UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(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, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from to
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Commission file number 000-51804
PEDIATRIC PROSTHETICS, INC.
---------------------------
(Exact name of small business issuer as specified in its charter)
IDAHO 68-0566694
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12926 Willowchase Drive, Houston, Texas 77070
---------------------------------------------
(Address of principal executive offices)
(281) 897-1108
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(Registrant's telephone number)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] No [ ]
As of June 29, 2006, 98,274,889 shares of Common Stock of the issuer
were outstanding ("Common Stock").
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The Registrant is filing this Amended Report on Form 10-QSB, to include restated
financial statements for the three and nine months ended March 31, 2006; to
update its comparison of operating results for the three and nine months ended
March 31, 2006, compared to the three and nine months ended March 31, 2005; and
to update its liquidity and capital resources discussion in connection with the
revised financial statements contained herein. Additionally, all of the
references to financial numbers relating to March 31, 2006 included in this
amended filing have been updated throughout with the restated financial
information contained herein. Specifically, the Registrant's financial
statements were restated to reflect the proper accrual of receivables and the
presentation of sales through Host-Affiliates on a gross basis, to properly show
gross revenue and cost of sales, to include allowance for doubtful accounts
related to Host-Affiliate receivables, to properly account for the treatment of
certain shares of common stock issued in connection with various service
contracts and agreements including Global Media (as described below), to correct
the accounting treatment of certain securities containing beneficial conversion
features described herein, and to provide for the correct accounting treatment
in connection with the return and cancellation of certain shares of common stock
issued to a consultant of the Registrant. Also, the Registrant has updated its
controls and procedures language described below as of March 31, 2006. Other
than those sections described above, all portions of this Amended Form 10-QSB
remain unchanged from the Registrant's original Form 10-QSB filing for the
period ending March 31, 2006, as filed with the Commission on July 5, 2006, and
investors are encouraged to review the Registrant's most recent filings with the
Commission for updated and current information on the operations and financial
condition of the Registrant before making any investment in the Registrant.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEDIATRIC PROSTHETICS, INC.
UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2006 AND 2005
PEDIATRIC PROSTHETICS, INC.
TABLE OF CONTENTS
PAGE
Unaudited Balance Sheets as of March 31, 2006 (Restated) and F-3
June 30, 2005 (Restated)
Unaudited Statements Of Operations for the Three and Nine
Months Ended March 31, 2006 (Restated) and 2005 F-4
Unaudited Statement Of Stockholders' Deficit for the Nine Months Ended
March 31, 2006 (Restated) F-5
Unaudited Statements Of Cash Flows for the Nine Months Ended
March 31, 2006 (Restated) and 2005 F-6
Notes To Unaudited Financial Statements F-7
PEDIATRIC PROSTHETICS, INC.
UNAUDITED BALANCE SHEETS
MARCH 31, 2006 AND JUNE 30, 2005
MARCH 31, 2006 JUNE 30, 2005
(RESTATED) (RESTATED)
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ASSETS
Current assets:
Cash and cash equivalents $ 4,548 $ 29,818
Trade accounts receivable, net 240,652 107,851
Prepaid expenses and other current assets 15,848 16,492
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Total current assets 261,048 154,161
Furniture and equipment, net 63,245 81,229
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Total assets $ 324,293 $ 235,390
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable, net of debt discount of $23,333 $ 11,667 $ -
Trade accounts payable 153,949 89,280
Accrued liabilities 66,280 183,791
Convertible debt - 201,045
Due to related party 500 500
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Total current liabilities 232,396 474,616
Deferred rent 13,280 14,188
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Total liabilities 245,676 488,804
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Commitments and contingencies:
Stockholders' equity (deficit):
Preferred stock, par value $0.001; authorized
10,000,000; 1,000,000 issued and outstanding 1,000 1,000
Common stock, par value $0.001; authorized 100,000,000
shares; issued and outstanding 97,828,452 and
88,878,452 at March 31, 2006 and June 30, 2005,
respectively 97,828 88,878
Additional paid-in capital 8,253,544 7,742,620
Accumulated deficit (8,273,755) (8,085,912)
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Total stockholders' equity (deficit) 78,617 (253,414)
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Total liabilities and
stockholders' equity (deficit) $ 324,293 $ 235,390
============== ==============
The accompanying notes are an integral part of these financial statements
F-3
PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2006 AND 2005
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2006 2005 2006 2005
--------- --------- --------- -----------
(RESTATED) (RESTATED)
Revenue $ 265,620 $ 54,457 $ 535,363 $ 271,057
---------- --------- --------- -----------
Operating expenses:
Cost of sales, except for items stated
separately below 29,845 50,102 140,660 97,387
Depreciation expense 5,059 5,427 15,174 14,651
Selling, general and administrative expenses 410,171 222,226 846,994 4,454,763
---------- --------- --------- -----------
Total operating expenses 445,075 277,755 1,002,828 4,566,801
---------- --------- --------- -----------
Loss from operations (179,455) (223,298) (467,465) (4,295,744)
---------- --------- --------- -----------
Other income and (expense):
Interest income 4 - 4 83
Interest expense (12,859) (8,674) (28,370) (16,601)
Loss on disposal of equipment - - (2,811) -
Gain on extinguishment of debt - - 310,799 -
---------- --------- --------- -----------
Other income (expense), net (12,855) (8,674) 279,622 (16,518)
---------- --------- --------- -----------
Net loss $ (192,310) $(231,972) $(187,843) $(4,312,262)
========== ========= ========= ===========
Net loss per common share - basic
and diluted $ (0.00) $ (0.00) $ (0.00) $ (0.07)
========== ========= ========= ===========
Weighted average shares of common
stock outstanding - basic and
diluted 99,108,452 86,168,508 95,581,737 59,215,642
========== ========== ========== ===========
The accompanying notes are an integral part of these financial statements
F-4
PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Nine Months Ended March 31, 2006
Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ------- ----------- -------- ---------- ---------- ---------
Balance at June 30, 2005,
as originally reported 1,000,000 $ 1,000 88,878,452 $ 88,878 $7,742,620 $(8,120,341) $(287,843)
Adjustment to properly recognize
revenue and cost of services
for services by Host Affiliates - - - - - 34,429 34,429
--------- ------- ---------- -------- ---------- ----------- ---------
Balance at June 30, 2005, as restated 1,000,000 1,000 88,878,452 88,878 7,742,620 (8,085,912) (253,414)
Common stock issued for cash - - 4,700,000 4,700 215,300 - 220,000
Common stock issued for services
to non-employees
employees - - 8,250,000 8,250 256,624 - 264,874
Common stock surrendered to
treasury by major stockholder/
officer/director - - (4,000,000) (4,000) 4,000 - -
Debt Discount on convertible notes - - - - 35,000 - 35,000
Net loss, as restated - - - - - (187,843) (187,843)
--------- ------- ----------- -------- ---------- ----------- ---------
Balance at March 31, 2006 1,000,000 $ 1,000 97,828,452 $ 97,828 $8,253,544 $(8,273,755) $ 78,617
========= ======= =========== ======== ========== ============ =========
The accompanying notes are an integral part of these financial statements
F-5
PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2006 AND 2005
2006
(RESTATED) 2005
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Cash Flows From Operating Activities
Net income (loss) $(187,843) $(4,312,262)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation expense 15,174 14,651
Loss on disposal of equipment 2,811 -
Deferred rent (908) -
Share-based compensation 264,874 4,017,514
Amortization of debt discount 11,667 -
Provision for doubtful accounts 36,921 37,000
Gain on extinguishment of debt (310,799) -
Changes in operating assets and liabilities:
Accounts receivable (169,723) (30,099)
Prepaid expenses and other current assets 644 (3,011)
Accounts payable 64,669 7,761
Accrued liabilities 22,243 52,194
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Net cash used by operating activities (250,270) (216,252)
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Cash Flows From Investing Activities
Purchase of furniture and equipment - (387)
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Net cash used by investing activities - (387)
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Cash Flows From Financing Activities:
Payment in settlement of convertible debt (30,000) -
Proceeds from issuance of debt 35,000 -
Proceeds from common stock, net of expenses 220,000 271,500
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Net cash provided by financing activities 225,000 271,500
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Net increase (decrease) in cash and cash equivalents (25,270) 54,861
Cash and cash equivalents, beginning of period 29,818 9,110
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Cash and cash equivalents, end of period $ 4,548 $ 63,971
========= ===========
Supplemental disclosure of cash flow information
Cash paid for interest expense $ 12,107 $ 3,042
Cash paid for income taxes - -
The accompanying notes are an integral part of these financial statements
F-6
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Pediatric Prosthetics, Inc. (the "Company") is involved in the design,
fabrication and fitting of custom-made artificial limbs. The Company's
focus is infants and children and the comprehensive care and training
needed by those infants and children and their parents.
INTERIM FINANCIAL STATEMENTS
The unaudited condensed financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments that are, in the opinion of management, necessary to fairly
present such information. All such adjustments are of a normal recurring
nature. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, certain information and
footnote disclosures, including a description of significant accounting
policies normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of
America (US GAAP), have been condensed or omitted pursuant to such rules
and regulations.
These financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's 2005
Annual Report. The results of operations for interim periods are not
necessarily indicative of the results for any subsequent quarter or the
entire fiscal year ending June 30, 2006.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP")
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECENTLY ISSUED PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS 123R, which requires companies to recognize in the statement of
operations all share-based payments to employees, including grants of
employee stock options, based on their fair values. Accounting for
share-based compensation transactions using the intrinsic method
supplemented by pro forma disclosures will no longer be permissible. The
new statement is effective for public entities no later than the beginning
of the first fiscal year beginning after June 15, 2005. The Company adopted
the new statement on July 1, 2005. The adoption of this new statement did
not affect the Company's results of operations or net income per share, but
may have a significant future effect as the Company will be required to
expense the fair value of all share-based payments.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections", a replacement of Accounting Principles Board Opinion
No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes
in Interim Financial Statements" ("SFAS 154"). SFAS 154 changes the
requirements for the accounting for, and reporting of, a change in
accounting principle. Previously, voluntary changes in accounting
principles were generally required to be recognized by way of a cumulative
effect adjustment within net income during the period of the change. SFAS
154 requires retrospective application to prior periods' financial
F-7
statements, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 is
effective for accounting changes made in fiscal years beginning after
December 15, 2005; however, the statement does not change the transition
provisions of any existing accounting pronouncements. The Company does not
believe adoption of SFAS 154 will have a material effect on its financial
position, cash flows or results of operations.
2. GOING CONCERN CONSIDERATIONS
Since its inception, the Company has suffered significant net losses
and has been dependent on outside investors to provide the cash resources
to sustain its operations. During the nine months ended March 31, 2006 and
2005, the Company had net losses of $187,843 and $4,312,262, respectively,
and negative cash flows from operations of $250,270 and $216,252,
respectively.
Negative operating results have resulted in a working capital balance
of $28,652 and stockholders' equity of only $78,617 at March 31, 2006. The
Company's negative financial results and its current financial position
raise substantial doubt about the Company's ability to continue as a going
concern.
The Company is currently implementing it plans to deal with going
concern issues. The first step in that plan was its recapitalization into a
public shell on October 10, 2003. Management believes that the
recapitalization and its current plan to become a fully reporting public
company will allow the Company, through private placements of its common
stock, to raise the capital to expand operations to a level that will
ultimately produce positive cash flows from operations.
The Company's long-term viability as a going concern is dependent on
certain key factors, as follows:
- The Company's ability to obtain adequate sources of outside
financing to support near term operations and to allow the Company to
continue forward with current strategic plans.
- The Company's ability to increase its customer base and broaden
its service capabilities.
- The Company's ability to ultimately achieve adequate
profitability and cash flows to sustain continuing operations.
