UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from to
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Commission file number 000-51804
PEDIATRIC PROSTHETICS, INC.
---------------------------
(Exact name of small business issuer as specified in its charter)
IDAHO 68-0566694
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12926 Willowchase Drive, Houston, Texas 77070
---------------------------------------------
(Address of principal executive offices)
(281) 897-1108
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(Registrant's telephone number)
N/A
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(Former name and address)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] No [ ]
As of May 9, 2006, 97,828,462 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].
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
The Registrant is filing this Amended Report on Form 10-QSB, to include restated
financial statements for the three and six months ended December 31, 2005; to
update its comparison of operating results for the three and six months ended
December 31, 2005, compared to the three and six months ended December 31, 2004;
and to update its liquidity and capital resources discussion in connection with
the revised financial statements contained herein. Additionally, all of the
references to financial numbers relating to December 31, 2005 included in this
amended filing have been updated throughout with the restated financial
information contained herein. Specifically, the Registrant's financial
statements were restated to reflect the proper accrual of receivables and the
presentation of sales through Host-Affiliates on a gross basis, to properly show
gross revenue and cost of sales, to add disclosure of the Registrant's allowance
for doubtful accounts, and to record stock-based compensation on a pro rata
basis over the term of the consulting agreements. Also, the Registrant has
updated its controls and procedures language described below. Other than those
sections described above, all portions of this Amended Form 10-QSB remain
unchanged from the Registrant's original Form 10-QSB filing for the period
ending December 31, 2005, as filed with the Commission on June 28, 2006, and
investors are encouraged to review the Registrant's most recent filings with the
Commission for updated and current information on the operations and financial
condition of the Registrant before making any investment in the Registrant.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEDIATRIC PROSTHETICS, INC.
UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
PEDIATRIC PROSTHETICS, INC.
TABLE OF CONTENTS
PAGE
Unaudited Balance Sheets as of December 31, 2005 (Restated) and F-3
June 30, 2005 (Restated)
Unaudited Statements Of Operations for the Three and Six
Months Ended December 31, 2005 (Restated) and 2004 F-4
Unaudited Statement Of Stockholders' Deficit for the Six Months Ended
December 31, 2005 (Restated) F-5
Unaudited Statements Of Cash Flows for the Six Months Ended
December 31, 2005 (Restated) and 2004 F-6
Notes To Unaudited Financial Statements F-8
PEDIATRIC PROSTHETICS, INC.
UNAUDITED BALANCE SHEETS
DECEMBER 31, 2005 AND JUNE 30, 2005
DECEMBER 31, 2005 JUNE 30, 2005
(RESTATED) (RESTATED)
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ASSETS
Current assets:
Cash and cash equivalents $ 39,322 $ 29,818
Trade accounts receivable, net 150,302 107,851
Prepaid expenses and other current assets 15,848 16,492
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Total current assets 205,472 154,161
Furniture and equipment, net 68,302 81,229
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Total assets $ 273,774 $ 235,390
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable $ 125,925 $ 89,280
Accrued liabilities 53,000 183,791
Convertible debt - 201,045
Due to related party 500 500
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Total current liabilities 179,425 474,616
Deferred rent 14,188 14,188
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Total liabilities 193,613 488,804
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Commitments and contingencies:
Stockholders' equity (deficit):
Preferred stock, par value $0.001; authorized
10,000,000; none issued and outstanding 1,000 1,000
Common stock, par value $0.001; authorized 100,000,000
shares; issued and outstanding 99,378,452 and
88,878,452 at December 31, 2005 and June 30, 2005,
respectively 99,378 88,878
Additional paid-in capital 8,061,228 7,742,620
Accumulated deficit (8,081,445) (8,085,912)
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Total stockholders' equity (deficit) 80,161 (253,414)
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Total liabilities and
stockholders' equity (deficit) $ 273,774 $ 235,390
================= ==============
The accompanying notes are an integral part of these financial statements
F-3
PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
2005 2005
(RESTATED) 2004 (RESTATED) 2004
------------------ ----------- ---------------- ------------
Revenue $ 165,695 $ 124,089 $ 269,743 $ 216,600
------------------ ----------- ---------------- ------------
Operating expenses:
Cost of sales, except for items stated
separately below 73,599 27,085 110,815 47,285
Depreciation expense 5,427 4,612 10,115 9,224
Selling, general and administrative expenses 268,713 3,825,925 436,823 4,232,537
------------------ ----------- ---------------- ------------
Total operating expenses 347,739 3,857,622 557,753 4,289,046
------------------ ----------- ---------------- ------------
Loss from operations (182,044) (3,733,533) (288,010) (4,072,446)
------------------ ----------- ---------------- ------------
Other income and (expense):
Interest income - 43 - 83
Interest expense (9,480) (206) (15,511) (7,927)
Loss on disposal of equipment (2,811) - (2,811) -
Gain on extinguishment of debt 310,799 - 310,799 -
------------------ ----------- ---------------- ------------
Other income (expense), net 298,508 (163) 292,477 (7,844)
------------------ ----------- ---------------- ------------
Net income (loss) $ 116,464 $(3,733,696) $ 4,467 $ (4,080,290)
================== =========== ================ ============
Net loss per common share - basic
and diluted $ 0.00 $ (0.07) $ 0.00 $ (0.09)
================== =========== ================ ============
Weighted average shares of common
stock outstanding - basic and
diluted 95,954,539 51,046,750 93,481,713 46,032,175
================== =========== ================= ============
The accompanying notes are an integral part of these financial statements
F-4
PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Six Months Ended December 31, 2005
Additional
Preferred Stock Common Stock Paid- In Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- --------- ---------- --------- ---------- ------------ ---------
Balance at June 30, 2005, as originally
reported 1,000,000 $ 1,000 88,878,452 $ 88,878 $7,742,620 $ (8,120,341) $(287,843)
Adjustment to properly recognize revenue
and cost of services for services
by Host Affiliates - - - - - 34,429 34,429
--------- --------- ---------- --------- ---------- ----------- --------
Balance at June 30, 2005, as restated 1,000,000 1,000 88,878,452 88,878 7,742,620 (8,085,912) (253,414)
Common stock issued for cash - - 4,500,000 4,500 205,500 - 210,000
Common stock issued for services
to non-employees, as restated - - 10,000,000 10,000 109,108 - 119,108
Common stock surrendered to
treasury by major stockholder/
officer/director - - (4,000,000) (4,000) 4,000 - -
Net income, as restated - - - - - 4,467 4,467
--------- --------- ---------- --------- ---------- ------------ ---------
Balance at December 31, 2005, as
restated 1,000,000 $ 1,000 99,378,452 $ 99,378 $8,061,228 $ (8,081,445) $ 80,161
========== ========= ========== ========= ========== ============ =========
The accompanying notes are an integral part of these financial statements
F-5
PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
2005
(RESTATED) 2004
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Cash Flows From Operating Activities
Net income (loss) $ 4,467 $(4,080,290)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation expense 10,115 9,224
Loss on disposal of equipment 2,811 -
Stock-based compensation 119,108 3,934,139
Provision for doubtful accounts 22,921 30,000
Gain on extinguishment of debt (310,799) -
Changes in operating assets and liabilities:
Accounts receivable (65,372) (67,724)
Prepaid expenses and other current assets 644 (3,012)
Accounts payable 36,645 24,520
Accrued liabilities 8,964 51,611
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Net cash used by operating activities (170,496) (101,532)
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Cash Flows From Investing Activities
Purchase of furniture and equipment - (322)
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Net cash used by investing activities - (322)
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Cash Flows From Financing Activities:
Payment in settlement of convertible debt (30,000) -
Proceeds from common stock, net of expenses 210,000 135,000
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Net cash provided by financing activities 180,000 135,000
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Net increase (decrease) in cash and cash equivalents 9,504 33,146
Cash and cash equivalents, beginning of period 29,818 9,110
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Cash and cash equivalents, end of period $ 39,322 $ 42,256
========== ===========
Supplemental disclosure of cash flow information
Cash paid for interest expense $ 11,731 $ 3,042
Cash paid for income taxes - -
The accompanying notes are an integral part of these financial statements
F-6
PEDIATRIC PROSTHETICS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Pediatric Prosthetics, Inc. (the "Company") is involved in the design
fabrication and fitting of custom-made artificial limbs. The Company's focus is
infants and children and the comprehensive care and training needed by those
infants and children and their parents.
INTERIM FINANCIAL STATEMENTS
The unaudited condensed financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments that are, in the opinion of management, necessary to fairly present
such information. All such adjustments are of a normal recurring nature.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, certain information and footnote
disclosures, including a description of significant accounting policies normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP), have
been condensed or omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2005 Annual Report.
The results of operations for interim periods are not necessarily indicative of
the results for any subsequent quarter or the entire fiscal year ending June 30,
2006.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECENTLY ISSUED PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
123R, which requires companies to recognize in the statement of operations all
share-based payments to employees, including grants of employee stock options,
based on their fair values. Accounting for share-based compensation transactions
using the intrinsic method supplemented by pro forma disclosures will no longer
be permissible. The new statement is effective for public entities no later than
the beginning of the first fiscal year beginning after June 15, 2005. The
Company adopted the new statement on July 1, 2005. The adoption of this new
statement did not affect the Company's results of operations or net income per
share, but may have a significant future effect as the Company will be required
to expense the fair value of all share-based payments.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of Accounting Principles Board Opinion No. 20,
"Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements" ("SFAS 154"). SFAS 154 changes the requirements for the
accounting for, and reporting of, a change in accounting principle. Previously,
voluntary changes in accounting principles were generally required to be
recognized by way of a cumulative effect adjustment within net income during the
period of the change. SFAS 154 requires retrospective application to prior
periods' financial statements, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. SFAS 154 is
effective for accounting changes made in fiscal years beginning after December
15, 2005; however, the statement does not change the transition provisions of
any existing accounting pronouncements. The Company does not believe adoption of
SFAS 154 will have a material effect on its financial position, cash flows or
results of operations.
