UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from __________ to ______________
Commission file number 000-51804
PEDIATRIC PROSTHETICS, INC.
---------------------------
(Exact name of small business issuer as specified in its charter)
IDAHO 68-0566694
----- ----------
(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
--------------
(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 of 1934 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 November 15, 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].
Traditional Small Business Disclosure Format Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEDIATRIC PROSTHETICS, INC.
TABLE OF CONTENTS
PAGE
Financial Statements
Unaudited Balance Sheets as of September 30, 2006
and June 30, 2006 2
Unaudited Statements of Operations for the Three Months Ended
September 30, 2006 and 2005 3
Unaudited Statement of changes in Stockholders' Deficit for the
Three Months Ended September 30, 2006 4
Unaudited Statements of Cash Flows for the Three Months Ended
September 30, 2006 and 2005 5
Notes To Financial Statements 6
PEDIATRIC PROSTHETICS, INC.
UNAUDITED BALANCE SHEETS
September 30, 2006 and June 30, 2006
September 30, June 30,
2006 2006
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 54,466 $ 274,641
Trade accounts receivable, net 309,379 268,642
Prepaid expenses and other current assets 11,825 13,396
Current portion of deferred financing cost, net 119,665 109,693
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Total current assets 495,335 666,372
Furniture and equipment, net 64,992 59,138
Deferred financing cost 199,446 239,334
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Total assets $ 759,773 $ 964,844
============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable $ 123,361 $ 143,167
Accrued liabilities 284,230 257,680
Current portion of convertible debt, net of discount of $0 and $25,000
at September 30, 2006 and June 30, 2006, respectively 85,000 60,000
Due to related party 500 500
Derivative financial instruments 3,916,825 5,119,365
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Total current liabilities 4,409,916 5,580,712
Convertible debt, net of discount of $569,486 and $592,716 at September
September 30, 2006 and June 30, 2006, respectively 30,514 7,284
Deferred rent 11,871 12,575
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Total liabilities 4,452,301 5,600,571
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Commitments and contingencies
Stockholders' deficit:
Preferred stock, par value $0.001; authorized 10,000,000
shares; issued and outstanding 1,000,000 shares 1,000 1,000
at September 30, 2006 and June 30, 2006
Common stock, par value $0.001; authorized 100,000,000
shares; issued and outstanding 98,274,889 98,275 98,275
at September 30, 2006 and June 30, 2006
Additional paid-in capital 8,025,446 7,764,327
Accumulated deficit (11,817,249) (12,499,329)
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Total stockholders' deficit (3,692,528) (4,635,727)
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Total liabilities and stockholders' deficit $ 759,773 $ 964,844
============= ===========
The accompanying notes are an integral part of these financial statements
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PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2006 and 2005
2005
2006 (Restated)
----------- ------------
Revenue $ 195,230 $ 104,048
----------- ------------
Operating expenses:
Cost of sales, except for items stated separately below 76,001 37,216
Selling, general and administrative expenses 543,239 168,110
Depreciation expense 5,959 4,688
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Total operating expenses 625,199 210,014
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Loss from operations (429,969) (105,966)
Other income and (expenses):
Interest income 1 -
Interest expense (90,492) (6,031)
Change in value of derivative financial instruments 1,202,540 -
----------- ------------
Total other income (expense) 1,112,049 (6,031)
----------- ------------
Net income (loss) $ 682,080 $ (111,997)
=========== ============
Net income (loss) per common share - basic and diluted $ 0.01 $ (0.00)
=========== ============
Weighted average common shares outstanding - basic and diluted 98,274,889 91,758,887
The accompanying notes are an integral part of these financial statements
-3-
PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Three Months Ended September 30, 2006
Additional
Preferred Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ---------- ---------- ---------- ---------- ----------- ----------
Balance at June 30, 2006 1,000,000 $ 1,000 98,274,889 $ 98,275 7,764,327 $(12,499,329) $(4,635,727)
Amortization of stock-based
compensation - - - - 261,119 - 261,119
Net income - - - - - 682,080 682,080
--------- --------- ---------- --------- --------- ----------- ----------
Balance at September 30, 2006 1,000,000 $ 1,000 98,274,889 $ 98,275 8,025,446 $(11,817,249) $(3,692,528)
========= ========= ========== ========= ========= =========== ==========
The accompanying notes are an integral part of these financial statements.
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PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 2006 and 2005
2005
2006 (Restated)
--------------- --------------
Cash Flows From Operating Activities
Net income (loss) $ 682,080 $ (111,997)
Adjustments to reconcile net income (loss) to net cash used by
operating activities
Depreciation expense 5,959 4,688
Provision for doubtful accounts 9,784 7,933
Stock-based compensation 261,116 2,350
Amortization of debt issue costs 78,147 -
Change in value of derivative financial instruments (1,202,540) -
Deferred rent (704) -
Changes in operating assets and liabilities:
Accounts receivable (50,521) (7,586)
Prepaid expenses and other current assets 1,571 924
Accounts payable (19,804) 3,012
Accrued liabilities and other 26,550 (4,164)
--------------- --------------
Net cash used by operating activities (208,362) (104,840)
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Cash Flows From Investing Activities
Purchase of furniture and equipment (11,813) -
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Net cash used by investing activities (11,813) -
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Cash Flows From Financing Activities:
Proceeds from sale of common stock - 175,000
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Net cash provided by financing activities - 175,000
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Net increase in cash and cash equivalents (220,175) 70,160
Cash and cash equivalents, beginning of period 274,641 29,818
--------------- --------------
Cash and cash equivalents, end of period $ 54,466 $ 99,978
=============== ==============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest expense $ 78,942 $ 6,031
Cash paid for income taxes - -
The accompanying notes are an integral part of these financial statements
-5-
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES
------------------------------------------------------
GENERAL
Pediatric Prosthetics, Inc. ("Pediatric") is a company involved in
the design, fabrication and fitting of custom-made artificial limbs.
Pediatric's focus is infants and children and the comprehensive care and
training needed by those infants and children and their parents.
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.
INTERIM FINANCIAL STATEMENTS
The unaudited condensed financial statements included herein have been
prepared by Pediatirc 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 Pediatric 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
Pediatirc's 2006 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, 2007.
2. GOING CONCERN CONSIDERATIONS
----------------------------
Since its inception, Pediatric has suffered significant net losses and
has been dependent on outside investors to provide the cash resources to
sustain its operations. During the years ended June 30, 2006 and 2005,
Pediatric reported net losses of $4,413,417 and $4,356,519, respectively,
and negative cash flows from operations of $436,226 and $298,454,
respectively. For the three months ended September 30, 2006 Pediatric
reported net income of $682,080 and negative cash flows from operations of
$208,362.
