031, compared to a working capital deficit of $179,006 at December 31, 2006. Without respect to the improved working capital of the Company, the ability of the Company to continue as a going concern is in substantial doubt. The attached financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Three and Nine Months Ended September 30, 2007 and 2006

Our dental practice member revenues (net of member incentives), referred to as “cooperative revenues” were $86,571 and $229,066 for the three and nine months ended September 30, 2007 as compared to $65,320 and $238,820 for the comparable periods from the prior year. Cooperative revenues consist of member fees and marketing fees paid to the Company by member dentists as well as group purchasing rebates received from vendors for purchases made by our members. The decrease in cooperative revenues during the nine month periods resulted primarily from a reduction in the fee structure to our cooperative members and a net decrease of approximately ten percent in cooperative membership. The restructuring of our fee schedule was done in anticipation of new membership models that the Company introduced in 2007. Our revenues increased during the three month period.

Member incentives were $24,752 and $71,231 for the three and nine months ended September 30, 2007 as compared to $29,923 and $96,743 for the comparable periods from the prior year. These amounts are accounted for as reductions of Cooperative revenues. Member incentives are profit sharing distributions through Dental Cooperative to recognize significant contributions to Dental Cooperative by certain members, based largely on the growth in revenues of the member practices and the resulting fees to Dental Cooperative. Member incentives are expected to increase and decrease with the general growth or reduction in the number of member dentists, the growth or decline in member revenues and the resulting growth or decline in management fee revenue to Dental Cooperative. Member incentives are discretionary with the Board of Directors of Dental Cooperative, and these funds can be redirected to pay operating expenses as needed.

Our dental operation revenues (net of contractual and bad debt write-offs of $54,862 and $197,337 for the three and nine months ended September 30, 2007) were $267,178 and $864,298 for the three and nine months ended September 30, 2007 as compared to $0 for the comparable periods from the prior year. These 2007 revenues includes consolidated financial information from of DPAT, which the Company acquired during the first quarter of 2007 and sold in the third quarter of 2007, and Richard R. Clegg DDS PC, which we acquired in the first quarter of 2007. The Company did not own any dental practices during 2006.

Dental operations expenses were $261,149 and $827,598 for the three and nine months ended September 30, 2007 as compared to $0 for the comparable periods from the prior year. These 2007 expenses related to expenses incurred in the operation of the DPAT and Richard R. Clegg DDS PC practices, which practices were acquired by the Company during 2007.

General and administrative (“G&A”) expenses were $238,726 and $687,538 for the three and nine months ended September 30, 2007 as compared to $168,041 and $625,836 for the comparable periods from the prior year. The increase in G&A expenses is primarily due to expenses associated with the Company’s salary and benefit expenses.

Net other income was $368,848 and $302,157 for the three and nine months ended September 30, 2007 as compared to net other expense of $10,439 and $2,671 for the comparable periods from the prior year. The change between the 2007 and 2006 periods is primarily due to the gain recognized as a result of the assignment of DPAT offset by increased interest expense relating to borrowed funds.

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Liquidity and Capital Resources

To date, we have financed our operations principally through private placements of equity securities, debt financing, and revenues. We used net cash in operating activities of $445,997 for the nine months ended September 30, 2007 as compared to net cash used of $316,724 during the comparable period from the prior year. We received net cash from investing activities of $425,485 for the nine months ended September 30, 2007 as compared to $0 during the comparable period from the prior year. We also received net cash from financing activities of $89,708 during the nine months ended September 30, 2007, as compared to receiving $295,319 during the comparable period from the prior year. As of September 30, 2007, our working capital was $290,031 and we had $181,410 of cash on hand.

As of September 30, 2007, we have current assets of $475,194 as compared to $190,850 as of December 31, 2006. Our current liabilities of $185,163 at September 30, 2007 are lower than the balance of $369,856 at December 31, 2006. The increase in our current assets and decrease in our current liabilities is primarily a result of the acquisition and sale of DPAT and the acquisition of Richard R. Clegg DDS PC.