2. GOING CONCERN CONSIDERATIONS
Since its inception, the Company has suffered significant net losses and has
been dependent on outside investors to provide the cash resources to sustain its
operations. During the six months ended December 31, 2005 and 2004, the Company
had net income of $4,467 and net loss $4,080,290, respectively, and negative
cash flows from operations of $170,496 and $101,532, respectively.
Operating results have produced working capital of $26,047 and stockholders'
equity of only $80,161 at December 31, 2005. The Company's negative financial
results and its current financial position raise substantial doubt about the
Company's ability to continue as a going concern.
The Company is currently implementing plans to deal with going concern issues.
The first step in that plan was its recapitalization into a public shell on
October 10, 2003. Management believes that the recapitalization and its current
plan to become a fully reporting public company will allow the Company, through
private placements of its common stock, to raise the capital to expand
operations to a level that will ultimately produce positive cash flows from
operations.
The Company's longterm viability as a going concern is dependent on certain key
factors, as follows:
- The Company's ability to obtain adequate sources of outside
financing to support near term operations and to allow the Company to
continue forward with current strategic plans.
- The Company's ability to increase its customer base and broaden
its service capabilities.
- The Company's ability to ultimately achieve adequate
profitability and cash flows to sustain continuing operations.
3. RESTATEMENT
The accompanying December 31, 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 $ 169,879
Change in current assets related to
receivables from host affiliates 35,593
------------
Current assets, as restated $ 205,472
============
Current liabilities, as previously reported $ 173,856
Change in current liabilities related to
costs incurred by host affiliates 5,569
------------
Current liabilities, as restated $ 179,425
============
Stockholders' equity, as previously reported $ 50,137
Change in stockholders' equity related to
Change in net loss 800,487
Change in accumulated deficit for
restatement of period ended June 30, 2005 34,429
Recognition of stock-based compensation
over contractual service period (804,892)
------------
Stockholders' equity, as restated $ 80,161
=============
STATEMENT OF OPERATIONS Six Three
Months Months
------------- ----------
Revenue, as previously reported $ 246,233 $ 134,018
Change in revenue related to billings by
host affiliates 23,510 31,677
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Revenue, as restated $ 269,743 $ 165,695
============= ===========
Operating expenses, as previously reported $ 1,334,730 $ 557,066
Change in operating expenses related to
reduction of stock-based
compensation for amounts not yet
earned by the service providers (804,892) (247,242)
Change in cost of goods sold related to
billings by host affiliates 27,915 37,915
------------- -----------
Operating expenses, as restated $ 557,753 $ 347,739
============= ===========
Loss from operations, as previously reported $ (1,088,497) $ (423,048)
Loss from operations, as restated $ (288,010) $ (182,044)
Net loss, as previously reported $ (796,020) $ (124,540)
Net Income, as restated $ 4,467 $ 116,464
Net Income (Loss) per common share - basic
and diluted, as previously reported $ (0.01) $ (0.00)
Net Income (Loss) per common share - basic
and diluted, as restated $ 0.00 $ 0.00
4. CONVERTIBLE DEBT
In November 2005, the Company entered into a settlement agreement regarding its
convertible debt. Under the settlement agreement the Company paid $30,000 for
complete discharge of $201,045 of convertible debt and $139,754 of related
accrued interest. The Company recognized a $310,799 gain on extinguishment of
debt in connection with the settlement.
5. INCOME TAXES
At December 31, 2005 the Company has a net operating loss carry-forward ("NOL")
of approximately $826,000 expiring through 2025. The Company has a deferred tax
asset of approximately $281,000 resulting from this NOL. The loss carry-forwards
related to Grant Douglas Acquisition Corporation prior to the re-capitalization
are insignificant and are subject to certain limitations under the Internal
Revenue Code, including Section 382 of the Tax Reform Act of 1986. Accordingly,
such losses are not considered in the calculation of deferred tax assets. The
ultimate realization of the Company's deferred tax asset is dependent upon
generating sufficient taxable income prior to expiration of the NOL. Due to the
nature of this NOL and because realization is not assured, management has
established a valuation allowance relating to the deferred tax asset at both
December 31, 2005 and June 30, 2005, in an amount equal to the deferred tax
asset.
The difference between the benefit for income taxes and the 34% federal
statutory rate for the three months ended December 31, 2005 and 2004 relates
primarily to non-deductible share-based compensation and increases in the
valuation allowance for deferred tax assets.
6. STOCKHOLDERS' EQUITY
COMMON STOCK ISSUED FOR CASH
From time to time, in order to fund operating activities of the Company, common
stock is issued for cash. Depending on the nature of the offering and
restrictions imposed on the shares being sold, the sales price of the common
stock may be below the fair market value of the underlying common stock on the
date of issuance. During the six months ended December 31, 2005 the Company
issued 4,500,000 shares of common stock at prices ranging from $0.035 to $0.05,
for net cash proceeds of $210,000.
During the six months ended December 31, 2005 the Company issued 6,000,000
shares of common stock to consultants at $0.094 per share and 4,000,000 shares
at $0.09 per share and recognized compensation expense of $119,108, which is
included in selling, general, and administrative expenses.
COMMON STOCK SURRENDERED
On September 29, 2005, a primary stockholder/officer/director of the Company
agreed to surrender 4,000,000 shares of common stock to treasury. These shares,
previously issued for services in 2005, were removed from common stock at par
value with an offsetting increase to additional paid-in capital.
7. SUBSEQUENT EVENTS
In January 2006, we sold 200,000 shares of common stock to one individual for
$10,000 or $0.05 per share. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 for the above issuance, since the
foregoing issuance did not involve a public offering, the recipient took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
issuance and we paid no underwriting discounts or commissions.
In February 2006, we entered into a service agreement (the "Service Agreement")
with Global Media Fund Inc. ("Global"), whereby Global agreed to distribute
certain newspaper features, which Global has guaranteed will be placed in at
least 100 newspapers and radio features regarding the Company which Global has
guaranteed will be placed in at least 400 radio stations. In consideration for
the Service Agreement, we agreed to issue Global 250,000 restricted shares of
our common stock, which shares were issued in March 2006; and agreed to issue
Global a total of $112,500 worth of our common stock (as calculated below), to
be paid by the issuance of $28,125 worth of our common stock on May 1, 2006,
August 1, 2006, November 1, 2006 and February 1, 2007. We have not issued Global
the May 1, 2006 payment.
The value of our common stock in connection with the issuance of the additional
shares to Global shall be equal to the value of the common stock to be issued
divided by 90% of the average of the closing value of the common stock on the
five trading days prior to the date such stock is to be issued. For example, the
average of the closing price of our common stock for the five trading days prior
to the May 1, 2006 payment was $0.07 per share. Therefore, the amount of shares
we are due to issue Global for such May 1, 2006 payment was $28,125 divided by
$0.063 ($0.07 x 0.90), which is equal to approximately 446,429 shares of common
stock. We also granted Global piggyback registration rights in connection with
the shares issued to Global pursuant to the Service Agreement. If we fail to
issue Global any consideration owed pursuant to the Service Agreement when due,
Global may terminate the Service Agreement with thirty (30) days written notice
to us at which time Global will keep all consideration issued as of that date.
We have the right to cancel the Service Agreement at anytime with thirty (30)
days written notice to Global, at which time Global will keep all consideration
issued as of that date.
On March 1, 2006, and March 21, 2006, we entered into two separate loans for
$17,500, with two shareholders to provide us with an aggregate of $35,000 in
funding. The loans bear interest at the rate of 12% per annum, and are due sixty
(60) days from the date the money was loaned, renewable for additional sixty
(60) day periods at the option of the individuals. Additionally, both loans are
convertible into 500,000 shares of our common stock, with each $0.035 of each
outstanding loan being able to convert into one share of our common stock.
On March 28, 2006, we borrowed $50,000 from shareholders of the Company, and
issued those individuals a promissory note in connection with such loan. The
promissory note bears interest at the rate of 12% per annum, and is due and
payable on September 29, 2006. The promissory note may also be renewed for
additional thirty (30) day periods at the option of the holder. This loan is
also convertible into an aggregate of 1,428,571 shares of common stock at the
rate of one share for each $0.035 owed. Mr. Kertes also has 1,428,571
outstanding warrants with the Company, which are exercisable for shares of
common stock at an exercise price of $0.045 per share, and which expire on May
22, 2008.
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 "Securities
Purchase Agreement"). Pursuant to the Securities Purchase Agreement, we agreed
to sell the investors $1,500,000 in Convertible Debentures, which are to be
payable in three tranches, $600,000 upon signing the definitive agreements on
May 30, 2006, $400,000 upon the filing of a registration statement to register
shares of common stock which the Convertible Debentures are convertible into as
well as the shares of common stock issuable in connection with the Warrants
(defined below), and $500,000 upon the effectiveness of such registration
statement.
The Convertible Debentures are to be convertible into our common stock at a
discount to the then trading value of our common stock. Additionally, in
connection with the Securities Purchase Agreement, we agreed to issue the third
parties Warrants to purchase an aggregate of 50,000,000 shares of our common
stock at an exercise price of $0.10 per share (the "Warrants"). We also agreed
to issue a finder, Lionheart Associates, LLC doing business as Fairhills Capital
("Lionheart"), a finder's fee in connection with the funding which included
warrants to purchase up to 2,000,000 shares of our common stock at an exercise
price of $0.10 per share. The Lionheart warrants expire if unexercised on May
30, 2014. We claim an exemption from registration afforded by Section 4(2) of
the Securities Act of 1933, since the foregoing transaction did not involve a
public offering, the recipient had access to information that would be included
in a registration statement, took the shares for investment and not resale and
we took appropriate measures to restrict transfer.