Although, Pediatric has net income of $682,080 for the three months
ended September 30, 2006, such net income was the result of changes in the
value of derivative financial instruments and not the result of core
operations. Negative operating results have produced a working capital
deficit of $3,914,581 and a stockholders' deficit of $3,692,528 at
September 30, 2006. Pediatric's negative financial results and its current
financial position raise substantial doubt about Pediatric's ability to
continue as a going concern. The financial statements do not reflect any
adjustments relating to the recoverability and classification of recorded
asset amounts or liability amounts that might be necessary should Pediatric
be unable to continue in existence.
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PEDIATRIC PROSTHETICS, INC.
- ---------------------------
NOTES TO FINANCIAL STATEMENTS
2. GOING CONCERN CONSIDERATIONS, CONTINUED
------------------------------------------
Pediatric 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 Pediatric, 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.
Pediatirc's long-term viability as a going concern is dependent on
certain key factors, as follows:
- Pediatric's ability to obtain adequate sources of outside
financing to support near term operations and to allow
Pediatric to continue forward with current strategic plans.
- Pediatric's ability to increase its customer base and
broaden its service capabilities.
- Pediatric's ability to ultimately achieve adequate
profitability and cash flows to sustain continuing operations.
3. RESTATEMENT
-----------
The accompanying September 30, 2005 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
-------------
Current assets, as previously reported $ 196,788
Change in current assets related to
Receivables from host affiliates 71,146
Increase in allowance for doubtful
accounts (44,885)
------------
Current assets, as restated $ 223,049
============
Stockholders' deficit, as previously reported $ (784,326)
Change in stockholders' deficit related to
change in net loss 596,261
------------
Stockholders' deficit, as restated $ (188,065)
============
-9-
PEDIATRIC PROSTHETICS, INC.
NOTES TO FINANCIAL STATEMENTS
3. RESTATEMENT, CONTINUED
----------------------
STATEMENT OF OPERATIONS
Revenue, as previously reported $ 112,215
Change in revenue related to billings by
Host affiliates (8,167)
------------
Revenue, as restated $ 104,048
============
Operating expenses, as previously reported $ 777,667
Change in operating expenses related to
reduction of stock-based
compensation for amounts not yet
earned by the service providers (567,653)
------------
Operating expenses, as restated $ 210,014
============
Loss from operations, as previously reported $ (665,452)
============
Loss from operations, as restated (105,966)
============
Net loss, as previously reported $ (671,483)
============
Net loss, as restated $ (111,997)
============
The restatement's impact on the reported net loss per share for the three months
ended September 30, 2005 was $0.01.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ALL STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT OTHERWISE INCLUDE
THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS", "PROJECTS",
"ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR EXPRESSIONS OR
FUTURE OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE
GENERALLY FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE
FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED
UTILIZING NUMEROUS IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR
FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES.
THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE
HEADING "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN
THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS
ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE
UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-KSB,
UNLESS ANOTHER DATE IS STATED, ARE TO SEPTEMBER 30, 2006. AS USED HEREIN, THE
"COMPANY," "WE," "US," "OUR" AND WORDS OF SIMILAR MEANING REFER TO PEDIATRIC
PROSTHETICS, INC., AN IDAHO CORPORATION.
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.
-12-
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 have a website at www.kidscanplay.com, which contains information which we do
not desire to be incorporated by reference into this filing.
We generate an average of approximately $8,000 of gross profit per fitting for
each prosthetic device we fit, however, the exact amount of gross profit we will
receive for each fitting will depend on the exact mix of arms versus legs
fitted, the number of re-fittings versus new fittings, the total cost of the
components used as well as the amount we are reimbursed by Medicare or Medicaid
if such fittings are not paid for directly by the patients. From July 1, 2005,
until December 31, 2005, we made approximately twenty-seven (27) fittings, from
January 1, 2006, until June 30, 2006, we made approximately thirty-six (36)
fittings, and from July 1, 2006 until November 10, 2006, we made approximately
sixteen (16) fittings. We averaged approximately four to five fittings per month
through December 2005 and have averaged approximately five to six fittings per
month since January 2006.
HISTORY OF THE COMPANY
We were formed as an Idaho corporation on January 29, 1954, under the name
Uranium Mines, Inc. From January 1954 onward, we experienced various
restructurings and name changes, including a name change effective March 9,
2001, to Grant Douglas Acquisition Corp. On October 10, 2003, a separate Texas
corporation, Pediatric Prosthetics, Inc. ("Pediatric Texas"), entered into an
acquisition agreement with us, whereby Pediatric Texas 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
Texas remained as the surviving accounting entity following the Exchange and we
were the surviving legal entity and affected a name change from Grant Douglas
Acquisition Corp. to Pediatric Prosthetics, Inc. on October 31, 2003 in
connection with the Exchange. In connection with the Exchange, we retained
$443,632 in liabilities related to a $350,000 convertible note and $93,632 of
accrued interest on such note that was held by us prior to the Exchange. From
November 2003 through June of 2005 we repaid $148,955 of note principal through
the issuance of common stock with a fair value of $2,688,734 and recognized a
$2,539,779 loss on extinguishment of debt. During the year ended June 30, 2006,
we negotiated the extinguishment of the remaining convertible note of $201,045
and accrued interest of $139,754 for a one time cash payment of $30,000 and
recognized a gain on extinguishment of debt of $310,799.
Prior to the Exchange, we had been a non-operating, non-reporting, corporate
shell, without assets or operations since approximately the second quarter of
2001 (when our prior operations as a publisher of various print media including
magazines and newsletters had ceased), but had traded our common stock on the
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Pinksheets under the symbol "GDRG," prior to the Exchange. We had not been a
reporting company prior to the share exchange. We entered into the Exchange to
acquire an operating business, Pediatric Texas, and the shareholders of
Pediatric Texas entered into the Exchange to trade Pediatric Texas common stock
on the Pinksheets.
Pediatric Texas, the Texas corporation had limited operations prior to the share
exchange with us, which operations were affected through a partnership solely
controlled by the owners of Pediatric Texas. Upon our initial funding following
the share exchange, in November of 2003 we began start-up activities associated
with establishing a prosthetics "patient-care facility" according to the
regulations set forth by the Texas Department of Health. We also began
recruiting our core team of employees, equipping our prosthesis manufacturing
laboratory, and building out and furnishing our facility at 12926 Willowchase
Drive in Houston, Texas, in compliance with the Texas Board of Health and local
occupancy permit requirements. Our "patient-care facility" was approved and
accredited by the Texas Board of Health on March 18, 2004. We were approved at
that time for the clinical fitting of and fabrication of prosthetic devices for
the general public, and for the billing of third party payors, such as health
insurance companies for those services.