3. RESTATEMENT
The accompanying March 31, 2006, financial statements have been
restated to properly recognize revenue and cost of services for services
provided by Host Affiliates and to properly amortize the cost of services
provided for stock-based payments over the service period. The effect of
these restatements on the accompanying financial statements is as follows:
BALANCE SHEET
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Current assets, as previously reported $ 236,492
Change in current assets related to
receivables from host affiliates 24,556
------------
Current assets, as restated $ 261,048
============
Current liabilities, as previously reported $ 270,788
Change in current liabilities related to
costs incurred by host affiliates 5,774
Change to unamortized debt discount balance (23,333)
Change in current liabilities related to
stock-based compensation that was expensed
based on service period of contract (20,833)
------------
Current liabilities, as restated $ 232,396
============
F-8
Stockholders' equity, as previously reported $ 15,669
Change in stockholders' equity related to
Change in net loss 492,145
Change in accumulated deficit for restatement
of period ended June 30, 2005 34,429
Change to record debt discount on notes
with beneficial conversion feature (35,000)
Recognition of stock-based compensation
over contractual service period (428,626)
------------
Stockholders' equity, as restated $ 78,617
============
STATEMENT OF OPERATIONS Nine Three
Months Months
------------ ----------
Revenue, as previously reported $ 479,182 $ 232,949
Change in revenue related to billings by
host affiliates 56,181 32,671
------------ ----------
Revenue, as restated $ 535,363 $ 265,620
============ ==========
Operating expenses, as previously reported $ 1,450,459 $ 105,714
Change in operating expenses related to:
reduction of stock-based compensation
for amounts not yet earned by the
service providers (519,459) 295,448
Change in provision for doubtful accounts
to more accurately match the
provision with related revenue 40,396 40,396
Change in cost of goods sold related to gross-up
billings by host affiliates 31,432 3,517
------------ ----------
Operating expenses, as restated $ 1,002,828 $ 445,075
============ ==========
Other income (expense), as previously reported $ 291,289 $ (1,188)
Change in other income (expense) to record
amortization of debt discount (11,667) (11,667)
------------ -----------
Other income (expense), as restated $ 279,622 $ (12,855)
============ ===========
Income (loss) from operations, as
previously reported $ (971,277) $ 127,220
============ ===========
Loss from operations, as restated $ (467,465) $ (179,455)
============ ===========
Net income (loss), as previously reported $ (679,988) $ 126,032
============ ===========
Net income, as restated $ (187,843) $ (192,310)
============ ===========
Net income (Loss) per common share - basic
and diluted, as previously reported $ (0.01) $ (0.00)
============ ===========
Net income (Loss) per common share - basic
and diluted, as restated $ (0.00) $ (0.00)
============ ===========
4. CONVERTIBLE DEBT
In November 2005, the Company entered into a settlement agreement
regarding its convertible debt. Under the settlement agreement the Company
paid $30,000 for complete discharge of $201,045 of convertible debt and
$139,754 of related accrued interest. The Company recognized a $310,799
gain on extinguishment of debt in connection with the settlement.
5. NOTES PAYABLE
On March 1, 2006, and March 21, 2006, we entered into two separate
loans for $17,500, with two shareholders to provide us with an aggregate of
$35,000 in funding. The loans bear interest at the rate of 12% per annum,
F-9
and are due sixty (60) days from the date the money was loaned, renewable
for additional sixty (60) day periods at the option of the individuals.
Additionally, both loans are convertible into 1,000,000 shares of our
common stock at the rate of one share for each $0.035 owed. The
conversion price at the time the notes were issued created a beneficial
conversion feature that discounted the notes 100%. Amortization of the
discount for the nine months ended March 31, 2006 was $11,667.
On March 28, 2006, we borrowed $50,000 from shareholders of the
Company, and issued those individuals a promissory note in connection with
such loan. Although the promissory note was entered into on March 28, 2006,
the promissory note was not funded until April 2006, and as a result, the
$50,000 has not been included in the Company's March 31, 2006, financial
statements. The promissory note bears interest at the rate of 12% per
annum, and is due and payable on September 29, 2006. The promissory note
may also be renewed for additional thirty (30 day periods at the option of
the holder. This loan is also convertible into an aggregate of 1,428,571
shares of common stock at the rate of one share for each $0.035 owed. The
shareholders also have 1,428,571 outstanding warrants with the Company,
which are exercisable for shares of common stock at an exercise price of
$0.045 per share, and which expire on May 22, 2008.
6. INCOME TAXES
At March 31, 2006 the Company has a net operating loss carry-forward
("NOL") of approximately $925,000 expiring through 2025. The Company has a
deferred tax asset of approximately $314,000 resulting from this NOL. The
loss carry-forwards relating to Grant Douglas Acquisition Corp. prior to
the re-capitalization are insignificant and are subject to certain
limitations under the Internal Revenue Code, including Section 382 of the
Tax Reform Act of 1986. Accordingly, such losses are not considered in the
calculation of deferred tax assets. The ultimate realization of the
Company's deferred tax asset is dependent upon generating sufficient
taxable income prior to expiration of the NOL. Due to the nature of this
NOL and because realization is not assured, management has established a
valuation allowance relating to the deferred tax asset at both March 31,
2006 and June 30, 2005, in an amount equal to the deferred tax asset.
The difference between the benefit for income taxes and the 34%
federal statutory rate for the three months ended March 31, 2006, relates
primarily to non-deductible share-based compensation and increases in the
valuation allowance for deferred tax assets.
7. STOCKHOLDERS' EQUITY
COMMON STOCK ISSUED FOR CASH
From time to time, in order to fund operating activities of the
Company, common stock is issued for cash. Depending on the nature of the
offering and restrictions imposed on the shares being sold, the sales price
of the common stock may be below the fair market value of the underlying
common stock on the date of issuance. During the nine months ended March
31, 2006 the Company issued 4,700,000 shares of common stock at prices
ranging from $0.035 to $0.05, for net cash proceeds of $220,000.
COMMON STOCK ISSUED FOR SERVICES
During the nine months ended March 31, 2006, the Company issued
8,250,000 shares of common to consultants stock at prices ranging from
$0.07 to $0.095 per share and recognized stock based compensation of
$264,874.
COMMON STOCK SURRENDERED
On September 29, 2005, a primary stockholder/officer/director of the
Company agreed to surrender 4,000,000 shares of common stock to treasury.
These shares, previously issued for services in 2005, were removed from
common stock at par value with an offsetting increase to additional paid-in
capital.
F-10
GLOBAL MEDIA FUND, INC. AGREEMENT
In February 2006, we entered into a service agreement (the "Service Agreement")
with Global Media Fund Inc. ("Global"), whereby Global agreed to distribute
certain newspaper features, which Global has guaranteed will be placed in at
least 100 newspapers and radio features regarding the Company, which Global has
guaranteed will be placed in at least 400 radio stations. In consideration for
the Service Agreement, we agreed to issue Global 250,000 restricted shares of
our common stock, which were issued in March 2006. The terms of the agreement
call for the Company to issue Global a remaining value of shares equal to
$125,000, which will be paid by issuances of common stock on May 1, 2006, August
1, 2006, November 1, 2006 and February 1, 2007. The Service Agreement provides
that we will issue shares valued at $28,125 per payment; however the agreement
contains a provision that provides Global with shares that are at a 10% discount
to the quoted market price, therefore Global will receive common stock valued at
$31,250 for each of the remaining installment payments.
If we fail to issue Global any consideration owed pursuant to the
Service Agreement when due, Global may terminate the Service Agreement with
thirty (30) days written notice to us at which time Global will keep all
consideration issued as of that date. We have the right to cancel the
Service Agreement at anytime with thirty (30) days written notice to
Global, at which time Global will keep all consideration issued as of that
date.
8. SUBSEQUENT EVENTS
In May 2006, we entered into a Securities Purchase Agreement with
certain third parties to provide us $1,500,000 in convertible debt
financing (the "Term Sheet"). Pursuant to the Securities Purchase
Agreement, we agreed to sell the investors $1,500,000 in Convertible
Debentures, which are to be payable in three tranches, $600,000 upon
signing the definitive agreements on May 30, 2006, $400,000 upon the filing
of a registration statement to register shares of common stock which the
Convertible Debentures are convertible into as well as the shares of common
stock issuable in connection with the Warrants (defined below), and
$500,000 upon the effectiveness of such registration statement. The
Convertible Debentures are to be convertible into our common stock at a
discount to the then trading value of our common stock. Additionally, in
connection with the Securities Purchase Agreement, we agreed to issue the
third parties Warrants to purchase an aggregate of 50,000,000 shares of our
common stock at an exercise price of $0.10 per share (the "Warrants").
We also agreed to issue a finder, Lionheart Associates, LLC doing
business as Fairhills Capital ("Lionheart"), a finder's fee in connection
with the funding which included warrants to purchase up to 2,000,000 shares
of our common stock at an exercise price of $0.10 per share. The Lionheart
warrants expire if unexercised on May 30, 2013. We claim an exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, since
the foregoing transaction did not involve a public offering, the recipient
had access to information that would be included in a registration
statement, took the shares for investment and not resale and we took
appropriate measures to restrict transfer.
Additionally, in connection with the closing of the sale of the
Debentures, described above, we agreed to issue Geoff Eiten, as a finder's
fee in connection with the funding, 3,000,000 warrants to purchase shares
of our common stock. The 3,000,000 warrants are exercisable into shares of
our common stock as follows, 1,000,000 warrants are exercisable at $0.10
per share, 1,000,000 warrants are exercisable at $0.20 per share, and
1,000,000 warrants are exercisable at $0.30 per share. The warrants granted
to Mr. Eiten expire if unexercised on May 8, 2010. We claim an exemption
from registration afforded by Section 4(2) of the Securities Act of 1933,
since the foregoing transaction did not involve a public offering, the
recipient had access to information that would be included in a
registration statement, took the shares for investment and not resale and
we took appropriate measures to restrict transfer.
F-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE SET FORTH ON THE FORWARD LOOKING STATEMENTS AS A
RESULT OF THE RISKS SET FORTH IN THE COMPANY'S FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, GENERAL ECONOMIC CONDITIONS, AND CHANGES IN THE ASSUMPTIONS
USED IN MAKING SUCH FORWARD LOOKING STATEMENTS.
OVERVIEW
Pediatric Prosthetics, Inc. (the "Company," "we," and "us") is engaged in the
custom fitting and fabrication of custom made prosthetic limbs for both upper
and lower extremities to infants and children throughout the United States. We
also provide our services to families from the international community when the
parents can bring the child to the United States for fitting. We buy
manufactured components from a number of manufacturers and combine those
components to fabricate custom measured, fitted and designed prosthetic limbs
for our patients. We also create "anatomically form-fitted suspension sockets"
that allow the prosthetic limbs to fit comfortably and securely with each
patient's unique residual limb. These suspension sockets must be hand crafted to
mirror the surface contours of a patient's residual limb, and must be
dynamically compatible with the underlying bone, tendon, ligament, and muscle
structures in the residual limb.
We are accredited by the Texas Department of Health as a fully accredited
prosthetics provider. We began operations as a fully accredited prosthetic
facility on March 18, 2004.
We generate an average of approximately $8,000 of gross profit per fitting of
the prosthetics devices, however, the exact amount of gross profit we will
receive for each fitting, will depend on the exact mix of arms versus legs
fitted and the number of re-fittings versus new fittings. From July 1, 2005,
until December 31, 2005, we made approximately twenty-seven fittings and from
January 1, 2006, until the date of this filing, we have made approximately
thirty-five fittings. We averaged approximately four or five fittings per month
through December 2005 and have averaged approximately seven to eight fittings
per month since January 2006.