Additionally, in connection with the closing of the sale of the Debentures,
described above, we agreed to issue Geoff Eiten, as a finder's fee in connection
with the funding, 3,000,000 warrants to purchase shares of our common stock. The
3,000,000 warrants are exercisable into shares of our common stock as follows,
1,000,000 warrants are exercisable at $0.10 per share, 1,000,000 warrants are
exercisable at $0.20 per share, and 1,000,000 warrants are exercisable at $0.30
per share. The warrants granted to Mr. Eiten expire if unexercised on May 11,
2007. We claim an exemption from registration afforded by Section 4(2) of the
Securities Act of 1933, since the foregoing transaction did not involve a public
offering, the recipient had access to information that would be included in a
registration statement, took the shares for investment and not resale and we
took appropriate measures to restrict transfer.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH ON THE FORWARD LOOKING STATEMENTS AS A RESULT OF
THE RISKS SET FORTH IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION, GENERAL ECONOMIC CONDITIONS, AND CHANGES IN THE ASSUMPTIONS USED IN
MAKING SUCH FORWARD LOOKING STATEMENTS.
OVERVIEW
Pediatric Prosthetics, Inc. (the "Company," "we," and "us") is engaged in the
custom fitting and fabrication of custom made prosthetic limbs for both upper
and lower extremities to infants and children throughout the United States. We
also provide our services to families from the international community when the
parents can bring the child to the United States for fitting. We buy
manufactured components from a number of manufacturers and combine those
components to fabricate custom measured, fitted and designed prosthetic limbs
for our patients. We also create "anatomically form-fitted suspension sockets"
that allow the prosthetic limbs to fit comfortably and securely with each
patient's unique residual limb. These suspension sockets must be hand crafted to
mirror the surface contours of a patient's residual limb, and must be
dynamically compatible with the underlying bone, tendon, ligament, and muscle
structures in the residual limb.
We are accredited by the Texas Department of Health as a fully accredited
prosthetics provider. We began operations as a fully accredited prosthetic
facility on March 18, 2004.
We generate an average of approximately $8,000 of gross profit per fitting of
the prosthetics devices, however, the exact amount of gross profit we will
receive for each fitting, will depend on the exact mix of arms versus legs
fitted and the number of re-fittings versus new fittings. We have made
approximately sixty-one fittings since the beginning of our last fiscal
year July 1, 2005 and the date of this filing. We averaged approximately four or
five fittings per month through December 2005 and have averaged approximately
seven to eight fittings per month since January 2006.
HISTORY OF THE COMPANY
We were formed as an Idaho corporation on January 29, 1954, and experienced
various restructurings and name changes, including a name change effective March
9, 2001 to Grant Douglas Acquisition Corp. ("GDAC"). On October 10, 2003,
Pediatric Prosthetics, Inc., a Texas corporation ("Pediatric"), entered into an
acquisition agreement with us, whereby Pediatric agreed to exchange 100% of its
outstanding stock for 8,011,390 shares of our common stock and 1,000,000 shares
of our Series A Convertible Preferred Stock (the "Exchange"). Pediatric, emerged
as the surviving financial reporting entity under the agreement, but we remained
as the legal entity and adopted a name change to Pediatric Prosthetics, Inc. on
October 31, 2003 in connection with the Exchange.
THE MARKETPLACE
According to the Limb Loss Research and Statistics Program ("LLR&SP"), a
multi-year statistical study done by the American Amputee Coalition in 2001, in
concert with the Johns Hopkins Medical School, and the United States Center of
Disease Control, approximately 1,000 children are born each year with a
limb-loss in the United States. The LLR&SP can be found at
www.amputee-coalition.org. During their high growth years, ages 1 through age
12, these children will be candidates for re-fitting once per year as they grow.
We calculate that there are presently approximately up to 12,000 pre-adolescent
(younger than age 12) children in the United States in need of prosthetic
rehabilitation, based on the fact that there are approximately 1,000 children
born each year with a limb-loss in the United States.
COMPETITION
Although there are many prosthetic provider companies in the United States, to
the best of our knowledge, there is no other private sector prosthetics provider
in the country specializing in fitting infants and children. The delivery of
prosthetic care in the United States is extremely fragmented and is based upon a
local practitioner "paradigm." Generally, a local practitioner obtains referrals
for treatment from orthopedic physicians in their local hospitals based on
geographic considerations. Management believes the inherent limitation of this
model for pediatric fittings is that the local practitioner may never encounter
more than a very few small children with a limb loss, even during an entire
career. The result is that the local practice is a "general practice", and in
prosthetics that is considered an "adult practice" because of the overwhelming
percentage of adult patients. In any given year, according to The American
Amputee Coalition, over 150,000 new amputations are performed, suggesting the
need for prosthetic rehabilitation. The overwhelming majority of those
amputations are performed upon adults. For children ages 1-14, there will be
approximately 1,200 limb losses per year due primarily to illness, vascular
problems, and congenital accidents. Children, especially small children, cannot
provide practitioners the critical verbal feedback they usually receive from
their adult patients.
Management believes the challenge to effectively treat children with a limb-loss
in the United States is compounded by the time constraints of local
practitioners working primarily with their adult patients and a limited overall
number of board certified prosthetists. To engage in the intensive
patient-family focus required to fit the occasional infant or small child puts
enormous time pressure on local practitioners trying to care for their adult
patients.
Though not competitors in a business sense, the Shriner's Hospital system, a
non-profit organization with 22 orthopedic hospitals throughout North America,
has historically extended free prosthetic rehabilitation in addition to
providing medical and surgical services to children at no charge. We believe
that we can help organizations like Shriner's provide more efficient prosthetic
rehabilitation.
EMPLOYEES
As of December 31, 2005, we had six employees, three of which are in management
positions. We also use the services of outside consultants as necessary to
provide therapy, public relations and business and financial services.
AGREEMENTS WITH HOST AFFILIATES
We have entered into consulting contracts with twelve host prosthetic providers
("Host Affiliates") with facilities at various locations in 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
Affiliate on a case-by-case basis. These contracts generally have automatic
renewals every six months unless either party gives notice of termination.
REGULATIONS
We are accredited by the Texas Department of Health and are subject to certain
state and federal regulations related to the certification of our prosthetists,
patient-care facility and billing practices with insurance companies and various
state and federal health programs including Medicare and Medicaid.
RECENT EVENTS
In November 2005, we entered into a Settlement Agreement and Release with
Secured Releases, LLC ("Secured" and the "Release"). Pursuant to the Release,
we and Secured agreed to settle our claims against each other in connection with
a convertible promissory note issued in February 2001. In connection with the
Release, we agreed to pay Secured $30,000, which has been paid to date and we
and Secured agreed to release each other, our officers, directors, shareholders,
members, agents, employees, representatives and assigns from any and all causes
of action, suits, claims, demands, obligations, liabilities, damages of any
nature, whatsoever, known or unknown in connection with the promissory note or
any other dealings, negotiations or transactions between us and Secured.
SUBSEQUENT EVENTS
On March 1, 2006, and March 21, 2006, we entered into two separate loans for
$17,500, with two shareholders to provide us with an aggregate of $35,000 in
funding. The loans bear interest at the rate of 12% per annum, and are due
sixty (60) days from the date the money was loaned, renewable for additional
sixty (60) day periods at the option of the individuals. Additionally, both
loans are convertible into 500,000 shares of our common stock, with each $0.035
of each outstanding loan being able to convert into one share of our common
stock.
On March 28, 2006, we borrowed $50,000 from shareholders of the Company, and
issued those individuals a promissory note in connection with such loan. The
promissory note bears interest at the rate of 12% per annum, and is due and
payable on September 29, 2006. The promissory note may also be renewed for
additional thirty (30) day periods at the option of the holder. This loan is
also convertible into an aggregate of 1,428,571 shares of common stock at the
rate of one share for each $0.035 owed. The shareholders also have 1,428,571 in
outstanding warrants with the Company, which are exercisable for shares of
common stock at an exercise price of $0.045 per share, and which expire on May
22, 2008.
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 "Securities
Purchase Agreement"). Pursuant to the Securities Purchase Agreement, we agreed
to sell the investors $1,500,000 in Convertible Debentures, which are to be
payable in three tranches, $600,000 upon signing the definitive agreements on
May 30, 2006, $400,000 upon the filing of a registration statement to register
shares of common stock which the Convertible Debentures are convertible into as
well as the shares of common stock issuable in connection with the Warrants
(defined below), and $500,000 upon the effectiveness of such registration
statement. The Convertible Debentures are to be convertible into our common
stock at a discount to the then trading value of our common stock.
Additionally, in connection with the Securities Purchase Agreement, we agreed to
issue the third parties Warrants to purchase an aggregate of 50,000,000 shares
of our common stock at an exercise price of $0.10 per share (the "Warrants").
The Securities Purchase Agreement, Convertible Debentures and Warrants are
described in greater detail in our report on Form 8-K which was filed with the
Commission on June 2, 2006.