WARRANTIES
We provide an unlimited one-year warranty on each of our prostheses, which
covers both materials and workmanship. Our sub-component suppliers also provide
us a one-year warranty on all components, whether electrical or structural, and
as a result, we are in effect only responsible for the cost of the
re-installation of failed sub-components. To date, warranty repair costs borne
by us have been insignificant, and totaled approximately $500 and approximately
30 hours of time during the fiscal year ended June 30, 2006.
PRINCIPAL SUPPLIERS
We obtain the materials which we use to fabricate and fit our prosthetic limbs
from various suppliers including, ARTech Laboratory in Midlothian, Texas;
Liberating Technologies, Inc. in Holliston, Massachusetts; Otto Bock Health Care
in Minneapolis, Minnesota; Ross Prosthetics in Hartsdale, New York; Southern
Prosthetic Supply in Alpharetta, Georgia; Hosmer Dorrance in Campbell,
California; P.V.A. Sleeves Co. in Houston, Texas; Daw Industries in Atlanta,
Georgia; and American Plastics in Arlington, Texas.
SIGNIFICANT EVENTS DURING THE YEAR ENDED JUNE 30, 2006:
SERVICE AGREEMENT WITH GLOBAL MEDIA
In February 2006, the Company 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 executing the Service Agreement, the Company issued Global
250,000 restricted shares of common stock in March 2006. The terms of the
agreement call for the Company to issue Global a remaining value of shares equal
-14-
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 the Company will issue shares based on the contract payments of
$28,125 per payment; however the agreement contains a stock valuation provision
that will provide Global with shares that are discounted by 10% of the five day
average quoted market prices prior to the issuance dates, therefore Global will
receive common stock valued at $31,250 per installment. 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.
On or about June 2, 2006, we issued Global 446,427 shares of common stock valued
at $31,250, in connection with the May 1, 2006, payment of $28,125 on the
Service Agreement. 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 on the Pinksheets trading market, or Over-The-Counter Bulletin Board,
wherever our common stock is then traded. For example, the average of the
closing price of our common stock for the five trading days prior to the May 1,
2006 payment on the Pinksheets was $0.07 per share. Therefore, the amount of
shares we issued Global for such May 1, 2006 payment was $28,125 divided by
$0.063 ($0.07 x 0.90), which was equal to approximately 446,427 shares of common
stock which had a fair market value of $31,250.
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 were extended through November 2006. Additionally,
both loans are convertible into 500,000 shares of our common stock, which is
equivalent to each loan being convertible into shares of common stock at the
rate of one share of common stock for each $0.035 owed under the loans.
In April 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; however this note was subsequently renewed for an additional
-15-
six months, at the option of the holder, and is now due and payable in 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.
In May 2006, we entered into a services agreement with Stock Enterprises, a
privately held financial and investor relations services firm ("Stock"), whereby
Stock agreed to provide us investor relations services on a non-exclusive basis
for the period of one (1) year, and we agreed to issue Stock 2,000,000
restricted shares of our common stock, which shares have not been issued to
Stock to date.
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 from us. 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. In June 2006, we submitted applications and had physical
exams to increase our key man life insurance through the agent the Purchasers
recommended to us, but so far have not received the policies or paid any
premiums in connection with the increased key man life insurance to date.
The $600,000 we received from the Purchasers at the Closing, in connection with
the sales of the Debentures, which are due May 30, 2009, 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);
-16-
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; 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.
We plan to use the $900,000 in proceeds from the sale of the additional
Convertible Debentures (assuming all $900,000 of the additional debentures are
sold) as follows:
o $67,000 - Accounting, auditing and attorney's fees in connection
with our periodic reports, this Form 10-SB registration statement and
a to be filed Form SB-2 registration statement to register the shares
underlying the Convertible Debentures;
o $266,000 - Inventory for our prosthetics operations;
o $67,000 - Equipment and building improvements;
o $333,000 - Promotional, marketing and travel costs associated
with our increased marketing campaign;
o $100,000 - Closing costs and finders fees in connection with the
funding; and
o $67,000 - General working capital, including certain amounts for
officers and directors salaries, rent and office expenses.
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 have a three (3) year
term and 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
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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 (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 which the Debentures are convertible into within sixty
(60) days of the Closing (July 31, 2006), or obtain effectiveness of
such Registration Statement within one hundred and forty-five (145)
days of the Closing (October 22, 2006), which dates have been amended
to January 15, 2007 and April 16, 2007, respectively in connection
with the Waiver of Rights Agreement, described in greater detail
below, 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
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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.
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STOCK PURCHASE WARRANTS
In connection with the Closing, we issued 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, which we
were not able to accomplish, but which date was amended from sixty (60) days
from the Closing until January 15, 2007, in connection with the Waiver of Rights
Agreement (described below), 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 by
April 16, 2007, 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, and such default has not been waived by the Purchasers, then we are
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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 April 16, 2007 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 April 27, 2007, 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).
RECENT EVENTS
On October 25, 2006, with an effective date of July 31, 2006, we entered into a
Waiver of Rights Agreement with the Purchasers, whereby the Purchasers agreed to
waiver our prior defaults under the Securities Purchase Agreement and
Registration Rights Agreement. In connection with the Waiver of Rights
Agreement, the Purchasers agreed to amend the Securities Purchase Agreement to
state that we are required to use our best efforts to timely file our periodic
reports with the Commission, which amendment waived the previous default caused
by our failure to timely file this annual Report on Form 10-KSB with the
Commission. The Waiver of Rights Agreement also amended the Securities Purchase
Agreement to provide for us to use our best efforts to obtain shareholder
approval to increase our authorized shares of common stock as was required by
the Securities Purchase Agreement, which amendment waived our failure to obtain
shareholder approval to increase our authorized shares of common stock by August
15, 2006. Finally, the Waiver of Rights Agreement amended the dates we were
required to file a registration statement covering the shares of common stock
which the Purchasers Notes are convertible into and which their Warrants are
exercisable into from July 31, 2006 to January 15, 2007, and the date such
registration statement is required to be effective with the Commission from
October 22, 2006 to April 16, 2007. As a result of the Waiver of Rights
Agreement, we are not currently in default of any provision of the Securities
Purchase Agreement, Registration Rights Agreement and/or any of the other
agreements entered into with the Purchasers at the Closing.
THE MARKET PLACE
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.
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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 approximately 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.
The free care offered by Shriner's may put downward pressure on the prices we
charge for our services and/or lower the number of potential clients in the
marketplace, which may in turn lower our revenues.
EMPLOYEES
As of November 10, 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. Our
employees include the following individuals:
o Linda Putback-Bean, our President and upper extremity fabricating
specialist, who works for us full time. Her Texas certification and
licensure is that of a "Prosthetist's Assistant", (PA).