HISTORY OF THE COMPANY
We were formed as an Idaho corporation on January 29, 1954, and experienced
various restructurings and name changes, including a name change effective March
9, 2001 to Grant Douglas Acquisition Corp. ("GDAC"). On October 10, 2003,
Pediatric Prosthetics, Inc., a Texas corporation ("Pediatric"), entered into an
acquisition agreement with us, whereby Pediatric agreed to exchange 100% of its
outstanding stock for 8,011,390 shares of our common stock and 1,000,000 shares
of our Series A Convertible Preferred Stock (the "Exchange"). Pediatric, emerged
as the surviving financial reporting entity under the agreement, but we remained
as the legal entity and adopted a name change to Pediatric Prosthetics, Inc. on
October 31, 2003 in connection with the Exchange.
THE MARKETPLACE
According to the Limb Loss Research and Statistics Program ("LLR&SP"), a
multi-year statistical study done by the American Amputee Coalition in 2001, in
concert with the Johns Hopkins Medical School, and the United States Center of
Disease Control, approximately 1,000 children are born each year with a
limb-loss in the United States. The LLR&SP can be found at
www.amputee-coalition.org. During their high growth years, ages 1 through age
12, these children will be candidates for re-fitting once per year as they grow.
We calculate that there are presently approximately up to 12,000 pre-adolescent
(younger than age 12) children in the United States in need of prosthetic
rehabilitation, based on the fact that there are approximately 1,000 children
born each year with a limb-loss in the United States.
COMPETITION
Although there are many prosthetic provider companies in the United States, to
the best of our knowledge, there is no other private sector prosthetics provider
in the country specializing in fitting infants and children. The delivery of
prosthetic care in the United States is extremely fragmented and is based upon a
local practitioner "paradigm." Generally, a local practitioner obtains referrals
for treatment from orthopedic physicians in their local hospitals based on
geographic considerations. Management believes the inherent limitation of this
model for pediatric fittings is that the local practitioner may never encounter
more than a very few small children with a limb loss, even during an entire
career. The result is that the local practice is a "general practice", and in
prosthetics that is considered an "adult practice" because of the overwhelming
percentage of adult patients. In any given year, according to The American
Amputee Coalition, over 150,000 new amputations are performed, suggesting the
need for prosthetic rehabilitation. The overwhelming majority of those
amputations are performed upon adults. For children ages 1-14, there will be
approximately 1,200 limb losses per year due primarily to illness, vascular
problems, and congenital accidents. Children, especially small children, cannot
provide practitioners the critical verbal feedback they usually receive from
their adult patients.
Management believes the challenge to effectively treat children with a limb-loss
in the United States is compounded by the time constraints of local
practitioners working primarily with their adult patients and a limited overall
number of board certified prosthetists. To engage in the intensive
patient-family focus required to fit the occasional infant or small child puts
enormous time pressure on local practitioners trying to care for their adult
patients.
Though not competitors in a business sense, the Shriner's Hospital system, a
non-profit organization with 22 orthopedic hospitals throughout North America,
has historically extended free prosthetic rehabilitation in addition to
providing medical and surgical services to children at no charge. We believe
that we can help organizations like Shriner's provide more efficient prosthetic
rehabilitation.
EMPLOYEES
As of June 27, 2006, we had five employees, three of which are in management
positions. We also use the services of outside consultants as necessary to
provide therapy, public relations and business and financial services.
AGREEMENTS WITH HOST AFFILIATES
We have entered into consulting contracts with fourteen host prosthetic
providers ("Host Affiliates") with facilities at various locations in 21 states.
These consulting agreements allow us to utilize the Host Affiliate's
patient-care facilities and billing personnel to aid us in fitting and
fabricating custom-made artificial limbs and provide related care and training
in multiple geographic locations. We receive a consulting fee from the Host
Affiliate on a case-by-case basis. These contracts generally have automatic
renewals every six months unless either party gives notice of termination.
REGULATIONS
We are accredited by the Texas Department of Health and are subject to certain
state and federal regulations related to the certification of our prosthetists,
patient-care facility and billing practices with insurance companies and various
state and federal health programs including Medicare and Medicaid.
RECENT EVENTS
On March 1, 2006, and March 21, 2006, we entered into two separate loans for
$17,500, with two shareholders to provide us with an aggregate of $35,000 in
funding. The loans bear interest at the rate of 12% per annum, and are due
sixty (60) days from the date the money was loaned, renewable for additional
sixty (60) day periods at the option of the individuals. Additionally, both
loans are convertible into 500,000 shares of our common stock, with each $0.035
of each outstanding loan being able to convert into one share of our common
stock.
On March 28, 2006, we borrowed $50,000 from shareholders of the Company, which
amount was not paid to us until April 2006, and has therefore not been included
in the attached financial statements for the quarter ended March 31, 2006, and
issued those individuals a promissory note in connection with such loan. The
promissory note bears interest at the rate of 12% per annum, and is due and
payable on September 29, 2006. The promissory note may also be renewed for
additional thirty (30) day periods at the option of the holder. This loan is
also convertible into an aggregate of 1,428,571 shares of common stock at the
rate of one share for each $0.035 owed. The shareholder who loaned us the
$50,000 also has 1,428,571 outstanding warrants with the Company, which are
exercisable for shares of common stock at an exercise price of $0.045 per share,
and which expire on May 22, 2008.
SUBSEQUENT EVENTS:
MAY 2006 SECURITIES PURCHASE AGREEMENT
On May 30, 2006 (the "Closing"), we entered into a Securities Purchase Agreement
("Purchase Agreement") with AJW Partners, LLC; AJW Offshore, Ltd.; AJW Qualified
Partners, LLC; and New Millennium Capital Partners II, LLC (each a "Purchaser"
and collectively the "Purchasers"), pursuant to which the Purchasers agreed to
purchase $1,500,000 in convertible debt financing. Pursuant to the Securities
Purchase Agreement, we agreed to sell the investors $1,500,000 in Callable
Secured Convertible Notes (the "Debentures"), which are to be payable in three
tranches, $600,000 of which was received by the Company on or around May 31,
2006, in connection with the entry into the Securities Purchase Agreement;
$400,000 upon the filing of a registration statement to register shares of
common stock which the Debentures are convertible into as well as the shares of
common stock issuable in connection with the exercise of the Warrants (defined
below); and $500,000 upon the effectiveness of such registration statement. The
Debentures are to be convertible into our common stock at a discount to the then
trading value of our common stock as described in greater detail below.
Additionally, in connection with the Securities Purchase Agreement, we agreed to
issue the Purchasers warrants to purchase an aggregate of 50,000,000 shares of
our common stock at an exercise price of $0.10 per share (the "Warrants"). We
agreed to register the shares of common stock which the Debentures are
convertible into and the shares of common stock which the Warrants are
exercisable for on a Form SB-2 registration statement. We secured the Debentures
pursuant to the Security Agreement and Intellectual Property Security Agreement,
described below.
We also agreed in the Purchase Agreement to use our best efforts to increase our
key man life insurance on our President and Director, Linda Putback-Bean and our
Vice President and Director Kenneth W. Bean on or before fifteen (15) business
days from the Closing.
The $600,000 we received from the Purchasers at the Closing, in connection with
the sales of the Debentures was distributed as follows:
o $100,000 to Lionheart Associates, LLC doing business as Fairhills
Capital ("Lionheart"), as a finder's fee in connection with the
funding (we also have agreed to pay Lionheart an additional $50,000
upon the payment of the next tranche of the funding by the
Purchasers);
o $18,000 to Geoff Eiten, as a finder's fee in connection with the
funding (we also have agreed to pay Mr. Eiten an additional $27,000
upon the payment of additional tranches of funding by the Purchasers);
o $75,000 in legal fees and closing payments to our counsel, the
Purchaser's counsel and certain companies working on the Purchaser's
behalf;
o $10,000 to be held in escrow for the payment of additional key
man life insurance on Linda Putback-Bean and Kenneth W. Bean, as
described above; and
o $370,000 to us, which we anticipate spending on legal and
accounting fees in connection with the filing of our amended Form
10-SB, outstanding reports on Form 10-QSB, and Form SB-2 registration
statement, as well as marketing and promotional fees and inventory
costs, as well as other general working capital purposes.
CALLABLE SECURED CONVERTIBLE NOTES
Pursuant to the Purchase Agreement, we agreed to sell the Purchasers an
aggregate of $1,500,000 in Debentures, which Debentures bear interest at the
rate of six percent (6%) per annum, payable quarterly in arrears, provided that
no interest shall be due and payable for any month in which the trading value of
our common stock is greater than $0.10375 for each day that our common stock
trades. Any amounts not paid under the Debentures when due bear interest at the
rate of fifteen percent (15%) per annum until paid. The conversion price of the
Debentures is equal to 50% of the trading price of our common stock on any
trading day, during which we receive a notice of conversion from the Purchasers,
provided the conversion price shall increase to 55% of the trading price of our
common stock in the event our Registration Statement to be filed to register the
shares convertible into common stock in connection with the Debentures is filed
on or before the sixtieth (60th) day from the date of the Closing, Friday, July
28, 2006; and such conversion price shall increase to 60% of the trading price
of our common stock in the event that such Registration Statement becomes
effective on or before the one hundred and forty-fifth (145th) day after the
Closing (the "Conversion Price").
Furthermore, the Purchasers have agreed to limit their conversions of the
Debentures to no more than the greater of (1) $80,000 per calendar month; or (2)
the average daily volume calculated during the ten business days prior to a
conversion, per conversion.
Pursuant to the Debentures, the Conversion Price is automatically adjusted if,
while the Debentures are outstanding, we issue or sell, any shares of common
stock for no consideration or for a consideration per share (before deduction of
reasonable expenses or commissions or underwriting discounts or allowances in
connection therewith) less than the Conversion Price then in effect, with the
consideration paid per share, if any being equal to the new Conversion Price;
provided however, that each Purchaser has agreed to not convert any amount of
principal or interest into shares of common stock, if, as a result of such
conversion, such Purchaser and affiliates of such Purchaser will hold more than
4.99% of our outstanding common stock.
"Events of Default" under the Debentures include:
1. Our failure to pay any principal or interest when due;
2. Our failure to issue shares of common stock to the Purchasers in
connection with any conversion as provided in the Debentures;
3. Our failure to file a Registration Statement covering the shares
of common stock convertible which the Debentures are convertible into
within sixty (60) days of the Closing, or obtain effectiveness of such
Registration Statement within one hundred and forty-five (145) days of
the Closing, or if such Registration Statement once effective, ceases
to be effective for more than ten (10) consecutive days or more than
twenty (20) days in any twelve (12) month period;
4. Our entry into bankruptcy or the appointment of a receiver or trustee;
5. Our breach of any covenants in the Debentures or Purchase
Agreement, if such breach continues for a period of ten (10) days
after written notice thereof by the Purchasers, or our breach of any
representations or warranties included in any of the other agreements
entered into in connection with the Closing;
6. If any judgment is entered against us or our property for more
than $100,000, and such judgment is unvacated, unbonded or unstayed
for a period of twenty (20) days, unless otherwise consented to by the
Purchasers, which consent will not be unreasonably withheld; or
7. If we fail to maintain the listing of our common stock on the
OTCBB or an equivalent replacement exchange, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or
the American Stock Exchange within 180 days from the date of Closing.
Upon the occurrence of and during the continuance of an Event of Default, the
Purchasers can make the Debentures immediately due and payable, and can make us
pay the greater of (a) 130% of the total remaining outstanding principal amount
of the Debentures, plus accrued and unpaid interest thereunder, or (b) the total
dollar value of the number of shares of common stock which the funds referenced
in section (a) would be convertible into (as calculated in the Debentures),
multiplied by the highest closing price for our common stock during the period
we are in default. If we fail to pay the Purchasers such amount within five (5)
days of the date such amount is due, the Purchasers can require us to pay them
in shares of common stock at the greater of the amount of shares of common stock
which (a) or (b) is convertible into, at the Conversion Rate then in effect.
