UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: (DATE OF EARLIEST EVENT REPORTED): May 30, 2006
COMMISSION FILE NO.: 000-32885
PEDIATRIC PROSTHETICS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
IDAHO 68-0566694
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(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION)
12926 WILLOWCHASE DRIVE, HOUSTON, TEXAS 77070
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(281) 897-1108
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(ISSUER TELEPHONE NUMBER)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
On May 30, 2006 (the "Closing"), Pediatric Prosthetics, Inc. (the
"Company," "we," "us") 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;
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;
or
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 Purchaser's such amount
within five (5) days of the date such amount is due, the Purchasers can require
us to pay them in the number of shares of common stock the greater of (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 an unpaid interest thereunder) during the
first 180 days after the Closing, 130% of the outstanding amount of the
Debentures (plus any accrued an 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
there after 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 plan to file 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, subsequent to the filing of
this report.
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 and 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).
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES.
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 issued 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 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. 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 at
an exercise price of $0.10 per share. 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.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
Exhibit No. Description
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10.1* Securities Purchase Agreement
10.2* Callable Secured Convertible Note with AJW Offshore, Ltd.
10.3* Callable Secured Convertible Note with AJW Partners, LLC
10.4* Callable Secured Convertible Note with AJW Qualified Partners, LLC
10.5* Callable Secured Convertible Note with New Millennium Capital
Partners II, LLC
10.6* Stock Purchase Warrant with AJW Offshore, Ltd.
10.7* Stock Purchase Warrant with AJW Partners, LLC
10.8* Stock Purchase Warrant with AJW Qualified Partners, LLC
10.9* Stock Purchase Warrant with New Millennium Capital Partners II, LLC
10.10* Security Agreement
10.11* Intellectual Property Security Agreement
10.12* Registration Rights Agreement
* Attached hereto.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEDIATRIC PROSTHETICS, INC.
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June 2, 2006
/s/ Linda Putback-Bean
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Linda Putback-Bean,
Chief Executive Officer