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o Dan Morgan is Our Vice President/Chief Prosthetist, he is an ABC
and Texas certified Prosthetist licensed to perform "critical care
events" in all of our prosthetic fittings. He is on call full-time.
o Jean Gonzalez is an ABC and Texas certified Prosthetist, also
licensed to perform "critical care events" in all of our prosthetic
fittings, full time.
o Kenneth W. Bean is our Vice President of Operations, and works
for us full time. He is in charge of the non-patient care side of the
business.
o Kim Hardberger is our office manager/ bookkeeper, and third party
payer liaison in charge of coding and billing and accounts receivable,
who works for us full time.
CONSULTANTS
-----------
Occupational Therapists:
- -------------------------
1. Nancy Conte-Fisher
2. JoAnne Liberatore
Physical Therapist:
- --------------------
Kim Ramey
Other Consultants:
- -------------------
1. James Stock, Investor Relations Consultant
2. Joe Gordon, Business Consultant
3. Mark Santos, Marketing Consultant
4. George Boomer, Marketing Consultant
5. John Beagan, Marketing Consultant
6. Global Media Funding, Feature article Placement Consultants.
7. OTC Financial Network, Geoffery Eiten
AGREEMENTS WITH HOST AFFILIATES
We have entered into consulting contracts with fourteen (14) host prosthetic
providers ("Host Affiliates") with facilities at various locations in nineteen
(19) 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
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Affiliate on a case-by-case basis but generally we receive 70% of the net cash
after components costs for the fitting and fabrication, and the Host receives
30% of the net cash for billing services and use of their lab-facilities. These
contracts generally have automatic renewals every six months unless either party
gives notice of termination.
We have incorporated by reference a sample of one of our Host Affiliates
contracts to this filing as Exhibit 10.2.
As of November 10, 2006, our Host Affiliate companies were:
1. Restorative Health Services, Nashville, TN
2. Mandelbaum O&P, Port Jefferson, NY (covers New England as well)
3. Douglass Orthotics & Prosthetics, Seattle, WA
4. Union Prosthetics, Pittsburgh, PA
5. Advanced O&P, Springfield, MO (operates in MO, AR, KS, and OK)
6. AZ Prosthetics, Scottsdale, AZ (also operates in CA, and NC)
7. Orthotic Solutions, Fairfax, VA (also operates in MD)
8. Temecula Valley O&P, Temecula, CA
9. Hemet O&P Los Angeles, CA
10. Michigan Orthotics & Prosthetics, Saganaw MI
11. American Orthopedics, Columbus OH
12. Harlingen O&P, Harlingen TX
13. Land of Lakes O&P Minneapolis, MN, and St. Paul WI
14. O&P Clinical Technologies, Gainesville, FL
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.
PLAN OF OPERATIONS
During October 2005, our 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
7,000,000 shares of our common stock in connection with such contracts.
We have established working relationships with fourteen Host Affiliates
operating in approximately 19 states. In establishing the relationships with the
fourteen Host Affiliates, we also provided one-on-one pediatric training to
twelve prosthetists who are employed by those Host Affiliates. We currently plan
to hire one more certified prosthetists and two additional support personnel
during the next twelve months, funding permitting, of which there can be no
assurance.
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As of December 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, assuming we sell an additional $900,000 in Convertible
Debentures to the Purchasers pursuant to the Securities Purchase Agreement
subsequent to the filing of this report. However, if we are unable to file or
gain effectiveness of a Registration Statement to register the shares of common
stock underlying the Convertible Debentures and are therefore unable to sell the
additional tranches of Convertible Debentures, we anticipate only being able to
continue our business operations for three to four months, without raising
additional financing. If we are required to raise additional funding other than
through the sale of the additional tranches of Convertible Debentures, we
anticipate such funds to be raised through the sale of debt and/or equity
securities. We received $600,000 on May 30, 2006 (less closing costs and
structuring fees), from the sale of certain Convertible Debentures described
above. Assuming we receive and are able to sell the additional tranches of
Convertible Debentures, 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.
Increases in our advertising and marketing budget which we were able to
implement due to the $600,000 we raised through the sale of Convertible
Debentures in May 2006, have allowed us to undertake the following advertising
and marketing activities:
o The composition of and distribution of certain feature newspaper
articles through our agreement with Global, pursuant to which we
agreed to pay Global an aggregate of $160,000 worth of our common
stock, based on the trading value of our common stock on certain
payment dates, as described in greater detail above under "Recent
Events," of which approximately $48,750 in common stock has been
issued to date; and
o Publicity and marketing campaign, pursuant to which we previously
issued 7,000,000 shares of common stock to certain consultants.
Additionally, we believe the increases in our advertising and marketing budget
will allow us to undertake the following activities during the next twelve (12)
months, funding permitting:
o The production, filming, editing and narration of informational
videos on the value of modern prosthetic options for children, which
videos describe the success stories we have had in helping children
overcome limb loss by fitting such children with artificial limbs, as
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well as the distribution of such videos to fellow pediatric
professionals such as nurses, physical therapists, doctors and
hospital-based family counselors nationally, at a cost of
approximately $300,000;
o Costs associated with publicizing and scholarships for our four
day "whole family summer get-together" for children with a limb-loss
and their families, at a cost of approximately $50,000;
o Travel and associated costs involved with appearances on
television shows, medical conventions and nursing schools at a cost of
approximately $20,000; and
o Sponsorship costs of non-profit organizations such as the
"Amputee Coalition of American" and the Para-Olympics, at a cost of
approximately $50,000.
As stated above, we 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 Debentures 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.
Moving forward, we plan to work towards becoming traded on the Over-The-Counter
Bulletin Board ("OTCBB") by filing a revised Form 10-SB registration statement
filing with the Commission to respond to the Commission's comments, obtaining
shareholder approval to increase our authorized shares of common stock to allow
for sufficient authorized but unissued shares of common stock for the holders of
the Convertible Debentures and Warrants to convert such Debentures and exercise
such Warrants into and to file a Form SB-2 registration statement with the
Commission to register the shares of common stock underlying the Convertible
Debentures and issuable upon exercise of the Warrants. Furthermore, we hope to
gain approval to trade our common stock on the OTCBB during fiscal 2007, which
we believe will increase the liquidity of our common stock, of which there can
be no assurance.
COMPARISON OF OPERATING RESULTS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2005
We had revenue of $195,230 for the three months ended September 30, 2006,
compared to revenue of $104,048 for the three months ended September 30, 2005,
an increase in revenue of $91,182 or 87.6% from the prior period. The increase
in revenue for the three months ended September 30, 2006, compared to the three
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months ended September 30, 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, which we began during the fiscal year ended
2006 (described above), as well as a significant number of re-fittings of
existing patients due to such patient's physical growth.