Pursuant to the Debentures, we have the right, assuming (a) no Event of Default
has occurred or is continuing, (b) that we have a sufficient number of
authorized but unissued shares of common stock, (c) that our common stock is
trading at or below $0.20 per share, and (d) that we are then able to prepay the
Debentures as provided in the Debentures, to make an optional prepayment of the
outstanding amount of the Debentures equal to 120% of the amount outstanding
under the Debentures (plus any accrued and unpaid interest thereunder) during
the first 180 days after the Closing, 130% of the outstanding amount of the
Debentures (plus any accrued and unpaid interest thereunder) between 181 and 360
days after the Closing, and 140% thereafter, after giving ten (10) days written
notice to the Purchasers.
Additionally, pursuant to the Debentures, we have the right, in the event the
average daily price of our common stock for each day of any month the Debentures
are outstanding is below $0.20 per share, to prepay a portion of the outstanding
principal amount of the Debentures equal to 101% of the principal amount of the
Debentures divided by thirty-six (36) plus one month's interest. Additionally,
the Purchasers have agreed in the Debentures to not convert any principal or
interest into shares of common stock in the event we exercise such prepayment
right.
At the Closing, we entered into a Security Agreement and an Intellectual
Property Security Agreement (collectively, the "Security Agreements"), with the
Purchasers, whereby we granted the Purchasers a security interest in, among
other things, all of our goods, equipment, machinery, inventory, computers,
furniture, contract rights, receivables, software, copyrights, licenses,
warranties, service contracts and intellectual property to secure the repayment
of the Debentures.
STOCK PURCHASE WARRANTS
In connection with the Closing, we sold an aggregate of 50,000,000 Warrants to
the Purchasers, which warrants are exercisable for shares of our common stock at
an exercise price of $0.10 per share (the "Exercise Price"). Each Purchaser,
however, has agreed not to exercise any of the Warrants into shares of common
stock, if, as a result of such exercise, such Purchaser and affiliates of such
Purchaser will hold more than 4.9% of our outstanding common stock.
The Warrants expire, if unexercised at 6:00 p.m., Eastern Standard Time on May
30, 2013. The Warrants also include reset rights, which provide for the Exercise
Price of the Warrants to be reset to a lower price if we (a) issue any warrants
or options (other than in connection with our Stock Option Plans), which have an
exercise price of less than the then market price of the common stock, as
calculated in the Warrants, at which time the Exercise Price of the Warrants
will be equal to the exercise price of the warrants or options granted, as
calculated in the Warrants; or (b) issue any convertible securities, which have
a conversion price of less than the then market price of the common stock, as
calculated in the Warrants, at which time the Exercise Price of the Warrants
will be equal to the conversion price of the convertible securities, as
calculated in the Warrants.
Pursuant to the Warrants, until we register the shares of common stock which the
Warrant is exercisable for, the Warrants have a cashless exercise feature, where
the Purchasers can exercise the Warrants and pay for such exercise in shares of
common stock, in lieu of paying the exercise price of such Warrants in cash.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement entered into at the Closing, we
agreed to file a registration statement on Form SB-2, to register two (2) times
the shares of common stock which the Debentures are convertible into (to account
for changes in the Conversion Rate and the conversion of interest on the
Debentures) as well as the shares of common stock issuable in connection with
the exercise of the Warrants, within sixty (60) days of the Closing and use our
best efforts to obtain effectiveness of such registration statement as soon
thereafter as possible. However, we do not currently have enough authorized but
unissued shares to allow for such conversion and/or exercise by the Purchasers
and therefore have filed an information statement with the SEC to allow for
shareholder approval to affect an increase in our authorized shares in
connection with such registration statement filing.
If we do not obtain effectiveness of the registration statement with the SEC
within one hundred and forty-five (145) days from the Closing date, or if after
the registration statement has been declared effective by the SEC, sales of
common stock cannot be made pursuant to the registration statement, or our
common stock ceases to be traded on the Over-the-Counter Bulletin Board (the
"OTCBB") or any equivalent replacement exchange, then we are required to make
payments to the Purchasers in connection with their inability and/or delay to
sell their securities. The payments are to be equal to the then outstanding
amount of the principal amount of the Debentures, multiplied by $0.02,
multiplied by the number of months after such one hundred and forty-five (145)
day period and/or the date sales are not able to be effected under the
registration statement, pro rated for partial months. For example, for each
month that passes in which we fail to obtain effectiveness of our registration
statement, after the end of the one hundred and forty-five (145) day period, we
would owe the Purchasers an aggregate of $20,000 in penalty payments, based on
$1,000,000 then outstanding under the Debentures ($600,000 in debentures sold to
the Purchasers at the Closing, plus $400,000 in Debentures sold to the
Purchasers upon filing the registration statement).
SERVICE AGREEMENT WITH GLOBAL MEDIA
In February 2006, we entered into a service agreement (the "Service Agreement")
with Global Media Fund Inc. ("Global"), whereby Global agreed to distribute
certain newspaper features, which Global has guaranteed will be placed in at
least 100 newspapers and radio features regarding the Company which Global has
guaranteed will be placed in at least 400 radio stations. In consideration for
the Service Agreement, we agreed to issue Global 250,000 restricted shares of
our common stock, which shares were issued in March 2006; and agreed to issue
Global a total of $112,500 worth of our common stock (as calculated below), to
be paid by the issuance of $28,125 worth of our common stock on May 1, 2006,
August 1, 2006, November 1, 2006 and February 1, 2007. We have not issued
Global the May 1, 2006 payment. The value of our common stock in connection
with the issuance of the additional shares to Global shall be equal to the value
of the common stock to be issued divided by 90% of the average of the closing
value of the common stock on the five trading days prior to the date such stock
is to be issued. For example, the average of the closing price of our common
stock for the five trading days prior to the May 1, 2006 payment was $0.07 per
share. Therefore, the amount of shares we are due to issue Global for such May
1, 2006 payment was $28,125 divided by $0.063 ($0.07 x 0.90), which is equal to
approximately 446,429 shares of common stock. We also granted Global piggyback
registration rights in connection with the shares issued to Global pursuant to
the Service Agreement. If we fail to issue Global any consideration owed
pursuant to the Service Agreement when due, Global may terminate the Service
Agreement with thirty (30) days written notice to us at which time Global will
keep all consideration issued as of that date. We have the right to cancel the
Service Agreement at anytime with thirty (30) days written notice to Global, at
which time Global will keep all consideration issued as of that date.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with
U.S. GAAP. Preparing financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies for us relate
primarily to revenue recognition.
REVENUE RECOGNITION
We previously recognized revenues from the sale of prosthetic devices and
related services generated through the billing departments of the
Host-Affiliates only upon the performance of services by that Host-Affiliate.
However, subsequent to December 31, 2005, we amended our accounting to recognize
revenues from the sale of prosthetic devices through the billing department of
our Host-Affiliates in the same fashion as we recognize revenue when we directly
bill customers. Periods prior to January 2006 were not changed due to the fact
that the changes would not materially effect the financial statements.
When we directly bill customers, the revenue from the sale of prosthetic devices
and related services to patients, are recorded when the device is accepted by
the patient, provided that (i) there are no uncertainties regarding customer
acceptance; (ii) persuasive evidence of an arrangement exists; (iii) the sales
price is fixed and determinable; and (iv) collection is deemed probable.
When we directly bill customers, revenue is recorded at "usual and customary"
rates, expressed as a percentage above Medicare procedure billing codes. Billing
codes are frequently updated and as soon as we receive updates we reflect the
change in our billing system. There is generally a "co-payment" component of
each billing for which the patient-family is responsible. When the final appeals
process to the third party payors is completed, we bill the patient family for
the remaining portion of the "usual and customary" rate. As part of our
preauthorization process with third-party payors, we validate our ability to
bill the payor, if applicable, for the service provided before we deliver the
device. Subsequent to billing for devices and services, problems may arise with
pre-authorization or with other insurance issues with payors. If there has been
a lapse in coverage, or an outstanding "co-payment" component, the patient is
financially responsible for the charges related to the devices and services
received. If we are unable to collect from the patient, a bad debt expense is
recognized.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standard Board (FASB) issued a
revision to Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123R). SFAS 123R eliminates our ability to use
the intrinsic value method of accounting under APB 25, and generally requires a
us to reflect in our income statement, instead of pro forma disclosures in its
financial footnotes, the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. We
will estimate the grant-date fair value using option-pricing models adjusted for
the unique characteristics of those equity instruments. Among other things, SFAS
123R requires us to estimate the number of instruments for which the requisite
service is expected to be rendered, and if the terms or conditions of an equity
award are modified after the grant date, to recognize incremental compensation
cost for such a modification by comparing the fair value of the modified award
with the fair value of the award immediately before the modification. In
addition, SFAS 123R amends FASB Statement No. 95, "Statement of Cash Flows," to
require that we treat excess tax benefits as a financing cash inflow rather than
as a reduction of taxes paid in our statement of cash flows. SFAS 123R was
effective for us beginning July 1, 2005. The Company had no outstanding warrants
or options at the date of adoption SFAS 123R and, accordingly, the adoption had
no impact on us.
PLAN OF OPERATIONS
During October 2005, management contracted with three (3) consultants to
commence a national multi-media publicity campaign based upon the success
stories of the children for which we have provided services. Management's goal
is to provide awareness of our commitment to provide superior pediatric
prosthetic care on a national level. We paid the consultants an aggregate of
7,500,000 shares of our common stock in connection with such contracts.
We have established working relationships with fourteen Host Affiliates
operating in approximately 21 states. In establishing the relationships with the
fourteen Host Affiliates, we also provided one-on-one pediatric training to
fourteen prosthetists who are employed by those Host Affiliates. We currently
plan to hire one more certified prosthetist and two additional support personnel
during the next twelve months, funding permitting, of which there can be no
assurance.
As of June, 2006, based on our current monthly gross profits generated in
connection with fitting prosthetic limbs, which approximately totals our monthly
overhead of $54,000, we believe we will be able to continue our operations
throughout fiscal 2007. Due to the receipt of $600,000 on May 30, 2006, (less
closing costs and structuring fees), from the sale of certain Convertible
Debentures described above, we expect to increase our fiscal 2007 cash
advertising and marketing budget five fold over our fiscal 2006 advertising
budget. We believe the five fold increase in our advertising and marketing
budget will generate a substantial ramp-up of our monthly prosthetic fittings
rate and resulting gross profits due to a growing national awareness of our
specialization in personalized pediatric services, combined with the re-fitting
of the growing number of clients we have already fitted.
We also anticipate receiving approximately $900,000 in subsequent tranches in
connection with the funding agreement described above, however, investors should
keep in mind that any amounts of funding we receive pursuant to the funding will
be reduced by fees paid to the lending source in connection with closing costs
and legal and accounting costs associated with our need to file and obtain
effectiveness of a Form SB-2 Registration Statement to register the shares
convertible into common stock in connection with the sale of a Convertible
Secured Term Note and the shares issuable in connection with the exercise of the
Warrants.
We anticipate using the $900,000, which we anticipate receiving through the sale
of additional Convertible Debentures in connection with subsequent funding
tranches, on continued and sustained marketing and advertising efforts and the
anticipated increases in our components inventory, which we will require as a
result of our increased marketing and advertising efforts, and the resulting
increase in fittings, which we believe such increased marketing efforts will
create.
COMPARISON OF OPERATING RESULTS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
We had $265,620 of revenue for the three months ended March 31, 2006, compared
to revenue of $54,457 for the three months ended March 31, 2005, an increase in
revenue of $211,163 or 387.8% from the prior period. The increase in revenue for
the three months ended March 31, 2006, compared to the three months ended March
31, 2005, was mainly due to increased fees received from our Host Affiliates in
connection with increased fittings due to our national awareness and marketing
program, as well as a significant number of re-fittings of existing patients due
to such patients physical growth.