We choose to continue to distribute Dental Cooperative member incentives during 2007, although we have not yet generated significant or sustained positive cash flows from operating activities, and there can be no assurance that we will be able to generate significant or sustained positive cash flows in future periods. If we are unable to significant and sustained generate positive cash flows from operating activities, we will be required to seek financing through additional related party debt, including but not limited to salary waivers, or through the sale of debt or equity securities to investors. There can be no assurance that such related party financing or investor financing will be available to us if needed. We also may need to reduce or eliminate member incentives in order to maintain the services of our service providers through payment of their overdue bills.

On December 27, 2006, the Company and its subsidiaries entered into a Loan, Security and Warrant Agreement (the “Loan Agreement”) with Heartland Dental Care, Inc. (“Heartland”). Under the terms of the Loan Agreement, Heartland made loans to the Company in the amount of five hundred thousand dollars ($500,000) and may make additional loans to the Company in the total aggregate principal amount of up seven hundred fifty thousand dollars ($750,000). Interest on the principal amount outstanding is due on the first day of each calendar quarter and interest is payable at the rate of ten percent (10%) per annum. The principal amount is due and payable in full April 30, 2012. As collateral for the repayment of the loan, the Company granted Heartland a security interest in substantially all of its assets. Receipt of the additional loan proceeds is contingent upon the Company acquiring specified numbers of dental practices. There can be no assurance that any additional loan proceeds will be received or sought by the Company and there can be no assurance that the Company will have sufficient funds available to repay the amounts owing on the loan.

As additional consideration for the loan, the Company issued a warrant to Heartland that is exercisable for a number of shares of common stock equal to ten percent (10%) of the Company’s issued and outstanding common stock, on a fully diluted basis, on the date of exercise. Until and unless the principal amount of one million two hundred fifty thousand dollars ($1,250,000) is lent to the Company, the number of shares of common stock for which the warrant can be exercised is reduced in proportion to the amount actually lent. For example, the warrant is currently exercisable for 4.0% ((500,000/1,250,000) x 10%) of the Company’s issued and outstanding common stock, on a fully diluted basis. The Company has also agreed to file a registration statement registering the resale of the warrant and common stock that is issuable upon exercise of the warrants.

In addition, the Company executed a Benchmark Services Agreement with Heartland whereby Heartland has agreed to provide benchmarking services to dental practices who have received funding through Stillwater National Bank and Trust Company in connection with an effective Affiliate Member Practice Purchase Agreement to which the Company is a party (a “Covered Practice”). In consideration for such services, Heartland will be paid an amount equal to one percent (1%) of the aggregate collected revenues of the Covered Practices during each quarterly period that the agreement is in effect. The agreement terminates on the earlier of the date there are no Covered Practices or the five year anniversary of the agreement.

Finally, the Company and its directors entered into a Tag Along Rights Agreement with Heartland whereby the directors granted Heartland tag along rights should a director enter into an agreement to transfer shares held by such director.

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  Except as described above and except for our operating payables, we currently have no bank lines of credit or third party indebtedness. As our revenues grow, we plan on seeking one or more bank lines of credit to assist with meeting ongoing liquidity needs. There can be no assurance that we will be able to secure such financing in the future.

  On August 14, 2007 we borrowed $60,000 from a lender. On September 12, 2007 we repaid the principal amount owing and issued 60,000 shares of common stock as additional consideration for the loan.

Our working capital requirements for the foreseeable future will vary based upon a number of factors, including, our timing in the implementation of our business plan, our growth rate and the level of our revenues. We have no commitments to fund any future capital expenditures. Our current assets, along with cash generated from anticipated revenues, will not provide us with sufficient funding for the next twelve months. We anticipate that we will need at least $200,000 in funding to execute our business plan over the next twelve months and thereafter. We have contractual arrangements in place with Heartland that we believe will provide us with the necessary financing. Failure to raise the required capital could prevent us from achieving our long-term business objectives and may result in substantially reducing or even terminating operations.

   As of November 15, 2007, we have outstanding stock options that are exercisable for (i) 264,000 shares of common stock at an exercise price of $2.50 per share and (ii) 470,399 shares of common stock at an exercise price equal to eighty percent (80%) of the average closing price during the of the Company’s common stock for the twenty (20) day period prior to exercise. Subject to shareholder approval, we also intend to grant stock options exercisable for 12,559,791 shares of common stock at an exercise price of $.30 per share.