We had total operating expenses of $625,199 for the three months ended September
30, 2006, compared to total operating expenses of $210,014 for the three months
ended September 30, 2005, an increase in total operating expenses of $415,185 or
198% from the previous years period. The increase in total operating expenses
was mainly due to a $375,129 or 223% increase in selling, general and
administrative expenses for the three months ended September 30, 2006, compared
to the three months ended September 30, 2005, which increase was due to
increased marketing expenses in connection with our advertising and marketing
campaign (described above), and increases in our legal and accounting expenses
in connection with our amended Form 10-SB registration statement filings and the
preparation of our public filings, which expenses were not present during the
three months ended September 30, 2005, as we were not a public reporting company
at that time, as well as an increase of $1,271 in depreciation expense, to
$5,959 for the three months ended September 30, 2006, compared to $4,688 for the
three months ended September 30, 2005, in connection with an increase in our
depreciable asset base during the year ended June 30, 2006, and a $38,785 or
104% increase in cost of sales, to $76,001 for the three months ended September
30, 2006, compared to $37,216 for the three months ended September 30, 2005,
which increase in cost of sales was directly attributable to increased purchases
of parts and components in connection with our increased sales for the three
months ended September 30, 2006, compared to the prior period.
Selling, general and administrative expenses as a percentage of revenue for the
three months ended September 30, 2006 were 278%, compared to selling, general
and administrative expenses as a percentage of revenue of 162% for the three
months ended September 30, 2005, which represented an increase in selling,
general and administrative expenses as a percentage of revenue of 116% from the
prior period. This increase was mainly due to the 223% increase in selling,
general and administrative expenses for the three months ended September 30,
2006, which was not sufficiently offset by the 87.6% increase in revenue for
September 30, 2006. 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 $429,969 for the three months ended
September 30, 2006, compared to a total loss from operations of $105,966 for the
three months ended September 30, 2005, an increase of $324,003 or 306% from the
prior period. The increase in loss from operations was mainly caused by the
$415,185 or 198% increase in total operating expenses (which was mainly due to
the 223% increase in selling, general and administrative expenses) for the three
months ended September 30, 2006, compared to the three months ended September
30, 2005, which was not sufficiently offset by the 87.6% increase in revenue for
the three months ended September 30, 2006, compared to the prior period.
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We had total other income of $1,112,049 for the three months ended September 30,
2006, compared to total other expense of $6,031 for the three months ended
September 30, 2005, which represented an increase in other income of $1,118,080
or 18,338% from the prior period. The increase in net other income was mainly
due to the $1,202,540 increase in change in value of derivative financial
instruments, which accounting income totaled $1,202,540 for the three months
ended September 30, 2006, and was not represented for the three months ended
September 30, 2005, in connection with the change in value of our outstanding
Convertible Debentures, which was offset by an increase of $84,461 of interest
expense also in connection with our outstanding Convertible Debentures, to
interest expense of $90,492 for the three months ended September 30, 2006,
compared to interest expense of $6,031 for the three months ended September 30,
2005.
We had total net income of $682,080 for the three months ended September 30,
2006, compared to a total net loss of $111,997 for the three months ended
September 30, 2005, an increase in net income of $794,077 or 682% from the
previous period. The increase in net income was mainly due to the $1,118,080
increase in total other income, which was mainly due to the $1,202,540 of change
in the value of derivative financial instruments in connection with the fair
value of our Convertible Debentures and our $91,182 or 87.6% increase in
revenues, which was offset by our $375,129 or 223% increase in general and
administrative expenses for the three months ended September 30, 2006, compared
to the three months ended September 30, 2005. Investors should keep in mind that
our net income for the three months ended September 30, 2006, was the result of
changes in the value of our derivative financial instruments and not the result
of our core operations.
LIQUIDITY AND CAPITAL RESOURCES
We had total assets of $759,773 as of September 30, 2006, compared with total
assets of $964,844 as of June 30, 2006, which represented a $205,071 or 21.3%
decrease in total assets from the prior period.
Total assets as of September 30, 2006, included current assets of $495,335,
furniture and equipment, net of accumulated depreciation, of $64,992, and
deferred financing cost of $199,446. Current assets included cash and cash
equivalents of $54,466, trade and accounts receivable, net of $309,379, and
prepaid expenses and other current assets of $11,825, and current portion of
deferred financing cost, net of $119,665.
We had total liabilities of $4,452,301 as of September 30, 2006, compared to
total liabilities of $5,600,571 at June 30, 2006, representing a decrease in
total liabilities of $1,148,270 or 20.5%.
Total liabilities as of September 30, 2006 included current liabilities of
$4,409,916, consisting of trade accounts payable of $123,361; accrued
liabilities of $284,230, which included deferred salary payable to our officers;
current portion of convertible debt of $85,000 which includes the loans entered
into in March 2006 and April 2006, as described in greater detail below; amounts
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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
derivative financial instruments of $3,916,825, in connection with our
Convertible Debentures and Warrants (explained in greater detail above); and
non-current liabilities consisting of deferred rent of $11,871 and long term
portion of convertible debt of $30,514.
We had a working capital deficit of $3,914,581 and an accumulated deficit of
$11,817,249 as of September 30, 2006.
In April 2006, we borrowed $50,000 from a shareholder of the Company, and issued
that individual a promissory note and warrants 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 was renewed for an additional
six months, at the option of the holder, through March 2007. The shareholder has
the option to convert this loan into 1,428,571 shares of our common stock at the
rate of one share for each $0.035 then owed. The shareholder also has 1,428,571
outstanding warrants to purchase shares of our common stock at an exercise price
of $0.045 per share, which warrants expire if unexercised on May 22, 2008.
On March 1, 2006, and March 21, 2006, we entered into two separate loans for
$17,500, with two separate 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 of issuance. Both loans have been extended
through November of 2006. The loans are convertible into an aggregate of
1,000,000 shares of our common stock at the rate of one share for each $0.035
owed.
We had total net cash used by operating activities of $208,362 for the three
months ended September 30, 2006, which was mainly due to $1,202,540 of change in
value of derivative liability, offset by $682,080 of net income and $261,116 of
stock-based compensation, which included amounts amortized in connection with
shares of common stock issued in connection with our agreement with Global
Media, described above, as well as approximately 7,000,000 shares of common
stock issued in connection with twelve month consulting agreements entered into
in October 2005 for investor relations and consulting services.
We had net cash used in investing activities of $11,813 for the three months
ended September 30, 2006, which was used solely in connection with the purchase
of furniture and equipment.
We did not have net cash provided by financing activities for the three months
ended September 30, 2006.
In April 2006, we borrowed $50,000 from a shareholder of the Company, and issued
that individual a promissory note and warrants in connection with such loan. The
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promissory note bears interest at the rate of 12% per annum, and is 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.