We had total operating expenses for the three months ended March 31, 2006 of
$445,075, compared to total operating expenses for the three months ended March
31, 2005 of $277,755, an increase in total operating expenses of $167,320 or
60.2% from the prior period. The increase in total operating expenses was mainly
attributable to the $187,945 or 84.6% increase in selling, general and
administrative expenses, to $410,171 for the three months ended March 31, 2006,
compared to $222,226 for the three months ended March 31, 2005, which increase
was mainly attributable to stock based compensation during the three months
ended March 31, 2006, compared to the three months ended March 31, 2005, and the
$20,257 or 40.4% decrease in cost of sales, to $29,845 for the three months
ended March 31, 2006, compared to $50,102 for the three months ended March 31,
2005. The decrease in costs of sales was due to a larger number of re-fittings
of prosthetic limbs during the three months ended March 31, 2006, compared to
the three months ended March 31, 2005, which re-fittings require fewer
electronic components than new fittings. Also included in total operating
expenses for the three months ended March 31, 2006 was depreciation expense of
$5,059.
Selling, general and administrative expenses as a percentage of revenue for the
three months ended March 31, 2006 were 154%, compared to selling, general and
administrative expenses as a percentage of revenue of 408% for the three months
ended March 31, 2005, which represented a decrease in selling, general and
administrative expenses as a percentage of revenue of 254% from the prior
period. This decrease was mainly due to the 387.8% increase in revenue from the
three months ended March 31, 2005, to the three months ended March 31, 2006,
offset by the 84.6% increase in selling, general and administrative expenses
over the same period. We expect our selling, general and administrative expenses
as a percentage of revenue to initially be higher than future percentages due to
early stage startup costs associated with building an administrative
infrastructure.
We had loss from operations of $179,455 for the three months ended March 31,
2006, compared to a loss from operations of $223,298 for the three months ended
March 31, 2005, a decrease in loss from operations of $43,843 or 19.6% from the
prior year's period. The decrease in loss from operations was mainly caused by
the 387.8% increase in revenue offset by the 60.2% increase in total operating
expenses for the three months ended March 31, 2006, compared to the three months
ended March 31, 2005.
We had total other expense of $12,855 for the three months ended March 31, 2006,
compared to total other expense of $8,674 for the three months ended March 31,
2005, an increase of $4,181 or 48.2% from the prior period, which increase was
due to a $4,185 or 48.2% increase in interest expense for the three months ended
March 31, 2006, compared to the three months ended March 31, 2005, which
increase was mainly due to the amortization of the debt discount on our
outstanding loans during the three months ended March 31, 2006, as described
below.
We had a net loss of $192,310 for the three months ended March 31, 2006,
compared to a net loss of $231,972 for the three months ended March 31, 2005, a
decrease in net loss of $39,662 or 17% from the prior year's period. The
decrease in net loss was mainly caused by the 387.8% increase in revenue offset
by the 60.2% increase in total operating expenses and the 48.2% increase in
other expenses for the three months ended March 31, 2006, compared to the three
months ended March 31, 2005.
NINE MONTHS ENDED MARCH 31, 2006 COMPARED TO NINE MONTHS ENDED MARCH 31, 2005
We had revenue of $535,363 for the nine months ended March 31, 2006, compared to
revenue of $271,057 for the nine months ended March 31, 2005, an increase in
revenue of $264,306 or 97.5% from the prior period. The increase in revenue for
the nine months ended March 31, 2006, compared to the nine months ended March
31, 2005, was mainly due to increased fees received from our Host Affiliates in
connection with increased fittings due to our national awareness and marketing
program, as well as a significant number of re-fittings of existing patients due
to such patients physical growth.
We had total operating expenses of $1,002,828 for the nine months ended March
31, 2006, compared to total operating expenses of $4,566,801 for the nine months
ended March 31, 2005, a decrease in total operating expenses of $3,563,973 or
78% from the previous year's period. The decrease in total operating expenses
was mainly due to the $3,607,769 or 81% decrease in selling, general and
administrative expenses, which amount included share-based compensation, to
$846,994 for the nine months ended March 31, 2006, from $4,454,763 for the nine
months ended March 31, 2005, which decrease was caused by less shares being
issued for services to consultants and employees for the nine months ended March
31, 2006, compared to the prior year's period. Additionally included in total
operating expenses for the nine months ended March 31, 2006 was depreciation
expense of $15,174. Also included in total operating expenses was cost of sales
of $140,660 for the nine months ended March 31, 2006, compared to cost of sales
of $97,387 for the nine months ended March 31, 2005, an increase of $43,273 or
44.4% in cost of sales from the prior year's period. Costs of sales increased
for the nine months ended March 31, 2006, compared to the nine months ended
March 31, 2005 due to increased purchases of parts and components during the
nine months ended March 31, 2006.
Selling, general and administrative expenses as a percentage of revenue for the
nine months ended March 31, 2006 were 158%, compared to selling, general and
administrative expenses as a percentage of revenue of 1,643% for the nine months
ended March 31, 2005, which represented a decrease in selling, general and
administrative expenses as a percentage of revenue of 1,485% from the prior
year's period. This decrease was mainly due to the 97.5% increase in revenue for
the nine months ended March 31, 2006 and the 78% decrease in total operating
expenses for the nine months ended March 31, 2006, compared to the nine months
ended March 31, 2005. We expect our selling, general and administrative expenses
as a percentage of revenue to initially be higher than future percentages due to
early stage startup costs associated with building an administrative
infrastructure.
We had a total loss from operations of $467,465 for the nine months ended March
31, 2006, compared to a total loss from operations of $4,295,744 for the nine
months ended March 31, 2005, a decrease in loss from operations of $3,828,279 or
89.1% from the prior year's period. The decrease in loss from operations was
mainly caused by the $3,607,769 or 81% decrease in selling, general and
administrative expenses from the nine months ended March 31, 2005 to the nine
months ended March 31, 2006.
We had total other income of $279,622 for the nine months ended March 31, 2006,
compared to total other expense of $16,518 for the nine months ended March 31,
2005, which represented an increase in other income of $296,140 for the nine
months ended March 31, 2006. The change from a net other expense to net other
income was mainly due to a $310,799 gain on extinguishment of debt for the nine
months ended March 31, 2006. In November 2005, we entered into a Settlement
Agreement and Release with Secured Releases, LLC ("Secured" and the "Release").
Pursuant to the Release, we and Secured agreed to settle our claims against each
other in connection with a convertible promissory note issued in February 2001.
In connection with the Release, we agreed to pay Secured $30,000, which has been
paid to date and we and Secured agreed to release each other, our officers,
directors, shareholders, members, agents, employees, representatives and assigns
from any and all causes of action, suits, claims, demands, obligations,
liabilities, damages of any nature, whatsoever, known or unknown in connection
with the promissory note or any other dealings, negotiations or transactions
between us and Secured. Under the settlement agreement, we paid $30,000 for the
complete discharge of $201,045 of convertible debt and $139,754 of related
accrued interest, resulting in a gain on extinguishment of debt of $310,799 for
the nine months ended March 31, 2006.
We had a total net loss of $187,843 for the nine months ended March 31, 2006,
compared to a total net loss of $4,312,262 for the nine months ended March 31,
2005, a decrease in net loss of $4,124,419 or 95.6% from the previous year's
period. The decrease in net loss was mainly due to the 3,607,769 or 81% decrease
in selling, general and administrative expenses, the $310,799 of gain on
extinguishment on debt, and the $296,140 increase in other income from the nine
months ended March 31, 2005 to the nine months ended March 31, 2006, offset by
the $43,273 or 44.4% increase in cost of sales over the same periods.
LIQUIDITY AND CAPITAL RESOURCES
We had total assets of $324,293 as of March 31, 2006, compared with total assets
of $235,390 as of the fiscal year ended June 30, 2005, which represented an
$88,903 or 37.8% increase in total assets.
Total assets as of March 31, 2006, included current assets of $261,048 and
furniture and equipment, net of accumulated depreciation of $63,245. Current
assets included cash and cash equivalents of $4,548, trade and accounts
receivable, net of $240,652, and prepaid expenses and other current assets of
$15,848.
We had total liabilities of $245,676 as of March 31, 2006, compared to total
liabilities of $488,804 for the fiscal year ended June 30, 2005, representing a
decrease in total liabilities from the fiscal year ended June 30, 2005 of
$243,128 or 49.7%.
Total liabilities as of March 31, 2006 included current liabilities of $232,396
and non-current liabilities consisting of deferred rent of $13,280.
Current liabilities as of March 31, 2006 included trade accounts payable of
$153,949, accrued liabilities of $66,280; which included deferred salary payable
to our officers; amounts due to related party of $500, which amounts were owed
to our Chief Executive Officer, Linda Putback-Bean, in connection with the
initial funding of our corporate bank account, which amounts have not been
repaid to date; and notes payable of $11,667 ($35,000, net of debt discount of
$23,333), which does not include the $50,000 loan described below, which loan
was entered into in March 2006, but funded in April 2006.
On March 1, 2006, and March 21, 2006, we entered into two separate loans for
$17,500, with two shareholders to provide us with an aggregate of $35,000 in
funding. The loans bear interest at the rate of 12% per annum until paid. Both
loans became due in May, but have since been extended. In December 2006, $10,000
was repaid on one of the loans, leaving $25,000 outstanding under the loans as
of the date of this report. Additionally, the remaining $25,000 owed pursuant to
the loans are convertible into an aggregate of 714,286 shares of our common
stock, with each $0.035 of each outstanding loan being able to convert into one
share of our common stock.
On March 28, 2006, we borrowed $50,000 from a shareholder of the Company, and
issued a promissory note and warrants in connection with such loan. The
promissory note bears interest at the rate of 12% per annum, and was due and
payable on September 29, 2006. The promissory note was renewed for an additional
six months, at the option of the holder, through March 2007. This loan is also
convertible into an aggregate of 1,428,571 shares of common stock at the rate of
one share for each $0.035 owed. The shareholder also received as consideration
for the $50,000 promissory note, 1,428,571 warrants, which are exercisable for
shares of common stock at an exercise price of $0.045 per share, and which
expire on May 22, 2008.
We had working capital of $28,652 and a total accumulated deficit of $8,273,755
as of March 31, 2006.
We had total net cash used by operating activities of $250,270 for the nine
months ended March 31, 2006, which was mainly due to $187,843 of net loss,
$310,799 of gain on extinguishment of debt and $169,723 of accounts receivable;
offset by $264,874 of share based compensation, which included 10,000,000 shares
of common stock issued to consultants for services in connection with such
consultants making families of limb loss patients aware of the Company's
services, of which 2,000,000 shares were subsequently cancelled by a consultant
in connection with such consultant's notice to the Company that he would not be
able to spend as much time on the Company's marketing campaign as previously
anticipated, and $36,921 of provision for bad debts.
We had net cash provided by financing activities of $225,000 for the nine months
ended March 31, 2006, which included $220,000 of proceeds from the sale of
4,700,000 shares of common stock to certain individuals for aggregate
consideration of $220,000 and proceeds from note payable of $35,000, offset by
$30,000 of payment in settlement of convertible debt in connection with the
Release, described above.
In May 2006, we entered into a Securities Purchase Agreement with certain third
parties to provide us $1,500,000 in convertible debt financing (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, we agreed to sell the investors
an aggregate of $1,500,000 in Convertible Debentures, which are to be payable in
three tranches, $600,000 upon signing the definitive agreements on May 30, 2006,
$400,000 upon the filing of a registration statement to register shares of
common stock which the Convertible Debentures are convertible into as well as
the shares of common stock issuable in connection with the Warrants (defined and
described in greater detail above), and $500,000 upon the effectiveness of such
registration statement. The Convertible Debentures are to be convertible into
our common stock at a discount to the then trading value of our common stock.