In February 2006, we entered into a service agreement (the "Service Agreement")
with Global Media Fund Inc. ("Global"), whereby Global agreed to distribute
certain newspaper features, which Global has guaranteed will be placed in at
least 100 newspapers and radio features regarding the Company which Global has
guaranteed will be placed in at least 400 radio stations. In consideration for
the Service Agreement, we agreed to issue Global 250,000 restricted shares of
our common stock, which shares were issued in March 2006; and agreed to issue
Global a total of $112,500 worth of our common stock (as calculated below), to
be paid by the issuance of $28,125 worth of our common stock on May 1, 2006,
August 1, 2006, November 1, 2006 and February 1, 2007. We have not issued
Global the May 1, 2006 payment. The value of our common stock in connection
with the issuance of the additional shares to Global shall be equal to the value
of the common stock to be issued divided by 90% of the average of the closing
value of the common stock on the five trading days prior to the date such stock
is to be issued. For example, the average of the closing price of our common
stock for the five trading days prior to the May 1, 2006 payment was $0.07 per
share. Therefore, the amount of shares we are due to issue Global for such May
1, 2006 payment was $28,125 divided by $0.063 ($0.07 x 0.90), which is equal to
approximately 446,429 shares of common stock. We also granted Global piggyback
registration rights in connection with the shares issued to Global pursuant to
the Service Agreement. If we fail to issue Global any consideration owed
pursuant to the Service Agreement when due, Global may terminate the Service
Agreement with thirty (30) days written notice to us at which time Global will
keep all consideration issued as of that date. We have the right to cancel the
Service Agreement at anytime with thirty (30) days written notice to Global, at
which time Global will keep all consideration issued as of that date.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with
U.S. GAAP. Preparing financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies for us relate
primarily to revenue recognition.
REVENUE RECOGNITION
We recognize revenues from the sale of prosthetic devices and related services
generated through the billing department of the Host-Affiliates only upon
performance of services by that Host-Affiliate. We consider such revenues, which
are net of any costs of goods, a "fee for services".
Subsequent to December 31, 2005, we amended our accounting to recognize revenues
from the sale of prosthetic devices through the billing department of our
Host-Affiliates in the same fashion as we recognize revenue when we directly
bill customers.
When we directly bill customers, the revenue from the sale of prosthetic devices
and related services to patients, are recorded when the device is accepted by
the patient, provided that (i) there are no uncertainties regarding customer
acceptance; (ii) persuasive evidence of an arrangement exists; (iii) the sales
price is fixed and determinable; and (iv) collection is deemed probable.
When we directly bill customers, revenue is recorded at "usual and customary"
rates, expressed as a percentage above Medicare procedure billing codes. Billing
codes are frequently updated and as soon as we receive updates we reflect the
change in our billing system. There is generally a "co-payment" component of
each billing for which the patient-family is responsible. When the final appeals
process to the third party payors is completed, we bill the patient family for
the remaining portion of the "usual and customary" rate. As part of our
preauthorization process with third-party payors, we validate our ability to
bill the payor, if applicable, for the service provided before we deliver the
device. Subsequent to billing for devices and services, problems may arise with
pre-authorization or with other insurance issues with payors. If there has been
a lapse in coverage, or an outstanding "co-payment" component, the patient is
financially responsible for the charges related to the devices and services
received. If we are unable to collect from the patient, a bad debt expense is
recognized.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standard Board (FASB) issued a
revision to Statement of Financial Accounting Standard No. 123, "Accounting for
Share-Based Compensation" (SFAS 123R). SFAS 123R eliminates our ability to use
the intrinsic value method of accounting under APB 25, and generally requires a
us to reflect in our income statement, instead of pro forma disclosures in its
financial footnotes, the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. We
will estimate the grant-date fair value using option-pricing models adjusted for
the unique characteristics of those equity instruments. Among other things, SFAS
123R requires us to estimate the number of instruments for which the requisite
service is expected to be rendered, and if the terms or conditions of an equity
award are modified after the grant date, to recognize incremental compensation
cost for such a modification by comparing the fair value of the modified award
with the fair value of the award immediately before the modification. In
addition, SFAS 123R amends FASB Statement No. 95, "Statement of Cash Flows," to
require that we treat excess tax benefits as a financing cash inflow rather than
as a reduction of taxes paid in our statement of cash flows. SFAS 123R was
effective for us beginning July 1, 2005. The Company had no outstanding warrants
or options at the date of adoption SFAS 123R and, accordingly, the adoption had
no impact on us.
PLAN OF OPERATIONS
During October 2005, management contracted with three (3) consultants to
commence a national multi-media publicity campaign based upon the success
stories of the children for which we have provided services. Management's goal
is to provide awareness of our commitment to provide superior pediatric
prosthetic care on a national level. We paid the consultants an aggregate of
7,500,000 shares of our common stock in connection with such contracts.
We have established working relationships with twelve Host Affiliates operating
in approximately 19 states. In establishing the relationships with the twelve
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 prosthetist and two additional support personnel during
the next twelve months, funding permitting, of which there can be no assurance.
As of June, 2006, based on our current monthly gross profits generated in
connection with fitting prosthetic limbs, which approximately totals our monthly
overhead of $54,000, we believe we will be able to continue our operations
throughout fiscal 2007. Due to the receipt of $600,000 on May 30, 2006, (less
closing costs and structuring fees), from the sale of certain Convertible
Debentures described above, we expect to increase our fiscal 2007 cash
advertising and marketing budget five fold over fiscal 2006 advertising budget.
We believe the five fold increase in our advertising and marketing budget will
generate a substantial ramp-up of our monthly prosthetic fittings rate and
resulting gross profits due to a growing national awareness of our
specialization in personalized pediatric services, combined with the re-fitting
of the growing number of clients we have already fitted.
We also anticipate receiving approximately $900,000 in subsequent tranches in
connection with the funding agreement described above, however, investors should
keep in mind that any amounts of funding we receive pursuant to the funding will
be reduced by fees paid to the lending source in connection with closing costs
and legal and accounting costs associated with our need to file and obtain
effectiveness of a Form SB-2 Registration Statement to register the shares
convertible into common stock in connection with the sale of a Convertible
Secured Term Note and the shares issuable in connection with the exercise of the
Warrants.
We anticipate using the $900,000, which we anticipate receiving through the sale
of additional Convertible Debentures in connection with subsequent funding
tranches, on continued and sustained marketing and advertising efforts and the
anticipated increases in our components inventory, which we will require as a
result of our increased marketing and advertising efforts, and the resulting
increase in fittings, which we believe such increased marketing efforts will
create.
COMPARISON OF OPERATING RESULTS
THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2004
We had $165,695 of revenue for the three months ended December 31, 2005,
compared to revenue of $124,089 for the three months ended December 31, 2004, an
increase in revenue of $41,606 or 33.5% from the prior year. The increase in
revenue for the three months ended December 31, 2005, compared to the three
months ended December 31, 2004, was mainly due to increased fees received from
our Host Affiliates.
We had total operating expenses for the three months ended December 31, 2005 of
$347,739, compared to total operating expenses for the three months ended
December 31, 2004 of $3,857,622, a decrease in total operating expenses of
$3,509,883 or 90.9% from the prior period. The decrease in total operating
expenses was mainly attributable to the $3,557,212 or 92.9% decrease in selling,
general and administrative expenses to $268,713 for the three months ended
December 31, 2005, compared to $3,825,925 for the three months ended December
31, 2004. The main item making up selling, general and administrative expenses
for the three months ended December 31, 2004, consisted of stock based
compensation. Also included in total operating expenses for the three months
ended December 31, 2005 were cost of sales (except for items stated separately)
of $73,599, and depreciation expense of $5,427.
The $73,599 of cost of sales for the three months ended December 31, 2005,
compared to cost of sales for the three months ended December 31, 2004 of
$27,085, represented an increase in costs of sales of $46,514 or 171.7% from the
prior period. Cost of sales increased for the three months ended December 31,
2005, compared to the three months ended December 31, 2004 due to increased
purchases of parts and components in connection with new fittings during the
three months ended December 31, 2005.
Selling, general and administrative expenses as a percentage of revenue for the
three months ended December 31, 2005 were 162%, compared to selling, general and
administrative expenses as a percentage of revenue of 3,083% for the three
months ended December 31, 2004, which, represented a decrease in selling,
general and administrative expenses as a percentage of revenue of 2,921% from
the prior period. This decrease was mainly due to the 33.5% increase in revenue
for the three months ended December 31, 2005 and the 92.9% decrease in selling
general and administrative expenses due to stock based compensation. We expect
our selling, general and administrative expenses as a percentage of revenue to
initially be higher than future percentages due to costs associated with
building an administrative infrastructure.
We had a loss from operations of $182,044 for the three months ended December
31, 2005, compared to a loss from operations of $3,733,533 for the three months
ended December 31, 2004, a decrease in loss from operations of $3,551,489 or
95.1% from the prior year's period. The decrease in loss from operations was
mainly caused by the $3,557,212 or 92.9% decrease in selling, general and
administrative expenses for the three months ended December 31, 2005, compared
to the three months ended December 31, 2004, which was mainly due to a large
decrease in stock based compensation for the three months ended December 31,
2005, compared to the prior period.
We had total other income of $298,508 for the three months ended December 31,
2005, compared to total other expense of $163 for the three months ended
December 31, 2004. The change from other expense to other income was due to the
$310,799 of gain on extinguishment of debt in connection with our November 2005
settlement agreement regarding our convertible debt. Under the settlement
agreement, we paid $30,000 for the compete discharge of $201,045 of convertible
debt and $139,754 of related accrued interest, resulting in a gain on
extinguishment of debt of $310,799 for the three months ended December 31, 2005.