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,
which are due May 30, 2009, $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 shares of 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 upon the sale of common stock for funding
our operations. In connection with such funding, we issued 4,700,000 shares of
common stock at prices ranging from $0.035 to $0.05 per share during the year
ended June 30, 2006, for aggregate net proceeds of $220,000. Additionally, we
issued 8,696,437 shares of common stock to consultants ranging from $0.08 and
$0.11 per share during the year ended June 30, 2006 and recognized compensation
expense of $482,360.
As of December 2006, we believe we can operate for approximately the next twelve
(12) months assuming we sell an additional $900,000 in Convertible Debentures
subsequent to the filing of this report, 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. However, we believe that will need to raise additional financing in the
next three to four months if we are unable to file and obtain effectiveness of a
registration statement with the Commission, which filing and effectiveness
trigger the additional sales of the $900,000 in additional Convertible
Debentures. If we are required to raise additional funding, we will likely do
so through the sale of debt or equity securities.
We also plan to increase our yearly advertising and marketing budget
approximately five fold, for the fiscal year ending June 30, 2007, compared to
the fiscal year ending June 30, 2006, by utilizing a large portion of the
$900,000 which we plan to receive pursuant to the subsequent funding tranches,
assuming such funds are received, 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.
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However, investors should keep in mind that any amounts of funding we receive
pursuant to the Convertible Debentures will be reduced by fees paid to the
lending source and legal and accounting costs associated with our need to file
and obtain effectiveness of a Form SB-2 Registration Statement to register the
Debentures 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.
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 several months.
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 recognize revenues from the sale of prosthetic devices and related services
generated through the billing departments of the Host-Affiliates upon the
performance of services by that Host-Affiliate.
When we directly bill customers or bill customers through our Host-Affiliates,
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. We require each patient to
sign a standard acknowledgement of delivery of device form in connection with
each sale at the time of sale, which provides that the patient has 1) received
the device and 2) is satisfied with the device. Our patients normally accept our
products upon delivery.
When we directly bill customers or bill customers through our Host-Affiliates,
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,
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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 us
to reflect in our income statement, instead of pro forma disclosures in our
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 of SFAS 123R and, accordingly, the adoption
had no impact on us.
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS
Statement No. 154 ("SFAS 154"), Accounting Changes and Error Corrections. SFAS
154 requires that, when a company changes its accounting policies, the change
must be applied retrospectively to all prior periods presented instead of a
cumulative effect adjustment in the period of the change. SFAS 154 may also
apply when the FASB issues new rules requiring changes in accounting. If the new
rule allows cumulative effect treatment, it will take precedence over SFAS 154.
This statement is effective for fiscal years beginning after December 15, 2005.
The adoption of SFAS 154 is not expected to have a significant impact on the
Company's financial position or its results of operations.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income taxes ("FIN 48").
FIN 48, which is an interpretation of SFAS No. 109, "Accounting for Income
Taxes," provides guidance on the manner in which tax positions taken or to be
taken on tax returns should be reflected in an entity's financial statements
prior to their resolution with taxing authorities. The Company is required to
adopt FIN 48 during the first quarter of fiscal 2008. The Company is currently
evaluating the requirements of FIN 48 and has not yet determined the impact, if
any; this interpretation may have on its consolidated financial statements.
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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 SUBSTANTIAL OPERATING LOSSES AND MAY INCUR ADDITIONAL
OPERATING LOSSES IN THE FUTURE.
During the fiscal years ended June 30, 2006 and 2005, we incurred net losses of
$4,413,417 and $4,356,519, respectively, and experienced negative cash flows
from operations of $436,226 and $298,454, respectively. During the three months
ended September 30, 2006, we had net income of $682,080, which net income was
the result of changes in the value of our derivative financial instruments and
not the result of our core operations, and negative cash flows from operations
of $208,362. Additionally, we had negative working capital of $3,914,581 as of
September 30, 2006. Our historical losses have been 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 79 fitted in
fiscal 2006; 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 charges to income of $482,360 and $4,020,264 during the years ended
June 30, 2006 and 2005, 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 with three (3) year
terms, and agreed to sell them an additional $900,000 in Convertible Debentures,
upon the occurrence of us filing a registration statement to register the shares
underlying the Convertible Debentures and the effectiveness date of such
registration statement. These Convertible Debentures and interest may be
converted into shares of our common stock at a discount to market. However, if
such Convertible Debentures are not converted into shares of our common stock,
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
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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. Putback-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.
WE MAY NOT BE ELIGIBLE TO REGISTER ALL OF THE SHARES OF COMMON STOCK UNDERLYING
THE DEBENTURES AND THE WARRANTS, WHICH COULD HAVE A MATERIALLY ADVERSE EFFECT ON
OUR OPERATIONS.
In connection with numerous recently filed private offering of public equity
registration statements (such as our planned registration statement to file the
shares of common stock underlying the Debentures and Warrant), the Commission
has taken the view that in the case where such registration statements attempt
to register a large number of shares of common stock representing a large
percentage of an issuer's public float, that such resellers are deemed
affiliates and the relating offerings are therefore deemed primary offerings.
When such registration statements are deemed primary offerings, and the
resellers are deemed affiliates, such registration statements are no longer
eligible to be filed under Rule 415(a)(1) of the Securities Act of 1933, which
may result in delays in the effectiveness of such filings and/or required
modifications in the number of securities being registered pursuant to such
registration statements. As we have agreed to register a large number of
shares pursuant to the Registration Rights Agreement with the Purchasers, which
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shares represent a large portion of our public float, pursuant to Rule
415(a)(1), this recent stance by the Commission may severely limit and/or
prevent us from registering the shares which the Debentures are convertible into
and/or that the Warrants are exercisable for with the Commission (the
"Registrable Securities"). If we are delayed in our ability to file a
registration statement with the Commission and/or are prevented from registering
all of the Registrable Securities with the Commission as we have previously
agreed to do pursuant to the Registration Rights Agreement, we could face
penalties in connection with the Registration Rights Agreement (as described in
greater detail herein) and/or could be forced to repay the Debentures in cash as
opposed to shares of common stock. These penalties may decrease the amount of
cash we have on hand and may cause us to curtail our business plan.
Additionally, if we are unable to effectively register the Registrable
Securities, we could be forced to repay the Purchasers in cash, which funds we
do not currently have. If we are forced to raise additional funds to repay the
Purchasers, it could cause substantial dilution to our existing shareholders and
if such funds are not available, we could be forced to curtail or abandon our
business operations, which could cause the value of our securities to become
worthless.
IF WE CANNOT COLLECT OUR ACCOUNTS RECEIVABLE OUR BUSINESS, RESULTS OF
OPERATIONS, AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED.
As of September 30, 2006, our accounts receivable over 120 days old represented
over 50% of total accounts receivable outstanding. If we cannot collect our
accounts receivable, our business, results of operations, and financial
condition could be adversely affected.
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 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.