Additionally, in connection with the Securities Purchase Agreement, we agreed to
issue the third parties warrants to purchase an aggregate of 50,000,000 shares
of our common stock at an exercise price of $0.10 per share (the "Warrants").
We have historically been dependent on the sale of common stock for funding for
our operations. In connection with such funding, we issued 4,500,000 shares of
common stock at prices ranging from $0.035 to $0.05 per share during the nine
months ended March 31, 2006, for aggregate net proceeds of $220,000.
Additionally, we issued 10,000,000 shares of common stock to consultants ranging
from $0.07 and $0.095 per share during the nine months ended March 31, 2006 and
recognized compensation expense of $264,874.
As of June 2006, we believe we can operate for approximately twelve (12) months
due to the $600,000 (less closing costs and finders fees), we received upon the
sale of certain Convertible Debentures on May 30, 2006, described above based on
our current approximate overhead of $54,000 per month, and monthly gross profits
of approximately $50,000 per month we receive in connection with fittings of our
prosthetic limbs. We also believe that we will be able to increase our yearly
advertising and marketing budget five fold, for the fiscal year ending June 30,
2007, compared to the fiscal year ending June 30, 2005, by utilizing $250,000
from both the first tranche of the funding, as well as our working capital. We
also anticipate receiving approximately $900,000 in subsequent tranches in
connection with such funding, which we believe will allow us to increase our
monthly sales and gross profits substantially over the next fiscal year, due to
our increased advertising and marketing of our services, explained above.
However, investors should keep in mind that any amounts of funding we receive
pursuant to the Term Sheet and a definitive agreement in connection with such
Term Sheet will be reduced by fees paid to the lending source in connection with
the entry into the definitive agreement and legal and accounting costs
associated with our need to file and obtain effectiveness of a Form SB-2
Registration Statement to register the shares convertible into common stock in
connection with the sale of a Convertible Secured Term Note and the shares
issuable in connection with the exercise of warrants pursuant to the terms of
the Term Sheet.
Other than the funding transaction described above, no additional financing has
been secured. The Company has no commitments from officers, directors or
affiliates to provide funding. However, management does not see the need for any
additional financing in the foreseeable future, other than the money the Company
will receive from the sale of the Debentures. We currently anticipate that our
operations will continue to grow as a result of our increased advertising and
marketing expenditures, which has allowed a greater number of potential clients
to become aware of our operations and services, as we have already seen a higher
volume of sales due to such advertising over the past one to two months.
RISK FACTORS
Any investment in shares of our common stock involves a high degree of risk. You
should carefully consider the following information about these risks before you
decide to buy our common stock. If any of the following risks actually occur,
our business would likely suffer. In such circumstances, the market price of our
common stock could decline, and you may lose all or part of the money you paid
to buy our common stock.
WE HAVE EXPERIENCED RECENT SUBSTANTIAL OPERATING LOSSES AND MAY INCUR ADDITIONAL
OPERATING LOSSES IN THE FUTURE.
During the fiscal years ended June 30, 2005 and 2004, we incurred net losses of
$4,356,519 and $3,729,393, respectively, and experienced negative cash flows
from operations of $298,454 and $312,148, respectively. During the nine months
ended March 31, 2006, we continued to experience negative operating results as
we reported a net loss of $187,843 and had negative cash flows from operations
of $250,270. Our losses are related to three primary factors as follows: 1) We
are not currently generating sufficient revenue to cover our fixed costs and we
believe that the break-even point from a cash flow standpoint may require that
we fit as many as 100 clients, up from 28 fitted in fiscal 2005; 2) We have
issued a significant number of our shares of common stock to compensate
employees and consultants and those stock issuances have resulted in significant
charges to income, costs that we believe will not be recurring in future
periods. In the event we are unable to increase our gross margins, reduce our
costs and/or generate sufficient additional revenues, we may continue to sustain
losses and our business plan and financial condition will be materially and
adversely affected.
WE WILL NEED ADDITIONAL FINANCING TO REPAY THE $1,500,000 IN CONVERTIBLE
DEBENTURES WHICH WE AGREED TO SELL IN MAY 2006, AND GROW OUR OPERATIONS.
We have limited financial resources. In May 2006, we sold certain third party
investors an aggregate of $600,000 in Convertible Debentures and agreed to sell
them an additional $900,000 in Convertible Debentures. These Convertible
Debentures and interest may be converted into shares of our common stock at a
discount to market. However, if they are not convertible into shares of our
common stock, until our operating results improve, if at all, we will need to
obtain outside financing to fund our business operations and to repay the
Convertible Debentures. If we are forced to raise additional debt or equity
financing, such financing may be dilutive to our shareholders. The sale of
equity securities, including the conversion of outstanding amounts under the
Convertible Debentures, could dilute our existing stockholders' interest, and
borrowings from third parties could result in our assets being pledged as
collateral and loan terms that would increase our debt service requirements
and/or restrict our operations. There is no assurance that capital will be
available from any of these sources, or, if available, upon terms and conditions
acceptable to us. If we are unable to repay the Convertible Debentures and/or
raise additional capital we may be forced to curtail or abandon our business
operations.
WE DEPEND SUBSTANTIALLY UPON OUR PRESIDENT TO IMPLEMENT OUR BUSINESS PLAN, AND
LOSING HER SERVICES WOULD BE INJURIOUS TO OUR BUSINESS.
Our success is substantially dependent upon the time, talent, and experience of
Linda Putback-Bean, our President and Chief Executive Officer. Mrs. Putback-Bean
possesses a comprehensive knowledge of our business and has built numerous
relationships with industry representatives. We have no employment agreement
with Ms. Bean. While Mrs. Putback-Bean has no present plans to leave or retire,
her loss would have a negative effect on our operating, marketing and financial
performance if we are unable to find an adequate replacement with similar
knowledge and experience within our industry. We maintain key-man life insurance
in the amount of $1,000,000 with respect to Mrs. Putback-Bean. If we were to
lose the services of Mrs. Putback-Bean, our operations may suffer and we may be
forced to curtail or abandon our business plan.
Additionally, in order for us to expand, we must continue to improve and expand
the level of expertise of our personnel and we must attract, train and manage
qualified managers and employees to oversee and manage our operations. As
demand for qualified personnel is high, there is no assurance that we will be in
a position to offer competitive compensation packages to attract or retain such
qualified personnel in the future. If we are not able to obtain qualified
personnel in the future, if our operations grow, of which there can be no
assurance, we may be forced to curtail or abandon our plans for future growth.
OUR BUSINESS DEPENDS UPON OUR ABILITY TO MARKET OUR SERVICES TO AND SUCCESSFULLY
FIT CHILDREN BORN WITH A LIMB-LOSS.
Our growth prospects depend upon our ability to identify and subsequently fit
the small minority of children born with a limb-loss. The LLR&SP Report
(referred to in our "Description of Business" section herein) indicates that
approximately 26 out of every 100,000 live births in the United States result in
a possible need for prosthetic rehabilitation. In addition, our business model
demands that we continue to successfully fit these widely dispersed infants and
children each year as they outgrow their prostheses. Because of the relatively
small number of these children born each year and the fact that each child is
different, there is can be no assurance that we will be able to identify and
market our services to such children (or the parents or doctors of such
children) and/or that we will be able to successfully fit such children with
prosthetic's devices if retained. If we are unable to successfully market our
services to the small number of children born with a limb-loss each year and/or
successfully fit such children if marketed to, our results of operations and
revenues could be adversely affected and/or may not grow.
DUE TO IMPROVED HEALTHCARE, THERE COULD BE FEWER AND FEWER CHILDREN EACH YEAR
WITH PRE-NATAL LIMB-LOSS.
Since the majority of our first-time prospective fittings are assumed to be with
children with a pre-natal limb-loss, breakthroughs in pre-natal safety regimens
and treatment could end the need for the vast majority of future fittings of
pediatric prosthetics. As such, there can be no assurance that the number of
children requiring our services will continue to grow in the future, and in fact
the number of such children may decline as breakthroughs occur.
CHANGES IN GOVERNMENT REIMBURSEMENT LEVELS COULD ADVERSELY AFFECT OUR NET SALES,
CASH FLOWS AND PROFITABILITY.
We derived a significant percentage of our net sales for the year ended June 30,
2005 and for the nine months ended March 31, 2006, from reimbursements for
prosthetic services and products from programs administered by Medicare, or
Medicaid. Each of these programs sets maximum reimbursement levels for
prosthetic services and products. If these agencies reduce reimbursement levels
for prosthetic services and products in the future, our net sales could
substantially decline. Additionally, reduced government reimbursement levels
could result in reduced private payor reimbursement levels because fee schedules
of certain third-party payors are indexed to Medicare. Furthermore, the
healthcare industry is experiencing a trend towards cost containment as
government and other third-party payors seek to impose lower reimbursement rates
and negotiate reduced contract rates with service providers. This trend could
adversely affect our net sales. Medicare provides for reimbursement for
prosthetic products and services based on prices set forth in fee schedules for
ten regional service areas. Additionally, if the U.S. Congress were to legislate
modifications to the Medicare fee schedules, our net sales from Medicare and
other payors could be adversely and materially affected. We cannot predict
whether any such modifications to the fee schedules will be enacted or what the
final form of any modifications might be. As such, modifications to government
reimbursement levels could reduce our revenues and/or cause individuals who
would have otherwise retained our services to look for cheaper alternatives.
OUR INDEPENDENT AUDITOR HAS EXPRESSED DOUBT REGARDING OUR ABILITY TO CONTINUE AS
A GOING CONCERN.
Since our inception, we have suffered significant net losses. During the nine
months ended March 31, 2006 and 2005, we had net losses of $187,843 and
$4,312,262, respectively and net cash used by operating activities of $250,270
and $216,252, respectively. Due to our negative financial results and our
current financial position, our independent auditor has raised substantial doubt
about our ability to continue as a going concern.
IF WE CANNOT COLLECT OUR ACCOUNTS RECEIVABLE AND EFFECTIVELY MANAGE OUR
INVENTORY, OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION COULD BE
ADVERSELY AFFECTED.
As of March 31, 2006, our accounts receivable over 120 days old represented
approximately 39% of total accounts receivable outstanding. If we cannot collect
our accounts receivable, our business, results of operations, and financial
condition could be adversely affected.
IF WE ARE UNABLE TO MAINTAIN GOOD RELATIONS WITH OUR SUPPLIERS, OUR EXISTING
PURCHASING COSTS MAY BE JEOPARDIZED, WHICH COULD ADVERSELY AFFECT OUR GROSS
MARGINS.
Our gross margins have been, and will continue to be, dependent, in part, on our
ability to continue to obtain favorable terms from our suppliers. These terms
may be subject to changes in suppliers' strategies from time to time, which
could adversely affect our gross margins over time. The profitability of our
business depends, in part, upon our ability to maintain good relations with
these suppliers, of which there can be no assurance.
WE DEPEND ON THE CONTINUED EMPLOYMENT OF OUR TWO PROSTHETISTS WHO WORK AT OUR
HOUSTON PATIENT-CARE FACILITY AND THEIR RELATIONSHIPS WITH REFERRAL SOURCES AND
PATIENTS. OUR ABILITY TO PROVIDE PEDIATRIC PROSTHETIC SERVICES AT OUR
PATIENT-CARE FACILITY WOULD BE IMPAIRED AND OUR NET SALES REDUCED IF WE WERE
UNABLE TO MAINTAIN THESE EMPLOYMENT AND REFERRAL RELATIONSHIPS.
Our net sales would be reduced if either of our two (2) practitioners leaves us.
In addition, any failure of these practitioners to maintain the quality of care
provided or to otherwise adhere to certain general operating procedures at our
facility, or among our Host Affiliates, or any damage to the reputation of any
of our practitioners could damage our reputation, subject us to liability and/or
significantly reduce our net sales.