We had net income of $116,464 for the three months ended December 31, 2005,
compared to a net loss of $3,733,696 for the three months ended December 31,
2004, an increase in net income of $3,850,160 or 103.1% from the prior year's
period. The increase in net income was mainly due to the $3,557,212 or 92.9%
decrease in selling, general and administrative expenses for the three months
ended December 31, 2005 compared to the three months ended December 31, 2004, as
described above; the $310,799 of gain on extinguishment of debt and the $41,606
or 33.5% increase in revenue, offset by the $46,514 or 171.7% increase in cost
of sales for the three months ended December 31, 2005, compared to the three
months ended December 31, 2004.
SIX MONTHS ENDED DECEMBER 31, 2005 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2004
We had revenue of $269,743 for the six months ended December 31, 2005, compared
to revenue of $216,600 for the six months ended December 31, 2004, an increase
in revenue of $53,143 or 24.5% from the prior year. The increase in revenue for
the six months ended December 31, 2005, compared to the six months ended
December 31, 2004, was mainly due to increased fees received from our Host
Affiliates.
We had total operating expenses of $557,753 for the six months ended December
31, 2005, compared to total operating expenses of $4,289,046 for the six months
ended December 31, 2004, a decrease in total operating expenses of $3,731,293 or
87% from the previous year. The decrease in total operating expenses was mainly
due to the $3,795,714 or 89.7% decrease in selling, general and administrative
expenses, which was mainly due to a decrease in stock based compensation from
the six months ended December 31, 2004 to the six months ended December 31,
2005. Also included in total operating expenses for the six months ended
December 31, 2005 was depreciation expense of $10,115. Also included in total
operating expenses were cost of sales of $110,815 for the six months ended
December 31, 2005, compared to cost of sales of $47,285 for the six months ended
December 31, 2004, an increase of $63,530 or 134.4% in cost of sales from the
prior year. Costs of sales increased for the six months ended December 31, 2005,
compared to the six months ended December 31, 2004 due to increased purchases of
parts and components in connection with new fittings during the six months ended
December 31, 2005.
Selling, general and administrative expenses, as a percentage of revenue for the
six months ended December 31, 2005 were 162%, compared to selling, general and
administrative expenses, as a percentage of revenue of 1,954% for the six months
ended December 31, 2004, which represented a decrease in selling, general and
administrative expenses as a percentage of revenue of 1,792% from the prior
period. This decrease was mainly due to the 24.5% increase in revenue for the
six months ended December 31, 2005 compared to the prior period, and the 89.7%
decrease in selling, general and administrative expenses for the six months
ended December 31, 2005, compared to the six months ended December 31, 2004,
which was mainly due to decreases in stock based compensation. 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 $288,010 for the six months ended
December 31, 2005, compared to a total loss from operations of $4,072,446 for
the six months ended December 31, 2004, representing a decrease in loss from
operations of $3,784,436 or 92.9%. The decrease in loss from operations was
mainly caused by the $3,795,714 or 89.7% decrease in selling, general and
administrative expenses from the six months ended December 31, 2004 to the six
months ended December 31, 2005, as described above.
We had total other income of $292,477 for the six months ended December 31,
2005, compared to total other expense of $7,844 for the six months ended
December 31, 2004, which represented an increase in other income of $300,321 for
the six months ended December 31, 2005. The change from a net other expense to
net other income was due to $310,799 of gain on extinguishment of debt for the
six months ended December 31, 2005. In November 2005, we entered into a
Settlement Agreement and Release with Secured Releases, LLC ("Secured" and the
"Release"). Pursuant to the Release, we and Secured agreed to settle our claims
against each other in connection with a convertible promissory note issued in
February 2001. In connection with the Release, we agreed to pay Secured
$30,000, which has been paid to date and we and Secured agreed to release each
other, our officers, directors, shareholders, members, agents, employees,
representatives and assigns from any and all causes of action, suits, claims,
demands, obligations, liabilities, damages of any nature, whatsoever, known or
unknown in connection with the promissory note or any other dealings,
negotiations or transactions between us and Secured. Under the settlement
agreement, we paid $30,000 for the compete discharge of $201,045 of convertible
debt and $139,754 of related accrued interest, resulting in a gain on
extinguishment of debt of $310,799 for the three months ended December 31, 2005.
We had a total net income of $4,467 for the six months ended December 31, 2005,
compared to a total net loss of $4,080,290 for the six months ended December 31,
2004, a decrease in net loss of $4,084,757 from the pervious year. The change
from a net loss to net income was mainly due to the $3,795,714 or 89.7% decrease
in selling, general and administrative expenses and the $53,143 or 24.5%
increase in revenue from the six months ended December 31, 2004 to the six
months ended December 31, 2005, along with the $310,799 of gain on
extinguishment on debt during the six months ended December 31, 2005, offset by
the $63,530 or 134.4% increase in cost of sales.
LIQUIDITY AND CAPITAL RESOURCES
We had total assets of $273,774 as of December 31, 2005, compared with total
assets of $235,390 as of the fiscal year ended June 30, 2005, which represented
a $38,384 or 16.3% increase in total assets.
Total assets as of December 31, 2005, included current assets of $205,472 and
non-current assets of $68,302.
We had total liabilities of $193,613 as of December 31, 2005, compared to total
liabilities of $488,804 for the fiscal year ended June 30, 2005, representing a
decrease in total liabilities from the fiscal year ended June 30, 2005 of
$295,191 or 60.4%.
Total liabilities as of December 31, 2005 included current liabilities of
$179,425 and non-current liabilities consisting of deferred rent of $14,188.
Current liabilities as of December 31, 2005 included trade accounts payable of
$125,925, accrued liabilities of $53,000, which included deferred salary payable
to our officers and amounts to 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.
We had working capital of $26,047 and a total accumulated deficit of $8,081,445
as of December 31, 2005.
We had total net cash used by operating activities of $170,496 for the six
months ended December 31, 2005, which was mainly due to $310,799 of gain on
extinguishment on debt; and an increase of $65,372 in accounts receivable offset
by $119,108 of share-based compensation, relating to 10,000,000 shares of common
stock issued to consultants for marketing services in connection with such
consultants making families of limb loss patients aware of the Company's
services, of which 2,000,000 shares were subsequently cancelled in March 2006,
by a consultant in connection with such consultants notice to the Company that
he would not be able to spend as much time on the Company's marketing campaign
as previously anticipated.
We had net cash provided by financing activities of $180,000 for the six months
ended December 31, 2005, which included $210,000 of proceeds from the sale of
4,500,000 shares of common stock to four individuals for aggregate consideration
of $210,000 offset by $30,000 of payment in settlement of convertible debt in
connection with the Release, described above under "Recent Events."
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. The
loans were originally due in May 2006, but were extended. Additionally, in
December 2006, $10,000 was prepaid under one of the loans, leaving $25,000
outstanding. The remaining $25,000 owed pursuant to the loans is convertible
into an aggregate of 714,286 shares of our common stock with each $0.035
outstanding under the loan convertible into one share of common stock.
On March 28, 2006, we borrowed $50,000 from a shareholder of the Company, and
issued that individual a promissory note in connection with such loan. The
promissory note was renewed for an additional six months, at the option of the
holder, through March 2007. The promissory note bears interest at the rate of
12% per annum, and was due and payable on September 29, 2006. The promissory
note may also be renewed for additional thirty (30) day periods at the option of
the holder.
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 "Securities
Purchase Agreement"). Pursuant to the Securities Purchase Agreement, we agreed
to sell the investors an aggregate of $1,500,000 in Convertible Debentures,
which are to be payable in three tranches, $600,000 upon signing the definitive
agreements on May 30, 2006, $400,000 upon the filing of a registration statement
to register shares of common stock which the Convertible Debentures are
convertible into as well as the shares of common stock issuable in connection
with the Warrants (defined below), and $500,000 upon the effectiveness of such
registration statement. The Convertible Debentures are to be convertible into
our common stock at a discount to the then trading value of our common stock.
Additionally, in connection with the Securities Purchase Agreement, we agreed to
issue the third parties warrants to purchase an aggregate of 50,000,000 shares
of our common stock at an exercise price of $0.10 per share (the "Warrants").
We have historically been dependent on the sale of common stock for funding for
our operations. In connection with such funding, we issued 4,500,000 shares of
common stock at prices ranging from $0.035 to $0.05 per share during the six
months ended December 31, 2005, for aggregate net proceeds of $210,000.
Additionally, we issued 10,000,000 shares of common stock to consultants at an
average price of $0.0934 per share during the six months ended December 31,
2005.
- ---------------------------------------
As of June 2006, we believe we can operate for approximately twelve (12) months
due to the $600,000 (less closing costs and finders fees), we received upon the
sale of certain Convertible Debentures on May 30, 2006, described above based on
our current approximate overhead of $54,000 per month, and monthly gross profits
of approximately $50,000 per month we receive in connection with fittings of our
prosthetic limbs. We also believe that we will be able to increase our yearly
advertising and marketing budget five fold, for the fiscal year ending June 30,
2006, compared to the fiscal year ending June 30, 2005, by utilizing $250,000
from both the first tranche of the funding, as well as our working capital. We
also anticipate receiving approximately $900,000 in subsequent tranches in
connection with such funding, which we believe will allow us to increase our
monthly sales and gross profits substantially over the next fiscal year, due to
our increased advertising and marketing of our services, explained above.
However, investors should keep in mind that any amounts of funding we receive
pursuant to the Term Sheet and a definitive agreement in connection with such
Term Sheet will be reduced by fees paid to the lending source in connection with
the entry into the definitive agreement and legal and accounting costs
associated with our need to file and obtain effectiveness of a Form SB-2
Registration Statement to register the shares convertible into common stock in
connection with the sale of a Convertible Secured Term Note and the shares
issuable in connection with the exercise of warrants pursuant to the terms of
the funding.