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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 years ended June
30, 2005 and 2006, and for the three months ended September 30, 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 years
ended June 30, 2006 and 2005 we had net losses of $4,413,417 and $4,356,519,
respectively and net cash flows used in operating activities of $436,226 and
$298,454, respectively. During the three months ended September 30, 2006, we
had net income of $682,080, which net income was the result of changes in the
value of our derivative financial instruments and not the result of our core
operations, and we had a working capital deficit of $3,914,581 as of September
30, 2006. Furthermore, we had an accumulated deficit of $11,817,249 at
September 30, 2006. 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.
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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 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, including reviews from
Medicare and Texas Medicaid, in connection with rules and regulations we are
required to follow and comply with as a result of our position as a Medicare and
Texas Medicaid approved provider. Any adverse review, audit or investigation
could result in:
o refunding of amounts we have been paid pursuant to our government
contracts;
o imposition of fines, penalties and other sanctions on us;
o loss of our right to participate in various federal programs;
o damage to our reputation in various markets; or
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o 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 November 10, 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 1,725,111 shares of our
common stock. As a result, we do not have a sufficient number of authorized and
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 OUR
SHAREHOLDERS WILL REALIZE A RETURN ON THEIR INVESTMENT IS BY SELLING THEIR
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, the ability of our investors to generate a profit our common stock will
likely depend on their 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.
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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 November 10, 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 November 10, 2006, our President and Chief Executive Officer, Linda
Putback-Bean beneficially owned 30,210,251 shares of common stock or
approximately 31% of our outstanding common stock. Additionally, Ms.
Putback-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. Putback-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
50.2% of our total voting power based on 118,274,889 voting shares, which
includes the 98,274,889 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
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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.
WE MAY BE REQUIRED TO IMMEDIATELY PAY THE $1,500,000 IN DEBENTURES, OF WHICH
$600,000 IS CURRENTLY OUTSTANDING AND/OR BE FORCED TO PAY SUBSTANTIAL PENALTIES
TO THE DEBENTURE HOLDERS UPON THE OCCURRENCE OF AND DURING THE CONTINUANCE OF AN
EVENT OF DEFAULT.
Upon the occurrence of and during the continuance of any Event of Default under
the Debentures, which includes the following events:
o Our failure to pay any principal or interest on the Debentures when
due;
o Our failure to issue shares of common stock to the Purchasers in
connection with any conversion as provided in the Debentures;
o Our failure to file a Registration Statement covering the shares
of common stock convertible which the Debentures are convertible into
prior to January 15, 2007, or obtain effectiveness of such
Registration Statement by April 16, 2007, 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;
o Our entry into bankruptcy or the appointment of a receiver or trustee;
o Our breach of any covenants in the Debentures or Purchase
Agreement, or our breach of any representations or warranties included
in any of the other agreements entered into in connection with the
Closing;
o If any judgment is entered against us or our property for more
than $100,000; or
o 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;
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
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Debentures), multiplied by the highest closing price for our common stock during
the period we are in default. As we do not currently have sufficient cash on
hand to repay the debentures, if an Event of Default occurs under the
Debentures, we could be forced to curtail or abandon our operations and/or sell
substantially all of our assets in order to repay all or a part of the
Debentures.
THE DEBENTURES ARE CONVERTIBLE INTO SHARES OF OUR COMMON STOCK AT A DISCOUNT TO
MARKET, WHICH DISCOUNT TO MARKET MAY DECREASE ONLY IF WE ARE ABLE TO MEET
CERTAIN DEADLINES.
The conversion price of the Debentures is currently equal to 50% of the trading
price of our common stock, which will likely cause the value of our common
stock, if any, to decline in value as subsequent conversions are made, as
described in greater detail under the Risk Factors below.
THE ISSUANCE AND SALE OF COMMON STOCK UNDERLYING THE CONVERTIBLE NOTES AND THE
WARRANTS MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As sequential conversions of the Debentures and sales of such converted shares
take place, the price of our common stock may decline, and as a result, the
holders of the Debentures will be entitled to receive an increasing number of
shares in connection with their conversions, which shares could then be sold in
the market, triggering further price declines and conversions for even larger
numbers of shares, to the detriment of our investors. Upon the successful
registration of the shares of common stock which the Debentures are convertible
into and the Warrants are exercisable for, all of the shares issuable upon
conversion of the Debentures and upon exercise of the Warrants, may be sold
without restriction. The sale of these shares may adversely affect the market
price, if any, of our common stock.
In addition, the common stock issuable upon conversion of the Debentures and
exercise of the Warrants may represent overhang that may also adversely affect
the market price of our common stock. Overhang occurs when there is a greater
supply of a company's stock in the market than there is demand for that stock.
When this happens the price of the company's stock will decrease, and any
additional shares which shareholders attempt to sell in the market will only
further decrease the share price. The Debentures may be converted into common
stock at a discount to the market price of our common stock at 50% of the then
trading value of our common stock, and such discount to market, provides the
holders with the ability to sell their common stock at or below market and still
make a profit. In the event of such overhang, holders will have an incentive to
sell their common stock as quickly as possible. If the share volume of our
common stock cannot absorb the discounted shares, the value of our common stock
will likely decrease.
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THE ISSUANCE OF COMMON STOCK UNDERLYING THE DEBENTURES AND THE WARRANTS WILL
CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION.
The issuance of common stock upon conversion of the Debentures and exercise of
the Warrants will result in immediate and substantial dilution to the interests
of other stockholders since the Debenture holders may ultimately receive and
sell the full amount issuable on conversion or exercise. Although the Debenture
holders may not convert the Debentures and/or exercise their Warrants if such
conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock, this restriction does not prevent the Debenture
holders from converting and/or exercising some of their holdings, selling those
shares, and then converting the rest of their holdings, while still staying
below the 4.99% limit. In this way, the Debenture holders could sell more than
this limit while never actually holding more shares than this limit allows. If
the Debenture holders choose to do this it will cause substantial dilution to
the then holders of our common stock.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR DEBENTURES COULD
REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH MAY
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND CAUSE DILUTION TO OUR
EXISTING STOCKHOLDERS.
Our existing stockholders will experience substantial dilution of their
investment upon conversion of the Debentures and exercise of the Warrants. The
Debentures will be convertible into shares of our common stock at a discount to
market of 50% of the trading value of our common stock. As a result, the number
of shares issuable could prove to be significantly greater in the event of a
decrease in the trading price of our common stock, which decrease would cause
substantial dilution to our existing stockholders. As sequential conversions and
sales take place, the price of our common stock may decline and if so, the
holders of the Debentures would be entitled to receive an increasing number of
shares, which could then be sold, triggering further price declines and
conversions for even larger numbers of shares, which would cause additional
dilution to our existing stockholders and would likely cause the value of our
common stock to decline.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR DEBENTURES MAY
ENCOURAGE INVESTORS TO SELL SHORT OUR COMMON STOCK, WHICH COULD HAVE A
DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The Debentures will be convertible into shares of our common stock at a discount
to market of 50%. The significant downward pressure on the price of our common
stock as the Debenture holders convert and sell material amounts of our common
stock could encourage investors to short sell our common stock. This could place
further downward pressure on the price of our common stock. In addition, not
only the sale of shares issued upon conversion of the Debentures or exercise of
the Warrants, but also the mere perception that these sales could occur, may
adversely affect the market price of our common stock.