Off-Balance Sheet Arrangements

  We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Policies

 The policies discussed below are considered by us to be critical to an understanding of our financial statements. The application of these policies places significant demands on the judgment of our management and, when reporting financial results, cause us to rely on estimates about the effects of matters that are inherently uncertain. We describe specific risks related to these critical accounting policies below. A summary of significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements. Regarding all of these policies, we caution that future results rarely develop exactly as forecast, and the best estimates routinely require adjustment. Our critical accounting policies include the following:

We charge our member dentists membership fees, marketing fees for referrals provided by us, and receive rebates from the suppliers for purchases of dental equipment for its members. These revenues are recognized when payments are received since that is the earliest date when these amounts are readily determinable, and collection is reasonably assured. Amounts received prior to issuance of financial statements but after period ending dates that are attributable to prior periods are recorded as accounts receivable.

The Company’s dental practices charge fees to its patients for dental services performed. Fees are established internally by the practices based upon billing rates that are considered usual and customary among similarly situated dental service providers. Revenue is recognized at the time and during the period in which services are performed. Because a significant percentage of the Companies’ patients are insured or participate in managed care dental plans and programs, the rates charged by the Company may not be fully realized or

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collectible under the contractual payment terms of the managed care programs and insurance plans of it’s patients. The Company therefore makes adjustments to its periodic revenue based upon the estimated amounts due from the patients and third-party payers in order that revenues may be fairly stated in accordance with generally accepted accounting principles. Revenue adjustments are based on analysis of historical collection rates from amounts due from patients and third party payers, including managed care dental plans, commercial insurance companies and employers.

On January 1, 2006, we adopted the provisions of Statement 123 (revised 2004) (Statement 123 (R), “Share-Based Payment,” which revises Statement 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion 25, “Accounting for Stock Issued to Employees.” Statement 123(R) requires us to recognize expense related to the fair value of our stock-based compensation awards, including employee stock options.

Prior to the adoption of Statement 123(R), we accounted for stock-based compensation under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and has adopted the disclosure only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”.

We have elected to use the modified prospective transition method as permitted by Statement 123(R) and therefore have not restated our financial results for prior periods. Under this transition method, we have applied the provisions of Statement 123(R) to new awards granted, modified, repurchased, or cancelled after January 1, 2006. Accordingly, since all of the Company’s stock-based awards issued and outstanding as of December 31, 2006 are fully vested, we have recognized the associated compensation costs associated with these transactions. Additionally, had any of the stock-based awards not been vested, we would have recognized compensation cost for the portion of the awards for which the requisite service had not been rendered that were outstanding as of January 1, 2006, as the remaining service was rendered.

Recent Accounting Pronouncements

We have not adopted any new accounting policies that would have a material impact on our financial condition, changes in financial conditions or results of operations.

Inflation

Forward-Looking Statements

When used in this Form 10-QSB, in our filings with the Securities and Exchange Commission (“SEC”), in our press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, are based on certain assumptions and expectations which may or may not be valid or actually occur, and which involve various risks and uncertainties, including but not limited to risk of a lack of demand or low demand for our products and services; competitive products and pricing; changes in the regulation of our industry; a failure to timely obtain necessary regulatory approvals; changes to the tax laws; additional costs associated with compliance with the Securities and Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002, including any changes in the SEC’s rules, and other corporate governance requirements; failure of member dentists to timely and accurately pay management and other fees, changing government regulations and laws applicable to the delivery of dental services, competitive factors such as pricing pressures and/or competition to hire and retain employees; the results of current and/or future legal proceedings and government agency proceedings which may arise out of our operations (including our dental benefits plan business and the attendant risks of fines, liabilities, penalties, suspension and/or debarment; undertaking acquisitions that could increase our costs or liabilities or be disruptive; taking on additional debt to fund acquisitions or to implement

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affiliate agreements; failure to adequately integrate acquired businesses; material changes in laws or regulations applicable to the Company’s businesses; as well as other factors and other risks set forth in Item 6 “Risk Factors” of our last annual report on form 10-KSB and elsewhere herein and therein.

Unless otherwise required by applicable law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.