Other than the funding transaction described above, no additional financing has
been secured. The Company has no commitments from officers, directors or
affiliates to provide funding. However, management does not see the need for
any additional financing in the foreseeable future, other than the money the
Company will receive from the sale of the Debentures. We currently anticipate
that our operations will continue to grow as a result of our increased
advertising and marketing expenditures, which has allowed a greater number of
potential clients to become aware of our operations and services, as we have
already seen a higher volume of sales due to such advertising over the past one
to two months.
RISK FACTORS
Any investment in shares of our common stock involves a high degree of risk. You
should carefully consider the following information about these risks before you
decide to buy our common stock. If any of the following risks actually occur,
our business would likely suffer. In such circumstances, the market price of our
common stock could decline, and you may lose all or part of the money you paid
to buy our common stock.
WE HAVE EXPERIENCED RECENT SUBSTANTIAL OPERATING LOSSES AND MAY INCUR ADDITIONAL
OPERATING LOSSES IN THE FUTURE.
During the fiscal years ended June 30, 2005 and 2004, we incurred net losses of
$4,356,519 and $3,729,393, respectively, and experienced negative cash flows
from operations of $298,454 and $312,148, respectively. During the six months
ended December 31, 2005, we generated limited positive operating results as we
reported a net income of $4,467 and had negative cash flows from operations of
$170,496. Our losses are related to three primary factors as follows: 1) We are
not currently generating sufficient revenue to cover our fixed costs and we
believe that the break-even point from a cash flow standpoint may require that
we fit as many as 100 clients, up from 28 fitted in fiscal 2005; 2) We have
issued a significant number of our shares of common stock to compensate
employees and consultants and those stock issuances have resulted in charges to
income of $4,020,264 and $377,000 during the years ended June 30, 2005 and 2004,
respectively and charges to income of $119,108 for the six months ended December
31, 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 and agreed to sell
them an additional $900,000 in Convertible Debentures. These Convertible
Debentures and interest may be converted into shares of our common stock at a
discount to market. However, if they are not convertible into shares of our
common stock, until our operating results improve, if at all, we will need to
obtain outside financing to fund our business operations and to repay the
Convertible Debentures. If we are forced to raise additional debt or equity
financing, such financing may be dilutive to our shareholders. The sale of
equity securities, including the conversion of outstanding amounts under the
Convertible Debentures, could dilute our existing stockholders' interest, and
borrowings from third parties could result in our assets being pledged as
collateral and loan terms that would increase our debt service requirements
and/or restrict our operations. There is no assurance that capital will be
available from any of these sources, or, if available, upon terms and conditions
acceptable to us. If we are unable to repay the Convertible Debentures and/or
raise additional capital we may be forced to curtail or abandon our business
operations.
WE DEPEND SUBSTANTIALLY UPON OUR PRESIDENT TO IMPLEMENT OUR BUSINESS PLAN, AND
LOSING HER SERVICES WOULD BE INJURIOUS TO OUR BUSINESS.
Our success is substantially dependent upon the time, talent, and experience of
Linda Putback-Bean, our President and Chief Executive Officer. Mrs. Putback-Bean
possesses a comprehensive knowledge of our business and has built numerous
relationships with industry representatives. We have no employment agreement
with Mrs. 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.
OUR BUSINESS DEPENDS UPON OUR ABILITY TO MARKET OUR SERVICES TO AND SUCCESSFULLY
FIT CHILDREN BORN WITH A LIMB-LOSS.
Our growth prospects depend upon our ability to identify and subsequently fit
the small minority of children born with a limb-loss. The LLR&SP Report
(referred to in our "Description of Business" section herein) indicates that
approximately 26 out of every 100,000 live births in the United States result in
a possible need for prosthetic rehabilitation. In addition, our business model
demands that we continue to successfully fit these widely dispersed infants and
children each year as they outgrow their prostheses. Because of the relatively
small number of these children born each year and the fact that each child is
different, there is can be no assurance that we will be able to identify and
market our services to such children (or the parents or doctors of such
children) and/or that we will be able to successfully fit such children with
prosthetic's devices if retained. If we are unable to successfully market our
services to the small number of children born with a limb-loss each year and/or
successfully fit such children if marketed to, our results of operations and
revenues could be adversely affected and/or may not grow.
DUE TO IMPROVED HEALTHCARE, THERE COULD BE FEWER AND FEWER CHILDREN EACH YEAR
WITH PRE-NATAL LIMB-LOSS.
Since the majority of our first-time prospective fittings are assumed to be with
children with a pre-natal limb-loss, breakthroughs in pre-natal safety regimens
and treatment could end the need for the vast majority of future fittings of
pediatric prosthetics. As such, there can be no assurance that the number of
children requiring our services will continue to grow in the future, and in fact
the number of such children may decline as breakthroughs occur.
CHANGES IN GOVERNMENT REIMBURSEMENT LEVELS COULD ADVERSELY AFFECT OUR NET SALES,
CASH FLOWS AND PROFITABILITY.
We derived a significant percentage of our net sales for the year ended June 30,
2005 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 six
months ended December 31, 2005 and 2004, we had a small net income of $4,467 and
had a net loss of $4,080,290, respectively and negative cash flows from
operations of $170,496 and $101,532, respectively. Additionally, we had working
capital of $26,047 and stockholders' equity of $80,161 at December 31, 2005. Due
to our negative financial results and our current financial position, our
independent auditor has raised substantial doubt about our ability to continue
as a going concern.
IF WE CANNOT COLLECT OUR ACCOUNTS RECEIVABLE AND EFFECTIVELY MANAGE OUR
INVENTORY, OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION COULD BE
ADVERSELY AFFECTED.
As of March 31, 2006, our accounts receivable over 120 days old represented
approximately 39% of total accounts receivable outstanding. If we cannot collect
our accounts receivable, our business, results of operations, and financial
condition could be adversely affected.
IF WE ARE UNABLE TO MAINTAIN GOOD RELATIONS WITH OUR SUPPLIERS, OUR EXISTING
PURCHASING COSTS MAY BE JEOPARDIZED, WHICH COULD ADVERSELY AFFECT OUR GROSS
MARGINS.
Our gross margins have been, and will continue to be, dependent, in part, on our
ability to continue to obtain favorable terms from our suppliers. These terms
may be subject to changes in suppliers' strategies from time to time, which
could adversely affect our gross margins over time. The profitability of our
business depends, in part, upon our ability to maintain good relations with
these suppliers, of which there can be no assurance.
WE DEPEND ON THE CONTINUED EMPLOYMENT OF OUR TWO PROSTHETISTS WHO WORK AT OUR
HOUSTON PATIENT-CARE FACILITY AND THEIR RELATIONSHIPS WITH REFERRAL SOURCES AND
PATIENTS. OUR ABILITY TO PROVIDE PEDIATRIC PROSTHETIC SERVICES AT OUR
PATIENT-CARE FACILITY WOULD BE IMPAIRED AND OUR NET SALES REDUCED IF WE WERE
UNABLE TO MAINTAIN THESE EMPLOYMENT AND REFERRAL RELATIONSHIPS.
Our net sales would be reduced if either of our two (2) practitioners leaves us.
In addition, any failure of these practitioners to maintain the quality of care
provided or to otherwise adhere to certain general operating procedures at our
facility, or among our Host Affiliates, or any damage to the reputation of any
of our practitioners could damage our reputation, subject us to liability and/or
significantly reduce our net sales.
WE FACE PERIODIC REVIEWS, AUDITS AND INVESTIGATIONS UNDER OUR CONTRACTS WITH
FEDERAL AND STATE GOVERNMENT AGENCIES, AND THESE AUDITS COULD HAVE ADVERSE
FINDINGS THAT MAY NEGATIVELY IMPACT OUR BUSINESS.
We contract with various federal and state governmental agencies to provide
prosthetic services. Pursuant to these contracts, we are subject to various
governmental reviews, audits and investigations to verify our compliance with
the contracts and applicable laws and regulations. Any adverse review, audit or
investigation could result in:
- refunding of amounts we have been paid pursuant to our government
contracts;
- imposition of fines, penalties and other sanctions on us;
- loss of our right to participate in various federal programs;
- damage to our reputation in various markets; or
- material and/or adverse effects on the business, financial
condition and results of operations.
WE HAVE NEVER PAID A CASH DIVIDEND AND IT IS LIKELY THAT THE ONLY WAY YOU WILL
REALIZE A RETURN ON YOUR INVESTMENT IS BY SELLING YOUR SHARES.
We have never paid cash dividends on any of our securities. Our Board of
Directors does not anticipate paying cash dividends in the foreseeable future.
We currently intend to retain future earnings to finance our growth. As a
result, your return on an investment in our stock will likely depend on your
ability to sell our stock at a profit, of which there can be no assurance.
WE MAY ISSUE ADDITIONAL SHARES OF COMMON STOCK IN THE FUTURE, WHICH COULD CAUSE
DILUTION TO OUR THEN EXISTING SHAREHOLDERS.
We may seek to raise additional equity capital in the future. Any issuance of
additional shares of our common stock will dilute the percentage ownership
interest of all our then shareholders and may dilute the book value per share of
our common stock, which would likely cause a decrease in value of our common
stock.
WE MAY ISSUE ADDITIONAL SHARES OF PREFERRED STOCK WHICH PREFERRED STOCK MAY HAVE
RIGHTS AND PREFERENCES GREATER THAN OUR COMMON STOCK.