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WE MUST SATISFY CERTAIN CONDITIONS BEFORE THE SELLING SECURITY HOLDERS ARE
OBLIGATED TO PURCHASE THE REMAINING $900,000 OF DEBENTURES.
We sold $600,000 of Debentures in May 2006. We also received a commitment to
purchase an additional $400,000 of Debentures upon our filing of a Registration
Statement to register the shares convertible into common stock in connection
with the Debentures, and $500,000 of Debentures, upon the effectiveness of such
Registration Statement. If we fail to file the Registration Statement, and/or
the Registration Statement is not declared effective or an Event of Default
occurs under the Debentures, as defined herein, the Debenture holders will have
no obligation to purchase the remaining tranches of Debentures. If the Debenture
holders do not purchase the remaining Debentures, we will not raise the
additional $900,000. This could force us to curtail or abandon our business
plan, which would decrease the value of our securities.
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 amended Form 10-SB, and Form SB-2
registration statement (to register the shares underlying the Purchasers'
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Debentures and Warrants) 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
reporting 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.
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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. The most important
efficiency program we have instituted to date was entering into contracts with
our Host affiliates. By acquiring laboratory access from such Host Affiliates,
and acquiring the Host Affiliates help in billing and collections from third
party payers such as insurance companies and their respective state-centered
Medicaid programs, we have also cut down our travel costs, and our costs of
added staff to invoice and collect receivables. Additionally, in an attempt to
maximize our efficiency, we modified our "just in time" inventorying of
components for prosthetic devices to allow sufficient time for us to send such
components via less expensive ground freight instead of higher priced overnight
delivery. Finally, we have instituted a ten day lead-time policy on our airline
reservations to achieve lower air-fares to our patients, when we are required to
travel across the country, except in cases of emergencies.
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
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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
an average of $75.0 million 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
("ABC"). Our Prosthetists are certified by the State of Texas and by the ABC.
When we fit children in other States which have state licensure laws, we work,
under the supervision of licensed Prosthetists in those states.
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
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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. Our added costs of complying with the
HIPPA requirements relate primarily to attaining the on-going educational
credits needed for our Prosthetists to remain current with the professional
standards of practice. These credits are achieved by attending work-shops and
seminars in various locations throughout North America. During fiscal year ended
June 30, 2006 we spent approximately $5,000 complying with these on-going
educational needs. However, since our original formation, we have been aware of
impending HIPPA regulations, and have set up our systems and procedures to
comply with HIPPA requirements in view of such regulations. As a result, added
costs due to compliance with HIPPA guidelines have been minimal and immaterial.
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 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
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timely file our Quarterly Reports on Form 10-QSB for the quarters ended December
31, 2005, March 31, 2006, and September 30, 2006 and we failed to timely file
our Annual Report on Form 10-KSB for the period ending June 30, 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.
(b) Changes in internal control over financial reporting. 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.
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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
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EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------------- -------------------------------------
Exhibit 3.1(1) Articles of Incorporation (Pediatric Prosthetics,
Inc.[Texas]) dated September 15, 2003
Exhibit 3.2(4) Restated Articles of Incorporation of the Company
(March 9, 2001)
Exhibit 3.3(4) Reinstatement (June 29, 2003)
Exhibit 3.4(1) Amendment to Articles of Incorporation of the
Company (October 31, 2003)
Exhibit 3.5(1) Amendment to Articles of Incorporation of the
Company (November 7, 2003) (Series A Convertible
Preferred Stock Designation of Rights
Exhibit 3.6(4) Bylaws of the Company
Exhibit 4.1(1) Shareholder Voting Agreement dated October 31,
2003
Exhibit 10.1(1) Acquisition Agreement between Grant Douglas
Acquisition Corp. and Pediatric Prosthetics, Inc. dated
October 10, 2003
Exhibit 10.2(4) Sample Host Affiliate Agreement
Exhibit 10.3(2) Settlement Agreement with Secured Releases, LLC
Exhibit 10.3(3) Securities Purchase Agreement
Exhibit 10.4(3) Callable Secured Convertible Note with AJW
Offshore, Ltd.
Exhibit 10.5(3) Callable Secured Convertible Note with AJW
Partners, LLC
Exhibit 10.6(3) Callable Secured Convertible Note with AJW
Qualified Partners, LLC
Exhibit 10.7(3) Callable Secured Convertible Note with New
Millennium Capital Partners II, LLC
Exhibit 10.8(3) Stock Purchase Warrant with AJW Offshore, Ltd.
Exhibit 10.9(3) Stock Purchase Warrant with AJW Partners, LLC
Exhibit 10.10(3) Stock Purchase Warrant with AJW Qualified
Partners, LLC
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Exhibit 10.11(3) Stock Purchase Warrant with New Millennium Capital
Partners II, LLC
Exhibit 10.12(3) Security Agreement
Exhibit 10.13(3) Intellectual Property Security Agreement
Exhibit 10.14(3) Registration Rights Agreement
Exhibit 10.15(4) Consulting Agreement with National Financial
Communications Corp.
Exhibit 10.16(4) Warrant Agreement with Lionheart Associates, LLC
doing business as Fairhills Capital
Exhibit 10.17(4) Investor Relations Consulting Agreement with Joe
Gordon
Exhibit 10.18(5) Waiver of Rights Agreement
Exhibit 31.1* Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2* Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1* Chief Executive Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2* Chief Financial Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith.
(1) Filed as exhibits to our Form 10-SB, filed with the Commission on
February 13, 2006, and incorporated herein by reference.
(2) Filed as an exhibit to our quarterly report on Form 10-QSB, filed with
the Commission on July 5, 2006, and incorporated herein by reference.
(3) Filed as exhibits to our report on Form 8-K, filed with the Commission
on June 2, 2006, and incorporated herein by reference.
(4) Filed as exhibits to our Form 10-SB, filed with the Commission on July
14, 2006, and incorporated herein by reference.
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(5) Filed as an exhibit to our Form 10-KSB, filed with the Commission on
October 27, 2006, and incorporated herein by reference.
b) REPORTS ON FORM 8-K:
We filed no reports on Form 8-K during the three months ended September 30,
2006.
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 5, 2006
By: /s/ Kenneth W. Bean
---------------------------
Kenneth W. Bean
Principal Financial Officer
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