WE FACE PERIODIC REVIEWS, AUDITS AND INVESTIGATIONS UNDER OUR CONTRACTS WITH
FEDERAL AND STATE GOVERNMENT AGENCIES, AND THESE AUDITS COULD HAVE ADVERSE
FINDINGS THAT MAY NEGATIVELY IMPACT OUR BUSINESS.
We contract with various federal and state governmental agencies to provide
prosthetic services. Pursuant to these contracts, we are subject to various
governmental reviews, audits and investigations to verify our compliance with
the contracts and applicable laws and regulations. Any adverse review, audit or
investigation could result in:
- refunding of amounts we have been paid pursuant to our government
contracts;
- imposition of fines, penalties and other sanctions on us;
- loss of our right to participate in various federal programs;
- damage to our reputation in various markets; or
- material and/or adverse effects on the business, financial condition
and results of operations.
WE CURRENTLY ONLY HAVE A LIMITED NUMBER OF AUTHORIZED BUT UNISSUED SHARES, WHICH
MAY CAUSE US TO FACE PENALTIES IN CONNECTION WITH OUR INABILITY TO CONVERT OUR
DEBENTURES INTO COMMON STOCK AT THE OPTION OF THE DEBENTURE HOLDERS AND/OR TO
ISSUE SHARES OF COMMON STOCK IN CONNECTION WITH THE EXERCISE OF OUR OUTSTANDING
WARRANTS.
As of June 29, 2006, we had 98,274,889 shares of common stock issued
and outstanding out of a total of 100,000,000 shares of common stock authorized,
leaving us the ability to issue only approximately 2,171,538 shares of our
common stock. As a result, we do not have a sufficient number of authorized but
unissued shares to allow for the conversion of our outstanding Debentures by the
Debenture holders and/or the exercise of the Warrant. As a result, we may face
penalties in connection with such conversions and/or exercises and/or be forced
to repay such Debentures in cash, which cash may not be available on favorable
terms, if at all. We currently have plans to obtain shareholder approval to
increase our authorized common stock in the future. If we do not increase our
authorized shares in the future, we could face penalties in connection with our
inability to allow the Debenture holders to convert their Debentures into shares
of common stock and/or to allow them to exercise their Warrants. These penalties
and/or the requirement that we repay the Debentures in cash could have a
material adverse effect on our results of operations, working capital and
ability to pay our current liabilities. If we are unable to increase our
authorized shares in the future, we could be forced to curtail and/or abandon
our business plan.
WE HAVE NEVER PAID A CASH DIVIDEND AND IT IS LIKELY THAT THE ONLY WAY YOU WILL
REALIZE A RETURN ON YOUR INVESTMENT IS BY SELLING YOUR SHARES.
We have never paid cash dividends on any of our securities. Our Board of
Directors does not anticipate paying cash dividends in the foreseeable future.
We currently intend to retain future earnings to finance our growth. As a
result, your return on an investment in our stock will likely depend on your
ability to sell our stock at a profit, of which there can be no assurance.
WE MAY ISSUE ADDITIONAL SHARES OF COMMON STOCK IN THE FUTURE, WHICH COULD CAUSE
DILUTION TO OUR THEN EXISTING SHAREHOLDERS.
We may seek to raise additional equity capital in the future. Any issuance of
additional shares of our common stock will dilute the percentage ownership
interest of all our then shareholders and may dilute the book value per share of
our common stock, which would likely cause a decrease in value of our common
stock.
WE MAY ISSUE ADDITIONAL SHARES OF PREFERRED STOCK WHICH PREFERRED STOCK MAY HAVE
RIGHTS AND PREFERENCES GREATER THAN OUR COMMON STOCK.
The Board of Directors has the authority to issue up to 10,000,000 shares of
Preferred Stock. As of May 9, 2006, 1,000,000 shares of the Series A Convertible
Preferred Shares have been issued. Additional shares of preferred stock, if
issued, could be entitled to preferences over our outstanding common stock. The
shares of preferred stock, when and if issued, could adversely affect the rights
of the holders of common stock, and could prevent holders of common stock from
receiving a premium for their common stock. An issuance of preferred stock could
result in a class of securities outstanding that could have preferences with
respect to voting rights and dividends and in liquidation over the common stock,
and could (upon conversion or otherwise) enjoy all of the rights of holders of
common stock. Additionally, we may issue a series of preferred stock in the
future, which may convert into common stock, which conversion would cause
immediate dilution to our then shareholders. The Board of Director's authority
to issue preferred stock could discourage potential takeover attempts and could
delay or prevent a change in control through merger, tender offer, proxy contest
or otherwise by making such attempts more difficult to achieve or more costly
and/or otherwise cause the value of our common stock to decrease in value.
OUR MANAGEMENT CONTROLS A SIGNIFICANT PERCENTAGE OF OUR CURRENT OUTSTANDING
COMMON STOCK AND THEIR INTERESTS MAY CONFLICT WITH THOSE OF OUR SHAREHOLDERS.
As of June 29, 2006, our President and Chief Executive Officer, Linda
Putback-Bean beneficially owned 30,210,251 shares of common stock or
approximately 30.7% of our outstanding common stock. Additionally, Ms. Bean owns
900,000 shares of our Series A Convertible Preferred Stock which represents 90%
of the issued and outstanding shares of preferred stock. Dan Morgan, our Vice
President/Chief Prosthetist owns 9,198,861 shares of our common stock as well as
the remaining 100,000 shares of our Series A Convertible Preferred Stock which
represents 10% of the Series A Convertible Preferred Stock. Thus, management
owns 100% of our Series A Convertible Preferred Stock. The Series A Convertible
Preferred Stock is convertible on a one-to-one basis for our common stock but
has voting rights of 20-to-1, giving our management the right to vote a total of
59,409,112 shares of our voting shares, representing the 30,210,251 shares held
by Ms. Bean, the 900,000 shares of Series A Convertible Preferred Stock which
has the right to vote 18,000,000 shares of common stock, the 9,198,861 shares of
common stock held by Mr. Morgan, and the 100,000 shares of Series A Convertible
Preferred Stock which has the right to vote 20,000,000 shares of common stock,
for a total of a total of approximately 50.4% of our total voting power based on
117,828,462 voting shares, which includes the 97,828,462 shares of common stock
outstanding and the 20,000,000 shares which our Series A Convertible Preferred
Stock are able to vote. This concentration of a significant percentage of voting
power gives our management substantial influence over any matters that require a
shareholder vote, including, without limitation, the election of Directors
and/or approving or preventing a merger or acquisition, even if their interests
may conflict with those of other shareholders. Such control could also have the
effect of delaying or preventing a change in control or otherwise discouraging a
potential acquirer from attempting to obtain control of the Company. Such
control could have a material adverse effect on the market price of our common
stock or prevent our shareholders from realizing a premium over the then
prevailing market prices for their shares of common stock.
THE TRADING PRICE OF OUR COMMON STOCK ENTAILS ADDITIONAL REGULATORY
REQUIREMENTS, WHICH MAY NEGATIVELY AFFECT SUCH TRADING PRICE.
Our common stock is currently listed on the Pink Sheets, an over-the-counter
electronic quotation service, which stock currently trades below $4.00 per
share. We anticipate the trading price of our common stock will continue to be
below $4.00 per share. As a result of this price level, trading in our common
stock would be subject to the requirements of certain rules promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
rules require additional disclosure by broker-dealers in connection with any
trades generally involving any non-NASDAQ equity security that has a market
price of less than $4.00 per share, subject to certain exceptions. Such rules
require the delivery, before any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker-dealer
must determine the suitability of the penny stock for the purchaser and receive
the purchaser's written consent to the transaction before sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our common stock. As a
consequence, the market liquidity of our common stock could be severely affected
or limited by these regulatory requirements.
IN THE FUTURE, WE WILL INCUR SIGNIFICANT INCREASED COSTS AS A RESULT OF
OPERATING AS A FULLY REPORTING COMPANY UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, AND OUR MANAGEMENT WILL BE REQUIRED TO DEVOTE SUBSTANTIAL TIME
TO NEW COMPLIANCE INITIATIVES.
Moving forward, we anticipate incurring significant legal, accounting and other
expenses in connection with the filing of our Form 10-SB and our current status
as a fully reporting public company. The Sarbanes-Oxley Act of 2002 (the
"Sarbanes-Oxley Act") and new rules subsequently implemented by the SEC have
imposed various new requirements on public companies, including requiring
changes in corporate governance practices. As such, and as a result of the
filing of our Form 10-SB to become a publicly filing company, our management and
other personnel will need to devote a substantial amount of time to these new
compliance initiatives. Moreover, these rules and regulations will increase our
legal and financial compliance costs and will make some activities more
time-consuming and costly. For example, we expect these new rules and
regulations to make it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required to incur
substantial costs to maintain the same or similar coverage. In addition, the
Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal controls for financial reporting and disclosure of controls and
procedures. In particular, commencing in fiscal 2007, we must perform system and
process evaluation and testing of our internal controls over financial reporting
to allow management and our independent registered public accounting firm to
report on the effectiveness of our internal controls over financial reporting,
as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses. Our compliance with Section 404 will require
that we incur substantial accounting expense and expend significant management
efforts. We currently do not have an internal audit group, and we will need to
hire additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.
GOVERNMENT REGULATION
We are subject to a variety of federal, state and local governmental
regulations. We make every effort to comply with all applicable regulations
through compliance programs, manuals and personnel training. Despite these
efforts, we cannot guarantee that we will be in absolute compliance with all
regulations at all times. Failure to comply with applicable governmental
regulations may result in significant penalties, including exclusion from the
Medicare and Medicaid programs, which could have a material adverse effect on
our business. In November 2003, Congress initiated a three-year freeze on
reimbursement levels for all orthotic and prosthetic services starting January
1, 2004. The effect of this legislation has been a downward pressure on our
gross profit; however, we have initiated certain purchasing and efficiency
programs which we believe will minimize such effects.
HIPAA Violations. The Health Insurance Portability and Accountability Act
("HIPAA") provides for criminal penalties for, among other offenses, healthcare
fraud, theft or embezzlement in connection with healthcare, false statements
related to healthcare matters, and obstruction of criminal investigation of
healthcare offenses. Unlike the federal anti-kickback laws, these offenses are
not limited to federal healthcare programs. In addition, HIPAA authorizes the
imposition of civil monetary penalties where a person offers or pays
remuneration to any individual eligible for benefits under a federal healthcare
program that such person knows or should know is likely to influence the
individual to order or receive covered items or services from a particular
provider, practitioner or supplier. Excluded from the definition of
"remuneration" are incentives given to individuals to promote the delivery of
preventive care (excluding cash or cash equivalents), incentives of nominal
value and certain differentials in or waivers of coinsurance and deductible
amounts. These laws may apply to certain of our operations. Our billing
practices could be subject to scrutiny and challenge under HIPAA.
Physician Self-Referral Laws. We are also subject to federal and state physician
self-referral laws. With certain exceptions, the federal Medicare/Medicaid
physician self-referral law (the "Stark II" law) (Section 1877 of the Social
Security Act) prohibits a physician from referring Medicare and Medicaid
beneficiaries to an entity for "designated health services" - including
prosthetic and orthotic devices and supplies - if the physician or the
physician's immediate family member has a financial relationship with the
entity. A financial relationship includes both ownership or investment interests
and compensation arrangements. A violation occurs when any person presents or
causes to be presented to the Medicare or Medicaid program a claim for payment
in violation of Stark II. With respect to ownership/investment interests, there
is an exception under Stark II for referrals made to a publicly traded entity in
which the physician has an investment interest if the entity's shares are traded
on certain exchanges, including the New York Stock Exchange, and had
shareholders' equity exceeding $75.0 million for its most recent fiscal year, or
as an average during the three previous fiscal years.