The Board of Directors has the authority to issue up to 10,000,000 shares of
Preferred Stock. As of May 9, 2006, 1,000,000 shares of the Series A Convertible
Preferred Shares have been issued. Additional shares of preferred stock, if
issued, could be entitled to preferences over our outstanding common stock. The
shares of preferred stock, when and if issued, could adversely affect the rights
of the holders of common stock, and could prevent holders of common stock from
receiving a premium for their common stock. An issuance of preferred stock could
result in a class of securities outstanding that could have preferences with
respect to voting rights and dividends and in liquidation over the common stock,
and could (upon conversion or otherwise) enjoy all of the rights of holders of
common stock. Additionally, we may issue a series of preferred stock in the
future, which may convert into common stock, which conversion would cause
immediate dilution to our then shareholders. The Board of Director's authority
to issue preferred stock could discourage potential takeover attempts and could
delay or prevent a change in control through merger, tender offer, proxy contest
or otherwise by making such attempts more difficult to achieve or more costly
and/or otherwise cause the value of our common stock to decrease in value.
OUR MANAGEMENT CONTROLS A SIGNIFICANT PERCENTAGE OF OUR CURRENT OUTSTANDING
COMMON STOCK AND THEIR INTERESTS MAY CONFLICT WITH THOSE OF OUR SHAREHOLDERS.
As of May 9, 2006, our President and Chief Executive Officer, Linda Putback-Bean
beneficially owned 30,210,251 shares of common stock or approximately 30.9% of
our outstanding common stock. Additionally, Mrs. 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 Mrs. 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 50.4% of our total voting
power based on 117,828,462 voting shares, which includes the 97,828,462 shares
of common stock outstanding and the 20,000,000 shares which our Series A
Convertible Preferred Stock are able to vote. This concentration of a
significant percentage of voting power gives our management substantial
influence over any matters that require a shareholder vote, including, without
limitation, the election of Directors and/or approving or preventing a merger or
acquisition, even if their interests may conflict with those of other
shareholders. Such control could also have the effect of delaying or preventing
a change in control or otherwise discouraging a potential acquirer from
attempting to obtain control of the Company. Such control could have a material
adverse effect on the market price of our common stock or prevent our
shareholders from realizing a premium over the then prevailing market prices for
their shares of common stock.
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 May 9, 2006, we had 97,828,462 shares of common stock issued and
outstanding out of a total of 100,000,000 shares of common stock authorized,
leaving us the ability to issue only approximately 2,171,538 shares of our
common stock. As a result, we do not have a sufficient number of authorized but
unissued shares to allow for the conversion of our outstanding Debentures by the
Debenture holders and/or the exercise of the Warrant. As a result, we may face
penalties in connection with such conversions and/or exercises and/or be forced
to repay such Debentures in cash, which cash may not be available on favorable
terms, if at all. We currently have plans to obtain shareholder approval to
increase our authorized common stock in the future. If we do not increase our
authorized shares in the future, we could face penalties in connection with our
inability to allow the Debenture holders to convert their Debentures into shares
of common stock and/or to allow them to exercise their Warrants. These penalties
and/or the requirement that we repay the Debentures in cash could have a
material adverse effect on our results of operations, working capital and
ability to pay our current liabilities. If we are unable to increase our
authorized shares in the future, we could be forced to curtail and/or abandon
our business plan.
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 $5.00 per
share. We anticipate the trading price of our common stock will continue to be
below $5.00 per share. As a result of this price level, trading in our common
stock would be subject to the requirements of certain rules promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
rules require additional disclosure by broker-dealers in connection with any
trades generally involving any non-NASDAQ equity security that has a market
price of less than $4.00 per share, subject to certain exceptions. Such rules
require the delivery, before any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker-dealer
must determine the suitability of the penny stock for the purchaser and receive
the purchaser's written consent to the transaction before sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our common stock. As a
consequence, the market liquidity of our common stock could be severely affected
or limited by these regulatory requirements.
IN THE FUTURE, WE WILL INCUR SIGNIFICANT INCREASED COSTS AS A RESULT OF
OPERATING AS A FULLY REPORTING COMPANY UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, AND OUR MANAGEMENT WILL BE REQUIRED TO DEVOTE SUBSTANTIAL TIME
TO NEW COMPLIANCE INITIATIVES.
Moving forward, we anticipate incurring significant legal, accounting and other
expenses in connection with the filing of our Form 10-SB and our current status
as a fully reporting public company. The Sarbanes-Oxley Act of 2002 (the
"Sarbanes-Oxley Act") and new rules subsequently implemented by the SEC have
imposed various new requirements on public companies, including requiring
changes in corporate governance practices. As such, and as a result of the
filing of our Form 10-SB to become a publicly filing company, our management and
other personnel will need to devote a substantial amount of time to these new
compliance initiatives. Moreover, these rules and regulations will increase our
legal and financial compliance costs and will make some activities more
time-consuming and costly. For example, we expect these new rules and
regulations to make it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required to incur
substantial costs to maintain the same or similar coverage. In addition, the
Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal controls for financial reporting and disclosure of controls and
procedures. In particular, commencing in fiscal 2007, we must perform system and
process evaluation and testing of our internal controls over financial reporting
to allow management and our independent registered public accounting firm to
report on the effectiveness of our internal controls over financial reporting,
as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses. Our compliance with Section 404 will require
that we incur substantial accounting expense and expend significant management
efforts. We currently do not have an internal audit group, and we will need to
hire additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.
GOVERNMENT REGULATION
We are subject to a variety of federal, state and local governmental
regulations. We make every effort to comply with all applicable regulations
through compliance programs, manuals and personnel training. Despite these
efforts, we cannot guarantee that we will be in absolute compliance with all
regulations at all times. Failure to comply with applicable governmental
regulations may result in significant penalties, including exclusion from the
Medicare and Medicaid programs, which could have a material adverse effect on
our business. In November 2003, Congress initiated a three-year freeze on
reimbursement levels for all orthotic and prosthetic services starting January
1, 2004. The effect of this legislation has been a downward pressure on our
gross profit; however, we have initiated certain purchasing and efficiency
programs which we believe will minimize such effects.
HIPAA Violations. The Health Insurance Portability and Accountability Act
("HIPAA") provides for criminal penalties for, among other offenses, healthcare
fraud, theft or embezzlement in connection with healthcare, false statements
related to healthcare matters, and obstruction of criminal investigation of
healthcare offenses. Unlike the federal anti-kickback laws, these offenses are
not limited to federal healthcare programs. In addition, HIPAA authorizes the
imposition of civil monetary penalties where a person offers or pays
remuneration to any individual eligible for benefits under a federal healthcare
program that such person knows or should know is likely to influence the
individual to order or receive covered items or services from a particular
provider, practitioner or supplier. Excluded from the definition of
"remuneration" are incentives given to individuals to promote the delivery of
preventive care (excluding cash or cash equivalents), incentives of nominal
value and certain differentials in or waivers of coinsurance and deductible
amounts. These laws may apply to certain of our operations. Our billing
practices could be subject to scrutiny and challenge under HIPAA.
Physician Self-Referral Laws. We are also subject to federal and state physician
self-referral laws. With certain exceptions, the federal Medicare/Medicaid
physician self-referral law (the "Stark II" law) (Section 1877 of the Social
Security Act) prohibits a physician from referring Medicare and Medicaid
beneficiaries to an entity for "designated health services" - including
prosthetic and orthotic devices and supplies - if the physician or the
physician's immediate family member has a financial relationship with the
entity. A financial relationship includes both ownership or investment interests
and compensation arrangements. A violation occurs when any person presents or
causes to be presented to the Medicare or Medicaid program a claim for payment
in violation of Stark II. With respect to ownership/investment interests, there
is an exception under Stark II for referrals made to a publicly traded entity in
which the physician has an investment interest if the entity's shares are traded
on certain exchanges, including the New York Stock Exchange, and had
shareholders' equity exceeding $75.0 million for its most recent fiscal year, or
as an average during the three previous fiscal years.
With respect to compensation arrangements, there are exceptions under Stark II
that permit physicians to maintain certain business arrangements, such as
personal service contracts and equipment or space leases, with healthcare
entities to which they refer. We believe that our compensation arrangements
comply with Stark II, because the physician's relationship fits within a
regulatory exception or does not generate prohibited referrals. Because we have
financial arrangements with physicians and possibly their immediate family
members, and because we may not be aware of all those financial arrangements, we
must rely on physicians and their immediate family members to avoid making
referrals to us in violation of Stark II or similar state laws. If, however, we
receive a prohibited referral without knowing that the referral was prohibited,
our submission of a bill for services rendered pursuant to a referral could
subject us to sanctions under Stark II and applicable state laws.
Certification and Licensure. Most states do not require separate licensure for
practitioners. However, several states currently require practitioners to be
certified by an organization such as the American Board for Certification.
The American Board for Certification Orthotics and Prosthetics conducts a
certification program for practitioners and an accreditation program for
patient-care centers. The minimum requirements for a certified practitioner are
a college degree, completion of an accredited academic program, one to four
years of residency at a patient-care center under the supervision of a certified
practitioner and successful completion of certain examinations. Minimum
requirements for an accredited patient-care center include the presence of a
certified practitioner and specific plant and equipment requirements. While we
endeavor to comply with all state licensure requirements, we cannot assure that
we will be in compliance at all times with these requirements. Failure to comply
with state licensure requirements could result in civil penalties, termination
of our Medicare agreements, and repayment of amounts received from Medicare for
services and supplies furnished by an unlicensed individual or entity.