With respect to compensation arrangements, there are exceptions under Stark II
that permit physicians to maintain certain business arrangements, such as
personal service contracts and equipment or space leases, with healthcare
entities to which they refer. We believe that our compensation arrangements
comply with Stark II, either because the physician's relationship fits within a
regulatory exception or does not generate prohibited referrals. Because we have
financial arrangements with physicians and possibly their immediate family
members, and because we may not be aware of all those financial arrangements, we
must rely on physicians and their immediate family members to avoid making
referrals to us in violation of Stark II or similar state laws. If, however, we
receive a prohibited referral without knowing that the referral was prohibited,
our submission of a bill for services rendered pursuant to a referral could
subject us to sanctions under Stark II and applicable state laws.
Certification and Licensure. Most states do not require separate licensure for
practitioners. However, several states currently require practitioners to be
certified by an organization such as the American Board for Certification.
The American Board for Certification Orthotics and Prosthetics conducts a
certification program for practitioners and an accreditation program for
patient-care centers. The minimum requirements for a certified practitioner are
a college degree, completion of an accredited academic program, one to four
years of residency at a patient-care center under the supervision of a certified
practitioner and successful completion of certain examinations. Minimum
requirements for an accredited patient-care center include the presence of a
certified practitioner and specific plant and equipment requirements. While we
endeavor to comply with all state licensure requirements, we cannot assure that
we will be in compliance at all times with these requirements. Failure to comply
with state licensure requirements could result in civil penalties, termination
of our Medicare agreements, and repayment of amounts received from Medicare for
services and supplies furnished by an unlicensed individual or entity.
Confidentiality and Privacy Laws. The Administrative Simplification Provisions
of HIPAA, and their implementing regulations, set forth privacy standards and
implementation specifications concerning the use and disclosure of individually
identifiable health information (referred to as "protected health information")
by health plans, healthcare clearinghouses and healthcare providers that
transmit health information electronically in connection with certain standard
transactions ("Covered Entities"). HIPAA further requires Covered Entities to
protect the confidentiality of health information by meeting certain security
standards and implementation specifications. In addition, under HIPAA, Covered
Entities that electronically transmit certain administrative and financial
transactions must utilize standardized formats and data elements ("the
transactions/code sets standards"). HIPAA imposes civil monetary penalties for
non-compliance, and, with respect to knowing violations of the privacy
standards, or violations of such standards committed under false pretenses or
with the intent to sell, transfer or use individually identifiable health
information for commercial advantage, criminal penalties. The privacy standards
and transactions/code sets standards went into effect on April 16, 2003 and
required compliance by April 21, 2005. We believe that we are subject to the
Administrative Simplification Provisions of HIPAA and have taken steps necessary
to meet applicable standards and implementation specifications; however, these
requirements have had a significant effect on the manner in which we handle
health data and communicate with payors.
In addition, state confidentiality and privacy laws may impose civil and/or
criminal penalties for certain unauthorized or other uses or disclosures of
individually identifiable health information. We are also subject to these laws.
While we endeavor to assure that our operations comply with applicable laws
governing the confidentiality and privacy of health information, we could face
liability in the event of a use or disclosure of health information in violation
of one or more of these laws.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Principal Financial Officer, after evaluating the effectiveness
of our "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this amended Quarterly Report on Form 10-QSB (the
"Evaluation Date"), have concluded that as of the Evaluation Date, our
disclosure controls and procedures were not effective to provide reasonable
assurance that information we are required to disclose in reports that we
file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and
Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Our controls were not
effective, as we failed to properly account for certain consulting
agreements disclosed herein, failed to properly report the accrual of
receivables and the presentation of sales through Host-Affiliates on a
gross basis, failed to properly account for certain derivative liabilities
included herein, failed to properly account for the return and cancellation
of certain shares of common stock by a consultant of the company, and
failed to properly show gross revenue and cost of sales in this Report on
Form 10-QSB as originally filed. Additionally, we failed to timely file our
original Quarterly Report on Form 10-QSB for the quarter ended December 31,
2005, as well as for the quarter ended March 31, 2006. Moving forward, our
management believes that as we become more familiar and gain more
experience in completing our periodic filings and providing our outside
auditors with the required financial information on a timely basis, we will
be able to file our periodic reports within the time periods set forth by
the Securities and Exchange Commission.
Subsequent to the year ended June 30, 2006, our management has undertaken a
concerted effort to spend the appropriate time and resources to complete our
financial statements and disclosures in our periodic and annual reports within
the time periods set forth by the Commission. Our management hopes to accomplish
this goal by putting in place stricter controls and procedures and beginning
management's dialogue with our inside and outside accountants regarding our
periodic filings at an earlier stage in the review and/or audit process, which
our management believes will allow us to timely file our periodic reports moving
forward.
(b) Changes in internal control over financial reporting. There were no
significant changes in our internal control over financial reporting during
our most recent fiscal quarter that materially affected, or were reasonably
likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not aware of any pending or threatened legal proceeding to which we
are a party.
ITEM 2. CHANGES IN SECURITIES
In July 2005, we sold an aggregate of 2,500,000 free trading shares of common
stock to three individuals for aggregate consideration of $125,000 or $0.05 per
share. We claim an exemption from registration for the above issuances pursuant
to Rule 504 of the Securities Act of 1933.
In August 2005, we sold 1,000,000 free trading shares of common stock to one
individual for $50,000 or $0.05 per share. We claim an exemption from
registration for the above issuance pursuant to Rule 504 of the Securities Act
of 1933.
In September 2005, we issued an aggregate of 10,000,000 restricted shares of
common stock to four consultants (which included 2,000,000 shares which were
later cancelled) in connection with their entry into marketing agreements,
whereby they agreed to market our prosthetics services. We claim an exemption
from registration afforded by Section 4(2) of the Securities Act of 1933 for
the above issuances, since the foregoing issuances did not involve a public
offering, the recipients took the shares for investment and not resale and we
took appropriate measures to restrict transfer. No underwriters or agents
were involved in the foregoing issuances and we paid no underwriting
discounts or commissions.
In September 2005, our Chief Executive Officer and Director, Linda Putback-Bean
cancelled 4,000,000 of the shares which she held, which shares were previously
issued to Mrs. Putback-Bean for services in 2005, so that we would have a
sufficient number of shares of authorized but unissued common stock to pay
consultants in shares of our common stock. It is anticipated that once we
increase our authorized shares of common stock, Mrs. Putback-Bean will be
reissued the 4,000,000 shares of common stock which she previously agreed to
cancel.
In December 2005, we sold 1,000,000 shares of common stock to one individual for
$35,000 or $0.035 per share. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 for the above issuance, since the
foregoing issuance did not involve a public offering, the recipients took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
issuance and we paid no underwriting discounts or commissions.
In January 2006, we sold 200,000 shares of common stock to one individual for
$10,000 or $0.05 per share. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 for the above issuance, since the
foregoing issuance did not involve a public offering, the recipients took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
issuance and we paid no underwriting discounts or commissions.
In March 2006, we issued 250,000 shares of common stock to Global in connection
and in consideration for Global's entry into the Service Agreement and plan to
issue Global up to an additional 1,750,000 over the life of the Service
Agreement, as described above. We claim an exemption from registration afforded
by Section 4(2) of the Securities Act of 1933 for the above issuance, since the
foregoing issuance did not involve a public offering, the recipient took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
issuance and we paid no underwriting discounts or commissions.
SUBSEQUENT EVENTS
-----------------
On May 30, 2006, we entered into a Securities Purchase Agreement, with various
third parties (the "Purchasers") to sell an aggregate of $1,500,000 in Callable
Secured Convertible Notes, which bear interest at the rate of 6% per annum (the
"Debentures"), of which an aggregate of $600,000 in Debentures was sold to the
Purchasers on May 30, 2006, and the remaining $900,000 is to be sold in two
separate tranches, $400,000 on or around the date we file a registration
statement to register the shares of common stock the Debentures are convertible
into, and $500,000 upon the date such registration statement is declared
effective by the SEC. We claim an exemption from registration provided by Rule
506 of Regulation D for the above issuances.
In connection with the sale of the Debentures, we granted the various third
party Purchasers Stock Purchase Warrants to purchase an aggregate of 50,000,000
shares of our common stock at an exercise price of $0.10 per share, which
warrants expire if unexercised on May 30, 2013. We claim an exemption from
registration provided by Rule 506 of Regulation D for the issuance of the
warrants.
We also agreed to grant a finder, Lionheart Associates, LLC doing business as
Fairhills Capital ("Lionheart"), a finder's fee in connection with the funding
which included warrants to purchase up to 2,000,000 shares of our common stock
at an exercise price of $0.10 per share. The Lionheart warrants expire if
unexercised on May 30, 2013. We claim an exemption from registration afforded
by Section 4(2) of the Securities Act of 1933, since the foregoing transaction
did not involve a public offering, the recipient had access to information that
would be included in a registration statement, took the shares for investment
and not resale and we took appropriate measures to restrict transfer.
Additionally, in connection with the closing of the sale of the Debentures,
described above, we agreed to grant Geoff Eiten, as a finder's fee in connection
with the funding, 3,000,000 warrants to purchase shares of our common stock.
The 3,000,000 warrants are exercisable into shares of our common stock as
follows, 1,000,000 warrants are exercisable at $0.10 per share, 1,000,000
warrants are exercisable at $0.20 per share, and 1,000,000 warrants are
exercisable at $0.30 per share. The warrants granted to Mr. Eiten expire if
unexercised on May 8, 2010. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, since the foregoing transaction did
not involve a public offering, the recipient had access to information that
would be included in a registration statement, took the grant for investment
and not resale and we took appropriate measures to restrict transfer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Description
3.1(1) Articles of Incorporation
(Pediatric Prosthetics, Inc.-Texas) dated
September 15, 2003
3.2(1) Amendment to Articles of Incorporation
Grant Douglas Acquisition Corp. (October 31, 2003)
3.3(1) Amendment to Articles of Incorporation
Grant Douglas Acquisition Corp. (November 7, 2003)
(Series A Convertible Preferred Stock Designation of
Rights
4.1(1) Shareholder Voting Agreement dated October 31, 2003
dated October 10, 2003
10.2* Settlement Agreement with Secured Releases, LLC
10.3(2) Securities Purchase Agreement
10.4(2) Callable Secured Convertible Note with AJW Offshore, Ltd.
10.5(2) Callable Secured Convertible Note with AJW Partners, LLC
10.6(2) Callable Secured Convertible Note with AJW Qualified
Partners, LLC
10.7(2) Callable Secured Convertible Note with New Millennium
Capital Partners II, LLC
10.8(2) Stock Purchase Warrant with AJW Offshore, Ltd.
10.9(2) Stock Purchase Warrant with AJW Partners, LLC
10.10(2) Stock Purchase Warrant with AJW Qualified Partners, LLC
10.11(2) Stock Purchase Warrant with New Millennium
Capital Partners II, LLC
10.12(2) Security Agreement
10.13(2) Intellectual Property Security Agreement
10.14(2) Registration Rights Agreement
31.1* Certificate of the Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2* Certificate of the Principal Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1* Certificate of the Chief Executive
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2* Certificate of the Principal Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Filed Herein.
(1) Filed as exhibits to our Form 10-SB filed with the Commission on February
13, 2006 and incorporated by reference herein.
(2) Filed as exhibits to our Report on Form 8-K, filed with the Commission on
June 2, 2006, and incorporated herein by reference.
b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter for which this
report is filed. The Company filed one report on Form 8-K subsequent to the
period covered by this report, on June 2, 2006, to report the Company's entry
into the Securities Purchase Agreement, Debentures and Warrant, as described
above under "Recent Events."
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEDIATRIC PROSTHETICS, INC.
DATED: December 22, 2006
By: /s/ Kenneth W. Bean
---------------------------
Kenneth W. Bean
Principal Financial Officer