Confidentiality and Privacy Laws. The Administrative Simplification Provisions
of HIPAA, and their implementing regulations, set forth privacy standards and
implementation specifications concerning the use and disclosure of individually
identifiable health information (referred to as "protected health information")
by health plans, healthcare clearinghouses and healthcare providers that
transmit health information electronically in connection with certain standard
transactions ("Covered Entities"). HIPAA further requires Covered Entities to
protect the confidentiality of health information by meeting certain security
standards and implementation specifications. In addition, under HIPAA, Covered
Entities that electronically transmit certain administrative and financial
transactions must utilize standardized formats and data elements ("the
transactions/code sets standards"). HIPAA imposes civil monetary penalties for
non-compliance, and, with respect to knowing violations of the privacy
standards, or violations of such standards committed under false pretenses or
with the intent to sell, transfer or use individually identifiable health
information for commercial advantage, criminal penalties. The privacy standards
and transactions/code sets standards went into effect on April 16, 2003 and
required compliance by April 21, 2005. We believe that we are subject to the
Administrative Simplification Provisions of HIPAA and have taken steps necessary
to meet applicable standards and implementation specifications; however, these
requirements have had a significant effect on the manner in which we handle
health data and communicate with payors.
In addition, state confidentiality and privacy laws may impose civil and/or
criminal penalties for certain unauthorized or other uses or disclosures of
individually identifiable health information. We are also subject to these laws.
While we endeavor to assure that our operations comply with applicable laws
governing the confidentiality and privacy of health information, we could face
liability in the event of a use or disclosure of health information in violation
of one or more of these laws.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Principal Financial Officer, after evaluating the effectiveness
of our "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this amended Quarterly Report on Form 10-QSB (the
"Evaluation Date"), have concluded that as of the Evaluation Date, our
disclosure controls and procedures were not effective to provide reasonable
assurance that information we are required to disclose in reports that we
file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and
Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. Our controls were not
effective, as they failed to properly account for the proper accrual of
receivables and the presentation of sales through Host-Affiliates on a
gross basis and failed to properly show gross revenue and cost of sales in
this Report on Form 10-QSB as originally filed. Additionally, we failed to
timely file our original Quarterly Report on Form 10-QSB for the quarter
ended December 31, 2005. Moving forward, our management believes that as we
become more familiar and gain more experience in completing our periodic
filings and providing our outside auditors with the required financial
information on a timely basis, we will be able to file our periodic reports
within the time periods set forth by the Securities and Exchange
Commission.
Subsequent to the year ended June 30, 2006, our management has undertaken a
concerted effort to spend the appropriate time and resources to complete our
financial statements and disclosures in our periodic and annual reports within
the time periods set forth by the Commission. Our management hopes to accomplish
this goal by putting in place stricter controls and procedures and beginning
management's dialogue with our inside and outside accountants regarding our
periodic filings at an earlier stage in the review and/or audit process, which
our management believes will allow us to timely file our periodic reports moving
forward.
(b) Changes in internal control over financial reporting. There were
no significant changes in our internal control over financial
reporting during our most recent fiscal quarter that materially
affected, or were reasonably likely to materially affect, our internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not aware of any pending or threatened legal proceeding to which we are a
party.
ITEM 2. CHANGES IN SECURITIES
In July 2005, we sold an aggregate of 2,500,000 free trading shares of common
stock to three individuals for aggregate consideration of $125,000 or $0.05 per
share. We claim an exemption from registration for the above issuances pursuant
to Rule 504 of the Securities Act of 1933.
In August 2005, we sold 1,000,000 free trading shares of common stock to one
individual for $50,000 or $0.05 per share. We claim an exemption from
registration for the above issuance pursuant to Rule 504 of the Securities Act
of 1933.
In September 2005, we issued an aggregate of 10,000,000 restricted shares of
common stock to four consultants (which included 2,000,000 shares which were
later cancelled in March 2006) in connection with their entry into marketing
agreements, whereby they agreed to market our prosthetics services. We claim an
exemption from registration afforded by Section 4(2) of the Securities Act of
1933 for the above issuances, since the foregoing issuances did not involve a
public offering, the recipients took the shares for investment and not resale
and we took appropriate measures to restrict transfer. No underwriters or
agents were involved in the foregoing issuances and we paid no
underwriting discounts or commissions.
In September 2005, our Chief Executive Officer and Director, Linda Putback-Bean
cancelled 4,000,000 of shares that were previously issued to Mrs. Bean for
services in 2005. These shares were cancelled by Mrs. Bean to provide a larger
number of authorized and unissued shares, which allowed the Company to retain
and pay consultants in shares for services. It is anticipated that the
4,000,000 shares will be reissued to Mrs. Bean upon such time as the Company is
able to increase its authorized and unissued shares.
In December 2005, we sold 1,000,000 shares of common stock to one individual for
$35,000 or $0.035 per share. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 for the above issuance, since the
foregoing issuance did not involve a public offering, the recipient took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
issuance and we paid no underwriting discounts or commissions.
SUBSEQUENT EVENTS
-----------------
In January 2006, we sold 200,000 shares of common stock to one individual for
$10,000 or $0.05 per share. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 for the above issuance, since the
foregoing issuance did not involve a public offering, the recipient took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
issuance and we paid no underwriting discounts or commissions.
In March 2006, we issued 250,000 shares of common stock to Global in connection
and in consideration for Global's entry into the Service Agreement and plan to
issue Global up to an additional 1,750,000 over the life of the Service
Agreement, as described above. We claim an exemption from registration afforded
by Section 4(2) of the Securities Act of 1933 for the above issuance, since the
foregoing issuance did not involve a public offering, the recipient took the
shares for investment and not resale and we took appropriate measures to
restrict transfer. No underwriters or agents were involved in the foregoing
issuance and we paid no underwriting discounts or commissions.
On May 30, 2006, we entered into a Securities Purchase Agreement, with various
third parties (the "Purchasers") to sell an aggregate of $1,500,000 in Callable
Secured Convertible Notes, which bear interest at the rate of 6% per annum (the
"Debentures"), of which an aggregate of $600,000 in Debentures was sold to the
Purchasers on May 30, 2006, and the remaining $900,000 is to be sold in two
separate tranches, $400,000 on or around the date we file a registration
statement to register the shares of common stock the Debentures are convertible
into, and $500,000 upon the date such registration statement is declared
effective by the SEC. We claim an exemption from registration provided by Rule
506 of Regulation D for the above issuances.
In connection with the sale of the Debentures, we granted the various third
party Purchasers Stock Purchase Warrants to purchase an aggregate of 50,000,000
shares of our common stock at an exercise price of $0.10 per share, which
warrants expire if unexercised on May 30, 2013. We claim an exemption from
registration provided by Rule 506 of Regulation D for the grant of the warrants.
We also agreed to issue a finder, Lionheart Associates, LLC doing business as
Fairhills Capital ("Lionheart"), a finder's fee in connection with the funding
which included warrants to purchase up to 2,000,000 shares of our common stock
at an exercise price of $0.10 per share. The Lionheart warrants expire if
unexercised on May 30, 2014. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, since the foregoing transaction did
not involve a public offering, the recipient had access to information that
would be included in a registration statement, took the grant for investment
and not resale and we took appropriate measures to restrict transfer.
Additionally, in connection with the closing of the sale of the Debentures,
described above, we agreed to grant Geoff Eiten, as a finder's fee in connection
with the funding, 3,000,000 warrants to purchase shares of our common stock. The
3,000,000 warrants are exercisable into shares of our common stock as follows,
1,000,000 warrants are exercisable at $0.10 per share, 1,000,000
warrants are exercisable at $0.20 per share, and 1,000,000 warrants are
exercisable at $0.30 per share. The warrants granted to Mr. Eiten expire if
unexercised on May 11, 2007. We claim an exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, since the foregoing transaction did
not involve a public offering, the recipient had access to information that
would be included in a registration statement, took the grant for investment
and not resale and we took appropriate measures to restrict transfer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Description
3.1(1) Articles of Incorporation
(Pediatric Prosthetics, Inc.-Texas) dated
September 15, 2003
3.2(1) Amendment to Articles of Incorporation
Grant Douglas Acquisition Corp. (October 31, 2003)
3.3(1) Amendment to Articles of Incorporation
Grant Douglas Acquisition Corp. (November 7, 2003)
(Series A Convertible Preferred Stock Designation of
Rights)
4.1(1) Shareholder Voting Agreement dated October 31, 2003
10.1(1) Acquisition Agreement between Grant Douglas
Acquisition Corp. and Pediatric Prosthetics, Inc.
dated October 10, 2003
10.2(3) Settlement Agreement with Secured Releases, LLC
10.1(2) Securities Purchase Agreement
10.2(2) Callable Secured Convertible Note with AJW
Offshore, Ltd.
10.3(2) Callable Secured Convertible Note with AJW
Partners, LLC
10.4(2) Callable Secured Convertible Note with AJW Qualified
Partners, LLC
10.5(2) Callable Secured Convertible Note with New Millennium
Capital Partners II, LLC
10.6(2) Stock Purchase Warrant with AJW Offshore, Ltd.
10.7(2) Stock Purchase Warrant with AJW Partners, LLC
10.8(2) Stock Purchase Warrant with AJW Qualified
Partners, LLC
10.9(2) Stock Purchase Warrant with New Millennium Capital
Partners II, LLC
10.10(2) Security Agreement
10.11(2) Intellectual Property Security Agreement
10.12(2) Registration Rights Agreement
31.1* Certificate of the Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2* Certificate of the Principal Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1* Certificate of the Chief Executive
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2* Certificate of the Principal Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Filed Herein.
(1) Filed as exhibits to our Form 10-SB filed with the Commission on February
13, 2006 and incorporated by reference herein.
(2) Filed as exhibits to our Report on Form 8-K, filed with the Commission on
June 2, 2006, and incorporated herein by reference.
(3) 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.
b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
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 21, 2006 By: /s/ Linda Putback-Bean
------------------------
Linda Putback-Bean
Chief Executive Officer